Tuesday, March 16, 2010

ebook pricing madness

Everyone knows the publishing industry is in the doghouse, and faces an uphill battle for survival.  See this, this, and this.
ebooks probably represent the future of books. Devices like the Kindle and the Apple iPad are probably where users will read these books. All well and fine. But what about the pricing? Well, Amazon forced a $9.99 pricing for most bestsellers on the publishers. The publishers got to keep 30%. Then came Apple with its iPad, allowing publishers to charge upto $14.99 for most books. Publishers were happy. They were also happy that they had some bargaining leverage over Amazon. Competition is always good. Or does it? The first salvo was fired by MacMillan, who forced Amazon to let them and then other publishers charge a higher price. All well and fine, you could argue.

But then the madness starts.
Consider the current Amazon #1 ranked (accessed Mar 14 2010) bestseller,is

The Big Short: Inside the Doomsday Machine

The hardcover edition of the book has a list price of $27.95, and is available on Amazon.com for $15.09, representing a discount of 40%.

Now take a look at the Kindle price for the same book.
The Kindle list price is $33.96!! That is $6 costlier than the hardcover price. And that's not all.
The discounted price for the Kindle edition is $20.68!! That is $5.59 costlier than the hardcover edition!!!

And it doesn't end there.
The Kindle edition, perhaps mercifully, is not even available for customers from the United States.

So why this pricing madness? The month of March?
Many explanations spring to mind.

One is that the publishing industry is looking to the entertainment industry for its pricing strategy. Remember the region coding scam? Where DVDs came with a region code, and DVD players would also be region enabled, and would play DVD discs only for that particular region? This was a perfect example of using technology to enable a form of price discrimination that would have been technically impossible before. The thinking was that by releasing movies to DVD in a staggered manner, companies could extract the maximum revenue for their titles across the globe. If a movie had just been released to an Asian market, even as its DVD title was available in the US, then region encoding would mean that consumers in the Asian market could not watch the movie on DVD, and would have to shell out $$$ to go watch the movie in theaters.
Smart thinking.
Except that it did not work.
DVD hardware manufacturers had no incentive to cripple their players by building in region protection. So what did they do? They either sold players without region coding enforcement, or they made it trivially easy to make the players region free, so they could play DVDs for all regions. On the other hand, the encryption on the DVDs was hacked, and pirated versions of the DVD titles would sell for pennies. So much for that pricing strategy.

So, it seems that the publishing industry is wanting to do the same with ebooks. Release a hardcover title in the US, its ebook version in other markets, and so on... Not smart. This is also, if you look at it, similar to the publishing industry's existing strategy of releasing a hardcover edition first, then an trade paperback, and finally a mass market paperback. They are looking to slot the ebook as another edition. Except that it is not so. eBooks are not simply another 'type' of books. It is not simply a case of a paper cover, thinner paper, and so on...

The other thinking may be that the publishing industry really does not understand how to make money off this digital medium, and its pricing and distribution strategy is still stuck in a thought process from the analog age. A self-evident truth of the digital age has been that the marginal cost of reproduction is zero, or close to zero. Charging MORE for a digital copy than the paper version defies logic.

Publishers may also be waiting for someone else in the industry to figure out a way to profitability, and will then follow suit. Wait. For deliverance.

But how can they go about making money off digital books?
Not so straightforward, but not as difficult also as the hare-brained actions of the publishing industry suggest.

Let us look at bundling strategies first.
If you were to buy an Amazon Kindle or an Apple iPad or the Barnes & Noble Nook reader or some other digital ebook reader, why can't publishers offer a deal where you get to choose the publisher of your choice and then select 5, 10, or some other number of books from that publisher for free? Or at a substantially discounted price of, say, $0.99, or $1.99, or $4.99?

Take the second option.
If you buy a hardcover edition of a book, why can't the publishers offer a 75% or even 90% discount off the ebook price? If it is a paperback, then offer a 50% discount of the ebook price. Take a look at the discounts offered on Amazon.com, Barnes & Noble.com, and other book sellers. Discounts anyway run at 10%, 20%, or even 40% off the list prices. That amounts to as much as $10 or more on new hardcovers. For this amount I can get the ebook version of the book. As far as I am concerned, I now have the hardcover edition, and the ebook version of the book, for the price of the hardcover. Bottom line - I, as the customer, won't feel ripped off by being forced to essentially buy the same book, twice.

Third - what about a book club? These clubs have existed for decades for the physical paper books. These clubs have existed for audio books too. Audible.com is one example.. For a flat price you get to choose a fixed number of titles as month, a year. When a customer purchases a Kindle, offer him a discounted annual membership plan. The user is plunking down $250 or more for the reader. Why not offer him a discounted one year plan for $49.99 with the option to buy 12 ebooks?

Do this in reverse too. Any time a user buys an ebook, offer a discount on the paperback or hardcover.

What about the titles I already own? I am not going to buy them again. Well, if you are Amazon.com, you already have the purchase histories of your customers going back to 1996. Offer the same discounted purchase options to them on the ebooks for the titles they have purchased.

Then there is the reading experience. Which is emasculated and strangely devoid of the experience that accompanies a paper book. Improve this experience. Bring the same typeface to the digital books as the paper books. Bring the same texture and color of paper to the ebooks too.

You could also talk about making book reading a more social experience, ala Facebook, MySpace, etc... After all, the world of book readers and book lovers is a very passionate one.

The type of pricing being pursued by publishers today is nothing short of idiotic. Like an ostrich with its head in the sand, like a pigeon with its eyes shut.

© 2010, Abhinav Agarwal. All rights reserved.

Monday, March 15, 2010

New Crossword Bookstore

A new Crossword bookstore has opened up in JP Nagar. This is quite large, by Indian standards. That is, it wouldn't compare with a Barnes & Noble. On an entire floor, it has several aisles stacked with books. A section for children. There is still some work being done, but it is a pretty picture indeed. A welcome addition to the world of books, where the habit of reading is declining, and the world of physical books is being written off. How can anyone even begin to compare the grandeur of the physical book with the cold digitized artifact of a Kindle or an iPad? Huh??

View Larger Map

© 2010, Abhinav Agarwal. All rights reserved.

Sunday, March 14, 2010

Two in one - Black Swan and Fooled by Randomness

If you are interested in either Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets orThe Black Swan: The Impact of the Highly Improbable then this seems like a bargain - both books in one paperback edition. For Rs 599. At the Crossword bookstore in Bangalore.

© 2010, Abhinav Agarwal. All rights reserved.

Saturday, March 13, 2010

We are here for money, but we will play nice

This advertisement is one you are more likely to see when the economy is going down the tube, when loan defaults are soaring, and money in the bank doesn't really mean what it used to.

Snapped this advert in Koramangala in Bangalore in Jan 2010.
And what about the name of the firm? We have arms, and if you want to keep yours.... need we say more?

© 2010, Abhinav Agarwal. All rights reserved.

Monday, March 8, 2010

Reading from the week of Mar 01

Misc links from reading form the week of Mar 01, 2010

  • Dilbert and Dogbert debate whether the cure for incompetence is evil. [link]
  • Tim Harford, author of The Undercover Economist, on why you shouldn't shoot the messenger. [link]
  • I had never heard of the Collatz Conjecture. XKCD cartoon. [link, and the Wikipedia page]
  • The father of behavioral economics, Kahnemann, at TED [link via Paul Kedrosky]
  • Apple's lawsuit against HTC is really a warning shot to Google. [link]
  • On Taleb's Black Swan. [link]
  • Cringely argues that Goldman Sach's Lyod Blankfein would have been rewarded with a 1-6 year jail term had he done the kinds of things his company did to its customers in any other industry, heck - even the casino industry! [link]
  • Adrian Ward on the market for OBIEE consultants. Glad that my and others' work at product development is helping so many others :-) [link]
  • Now this is a seriously good photographer's portfolio site. The photos are mind blowing. Did I say I am envious? [link]
  • Thomas Friedman writes about the US, "We are the United States of Deferred Maintenance. China is the People’s Republic of Deferred Gratification", his interview with Paul Otellini, and the need for the US to stay competitive.[link]
  • Bruce Schneier links to an article by a former CIA operative on the assassination of a Hamas operative's assassination, suspected to be carried out by Mossad. [link]
  • Is the UK's Labor Party using immigration as a vote-bank? [link]
  • Dan Heath recommends Sheena Iyengar's The Art of Choosing [link] I am waiting for this book - should get it within the next week or two, I think. Am also very interested in reading the Heath brothers' latest book, Switch: How to Change Things When Change Is Hard
  • Auditory visualization of the Winter Olympic results. Very well done. [link, and from the Junk Charts blog]
  • Scott Adams drew flak for his flaying of Google's Gmail usability testing (the link, and I linked to it in an earlier post). He follows up in this post. [link]
  • Funny Heathcliff cartoon on karma. Funny. [link]
  • What's the worst advice you have ever received. Bob Sutton posts. [link]
  • A very, very good book - Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy, by Barry Ritholtz. My review. [link]
  • More bad press for Google Buzz. From Sillicon Alley. [link]
  • How to use the Google Hard Drive. Now all we need is all-you-can-eat broadband-and-I-mean-100GB-free at 50mbps. From Silicon Alley. [link]
  • Silicon Alley reminds us that Google is still a one-trick pony; SEARCH. [link]
  • Google acquires Picnic. Whither Picasa?? [link]
  • Barry Ritholtz admires Warren Buffet's letter to his shareholders. [link]
  • John Battelle thinks the Database of Intentions is a bigger thing than he thought. Interesting, but has flaws in its thinking, IMHO. [link]
  • Dilbert on the consequences of an engineer doing a QA engineer's job. Ouch! [link]
  • Barry Ritholtz lists the most frequently purchased books from his blog. [link]. While on the topic, also read his post, The Big Picture » Blog Archive » Apprenticed Investor: Reading Is Fundamental
  • Bob Sutton on the best(?) asshole busting story he has heard. Probably heard it before, and while it is indeed good, you have to also suspect that some bungholes are not going to be put off by a mere insult. [link]
  • Why not to like the iPad. One reason - it is under-featured and over-priced. But that has not stopped other products from succeeding, has it? [link]

© 2010, Abhinav Agarwal. All rights reserved.

Thursday, March 4, 2010

Jog Falls and the 800 feet sheer drop

I had blogged about Jog Falls in January (link), but I wanted to extract from that post just the section on the 800 feet sheer drop from near the Raja Falls.


Our intrepid guide, very helpful and cheerful, took us to the north side of Jog Falls, and then past the view point, where a five minute trek, not strenuous at all, took us to the point where a small stream of water forms a small pool of water that then makes it way through a small opening and plunges down as the Raja Falls. To the left right of this point is a huge boulder strategically placed so that it overlooks the Raja Fall. Almost completely over the falls.Now, you do not clamber over the boulder, walk over to the edge and peer over. No sir. Do not try that. Do not. Because you don't want to be wondering, as you go into a 800 feet free fall, "why ever did I do that for?"

So what do you do?
You clamber over to the rock. And then you crawl. On all fours. And your belly. Till you can peer over the precipitous ledge.

And this is what you would see.
The Raja fall is the one at the top left corner.
And the small white mass of water that you see at the bottom is 829 feet below.

Needless to say, the first time I peered over, I too a peek and then immediately peeled myself back. As far back as I could. The mind has a tough time coming to terms with heights as stark as this. At first. You get the feeling that if you were to peek long enough, you may just, somehow, find yourself tipping down. You won't really, because the ledge does not have a downward slope. But tell that to the mind.
After collecting my wits, I ventured again, this time armed with a camera. And shot off two shots, rapidly, one in portrait and the other one in landscape mode. And peeled myself back.

These two photos are, I believe,  the first ever taken from this vantage point. Till I am corrected.

So let us get mathematical and do some calculations. We want to calculate the time it would take for a person so deciding to take the final plunge to hit the water below. We will ignore the effects of wind resistance. And take the value of 'g' as 9.8 meters per second per second, i.e. g = 9.8 m/s2

Now, the height can be taken as 829 feet, which is 248 meters.
The initial velocity, u, is 0.
So, plug these values into the equation s = ut + 1/2 at2
248 = 0 + 0.5 (9.8 x t2)
or, 50.6 = t2
which gives us 7.11 seconds.

Per the Wikipedia entry on Jog Falls (accessed Jan 1 2010):
Jog Falls (Kannada: ಜೋಗ ಜಲಪಾತ), created by the Sharavathi River falling from a height of 253 meters (829 ft) is the highest plunge waterfall in India[1] Located in Shimoga District of Karnataka state, these segmented falls are a major tourist attraction. It is also called by alternative names of Gerusoppe falls, Gersoppa Falls and Jogada Gundi.[2]
There are many waterfalls in Asia - and also in India - which drop from a higher altitude. But, unlike those falls, Jog Falls is untiered, i.e., it drops directly and does not stream on to rocks. Thus, it can be described as the highest untiered waterfalls in India.

© 2010, Abhinav Agarwal. All rights reserved.

Tuesday, March 2, 2010

Reading from the week of Feb 22

Selected reading from the week of Feb 22, 2010.
  • This could have been a good post, but lots of immature thinking ruins this post on product management and saving good features for later [link]
  • Steve Jobs is the considered god of presentations. So you won't find him saying these things during a presentation. [link]
  • Will Wall Street drink the Apple iPad koolaid? Valleywag muses. [link]
  • Pakistani taxi driver and his Google skills. Amazing :-) [link]
  • The creepy world of sci-fi is soon becoming reality. Stalkers, cell phones, and face recognition programs. [link]
  • Stories behind still images. [link]
  • More on creepy real-life scenarios. This time a school spying on kids via webcams. [link]
  • Bruce Schneier on the usefulness, or lack thereof, of surveillance cameras. [link]
  • Dilbert creator Scott Adams muses whether Gmail has had any usability person ever take a look at its interface. [link]
  • Paul Kedrosky on a tale of two cities. A tale of relative per-capita personal incomes... [link]
  • Old one, but still as funny standup act on how not to use PowerPoint. [link]
  • Schneier links to this excerpt written by Mark Twain on risk perception. [link]
  • Scientific American laments that the opaque data agreements between ISPs threatens the future of the internet. [link]
  • Stephen Few is not overly impressed with a new book on Information Graphics. [link]
  • Dilbert on useless tasks. [link]
  • Ritholtz links to some good articles. Link to post, link to New Yorker article on Krugman, an Esquire article on movie critic Roger Ebert and his battle with cancer.
  • Managers who can't manage and leaders who can't lead are not news. But programmers who cannot program? Jeff Atwood at Coding Horror muses. [link]
  • Amitabh Bachchan goes down memory lane. [link]

© 2010, Abhinav Agarwal. All rights reserved.

Monday, March 1, 2010

Bailout Nation

Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy 

This is the second book on the global econo-financial meltdown I have read, and is much larger in scope than the first one I read (The Looting of America, Amazon.com review). A related one is The Future of Hedge Fund Investing: A Regulatory and Structural Solution for a Fallen Industry (Wiley Finance) (my review post, and Amazon.com review).
    What is depressing is the realization that taxpayer funded bailouts have been happening for decades. Each bailout only makes things worse, and sets the stage for a larger bailout down the road. Companies and industries lobby for these bailouts, get them, and yet find themselves out of business a decade or two later, despite the bailouts. The Federal Reserve, ever expanding its mandate and powers, personified and led by the blind pursuit of an intellectual belief in the self-correcting powers of the market by Alan Greenspan, has probably done more damage to the US economy than any other single player or institution. Politicians, US Presidents, and the Congress, Democrats and Republicans alike, have allowed themselves to be corrupted by the banking lobby. Treasury Secretaries have been like the proverbial wolves set to protect the sheep from the wolves. And this is without getting to the banks, the traders, the investment firms... Everyone has been relentless in their pillage of the taxpayer.

    The bailout numbers are huge. They start out relatively modest, in the low hundreds of millions of dollars, with the bailout of Lockheed Aircraft Corporation in 1971, then with the Chrysler bailout, and by the time we reach the end of the last decade, they are flowing like a torrent, gushing hundreds of billions of dollars, to all and sundry. Numbers so large they dwarf the cost of the Second World War, of the rebuilding of Europe, of the New Deal. Not only the amounts, but also the frequency is mind-boggling. A cash injection of $45 billion dollars and guarantees of $306 billion to the Bank of America. A $700 billion TARP program. The takeover of AIG - $173 billion. $249 billion in guarantees to Citi. And on and on.

    Barry Ritholtz takes his pen to the crisis and paints a rogues' gallery of players, all with their noses to the trough. Take the SEC, which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets. How in heaven's name can you expect effective regulation when the head of the SEC believes in less regulation, or is on record having advised companies to destroy evidence??!!
    Bush’s first SEC appointment, Harvey Pitt ... as a Wall Street lawyer, Pitt had “recommended that clients destroy sensitive documents before they could be used against them [page 241]
    What about the Treasury Secretaries - Hank Paulson under George Bush, and Tim Geithner under Barack Obama; they are all cut from the same cloth.
    "... are bankers, first and foremost. As such, they do what most professionals do when their industry is under assault: protect the institutions. ... The obvious solution—put the insolvent banks into FDIC receivership, fire management, liquidate holdings, sell the assets off, wipe out shareholders, and pay the bondholders whatever was left over - was simply unthinkable." [page 221]

    The less said about the Congress the better. Maybe Mark Twain said it first, and said it best.
    “Suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself.” [page 245]

    Ritholtz singles out former Federal Reserve chairman, Alan Greenspan, as the single most culpable player in this entire meltdown, and for the most withering of criticisms. Once seen as a demi-god, about whom Senator John McCain would go so far as to state during the GOP debate of 2000, "I would not only reappoint Mr. Greenspan - if Mr. Greenspan should happen to die, God forbid . . . I’d prop him up and put a pair of dark glasses on him and keep him as long as we could." ... "By 2008, the man formerly known as the Maestro saw his reputation in tatters." [page 61]

    Under the guidance of Alan Greenspan, the Federal Reserve abused monetary policy, ignored critical lending issues, and failed to regulate new and irresponsible banking products. ... Most of all, it was his deeply held philosophical conviction that all regulations are bad, and are to be avoided at all cost. [page 233]

    The U.S. central bank created moral hazard not by targeting inflation or the business cycle, but instead by focusing on asset prices. [page 58]
    Rather than seeing markets as a sign of the economy’s health, the Fed chair tended to see asset prices as an end unto themselves. [page 60]
    With the World Trade Center smoldering in ruins, the Fed sat around and waited. Wednesday, Thursday, Friday - nothing. It wasn’t until right before the markets reopened - when it would matter most to asset prices - that it finally did something. On September 17, 2001, almost one week after the attack, and precisely one hour before markets reopened, the Fed slashed rates another half point.
    Whatever doubts there were that Greenspan was supporting asset prices disappeared forever that morning. [page 86]

    For a person who believed in the markets' ability to "self-regulate", Fed chairman Alan Greenspan's repeated interventions to bailout markets and companies is astounding.
    And the unstinting champion of these unregulated derivatives was Alan Greenspan - "We think it would be a mistake to more deeply regulate the contracts." [page 138]

    Tom Savage, the president of FP, summed up the free lunch (on Credit Default Swaps) mantra succinctly: “The models suggested that the risk was so remote that the fees were almost free money. Just put it on your books and enjoy.” [page 205]

    " it was then Fed Governor Bernanke who ... provided the framework and intellectual cover for Greenspan’s ultra-easy money circa 2001 to 2003." [page 235]

    Under the leadership of then Chair Alan Greenspan, the Fed began the most significant rate-cutting cycle in its history. From pre-crash highs of 6.5 percent, the Fed took rates all the way down to 1.75 percent. [page 94]
    ... With wages stagnant, Americans turned to home equity withdrawals in order to maintain their standard of living. ... Mortgage equity withdrawals (MEWs)—normally a small portion of consumer debt—exploded. The accelerating borrowing against their homes allowed consumers to keep on spending, even as their savings rate went negative for the first time since the 1930s. [page 95]

    Just how deeply in bed (if that is indeed the right phrase) are politicians with corrupt industry can be gauged from these excerpts.
    The Glass-Steagall Act of 1933 not only established the Federal Deposit Insurance Coporation (FDIC) but also established separation between commercial banking and the securities industry. This Act was repealed in 1999 through the Financial Services Modernization Act, and set the stage for the rampant speculation by banks.
    "The CFMA removed derivatives and credit default swaps from any and all state and federal regulatory oversight." [page 138]
    Prior to the passage of the CFMA, unregulated credit default swaps were under $100 billion—a sizable, if manageable, amount of derivatives contracts. By 2008, they had grown to over $50 trillion. [page 138]
    "Among the over-the-counter derivatives freed from any federal jurisdiction by the CFMA were energy futures.... A key sponsor of the CFMA was Texas Senator Phil Gramm, whose wife, Dr. Wendy Gramm, was a member of Enron’s board...
    Enron paid Dr. Gramm between $915,000 and $1.85 million in salary, attendance fees, stock option sales, and dividends from 1993 to 2001.
    Days before her attorneys informed Enron in December 1998 that Wendy Gramm’s control of Enron stock might pose a conflict of interest with her husband’s work, she sold $276,912 worth of Enron stock."
    [pages 139, 140]
    ... Senator Phil Gramm ... was the senator behind the Commodity Futures Modernization Act of 2000 (CFMA), and spearheaded the repeal of Glass-Steagall.
    ... Placing any blame on deregulation was simply “an emerging myth,” the retired Texas senator has said.   Deregulation “played virtually no role” in the economic turmoil engulfing the globe, Gramm claimed
    in November 2008.
    What shameless nonsense. You will not come across a greater example of cognitive dissonance in your lifetime.  ... The inconsistency of his deeply held philosophy and the results thereof are logically incomprehensible to Gramm’s conflicted brain. If he were ever to admit the truth, he would likely go stark, raving mad [pages 235, 236]

    Thomas Jefferson, the principal author of the Declaration of Independence, argued that since the Constitution did not specifically empower Congress to create a central bank, doing so would be unconstitutional.
    “Banking establishments are more dangerous than standing armies,” Jefferson famously declared [page 15]

    One of the best books written on the collapse of the hedge fund, LCTM, is When Genius Failed: The Rise and Fall of Long-Term Capital Management

    The year 1998 saw the last opportunity to avoid moral hazard on a grand scale. A huge opportunity was lost, and the genesis of our current crisis was born. The missed opportunity in question involved Long-Term Capital
    Management (LTCM), a hedge fund that specialized in fixed-income arbitrage. [pages 68, 69]

    Much has been written about sub-prime mortgages that were bundled into mortgage backed securities and sold off, re-packaged and sliced-and-diced and re-sold.
    Allowing banks to give money to people regardless of their ability to pay it back is at the heart of the current situation. That factor, combined with the ultra low interest rates created by the Fed to bail out the prior market crash, sent the credit market cascading toward disaster. [pages 101, 102, 103]
     How could near-junk instruments like CDOs be rated AAA. And how could government debt also be rated AAA at the same time? Especially if there was a massive difference in returns between the two. Higher returns imply higher risk. Higher risk has to result in a lower rating. Because higher risk essentially means a higher probability of default. So why the identical ratings???
    Either this was a brilliant heretofore unrealized insight or it was a massive fraud. [page 111]

    It turns out that the three ratings agencies - Standard & Poor, Fitch, and Moodys - were rating these instruments. At the same time they were also helping create and package these instruments. Like a student who not only sets the question paper, and then writes it, but also gets to grade his own paper. Conflict of interest? You bet!
    The sellers of these mortgages made warranties to the Wall Street buyers of this paper that the borrowers would not default for 90 days - enough time for the loans to be sold off and repackaged as residential mortgage-backed securities (RMBSs). [pages 120, 121]

    Banks have a funny way of looking at lending: It’s not the loans you reject; it’s the ones you approve that get you into trouble. [page 119]
    And banks were approving trillions of dollars of mortgages a year. When interest rates are at historic lows, people want to lock their mortgages to these low rates. Logical. So... ask yourself:

    Why would ARMs make up so much lending when mortgage rates were at their lowest levels in 50 years? The only possible answer was to sell more - and bigger - loans. Getting people into teaser-rate mortgages, regardless of suitability, would get them past that default period covered by the initial warranty. This was the sub-prime mortgage industry’s primary raison d’ˆetre. [page 128]

    The Oracle of Omaha, Warren Buffet, was unsurprisingly prescient:
    The rapidly growing trade in derivatives poses a “mega-catastrophic risk.” . . . (F)or the economy, derivatives are financial weapons of mass destruction that could harm not only their buyers and sellers, but the whole economic system. - Warren Buffett, Berkshire Hathaway 2002 Annual Report [page 137]

    What serves as a chilling reminder of the law of unintended consequences and of the hubris that attends possibly accidental success is articulated in Chapter 12 - "Strange Connections, Unintended Consequences". The 1996 Telecommunications Reform Act eliminated media ownership regulations, resulted in Clear Chanel Communications owning 1200 channels nationwide, getting rewarded with a stock price of $70 and a $40 billion market cap. "now it trades for pennies. ... an under $1 billion market cap." Why??? It fired its local talent, replacing their programming with "... a homogenized playlist feed from a central bunker in Texas"

    The root cause - the root of the greed, the craziness, the mad dash to leverage, all of it - according to Ritholtz, was the result of "dot-com stock option p*nis envy". Yes. Not the first rush of technology driven billionaires like Oracle, Microsoft, EMC, Intel, Cisco, Dell, etc... Not even the second rush in the 1990s - Netscape, Yahoo!, RIM, etc... It was the dot-com boom where nerdy students with nothing more than gluttonous greed in their eyes and a paper-napkin thin business plans becoming paper millionaires that drove Wall Street bankers crazy. With envy. With greed. With a sense of an intellectual inferiority complex. Hence the rise of the quants on Wall Street.
    “We’re engineers, too - financial engineers! We design derivatives and securitize debt! We have access to massive leverage! Hey, everybody, we’re all gonna get laid!” [page 197]
    The problem was that banks are not the same as technology startups. When a tech start-up fails, the cost is minimal. A few million dollars at the most. Not so with banks. Add to that the hundreds of millions of dollars in bonuses that executives paid themselves. This is true of industries beyond Wall Street though.
    Then there are the so-called compensation consultants. They did a horrific disservice to the shareholders as well as the companies. The role of these primarily ethicless weasels was to give cover for these ridiculous compensation packages. [page 199]

    In 1836, Mayer Rothschild wrote, “Give me control of a nation’s money, and I care not who makes the laws.” [page 234]

    Some solutions are suggested towards the end of the book. Some are practical, some too idealistic; but at the end of the day, almost every one of those suggestions is better than keeping the status quo. And unfortunately, the status quo is what has actually been preserved. A free lunch to the pillagers of the American economy, fully paid-for by the taxpayer.
    Newsletter writer John Mauldin concurs: “Bring in one million fairly affluent, legal immigrants, and you put a floor (and maybe some bounce) in the housing markets at all levels. [page 289]
    This is a suggestion that is going to be anathema to both sides of the political spectrum, for various reasons.

    The US pumped in $170 billion into AIG - money that has most certainly gone down the drain, completely. Instead, if this money had been earmarked over a 10 year period to help fund research into green technologies, the payoff would have been much, much greater. The government could grant $100 million to 100 universities. That would be only $10 billion. Grant $100 each million to 100 startups in the energy technology sector. That's another $10 billion. Provide a $1000 credit to 10 million homeowners who install energy saving insulation, or upgrade their heating systems to greener alternatives. That's $10 billion. And so on...

    For $35 billion you could "...'fund four years of public college education for every student in high school with at least a B average." [page 294]
    This is less than one-fourth of the money pumped into one single entity - AIG!!! This amount is less than 5% of the money under the TARP program!!

    © 2010, Abhinav Agarwal. All rights reserved.