In March, I visited New York City to see Matt and Amy Cham. On a Saturday, we all ran around Manhattan taking tons of photos in places like the New York Public Library, The Metropolitan Museum of Art, and the top of Rockefeller Center (the GE Building). These photos were taken on a mix of my Canon 30D and Amy’s Nikon D700 with a mix of lenses including a Canon 24mm TS-E and Amy’s incredible Nikon 24-70mm. Here’s a gallery of my favorites:
With so much unhappiness over AIG, I thought I would write some thoughts and perspective about who they are and how their problems came about.
What is AIG?
AIG is the American International Group. They sell insurance to customers around the world - individual, corporate, non-profit, and more.
In the past AIG’s business depended on their AAA debt rating which allowed them to borrow money very cheaply. Whenever they had to pay out for claims (accidents, disasters, etc), they would borrow the money they needed from the markets. The insurance premiums they charged their customers more than covered the debt repayments while leaving plenty leftover for profit.
That AAA debt rating seems kind of silly now, huh?
Yup. But people have been skeptical about it for a while.
What’s a CDS?
A CDS is a Credit Default Swap. It’s basically insurance on a bond. If a bond defaults (can’t make its payments), then the insurer will pay some agreed upon value to the CDS buyer. In exchange, the buyer pays the insurer some kind of premium.
What did AIG do?
They sold lots of CDSs. Lots and lots and lots of CDSs. More than a trillion dollars worth of them. Most of these were viewed as safe bets during the good times because AIG never expected the economy as a whole to fall apart. In exchange, they basically viewed the premiums as free money.
That didn’t really work, did it?
Nope. AIG made a very classic mistake in that it did not realize that all of its CDS contracts were highly correlated. In other words, they thought that only a few bonds they insured would ever default. What they didn’t realize was that these bonds were all so related that one failure would mean lots of failures.
So where is all of this government money going?
Because so many bonds are defaulting, AIG is on the hook for a huge number of CDS claims. There’s no way they could borrow the money from the markets (their AAA debt rating is now a joke), so they have essentially defaulted. The government is now providing AIG with funding to pay for their CDS obligations.
What if the government just stopped funding AIG?
Then all of the banks, pension funds, and other bond holders would be required to take the losses from the bond defaults. Right now, AIG is meeting its obligations to cover all of these bond defaults with government funds while taking the corresponding losses. For all of the banks and other institutions around AIG, even though their bonds are worthless, AIG is providing them with the required insurance payouts.
How bad would it be if the government stopped funding AIG?
That depends, but probably bad. All of the losses that AIG is incurring (and the government is supporting) would be spread around all of the banks instead. In the best case, the government would bail out all of the banks. In the worst case, the banks would fail.
What most people don’t realize is that every bank owes money to practically every other bank. Their debt agreements usually have terms like “if your stock drops below $X, then you have to pay back $Y early.” Things like large losses to their bond portfolios can force banks to pay back huge sums of money that they just don’t have right now. This essentially forces the banks to default, which forces more banks to default, and so on.
American law makes it pretty much impossible for a bank to ever “restructure” in bankruptcy. Regular companies can do the Chapter 11 bankruptcy thing, fight off their creditors, make a new plan, and come out stronger and better. Banks are pretty much required to die and liquidate. For that reason, bank defaults are really really really bad. Really bad.
Shouldn’t the banks have known better themselves?
Yeah, probably.
Did AIG actually cause any of this overall economic mess?
Not really. They were just well positioned to take all of the losses and pain.
So that makes AIG…?
The fall guy. Yeah, they’re pretty much the fall guy for this whole mess.
When will this all end? We can’t keep paying them billions of dollars!
There are two ways to end this. One is for the economy to improve, meaning the bonds will stop defaulting. The other is for the government to stop paying AIG, but that means having a plan somewhere for supporting the banks and institutions that rely on AIG’s CDSs.
The other possibility is for banks to restructure themselves so that a total failure at AIG wouldn’t impact them as strongly. The good banks (JP Morgan, Goldman) are probably already doing this. The bad banks (Citi, Bank of America) likely have too much else to worry about right now.
Either way, beware of a plan that stops paying money to AIG that doesn’t at least address what happens to the various CDS holders. They would need funding and various legal changes to allow for restructuring. Alternatively, they would need to announce that they’re ok now, and the loss of AIG would not adversely impact them.
What about those bonuses?
Many of the top AIG executives were awarded large year-end bonuses. Honestly, they’re a drop in the bucket in the grand scheme of things. Those bonuses were originally agreed upon by Henry Paulson during the Bush administration as a way of retaining staff at AIG to help manage things while the government dealt with other problems. One of the concessions was that AIG CEO Robert Willumstad was forced to leave (making the whining about how Obama is treating GM so much more harshly than the banks very perplexing - he’s treating them nearly the same).
The bonuses were almost all returned, but frankly they’re irrelevant in the grand scheme of things.
What will happen to AIG?
Ironically, the rest of AIG was relatively profitable, and their regular insurance businesses could probably survive on their own. Expect the government to break apart the company and create several mini-AIGs that offer various different insurance products.
I have a huge backlog of photos to edit, and I just made my situation even worse by taking almost 400 over the weekend. Still, I wanted to share this “family photo” from a trip we took back in September to the New Brunswick, Canada to see the Bay of Fundy.
That’s our dog, Romeo, and he just wouldn’t sit still for a photo. We almost had it with this one, but at the last second before the camera clicked he jumped in my lap and surprised the heck out of me. Oh well. No family photos for us.
The end has arrived and tonight is the night. Battlestar Galactica will finally conclude in a 2 hour and 11 minute finale (note your recording times, DVR people!). At this point, I can’t even remotely predict what will happen, how the show will end, or what the outcomes will be. For that matter, I still have no clue what half the show has even meant up until now.
And, truth be told, I now look back on the series and realize I liked it that way. Without answers, it was a study of people under stress in dark and difficult times.
So - Tonight at 9:00 ET / 8:00 CT. Make sure your DVRs are set for that extra 11 minutes if you’re not watching it live.
Andie was griping about her MBA reading, so I decided to share wisdom from my business school experience by putting together my…
Rules for MBA Reading
I would read:
* Anything that looked interesting
* Anything I would be tested on (The Goal, sadly)
* All magazine/newspaper articles (they’re like candy, and you can always say with a straight face that you did “some” of the reading for class)
* Anything recommended by a professor I liked or trusted
* All cases (the Hardy Boys/Nancy Drew/Choose Your Own Adventure stories of business school)
* All survey material
* All material for the “core” curriculum (you need a good foundation)
* Anything that by reading the material, I would have a legitimate leg-up on everyone around me (pretty much all finance and strategy - plus it was interesting)
* Anything by Michael Porter (it’s like reading molasses, but you’re smarter when you’re done)
I didn’t read:
* Anything that required a PhD to understand. (If I couldn’t figure it out, most likely nobody else would either)
* Anything that would be explained verbatim the next day in class
* Anything that was blindingly obvious to an idiot
* Anything clearly written by idiots (all HR, managerial/leadership studies, and other pop psychology nonsense)
* Anything I could derive on my own for homework or at exam time (pretty much all of my cost accounting class)
* Almost anything “recommended” and not “required” (if the professor didn’t think it was important enough to require, then I usually didn’t think it was important enough to read)
Seth Stevenson at Slate just reviewed what may be the best worst ad ever. He describes it as the most sexually explicit ad he’s ever seen, and I have to agree. This one is pretty out there for American audiences. Honeslty, it’s probably out there for international audiences as well.
You can click the link to the Slate article to watch it. I’m not posting it here. But to keep things short, here’s the summary:
A super hot secretary is called into an office by her manager. The next scene shows the manager looking like he’s, umm, having the time of his life with someone under his desk. Then there’s a pitch for a 6 hour energy product, and then the manager jumps up and shouts that “he’s ready.”
So why is this ad “best” in any way? If the target audience is college aged men who party a lot and who watch Comedy Central, Cartoon Network, and Spike after 10:00 PM, then this ad probably hits the mark. It’s memorable, and this demographic can consume energy drinks like water.
Why is this ad the “worst?” Well, take this quote from the article:
Other ads in the 6 Hour Power campaign target slightly different demographics. An ad for the G4 network shows a video gamer first-person-shooting for hours on end, his focus sharpened by the energy drink. Another ad shows a harried mother chasing a toddler and airs on stations like E! and ABC Family. “There’s no one type of person we’re trying to reach,” Finnochio explains. “Everyone needs energy.”
So basically this company is going to try to reach lots of demographics with different kinds of ads. There’s nothing wrong with that except for one small detail: the Internet has a nasty habit of combining demographics together. In other words, plenty of “harried mothers” who watch ABC Family will see this ad on Slate or other places. It will get plastered on Twitter, Facebook, and everywhere else. Soon, all those other groups will have only one association in mind when they see this product: disgust.
Companies have to be really careful when they put together memorable ads meant for one market when they also want their product to be adopted by other markets as well. Sometimes, they can be trapped into a segment with no way to escape.
Here’s a short and very interesting video by Jonathan Jarvis that nicely explains the current financial crisis. If you’re wondering just how all of this mess could have happened, this is the video for you. It covers a lot of ground with very user friendly language and animation. Good stuff!
The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.
I’ve been so neglegent in keeping this blog up to date, but the good news is that’s because I’ve been incredibly busy. uTest has been growing like crazy, and marketing has been growing along with it. I would like to resolve to post more often, and maybe I will be able to in the coming months.
Until then, I post to Twitter on a regular basis. I also have a few minutes each day to drop in to Facebook. If you’re on either site, definitely connect with me. Also, I write posts on a somewhat regular basis for the uTest blog. Definitely drop by, especially if you’re interested in software development or testing.
A while back, I made a mental list of the “next to goes” after the Bear Stearns failure. The list included Lehman, AIG, WaMu, and Wachovia. At the very end of that list was Citi. I never thought any further about who would go after that because a failure at Citi would be a freaking disaster.
Well, here we are. So here’s the deal: there are three big banks on Wall Street that dwarf all the others: JP Morgan, Bank of America, and Citigroup. A failure at any one of those would be an economic catastrophe. They each manage so much money, both American and international, that any kind of failure would end up costing the tax payers billions for insured deposits while absolutely killing off billions more in uninsured global capital. And don’t fall for the FDIC is magically going to make it all better thinking: the FDIC insures American deposits up to $250 thousand. If you have more, or you’re global, then you’re screwed. If you think this only affects rich Saudi billionaires, consider the deposits belonging to businesses who need more than $250 thousand in working capital.
So my message to the government is this: fix Citi. I don’t care what it takes or how much it costs. If that means making its problems go away, then do it. If that means helping it fail gracefully, then do that too. I don’t care. Just don’t make me have to think up another “next to go” list because the names on that would be truly frightening.
Dear Democrats:
Congratulations! You won on Tuesday and you deserved it. Your planning, development, and evangelizing have earned you a legion of new and happy voters who are tired of the past and interested in your new brand of hope.
However, even though history doesn’t repeat, it frequently rhymes. With that in mind, I would like to offer you five pieces of advice:
The Republicans made a habit of jumping the shark time after time, but the party movement as a whole did so around the time they proclaimed their “permanent majority.” It was a ludicrous thing for Republicans to say, even when their power looked strong. Any student of history will tell you that nothing is permanent - especially political majorities in a democratic government.
Your majority is a gift from the American people to be used for doing our will. Don’t think for a second that it’s permanent, and never forget that we can and will remove your privileges if we think you no longer represent our interests. If you want our votes in 2010 and 2012, you’ll have to earn them.
There’s this belief going around (see various posts on DailyKos) that the Republican party is now a regional party. They’re not. While Republicans won strongly in the South while losing most of the rest of the country, the votes were still very close in the Southwest and Mountain West. Much of the new Democratic strength is fairly soft right now, and it remains to be seen if these new Democratic voters represent the future of the Democratic or Republican parties.
Also, never forget that the Democratic party was once declared a regional party of the coasts just a few years ago. Middle America would never go for such “left wing” values, and so on. Right now, Middle America appears to go for a whole lot of things when it suits them.
Take it from a guy with an MBA: Americans make a ton of decisions based on brand. But take this from a guy with an MBA: if the brand fails to meet expectations, Americans will drop the product like a hot potato. Coke created a flop with New Coke. Democrats: don’t make a flop out of Change.
Americans expect a number of things from this product of Change: more transparency, less corruption, a more intelligent level of dialog, and less single mindedness. These are easy things to promise, and I actually think that Obama wants this kind of government. What I’m not convinced is that the rest of the Democratic party wants this kind of government.
So Democrats be on notice: your party leader has created a very powerful brand with high expectations. Your new ascendency to power has been built on those expectations. Live up to them, or you will end up like New Coke, Crystal Pepsi, and the Ford Edsel.
Over the past eight years, one of the most interesting things to watch has been the downfall of Bill O’Reilly. Remember him? I’m not talking about the blowhard commentator who sits on Fox News and spits out right-wing press doctrine. I’m talking about the guy who led Fox News to incredible highs in the 2000 election by making the populist case against Bill Clinton and the Democrats.
O’Reilly has always been a jerk - just find the old video on YouTube of his meltdown on Inside Edition in the 90s. It’s just that eight years ago, O’Reilly was able to tap into a willing public consciousness looking for a new future. He spoke of the ills of eight years of Clinton rule, ranted against the perceived failures of Clinton policy, and made the frequent case for a new Bush based future.
Today, the role of O’Reilly has been replaced with the likes of Keith Olbermann, Rachel Maddow, and Markos ‘Kos’ Moulitsas. They are the voices of the underdog movement, but as of Tuesday, their roles have now completely changed. Their movement is now more powerful than ever, and they are certainly no longer the underdogs.
As leaders of the underdog movement, they are now faced with a choice. They can become pundits, like O’Reilly, and try to support their new found power by promoting themselves and their party, even in the face of overwhelming evidence of failure. Or they can wait until the time is right, jettison many of their previous followers, and rebuild a new movement around tomorrow’s problems. The second choice is obviously harder, requires more work, has less payoff, and creates many new enemies.
Kos, Olbermann, Maddow, and others be warned: you are now establishment pundits until proven otherwise.
The Republican party must now rebuild out of a mess of competing interests, and it’s a wonder that these people were ever able to form a party in the first place. Religious evangelicals, corporate executives, and libertarians have absolutely nothing to do with each other. All of this mess has to be put back together, and getting any kind of consensus will be nearly impossible.
But wait, before you Democrats find too much schadenfreude in all of this, remember that you too are a party of competing interests. You have a mess of high-tech nerds, union laborers, greens, “new” corporates, social liberals, and moderate conservatives. It is absolutely inevitable that this new coalition will collide, and the first conflict to come will be the unions vs. everyone else.
A rebuilding Republican party will almost certainly come cherry picking whomever loses in this coming battle of self-interested supporters. You can sometimes push off the conflict, but you can’t do that forever. There’s really no way to stop the collapse of a coalition government, and that’s what keeps a real permanent majority from forming. See #1.
Democrats, you are on notice. Your clock is ticking, and we as Americans expect results. All of us want a new direction, but the new directions we want are all completely different. Figure it out, or we’ll find someone else to do it.
(Coming Soon: Advice for Republicans.)
