Monday, January 25, 2010

Perilous

This past week there were articles all over the Internet about "The China Incident." If you have been so distracted by the unfortunate disaster in Haiti that you didn't see it, Google has threatened to pull its operations out of China because an attempt to hack it and 30 other companies occurred. Worse, Google says it has evidence pointing to the Chinese government as the source of the intrusions.

The scary part is that although initial reports implied that the hackers were looking for information on Chinese dissidents, it now seems that they were after intellectual property. This raised an interesting question: what if they installed a Trojan horse into Google's source code without stealing anything? How would you know what happened?

I spent 20 years in application development, and I know firsthand that the more complex systems can easily be in excess of 1,000,000 lines of code in size. If someone inserted 100 - even 1,000 - lines of new code as a backdoor, is a company like Google really going to notice the %0.1 difference in size? Worse, what are the bigger implications, e.g. what could they steal from users such as you or me using such a technique?

At least Google made an effort to protect itself. A recent New York Times article said that 20% of people choose their passwords from the relatively small pool of 5,000 words and variations. 1% of people use "123456" as their password, with the 2nd most popular password being "12345." While I realize that having your financial information on a computer does not impress you with the same sense of urgency for security as the old school safe deposit box did, that makes this doubly disconcerting since there is so much more data to be mined from people's personal computers than you could ever find in a single safe deposit box.

This is your personal identity at risk. My brother was the victim of identity theft several years ago. And while the damage was more limited than what you typically find in the news articles written in Wired et al, it still took him forever to straighten the situation. Imagine if all of his data were pilfered and his identity completely taken over by a rogue hacker.

Better still, imagine if your identity were completely taken over.

Don't tempt fate. You, me, and every individual are not Googles unto ourselves. We don't have the same facilities available to protect the intellectual property that is our life. This means that it is that much more important to ensure the safety of our digital selves.

Tuesday, January 19, 2010

Corporate Morals

I don't have a witty introduction to this week's topic. It's not that I couldn't think of one (though it would be tough at this point in the morning since the caffeine hasn't yet circulated through my bloodstream). The topic, however, needs to be discussed in stark contrast to my usual lighthearted modus operandi.

A few days ago, it was reported that the top 4 cigarette makers (representing a 90% stake of the market) have been trying to "backdoor" their way out of paying penalties on past profits because of their knowledge of nicotine addiction, complicity in its marketing, and downright conspiracy to addict the general public to a product they control so that they can continue to reap the financial benefits.

We're not talking about a few dollars here. In the article, the numbers that were bandied about were $280 billion of the past profits plus an addition $14 billion to run a campaign to help people quit smoking. This isn't chump change as you know - in fact, this is a substantial percentage of the $1 trillion budget / deficit / robbing of our children that you've heard so much about over the past few months. So while it is understandable that R. J. Reynolds, Phillip Morris, etc. want to protect their financial positions, it is my opinion that you have no such right when you are in the business of robbing the public of something far more precious than their material possessions: their health and longevity.

I am the only person in my immediate family that doesn't smoke. As a young, curious boy at age 6, I asked my mother one night why she smoked. She said that she couldn't stop and, curiosity full engaged, I asked if it was because of the taste. She answered that it wasn't that either and, knowing I wouldn't stop, she told me to take a drag because I couldn't comprehend the concept of addiction or why someone would do something they didn't enjoy. That one puff along with the obligatory huffing, puffing, coughing and sputtering traumatized me to the point that I've never, ever wanted to touch a cigarette.

My younger brother wasn't so lucky. I caught him smoking (by finding the leftover butts hidden under my nightstand) at the age of 12. I don't know how long he had been smoking already, but 12 is too young in my opinion.

My mother still smokes. My father wants to quit, but can't because the addiction has him in its clutches so every time he tries and my mother starts sneaking cigarette breaks he can tell and it wracks his psyche to the point that he has to start again.

While I am happy to say that my brother, several years ago, quit cold turkey and hasn't smoked since (it's easier when you don't have people around you who are still smoking), my mother continues trying to quit but fails due to a lack of willpower. It kills me, too, because now she's developing emphysema on top of the other medical issues she's experienced on an ongoing basis for the past 20 years: acute fibromyalgia; two cases of bacterial meningitis; cancer; several mini strokes and heart attacks; etc. For once, I wish she could just catch a break.

So to read about companies who, in the pursuit of the Almighty Dollar, have raped us of our ability to control one very big aspect of our own health complain that they are getting the short end of the stick financially, it is upsetting. My mother's life has been shortened by several years because of the addiction you forced upon her, Mr. Phillip Morris. Are you going to pay the bill for the oxygen tanks that she will soon need, Mr. R. J. Reynolds?

The irony in all of this is that I could easily replace "cigarettes" with "oil" or "nicotine" with "groceries" and we'd have essentially the same story (albeit without the health issues associated with nicotine addiction). This singular control over a necessary resource (hydraulic despotism for those of you keeping score at home) or the ability for a tightly knit group of companies to generate the necessity for a single resource (i.e. tobacco) goes strictly against the anti-trust concepts regardless of whether they are a cartel, an oligopoly, a monopoly, etc.

And while I'm not a huge fan of government regulation when it comes to capitalism, the need to "stay out" is predicated on the trust that we have in companies to act with morals, ethics, and a general compassion toward their fellow humans. When that criteria is not met then the governments obligation to stay out of their business also gets removed from the mix.

See you next week.

Tuesday, January 12, 2010

"Dubya"

If you think this week's post is about the last President of the United States, you're wrong. Instead, it's about the esteemed 23rd letter of the alphabet: "W."

In English, we pronounce it "double-yoo," where "yoo" is the 21st letter of the alphabet, "U." But in France, it is pronounced "double-vee," using the letter "V" to more accurately describe the shape of the character.

"Double V" shapes are not unknown to those who work in the finance industry. The shape to which I am referring is the shape of the graph that the DJIA makes when you look at it over a long period of time. (And for those of you who are day traders, John Magee's gospel on the subject of graph, or technical, analysis said and proved that short term graphs really aren't worth the time to watch them if you're looking for patterns.) Essentially, the situation ends up like this:
  1. Stocks take a huge dive from near highs.
  2. At the bottom, speculators buy stocks because they are at such good prices.
  3. Stocks go up, but because the underlying fundamentals of the stocks don't support the new run-up in prices, there is much less momentum on the upswing.
  4. As the prices approach the top, the speculators get out having made their profit.
  5. Since no one else feels the stocks are a good buy and are in fact overvalued their prices collapse under their own weight.
  6. Eventually, the underlying companies get their act together and the stocks make a momentous climb again.
There is a fair amount of debate as to whether we are in a true resurgence of the upward trend from the pre-mortgage meltdown days. Many analysts seem to think that we are. My boss, who was a trader in a previous life, swears to me that the income statements support the companies' run-ups in price.

But there are those contrarians, like myself, who feel that the unresolved housing situation coupled with the state of (un)employment represent a double-whammy that will suck the life out of any long term increase in price. And after the January bounce wears off (due to portfolio rebalancing) it is my firm belief that stocks will resume their trend downward.

It is to be noted that this is a complete reversal from a stance I took when discussing the topic with some friends when the market initially dove (in late 2007). I had said then that the stock market would be over 9,000 again by July 2009. While I was right (albeit off by a month, since it didn't cross the 9,000 mark until July 30), I must confess that at the time I was expecting a "normal" recovery.

That was then, before the housing market decided to stay in the doldrums. Before we had double digit unemployment. And certainly before economists started saying that unemployment will take quite a while before it returns to it's historical average of 5%. Looking at this, it isn't difficult to see how this general malaise can (and will!) have an effect on the attitude of the consumer, the small business, and then the large business as the trickle up effect takes hold.

The real question in my mind now is how will Wall Street react with regards to the "New Deal" bonuses that are being paid now. For those who haven't heard, a number of firms are now planning to award bonuses that are less cash heavy and more stock heavy. But, as a bonus (pun intended), there are "claw back" clauses that essentially mean the company can take back the bonuses if the company's long term performance suffers.

If I had to make a guess, I would say that there will be no effect. Not only do I have little confidence in the morality of the financial services industry, the normal rules of finance do not seem to apply to them. Specifically, there is an adage that says:

"The bulls make money; the bears make money; the pigs get slaughtered."

The problem is that, in this scenario, the pigs always make money because they find ways to skirt the touchy subject of ethics while (usually) not breaking the law. Don't believe me? Consider the Galleon insider trading criminal case that is currently ongoing. Or consider the behavior of two prominent financial services firms that I discussed last week. Are they breaking the law? Perhaps. But one thing is for sure: they are making money, and scads of it. If you're following me on Twitter, you've seen my scathing commentary on these companies especially as it pertains to the payouts that will be starting in the new few weeks.

It's enough to make me nauseous, honestly. And while I recognize (and even know personally) that there are individuals in that industry that do have a conscience, I (and the American Public) are being inundated with news report after news report of how these companies do not believe there is anything wrong with what they've done. Read the excellent op-ed piece by Frank Rich in last Sunday's New York Times if you want another person's view on this topic.

So I'll say it again: bring back Glass-Steagall!

Monday, January 4, 2010

Morals and Ethics

"He who dies with the most toys wins!" - unknown

I remember hearing that expression as a young man and thinking that it was silly but still made a lot of sense. Thinking back to that now, I can justify my agreement by saying how men are "goal oriented" and other such drivel, but in the end it was basically a vocalization of my own selfishness and greed.

One has to wonder if that is / was the motto for the financial services companies. In recent days news articles have been published in the New York Times and elsewhere about reprehensible behavior at both Goldman Sachs and Morgan Stanley. Essentially, they were promoting Credit Default Swaps as good investments when they were secretly betting against those same investments since they knew the truth of the matter: they weren't worth the paper they were printed on.

When I read these articles, I was aghast. How could any company maliciously trick another when they are the ones to which many others look at the reference source of information? Specifically, instruments such as CDS, CDO, MBS, and others are very complicated so we expect the financial services companies to provide us with sound advice regarding any potential investment involving these instruments. I'm not suggesting that "sound advice" should be equated with "advice that is never wrong," for everyone makes mistakes. But it's one thing to make a mistake and another thing entirely to intentionally mislead so that you can make a profit.

In fact, I believe there's a term for that: fiduciary malfeasance.

A good friend of mine who was rather religious was also the CFO of a small company in Manhattan several years ago. I found these two aspects of his life to be somewhat contradictory, so I asked him about it. He said to me (paraphrased) that being honorable does not mean you have to be a floor mat for everyone. That expression left an indelible impression upon me, because it illustrated that it is still possible to succeed at what you do without losing your morals in the process.

Adopting the position that honor is greater than money has its benefits, albeit intangible ones. Specifically, knowing that you've never needed to use any underhanded tactics to further your own career does provide a degree of job satisfaction that no promotion or pay raise will ever duplicate. I have found this to be true and, while it does not pay the bills, it certainly helps me sleep well at night.