Judge Says Ratings Agencies Are Not Necessarily Protected By Free Speech

from the that-seems-bad dept

The big ratings agencies, Moody's and S&P have taken something of a beating for their role in the financial crisis -- often rating pure junk as if it were pure gold. But, of course, in the rush to find someone to blame legally, it made little sense to go after the ratings agencies. The real problem wasn't that the ratings sucked (they did), but that federal regulations gave those ratings power in the law. This made those ratings not only more important, but gave them an official "stamp of approval" such that people assumed (incorrectly, obviously) that they must be accurate. The idea that a small group of guys sitting in an office could more accurately rate the risk of debt over the actual market seems rather absurd -- and yet, we gave it the federal stamp of approval. Still, as bad as the ratings were, there shouldn't be any legal consequence for getting the ratings wrong. After all, unless there was evidence of outright fraud, the ratings are simply opinions, which are protected by the First Amendment... or so we thought.

In a ruling last week, a judge has noted that ratings agencies' ratings are not protected free speech if they're only disseminated to a small group of people, rather than the wider public. While the ruling cites a few earlier cases, I have to admit that I have trouble understanding this reasoning. I don't recall anything in the First Amendment that says the government can restrict freedom of expression if it's to a small group of people, but not if it's to a large group of people. This probably isn't a huge deal for the ratings agencies -- though, it will keep them busy with some lawsuits that may cost them some money. The bigger "problem" in the market came from relying on their public ratings -- and those should (still) be protected.

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Copyright Fight Over Famous Wall Street Bull Statue

from the well,-that's-a-lot-of-bull... dept

What is it with statues and copyright claims lately? Following closely on stories about copyright claims against a town's statue of a mermaid (since resolved) and a still ongoing fight over a photo and US postage stamp of the DC Korean War monument, comes the news that the guy who created the famous (infamous?) Wall Street "bull" statue, is suing both the publisher and authors of a new book about the fall of Lehman Bros., for using a photo of the statue on the cover of the book. Apparently (I had no idea), the statue was made by Arturo Di Modica back in 1989 -- totally uninvited -- and he just dumped it in front of the New York Stock Exchange unannounced. It was soon moved nearby, and it's stuck around ever since. Apparently, this is not the first time he's sued over such things, though it's unclear what happened in that lawsuit. Still, um... shouldn't there be a rule, that if you just dump a big sculpture on the sidewalk somewhere without permission and leave it for twenty years, you no longer own it? Isn't it like throwing something out?

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Is The Goldman Sachs Stolen Code A Big Deal?

from the not-really dept

A few weeks back there was a lot of news over a former Goldman Sachs programmer who was arrested by the FBI for supposedly "stealing code" he had worked on while at GS. The headlines made a big deal over the importance of this software, talking about how its proprietary nature could represent a "huge loss" for the banking giant. That struck me as typical journalistic hyperbole, and it's great to see the NY Times actually be the one to step in with an op-ed from a programmer who points out how blown out of proportion this story likely is compared to the real issue. The op-ed piece makes two key points: (1) It's pretty common for programmers to keep copies of their code, if only to be able to refer back to it and (2) the code, by itself, isn't really all that useful. He notes that simply reusing someone else's code really doesn't help much -- and what most companies want is better code that is better suited to what their approach is -- meaning that they want the know-how of the programmer, not the old code.

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Wall Street Quants Not Interested In Startups

from the pay-cut dept

With Wall Street firms crashing left and right, some tech startup investors thought there would be plenty of smart and available talent in NYC looking for work, who might be persuaded to join startups. Turns out that it hasn't worked that way. Laid off Wall St. quants seem to want to stay on Wall Street, and don't seem particularly interested in joining startups at a greatly reduced salary and a small chance for eventual stock option wealth. This actually might be for the best. It helps to really believe in what a startup is doing before committing to it -- and a lot (certainly not all) of the Wall St. folks are simply focused on making lots of money as quickly as possible. That doesn't always mix well in a tech startup.

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Making The Tough Choices To Save The Economy?

from the stop-giving-the-banks-everything-they-want dept

With the latest plan laid out last week on how to "save Wall Street" ("the Geithner plan"), there's a lot of back and forth over whether or not this is a good plan or not -- and while Planet Money had a decent "is it good or bad?" show, the folks there didn't get too deep into it (and even claimed that no one really thought the plan was all that dangerous (just that it could slow down the recovery). However, the more I read up on it, the worse and worse it seems. Simon Johnson has a long, but worthwhile writeup at The Atlantic, where he delves into how Wall Street has effectively taken over Washington DC, such that it helped both create the mess, and then set things up so that the "recovery plan" only benefits those who caused the problems in the first place. This echoes a piece by Andy Kessler last week, where he pointed out that we're effectively handing money to those who brought the collapse upon us -- and suggests that the better response is to simply stymie the plans of the hedge funds -- flooding the markets where they're looking to buy, rather than subsidizing them.

Then, there's Umair Haque, who basically makes the same points, but suggests that this is an outright looting of taxpayer money by putting most of the risk on taxpayers, and encouraging the hedge funds to make increasingly risky loans (you know, like the ones that got us into this mess in the first place). The root of all of these stories is that the government seems to think that the only way to fix the problem is to reinflate the bubble, rather than letting the bubble deflate and moving forward from there. The problem with reinflating the bubble isn't just that it puts off the inevitable (though, it does), but that the inevitable is that much worse when it comes.

It's what we've done for the past couple decades -- effectively building an even shakier house of cards, and every time the cards start to fall... we just reinforce it with another layer of shaky cards to prop it up. At some point, the cards do have to fall, and propping it up with more leverage isn't going to help that.

Even if, as Richard Posner suggests, the current plan is about the most politically feasible, it's still problematic. The politics of the situation is troubling. On one side, you have populist anger, making it difficult to do certain necessary things. On the other, you do still have the influence of the bankers, who view the world as being one where we need to keep propping up that house of cards.

Why is it that no one is talking about carefully taking down the house of cards while building a sturdy house next door?

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Transparency On The Bailout? Banks: No Thanks!

from the who-needs-transparency? dept

The Associated Press is being a bit unfair with its set of "gotcha questions" it asked a bunch of banks that have received bailout money, suddenly demanding that they all explain how the money is being used and how much is being used, but it is an important issue. In handing over all of this money to banks for a stake in those banks, one would think that we, the taxpayers, deserve at least some transparency into how the money is being spent. Considering the sums handed over, this is hardly an out-of-line question. Yet, we've already seen that the promised transparency surrounding the bailout has hardly been forthcoming. And, the worst part of it is that the thing we need more than anything else right now is significantly more transparency to rebuild the trust in the financial system.

Of course, it's not the banks' fault that they're not detailing what they're doing. There's no reason for them to do so right now. However, we should be asking why the government, which rushed to hand over so much money while promising transparency, didn't require more openness as a part of the deal and hasn't done much to add any transparency to the process since handing over the cash. Sure, everyone's been pretty busy, but transparency shouldn't be an afterthought here, it should be a central piece of any economic recovery package. The fact that the government hasn't done much to increase transparency should be seen as a troubling sign.

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Bankers Getting Toxic Assets For Bonuses

from the two-birds,-one-stone dept

The various banks on Wall Street have a bunch of problems that they're dealing with right now, including getting rid of toxic assets on their balance sheet, properly compensating staff who are expecting big bonuses even in such a down year and figuring out ways to motivate staff to invest in good assets, even in such tough times. It appears that Credit Suisse Group may have come up with a creative solution to all of those things. Instead of cash bonuses this year, it's going to give employees some of those toxic assets it holds. This is incredibly creative for a variety of reasons. It starts to get some of those assets off the balance sheet. It gives them to employees who want bonuses, and it gives those employees quite the incentive to make sure those assets are actually worth something. Of course, since many of those employees recognize that the assets aren't worth much at all, many of them are pissed off, but it's pretty difficult to come up with any reason at all that they deserve any sort of bonus, so they're probably a lot better off accepting what they're given and seeing if they can actually make it worth something.

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Garbage In, Financial Crisis Out

from the so-much-for-the-quants dept

With everyone trying to figure out just what went wrong to cause the rather spectacular financial mess Wall Street finds itself in these days, Saul Hansell over at the NY Times wanted to find out why all the sophisticated risk management quant algorithms that Wall St. has been so big on lately failed to warn of impending doom. His answer, basically, is that people on Wall St. were lying to the algorithms, coming up with ways to purposely enter data such that the risk seemed much less than it actually was -- in order to let them keep pushing the boundary. Then, it became a situation where people start relying on the computers just because the computer says so -- even though the data is bad. This happens time and time again. Even when people know that computers make mistakes, it's just so convenient to have a computer "confirm" your thinking that you start ignoring other warning signs.

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How Wall Street's Short Term Thinking Can Destroy Tech Businesses

from the gotta-look-to-the-long-term dept

For whatever you think of either Amazon.com or Google, one thing that's worth giving both companies kudos for is their ability to ignore the short term questions raised by Wall Street in favor of much more strategic long term thinking. It's been less clear with Google, who has consistently done well. But Amazon has, for years, faced numerous questions from Wall St. analysts who consistently seem to get upset by the company's willingness to invest in big long-term projects. Other companies, unfortunately, get swayed too easily. For example, last year, Sprint gave in to short-term thinking from investors who got upset that the company was spending so much on its next generation wireless strategy -- despite it being an absolute necessity.

The latest place where that may be happening is with Netflix, which has been investing heavily in its digital download strategy -- causing some Wall Street folks to complain that the company is spending too much, and it won't make sense until the majority of users switch over. However, as Greg Sandoval points out, if Netflix follows this path, it'll be dead. That's because these projects take time. If you wait until the majority of your customers will switch over, they've already switched over... to your competitors who didn't wait around for Wall Street's short-term thinking to catch up.

This same issue comes up all too often, by the way, in discussing the various business models that the entertainment industry can adopt -- with people insisting that the record labels and movie studios should wait until the model is proven and everyone else is doing it. The problem, at that point, is that the laggards have lost all relevance, and their brand and reputation are worthless at that point. Betting on the long-term means not being a follower -- because in waiting for others to create the new market, you'll be left too far behind.

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JP Morgan Buys Bear Stearns For Pennies On The Dollar; What's It Mean For Tech?

from the bubble-bursting-or-economic-collapse? dept

While not strictly a technology story, JPMorgan's buyout of Bear Stearns on Sunday is worth looking at in the larger context of the tech industry. As you hopefully know by now, JPMorgan picked up Bear Stearns for $2/share, a total of $236 million, which is (quite literally) pennies on the dollar for a firm that not so long ago was valued at $170/share and on Friday alone had tumbled from about $55/share to $30/share. On Friday, of course, the Fed stepped in to keep Bear Stearns alive (through JPMorgan) and the weekend was spent trying to figure out options before the Asian markets could open late Sunday night (US time). There will be plenty of Monday-morning quarterbacking on this deal (so it's fitting that it all played out on a Sunday), but the discussions about the impact on the tech world has been mixed if anything. It would be great to get the perspective of some readers on how this is likely to play out for tech companies (both big and small). While many may be somewhat isolated from a meltdown on Wall Street, there certainly are some important indirect connections. From what I've seen, it doesn't seem like there will be much short-term impact, but the longer-term issues could be worth watching out for.

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Wall Street Noticing That The Math On iPhones Doesn't Add Up

from the 2-+-2-only-equals-3? dept

While Wall Street has had something of a love affair with Apple's stock until very recently, it appears that they're finally catching on that not everything may be as rosy as stated. With Apple and AT&T announcing numbers on iPhone sales and iPhone activations, respectively, there's a 1.7 million phone gap between those numbers. Taking into account the recent launches of iPhones in other countries (estimated at 350,000 to 400,000 iPhones so far) and a 20% estimate on people buying iPhones solely for unlocking, there are still nearly 700,000 iPhones unaccounted for... suggesting that they're sitting on store shelves, piling up as unsold inventory. That number suggests at least some gap between perceived demand and actual demand -- while also raising questions about how much effort it will take to eat through that inventory.

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Like $200 Million In Invesment Money Is Going To Make A Difference In Hollywood?

from the it'll-make-one-crappy-movie dept

We've discussed in the past the idea that Wall Street might start investing directly in movies, hoping that if that happened it would help kick the studios into realizing that their old model of doing things wasn't working out so well. With that in mind, it's not too surprising to hear that JPMorgan is planning to start investing in Hollywood, hiring some former Hollywood bigshots as advisors and setting aside $200 million for investments. Wait... $200 million? Isn't that what Hollywood insiders falsely insist a good movie has to cost to make these days? In other words, isn't that pocket change? It's hard to see how that kind of money makes any difference at all in Hollywood unless JPMorgan is really planning to embrace the Silicon Valley model of making films, where less money is put to more efficient work. Hopefully, that's where it's heading (though, hiring those bigshots suggests otherwise). If it's simply going to throw that money into the traditional Hollywood machine, it seems quite unlikely that it will last very long or go very far.

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You Mean Wall Street Just Realized The Recording Industry Was In Trouble?

from the why-you-don't-trust-wall-street-analysts dept

You didn't have to be particularly insightful to realize a while back that the traditional recording industry was in trouble if it kept traveling down the self-destructive path of suing music fans and shutting down unique and innovative distribution tools. However, it appears that the folks on Wall Street are just starting to figure it out. Apparently, the recent defections of Madonna, Radiohead and other big name acts has Wall Street analysts finally suggesting that the recording industry's future isn't very bright, and thus downgrading the labels' prospects. The thing is, they should have realized that long ago. The big name act defections are simply the end result of a long chain of strategic blunders, despite any number of people presenting more reasonable plans forward. Again, this is focused solely on the record labels, not the overall music industry -- which is thriving. In fact, the record labels have had every opportunity to embrace these new tools and be a big part of online promotions -- but they chose not to. One would hope that with even Wall St. analysts telling them their strategy is wrong the record labels might wake up to the opportunity they've thrown away, but the labels themselves (with the possible exception of EMI -- which was recently taken over by private equity folks who seem to realize what's going on) have given no indication of any significant change in strategy.

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Open Source Business Strategies Had A Bubble Too

from the now-its-growing-again dept

Matt Asay points us to a fascinating paper (pdf) by Oliver Alexy of Technische Universitat Munchen (TUM) Business School, that looks at how the stock market reacts to companies that announce open-source software releases. The paper looks at how stock prices move the day the news is released in an effort to gauge how Wall Street evaluates open-source-oriented business strategies. The study found a couple of interesting things. First Wall Street reacted positively to open-source announcements in 1999 and 2000, negatively in 2002-2004, and then positively again in the last couple of years. This suggests an open source bubble that coincided with the broader tech bubble. That was followed by a period of open source pessimism while the technology industry was in the doldrums. More recently, as open-source-related business strategies have matured, investor attitudes have become positive once again, and source code releases are rapidly becoming standard in some parts of the software industry.

Second, Alexy finds that Wall Street reacts more positively to business models that use open source as a way to directly cut costs or enhance revenue (for example by selling support services) than they do to longer-term strategies aimed at using open source as a "competitive weapon." Asay suggests the paper shows that a business will do poorly "if a vendor is more worried about pulverizing its competitors than it is in serving its customers," but that's not exactly what the paper is focused on. Rather, "competitive weapon" is used in the paper as a kind of catch-all term for source code releases focused on long-term strategic concerns rather than short-term revenue generation. For example, releasing a product as open source might help a company's preferred file format or networking protocol become the industry standard rather than a competitor's format. Alexy suggests that it's harder for companies to explain such long-range strategies to investors, and harder for investors to evaluate their effect on a company's bottom line. As Wall Street has become more familiar with the long-term benefits of open source software releases (for example, IBM's 2001 support of Eclipse) investor attitudes toward decisions to release software for long-term strategic reasons have become more positive.

Timothy Lee is an expert at the Insight Community. To get insight and analysis from Timothy Lee and other experts on challenges your company faces, click here.

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Wall Street Looking To Continue Its Buy 'Em Up Then Break 'Em Up Strategy With Yahoo?

from the next! dept

In the past, we've joked about Wall Street's amazing ability to convince companies that they need to acquire each other and merge to bring out "synergies" and then convince those same firms to later break themselves up into separate companies to "release shareholder value." It's all part of the shell game, where the investment bankers on Wall Street get to take out their huge fees whether a company is being built up or broken apart. It looks like the latest such target may be Yahoo, as an analyst at Sanford Bernstein has kicked off the discussion by noting that the company could release shareholder value by breaking itself up into three companies. Which companies? Well, it would want to split up the search and the advertising parts of the business... you know, the same parts of the business that folks convinced Yahoo it needed to buy four years ago if it was going to successfully take on Google. Now, of course, the only way for it to successfully take on Google is to get rid of those businesses. Luckily, the folks on Wall Street will happily help with both ends of the transaction for a small significant fee. Sometimes I think I'm in the wrong business.

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Will Investors Pressure RIAA To Change Its Ways?

from the we-can-hope dept

The Motley Fool had an article last week predicting that the RIAA will soon be forced to abandon its lawsuit-happy business strategy, as a number of lawsuit targets have not only been winning in court but also getting their legal fees covered by the recording industry. The article makes a lot of points that Techdirt has been making for years, but a couple of things are particularly interesting about the article. First, the Motley Fool is a mainstream investment site that's read by a ton of people on Wall Street. If the financial press starts writing stories about how the lawsuits are a waste of money, these companies could start to feel increased pressure from their shareholders to find a new strategy. Secondly, the article makes an important point about the effects of file-sharing on musicians: file-sharing can hurt artists by reducing their sales, but it can also help them by getting the word out about their music. The former effect is more important to the superstars, who are already famous. But for up-and-coming artists, the benefits of greater exposure greatly outweigh any losses from their (already small) sales. Since most musicians aren't superstars, the rise of file-sharing may actually help the average artist, by flattening out the distribution of music revenues: Justin Timberlake won't be as rich, but up-and-coming bands will find it easier to reach new fans.

Timothy Lee is an expert at the Insight Community. To get insight and analysis from Timothy Lee and other experts on challenges your company faces, click here.

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Wall Street Still Sending Some Cash Hollywood's Way

from the cruisin'-for-a-bruisin' dept

Just when it looked like Wall Street might be backing off from financing Hollywood films, Tom Cruise's film company, United Artists, has announced that it has raised $500 million from a group of investors put together by Merrill Lynch. Tom Cruise had had a longtime relationship with Paramount, although that was cut off, in part for personal reasons, but also because of doubts his ability to turn movies into hits. It's impressive that Merrill Lynch was able to pull together so much money, in times like these, for a proposition as shaky as investing in Hollywood blockbusters, but if things don't work out as planned, it could severely constrain future attempts at similar deals.

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Wall Street Banks Back Off Plans To Finance Films

from the no-motion-pictures dept

In the past year or so, there's been a surge of interest on Wall Street in financing Hollywood films. As the cost of making motion pictures continues to spiral higher, it makes sense that studios would look beyond its traditional networks to raise money. That being said, we had some hope that investment banks and hedge funds could be a positive force in the industry, since they'd likely be reluctant to write a blank check for some of the big budget, big star boondoggles that have characterized the industry of late. Well, it looks like we'll have to wait awhile before we learn how this plays out. The credit crunch has prompted Goldman Sachs and Deutsche Bank to postopone plans to raise $1 billion to fund films at MGM. The banks could still do the deal if they see a lot of investor demand for it, but that seems pretty unlikely in light of current conditions. Meanwhile, the Hollywood studios might have to make do with a bit less cash.

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If You Can't Even Describe The Past, How Can You Predict The Future?

from the iPhorecast dept

When Apple reported its opening weekend iPhone sales, Wall Street was disappointed that the 270,000 figure it gave out failed to hit much loftier estimates. Of course, this raises the old question: did Apple miss estimates or did analysts mis-estimate? In a sense, the answer is always both, although its worth exploring why the numbers were so far apart. Looking into this question, Carl Bialik notes that Wall Street analysts basically got caught up in emotional hype, as each one tried to outdo each other by making bolder predictions. Their mistakes were exacerbated by the use of small sample sizes, which they mistakenly extrapolated across the country. Analysts make predictions about unit sales all the time for all kinds of products, but you have to wonder how they can accurately predict the future when they can't even correctly gauge what's already happened.

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More Banks Set To Establish Their Own Stock Exchanges

from the privately-public dept

Last week, private equity firm Apollo Management announced that it would sell shares of itself on a private stock exchange run by Goldman Sachs. Because the exchange is closed to most investors, companies listing on it don't have to comply with various government regulations, which they would if they were to list on, say, the New York Stock Exchange. Considering all of the headaches associated with being a public company these days, this option may look increasingly appealing for companies looking for an alternative way to raise money and give its owners liquidity. It's not surprising, then, that many of the big name investment banks, including Citigroup, JP Morgan, Lehman Brothers, and Morgan Stanley are all rushing to build out their own private, electronic stock exchanges. The question, however, is whether or not these various exchanges will be compatible or whether they'll be islands, with little inter-exchange trading. If they're the former, then a robust alternative market could flourish. If it's the latter, then the appeal to both traders and companies is likely to be limited.

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