$2 billion here, $2 billion there …

… pretty soon we’re talking real money

By Bob Gaydos

Mark Zuckerberg lost $2 billion the second day after his company, Facebook, raised $16 billion in an initial public offering. Maybe you didn’t notice because Mark is still a long way from visiting the soup kitchen.

Facebook sold 421.2 million shares at $38 a share on May 17, a Friday, the biggest technology IPO in history. By Monday, the share price had dropped below $34, delivering that “blow” to Zuckerberg’s wallet. By the close of business Tuesday, Facebook shares had dropped to $31, but the founder, whose financial interest in the company stock was estimated at $17 billion, was reportedly enjoying his honeymoon and not fretting about the public’s judgment that his wildly popular social media enterprise was also wildly overvalued. He actually got married after the IPO (photo), which to me implies true love.

At roughly the same time, JP Morgan Chase, the bank that is too big and too smart to make an investment mistake, much less fail, announced it had blown $2 billion -- there’s that number again -- on something called synthetic derivatives. This is what we make in America today instead of shoes and cameras and tires and auto parts. Jamie Dimon, the Zuckerberg of JP Morgan, was uncharacteristically embarrassed and apologetic about the loss, which, as with Zuckerberg, barely put a dent in the JP Morgan bank account, although it did get some people fired.

The problem with the JP Morgan fiasco, though, is that it is a bank as well as an investment company and $2 billion is still a lot of money to lose. It tends to weaken people’s trust in your judgment and maybe even make them put their money elsewhere.

Even worse, nobody, not even supposed experts on complicated investment schemes, can seem to explain what the heck a synthetic derivative is in the first place. I asked a college business professor to explain it and all I got was a blank stare. As far as I can tell, a synthetic derivative seems to be something akin to a fantasy baseball league for bored stock traders looking to hedge their bets on other investments. Whatever that means. I think they make it up as they go along. The main requirement seems to be that not even the people who create it know exactly what they’ve created. Maybe Mary Shelley would understand.

Once upon a time, banks weren’t allowed to take such risks with clients’ money, but that was before all the smart Wall Street guys and gals convinced their bought-and-paid-for members of Congress that really, really, really, really, really big banks didn’t need to be regulated and could be trusted to deal responsibly with complex investments as well as mortgages and savings accounts. Why? Because they were really big and really smart and could make a heap more money for the people who were bankrolling congressional campaigns -- and for themselves. And because most politicians were too embarrassed to admit they didn’t have a clue what the big banks were up to.

I don’t venture into the world of high finance often because, like most Americans, never mind politicians, I don’t understand it very well. But at least I admit it. Plus, I get depressed hearing about $25 million golden parachutes for CEOs who mess up, lose other people’s money, but still somehow deserve to be handsomely rewarded for their service. It seems to me if you can’t hit a curveball anymore, you get released. Period.

I also find it had to understand why anyone these days would trust the same bankers who mortgaged this country’s future with phony baloney home loans to people who didn’t have a prayer of repaying them, then gobbled up federal bailout money to make profits, and then foreclosed on all those people to whom they gave bad mortgages -- often without bothering to do any real follow up on the loans and their clients to see if they could maybe work out a way to pay.

These are not honorable people. These are people who see only the need to make more money, in any way possible, including conjuring synthetic derivatives. I’d rather invest in a crystal ball factory. The people who work at these super banks are this way because no one has paid the price for their greed. They say they are merely applying the principles of a free market to their trade -- a market that returns less than 1 percent on savings accounts and charges fees every time someone answers a customer’s question.

This change in the approach to banking began at the end of the Clinton administration with repeal of the Glass-Steagall Act, which prohibited banks from co-mingling commercial and investment accounts. Risking clients’ savings by creating exotic investment packages and selling them to other clueless investors was forbidden.

In the wake of the 2008 banking crisis, the Dodd-Frank Bill was enacted, to return some modicum of regulation over the super banks that were created when Glass-Steagall was repealed. Part of that bill is the so-called Volcker Rule, which prohibits proprietary trading by commercial banks in which bank deposits are used to trade on the bank’s investments.

The rule is named after former United States Federal Reserve Chairman Paul Volcker, who was named chairman of the President's Economic Recovery Advisory Board by President Obama when he inherited the banks’ financial mess in 2008. Things being what they are in Washington these days, the Volcker Rule is not scheduled to go into effect until July 21 of this year. And no one expects that deadline to be met.

What’s more, some economists feel the rule is still too weak because it is full of exceptions and would not have prevented the JP Morgan Chase fiasco. (Volcker himself warned about the risks of derivatives.) All of this has, predictably, led to a lot of calls for stricter regulations on these super banks.

But Morgan’s Dimon, chagrined and embarrassed as he may be, isn’t ready for a return to the old days, when banks were banks and investment companies were investment companies and people knew their money was safe. In fact, he wants Volcker weakened so his minions can try to create even more exotic investment thingamajigs. Apparently, he just plans to watch his help a lot closer from now on and wants us to trust that he will do it. Shame on him.

Most likely, given the political climate, nothing is going to change. Democrats will argue for more regulation as they have for years. Republicans, who lately seem to believe only the rich should get richer, will demand no regulation at all. Meanwhile, these 20 or so super banks that now control the U.S. economy will continue to try to create billions out of nothing because sometimes it works. No one knows quite what they do, but everyone involved at the bank winds up with tons of money when it works and a chunk of that money finds its way to congressional campaigns. So it apparently doesn’t matter that none of it seems to create jobs or promote economic development or entrepreneurship. The derivatives just keep feeding the same overstuffed mouths over and over again.

Too big to fail? Too big to regulate? These banks are really too big to exist, but no one except the Occupy movement is making this argument publicly and persistently these days.

Which brings me back to young Mr. Zuckerberg. I don’t feel sad for him that his IPO didn’t cash in as big as some had predicted. (Some of that, by the way, was due to bad calculations by the NASDAQ and the big banks that handled the initial offering.) He and his partners made their millions or billions and one of them (not a native American) even renounced his U.S. citizenship to protect his profits from the IRS.

But hey, the way I see it, they’re entitled. Heck, they created Facebook with their own brains and there is nothing synthetic about it. They made it into the closest electronic version of a living, breathing organism. It has a pulse. It is a vehicle for people around the world to communicate instantly with each other at any time. Their product is useful, portable, entertaining, ubiquitous -- and free. In our economic system, that should equate to profitable. It may just not be as profitable as its creators thought it was.

But that’s what happens when people have even the slightest understanding about what they’re being asked to buy.

bobgaydos.blogspot.com

Bagels and farts, hold the dressing

By Bob Gaydos

“So you know how some people use religion to say that gay marriage should not be allowed and others say that as long as it doesn’t affect them they don’t care, that it should be an individual choice?”

“Yeah.”

“OK. So you know how people add dressings -- Russian, Italian, ranch -- when they eat salads?”

“Yeah.”

“So how come when I eat my salad with no dressing people look at me funny and tell me I’m weird? Isn’t that my individual choice?”

“Nothing at all?”

“Nothing.”

(Long pause for effect.) “No … you’re weird. That’s just messed up. A salad with no dressing? How about oil and vinegar?”

“I hate vinegar. I do put ketchup on my lettuce, though. And it’s tomato ketchup.”

“Eww. That’s disgusting. What’s wrong with you? This sounds like it might stem from some repressed childhood crisis.”

“But it’s tomato ketchup.”

* * *

The two Bobs have been meeting over coffee and buttered, toasted sesame bagels for some time, figuring out what’s wrong with the world, how it could be easily fixed if someone would only let them and agreeing that their sons were going to do whatever the hell they pleased, so it made no sense to worry about them. Although they did.

This particular morning, there was a shortage of weighty topics, though and having exhausted salads without dressing they moved on to dinosaur farts.

“So,” says the Bob who likes dressing on his salad, “I saw this report from the BBC. It says the dinosaurs, in effect, farted themselves into extinction.”

“What?”

“Yeah. You know how cows produce an incredible amount of methane, which is the scientific name for cow farts, and methane is one of those greenhouse gasses that contribute to global warming?”

“Yeah. OK …?”

“Well, some scientists in England figured if cows today produce 50 million to 100 million cubic tons of methane a year, which sounds like a s**tload of methane, the biggest dinosaur species, like the Brachiosaurus (picture above), must have created even more.”

“Seriously, they got money to study this instead of why boring soccer games cause riots?”

“Yeah. A bunch of scientists from universities in England and Scotland figured out mathematically that the big dinosaurs that lived about 150 million years ago created about 520 million cubic tons of gas every year, which must have really stunk up the joint. But they say it also made the earth much warmer -- 18 degrees hotter -- than it is today and that helped melt the ice caps and glug, glug, no more dinosaurs.”

“No s**t?”

“No. And if you remember your biology, those dinosaurs were vegetarians.”

“So?”

“So it mean they were basically eating salads without dressing and farting themselves to death. A cautionary tale if there ever was one.”

“Eat your bagel.”

“Fine. Wanna hear some good news on the save-the-earth front?”

“Sure.”

“OK, so some students and professors from Yale were apparently wandering through the Amazon rain forest on an educational expedition and found fungi that -- get this -- eat plastic.”

“Get outta here.”

“Really. There’s a paper on it. They gathered up a bunch of plants and snooped around inside them and found a couple of fungi that eat and digest polyurethane. In fact, they don’t need anything else to survive. And you know the greenies keep telling us we’re going to be buried alive in polyurethane. Maybe the fungi can save us.”

“Well, I guess that would be a good thing. But is polyurethane even a plastic?”

“I don’t know. I think so, but that’s not the point. When did you become such a science whiz? The point is, it’s in everything we use and throw away. Maybe the fungi can be used to get rid of some of it. Cool, huh?”

“Yeah, great. But tell me this -- what happens after the fungi eat the polyurethane?”

“Whaddyou mean?”

“It’s digestion, right? What do the fungi give off as part of the process? Are they putting more methane into the atmosphere?”

“Jeez, I don’t know. But how much could fungi fart in comparison to cows or dinosaurs? And it probably wouldn’t smell as bad.”

“Yeah, probably not.”

“All right, gotta go. See you next week.”

“Right. Hey, maybe try a little honey mustard dressing on your salad next time, instead of tomato ketchup.”

(Part of the preceding actually happened. The rest was made up, but entirely plausible.)

bobgaydos.blogspot.com

Modern Greek tragedy: It's chilling

By Bob Gaydos

It has been quite a while since what happens in Greece has mattered in a grand-scheme-of-things sort of way. Heck, it’s been a couple of millennia, give or take a few hundred years here and there, since the birthplace of democracy has had superpower status. For a very long time, Greece has muddled through, more or less contentedly, on grapes and wine and nostalgia for its days of glory.

But apparently even classical ruins and beautiful Mediterranean scenery aren’t sufficient to keep tourists and history buffs visiting Greece often enough to offset the reality that when hardly anybody pays taxes, the stage is set for more ruins -- and these won’t be anywhere near as architecturally meaningful as the ones the world has come to know and love.

Greece today is a mess. A train wreck. It is a country on the verge of a financial meltdown and almost nobody -- even other European countries who are its partners in the Eurozone -- is saying it’s too big too fail. The deus ex machina that has come to its rescue before is on the verge of being turned off. Olympus is on hiatus.

“And so what?” we say in our typical American way. “I can still get baklava.”

Perhaps, but what if the baklava factory (just go with the metaphor)

goes belly up? And what’s a Greek salad without feta cheese? And, for the sake of serious argument, what about the Greeks themselves, especially the ones most vulnerable to a total economic collapse? That would be older Greeks, who face sizable cuts in their pensions and a serious lack of health care resources and the youngest, the ones who see no future in their country because the grownups have made a mess of it.

If you see some parallels with the situation in the United States today, you see where I’m going. But the threat goes beyond older folks having to tighten their belts and younger folks having to face an uncertain future. The threat -- and the lesson for Americans -- lies in what many members of those disaffected groups did recently when Greeks elected a new government.

They went nuts.

Sunday, Greek voters rejected what for them are centrist parties -- those whose leaders had agreed to a rigid fiscal bailout plan with Greece’s creditors -- in favor of, well, no party. Worse, in the parliamentary system with representatives of many political parties running, Greeks gave 15 percent of the seats in the Hellenic Parliament to communists and neo-Nazis, split pretty much evenly. Somehow, the two rejected political philosophies that clashed in Word War II are now expected to work together and with others to save Greece. Herodotus must be rolling in his grave.

The neo-Nazis, known as the Golden Dawn Party, are by far the scarier proposition because they believe what they believe fanatically. They do not believe the Holocaust happened. They do advocate placing land mines at Greece’s border to keep out immigrants. They have threatened reporters who wrote honestly about their meetings, their Nazi salutes, their swastika-like flag, their selling of Mein Kampf, their suspected links with the Greek secret service and police and the fact that they demanded reporters in the room stand up when their party leader entered.

Yes, we have communists and neo-Nazis in America, but these days, even with our fractured political system, they almost never get elected to public office. On Sunday, many Greeks didn’t seem to care who was elected. Many of them are still upset about waiting until 65 to retire and paying taxes. No party came close to a majority, leaving the government in chaos as different groups try to form coalitions.

Significantly, the votes for communists and neo-Nazis came heavily from the old and the young. The fearful and the fed up. The young, especially, having little sense of what Nazis, neo or otherwise, really stand for, seem to have decided that since the adults messed it up, it doesn’t matter who is in charge.

But it does. In every country.

On a less-frightening scale for now, one of America’s two major parties is finding out what happens when mainstream citizens, middle-of-the-road Americans, the people who pay their taxes and form a community, stop paying attention to who runs for office and don’t bother to vote. The angry and fearful go from being loud nuisances to taking over. They dominate the political debate. They run for office. They reject any thought of working with members of other parties and they threaten those in their party who don’t always agree with them with retribution -- well-financed campaigns to drive them out of office.

They also occasionally make outrageous claims that go unchallenged -- for example, that some 80 Democrats in the House of Representatives are actually members of the Communist Party.

Some might say this is a bridge too far, that what happened in Greece could never happen in the United States. I truly hope that is the case. But it has also been said by wiser men and women than I that the only thing necessary for the voices of fear and intolerance to succeed is for the voices of hope and reason to remain mute. I would add, and to discard their vote.

bobgaydos.blogspot.com

Did he get Osama, or not? Case closed

By Bob Gaydos

Osama bin Laden is dead and General Motors is alive.

Those are two incontrovertible facts.

Barack Obama made the crucial decisions to kill one and save the other.

Incontrovertible.

Also, if one happens to be a Republican, inconvenient and uncomfortably on target for the two things Americans care about these days when voting for a president — national security and jobs.

Protect us from terrorists and protect our jobs.

In a presidency hamstrung by two wars he did not start, a recession he did not cause and a Republican Party that struck the words “bipartisanship” from its playbook on Day One, President Obama has had only a few clear successes. He killed Osama and he saved the American auto industry.

God forbid, though — now that the election campaign has switched focus from the GOP field of nightmares to a man-to-man between Obama and presumptive GOP candidate Mitt Romney — that the president’s supporters should be allowed to brag about his accomplishments.

Take Osama, please, as Henny Youngman might have said. In a surprisingly direct (for Democrats) attack on Romney, Obama’s campaign ran web ads on the first anniversary of the event, trumpeting the daring Navy Seals raid in Pakistan that killed the al-Qaeda leader and asked, “Would Mitt Romney have made that decision?”

Good question. In fact, it’s one Newt Gingrich might well have asked of the man he described as an indecisive liar. But the Republican whiners came out in force immediately. How dare the president exploit the killing of bin Laden for political purposes? How could he take a unifying event like that and make it a divisive one? Whaa! Whaa! Whaa!

Do you hear yourselves? Who precisely is he dividing? I still don’t know a single American who is angry that bin Laden is dead and most of them are grateful that Obama gave the order to go get him.

Which, of course, is more than George W. Bush ever did. I know, we’re not supposed to talk about any of that stuff, either, right? About forgetting about capturing the 9/11 mastermind in the mountains of Afghanistan and deciding to level Iraq instead.

And, of course, we’re supposed to forget about that W. landing, in a Navy jet and wearing full flight gear, on an aircraft carrier in the Persian Gulf to declare “Mission Accomplished” in Iraq when the war there had barely begun. And let’s not bring up the Bush team’s attacks in the 2004 campaign on Sen. John Kerry’s courage and patriotism while serving in Vietnam while W. was avoiding National Guard training in Texas. Wouldn’t be fair to recall that, right?

Aw heck, if W. had nabbed bin Laden, he would have just moved on to getting the next tyrant and we would never have heard of it again, right? He wouldn’t have it any other way.

Utter fantasy. And yet, this reaction is pretty much par for the course for the GOP these days. It has no grounding in reality most of the time and the facts are whatever its members say they are, even when they contradict one another. The more troubling reaction to the Obama ads came from some liberal/Democratic supporters who felt Obama should not be politicizing the killing of bin Laden. That it was somehow unseemly for the president to do so.

Yeah? So?

We are talking politics here aren’t we? Since when has it been a genteel sport? Did anyone pay attention to the GOP primaries? Talk about political blood sport. Republicans, conservatives, tea partiers (once upon a time that was genteel) have shown they will say and do anything to tear down the president, including belittling his accomplishments. Don’t ask, don’t tell? Don’t remind them.

The point is, Obama made a carefully calculated decision to take out the head of the most notorious terrorist group on the planet by using feet-on-the-ground troops rather than remote-controlled drones or “smart” bombs. He did it over the objections of some of his top advisers, including the vice president, secretary of state and secretary of defense. And he did it knowing full well that, if the mission failed — as did President Carter’s effort to rescue the hostages in Iran — as commander-in-chief, Obama would get full blame for it. And we would be seeing ads today reminding us of that, paid for by Romney supporters.

So yes, it seems a fair question to wonder whether the ever-changing Romney as commander-in-chief might have made the same decision. (We already know he would have let GM fail.)

Of course, the raid succeeded and al-Qaeda is a badly crippled shell of itself. To mark the anniversary, the president flew in secret to Afghanistan to thank the troops (photo above) and to sign an agreement with the new government there — the one that replaced the al-Qaeda-friendly Taliban — pledging the support of the United States even when U.S. forces leave Afghanistan.

Yes, the war there will come to an end soon, just as the one in Iraq did. On Obama’s watch.

The man has a right to brag.

bobgaydos.blogspot.com

The kid aces his geography test

Addendum to “10 states my sons should not live in”

After I posted my latest piece on this site, I asked Son the Younger (Zack) if he had read it and naturally he said no. So I told him the headline on the column and asked him what states he thought might be on the list of places I urged him and his brother to avoid.

“Well … Texas probably and maybe Arizona and South Carolina,” he started off without hesitation.

“That’s great!” I said. “You got three of the worst right off the bat. Which one do you think is the worst?”

“Probably Texas because it’s dumb and there’s nothing there. But … Arizona has that new law on immigrants which is pretty bad.”

“Terrific … A-plus,” I said. “I put Arizona first only because A comes before T. Who else?”

“Alabama? Maybe West Virginia and Kentucky. Louisiana?”

“Yes, yes, yes and on the watch list.”

“Well, they have New Orleans.”

“Precisely.”

“Maybe Mississippi, too’” he continued. “Pretty much all the southern states.”

“Pretty much,” I agreed “Fantastic job. I also included Alaska.”

“Well, yeah, it’s kinda like Texas and they pay people to live there.”

“Plus they elected Sarah Palin.”

“Oh, yeah. Pretty bad.”

The moral to this story? I dunno, maybe to pay attention to what you tell your kids because they may actually be paying attention.

I do know that after that brief chat I upgraded my own score as a responsible father and a couple of days later treated Zack to a steak dinner (Aussie style, not Texas).

-- Bob Gaydos