Satoshi Nakamoto and the invention of a new currency

Satoshi Nakamoto drew from the history of cryptocurrencies since David Chaum’s seminal blinding formula in the 1980s.  He postulated that the flaw with existing approaches to cryptocurrencies was that a single powerful attacker could undermine and destroy the system.  In order to to defeat the powerful attacker, Satoshi decentralised the control of the cryptocurrency over an open set of participants, designed a consensus algorithm to align the interests of the majority to find agreement, and thus overcome byzantine actions by minority parties.

Source: What Satoshi Did | Coinscrum

 

These series of blog posts are worth reading in their entirety.

Who says banks aren’t lending?

Here’s a picture of the three envelopes I received in the mail from PNC yesterday:

PNC's pick an envelope campaign

PNC's pick an envelope campaign

If you can’t tell from the small picture, one envelope says I qualify for an introductory APR of 0.99%, another says 1.99%, and a third was blank on the cover, but opening it revealed a surprise – only 4.99%!

Last week PNC called me to see if I was interested in a home equity line of credit.  Well, I might have been, you know, if I actually owned a home!

I’m not sure if this is poor customer data management or just a bank that is trying to show congress that it’s eager to lend.

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Intel Capital continues to search for opportunities despite downturn

Image representing Intel as depicted in CrunchBase
Image via CrunchBase

Sodhani’s multi-billion dollar investments include major positions in Clearwire (recently announced) and over 400 other early stage startups.  Below is a brief excerpt from the interview:

Interview with Arvind Sodhani: Intel Capital isn’t backing off on venture » VentureBeat

VB: How is the downturn changing what Intel Capital does?

AS: Not much has changed on our side. We will continue to invest. My belief, shared by the CEO of Intel, is that you continue to innovate in a downturn, and innovation doesn’t stop because of slowdowns. We’ll continue to invest in technology innovation. The good news is valuations will be more attractive. I think other investors will pull back. We have heard a lot of stories about the venture capital community pulling back. Depending on the life-stage of the fund, VCs are not funding existing companies or new companies.

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Taleb on the financial markets

IMG_4281
Image by eirikso via Flickr

Nassim Taleb was on Charlie Rose this past Wednesday, and I just got around watching the interview. I wish Charlie had scheduled Taleb for the entire hour. Last week I wrote about the current financial crisis being an opportunity to learn about how financial markets function, and I referred to the fact that I’d been lucky in dodging the major collapse of the past few months. Not all of it was luck, much had to do with Taleb’s thinking as revealed in his book ‘The Black Swan‘. If you haven’t read it yet, add this book to the top of your list. And, if you can stomach a sobering reality check, watch the interview here:

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Citibank CEO Vikram Pandit on Charlie Rose last night

Journalist and TV talk show host Charlie Rose ...

Image via Wikipedia

Yesterday I posted about how the current financial crisis was an opportunity to learn about how the global financial markets function. Another great resource for digging deeper is Charlie Rose‘s show on PBS. Last night he had Citibank CEO Vikram Pandit on for the hour.  As one would expect from a CEO of a major financial institution, Pandit doesn’t offer much of a mea culpa, however he does offer some insight into the causes of the current crisis.  Pandit arrived at Citi a about a year ago, and began to deal with a mess that had been created when Citi merged with the Travelers Group.  It’s an excellent interview:

SAJAforum has a full transcript of the interview.

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Consider this an opportunity to learn about the world of finance

Panic room.

Image by LunaDiRimmel via Flickr

Over the last few months, we’ve seen a roller coaster ride of unequaled magnitude in the financial markets.  Having been in the institutional banking world myself, I’ve had many friends and colleagues ask me if I can make sense of what is going on out there.  Many are just worn out from the gyrations in the stock market, others are in utter panic about the collapse of their life savings.  I’m no stock picker – never have been – but I did get lucky about a year ago when I decided to pull almost all of our personal wealth out of the equity markets and put it into cash or government securities.  Basically, from a net worth perspective, we haven’t been hurt…yet.  While that won’t help those who were deeply invested in the equity markets, I have advised them to follow the broad trends in the news, and not worry so much about the day to day, hour to hour hysteria that grips Wall Street.  The problem in trying to do this, however, is that the main stream media (MSM) doesn’t provide a sober analysis of events of the day.  Instead, MSM focuses on the latest crisis, or the political angle of the events as they unfold.  Now, I have some opinions on the political angle, but that won’t help me (or my friends) ride through the storm.  What I have suggested is to augment the daily hype that MSM dishes out with some thoughtful blogging that is going on out there.  Not all blogs offer quality insight and most have a particular political-economic bent that may not be the same as yours.  But, there are many that offer a good set of lessons on what has happened, and possibly on what will happen next.  Here are two that are on my daily radar:

naked capitalism
– This blog offers opinionated, but well thought out analysis of the nature of modern finance.  From a recent post:

naked capitalism: Finance Has Lost Sight of Its Role

In 1980, financial firms accounted for 8% of S&P earnings. During the peak of our last stock market cycle, their profits were over 40% of the total.

Now consider: finance is a necessary function, but is represents a tax, a drain on the productive economy, just as defense and lawyers do (aside: I had a lawyer from an entrepreneurial family who was refreshingly aware of that issue, and would write off hours before sending bills to clients, recognizing that the amount of time her firm had spent on certain matters simply wasn’t worth it from an economic standpoint to the client). It is ironic that free market fundamentalists have so vociferously argued for unfettered markets, without understanding (or perhaps understanding all too well) that the house always wins.

Read the entire post, in fact add naked capitalism to your daily RSS feed.  I don’t totally agree with the sentiments in this post, or others from this blog, but this analysis is more thoughtful – and thought provoking – then any of the crap that is pushed out in MSM.

Another blog that is worth following on a regular basis:

Paul Kedrosky’s Infectious Greed – Kedrosky often offers the best near real time analysis of events in the financial markets.  Take this post about the deal that Citibank secured to save itself:

Paul Kedrosky: Good Bank, Bad Bank, and F**ked Bank

To be clear, this is not a “bad bank” model. Assets are not, apparently, being taken off the Citi balance sheet and put into another entity walled off from the Citi biological host. Instead, they are being left on the Citi balance sheet, but tagged and bagged for eventual disposal via taxpayers. In other words, we are, given the size and nature of the maneuver, creating a new variant on the good/bad bank model that I hereby christen “fucked” bank. You do that, of course, when removing all the toxic assets from a “good” bank’s balance sheet would leave no bank behind at all.

[Side note, as a former banker at Mellon, the good bank, bad bank structure that saved Mellon in the 1980’s was stuff of legend when I was there.]

So, while times may be tough and you may have successfully avoided boring subjects like finance and political economy in college, make it a point to spend some time every day to learn about what is actually going on out there.  We are all participants in this market, and it is time to understand capital flows and how they will shape your future.

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The collapse of Bear Stearns

Vanity Fair is running a lengthy piece on the events leading to the collapse of Bear Sterns. It’s worth reading:

Bringing Down Bear Stearns: Politics & Power: vanityfair.com

On Monday, March 10, the rumor started: Bear Stearns was having liquidity problems. In fact, the maverick investment bank had around $18 billion in cash reserves. But soon the speculation created its own reality, and the race was on to keep Bear’s crisis from ravaging Wall Street. With the blow-by-blow from insiders, Bryan Burrough follows the players—Bear’s stunned executives, trigger-happy reporters at CNBC, a nervous Fed, a shadowy group of short-sellers—in what some believe was the greatest financial scandal in history.

[via Paul Kedrosky]

Fools, (Hedge) Funds and the Feds

Seal of the U.S. government's Small Business Administration.

Image via Wikipedia

While I was in New York City a few weeks back, I had a book handed to me by my cousin Vinit Sethi.  It was a newly released book, penned by David Einhorn, the founder of Greenlight Capital, where Vinit is also a partner.  It was quite a read.  Fooling Some of the People All of the Time: A Long Short Story is one of those books that I wouldn’t have picked up wandering through a bookstore or surfing online.  On the surface, it’s a book about a peculiar publicly traded company, Allied Capital, and Greenlight’s (Einhorn’s hedge fund) short position on Allied’s stock.  Allied is primarily a high risk financing company that maintains a portfolio of investments, many of which are secured (guaranteed) by the federal government.  Allied has had a long history of returning solid returns for its investors, a trend that seemed to be on track when Greenlight began it’s short sell strategy.  Below that surface emerges a story of financial shenanigans, and criminal deeds, that reads like a banker’s version of a John Grisham novel.  Einhorn reveals not only the smoke and mirrors accounting methods of Allied (and it’s auditors), but also exposes a level of incompetence by federal agencies and regulators that should make all taxpayers’ blood boil.  The book serves as much an indictment of Allied’s management team as it does of the Small Business Administration, one of the primary ‘victims’ of Allied’s fancy financial footwork.  Towards the end of Einhorn’s tale, I couldn’t help to think of the scene from an old Seinfeld episode where Kramer destroys Jerry’s stereo,  ships it insured through the Post Office, and then tries to collect the insurance claim on the basis of a damaged shipment:

Jerry : So we’re going to make the Post Office pay for my new stereo?
Kramer : It’s just a write off for them.
Jerry : How is it a write off?
Kramer : They just write it off.
Jerry : Write it off what?
Kramer : Jerry all these big companies they write off everything
Jerry : You don’t even know what a write off is.
Kramer : Do you?
Jerry : No. I don’t.
Kramer : But they do and they are the ones writing it off.
Jerry : I wish I just had the last twenty seconds of my life back.

Unfortunately, in both Kramer’s insurance caper and Allied’s financial manipulations, the ‘write offs’ are on our backs, the taxpayers.  I wonder if Einhorn had the same quizzical look as Jerry did after Kramer’s explanation when he engaged Allied.

Hedge funds get slammed everyday by media, management teams and shareholders for taking questionable short positions, and then tying to ‘talk down’ the stock to lock in profits.  There is tremendous pressure on public officials and federal agencies to ‘regulate’ hedge fund activity.  I’m sure that is the case in many instances, but the drama that unfolds in Einhorn’s book is remarkable for both how brazen Allied’s actions were and how maddeningly incompetent the federal government was when Greenlight exposed the fraud.  Instead of enforcing the laws against Allied, Einhorn (and Greenlight) became the target of federal ire.

To be sure, Einhorn didn’t expose the fraud, or write the book, out of a simple search for the truth (although his portion of any profits are headed to charity), he repeatedly called Allied’s bluff because of the profit potential Greenlight could deliver to it’s partners and investors.  And, apparently the focus on Allied has proven profitable.

In recent days Einhorn has again raised questions about the financial reporting of a public company.  This time it is Lehman Brothers.  The result has been a very public battle which even led to headline grabbing attention.  Both instances, the Allied story chronicled in the book and the Lehman story unfolding as I write this, reveal Greenlight’s sharp analysis of financials in exposing irregularities that put those companies on the defensive.  As you might expect, that’s not always the case.  As Einhorn himself admits, he’s not always right.  One example that his critics point to is Einhorn’s activities related to the collapse of sub-prime mortgage lender New Century Financial.  I don’t know the details of how and why Einhorn ended up on New Century’s board, but given Greenlight’s tenacity in unraveling financial puzzles, it’s perplexing that Einhorn apparently didn’t see the shaky foundation on which the mortgage market of the last decade was built.  I spent some time about four years ago looking at the processes of the mortgage business and was astounded by how weak the entire system was.  It didn’t take long to figure out that the mortgage Ponzy scheme would unravel.  I’m surprised that Greenlight didn’t see the same problems, given their analytical successes with Allied.

Like I said at the beginning of this post, I wouldn’t have picked this book up by myself, but having read it, I would wholeheartedly encourage you to read it as well.


Disclosure:  While I am related to Vinit, we typically do not discuss investment ideas and most definitely not Greenlight short positions.  We mostly talk sports when we get together. 🙂

UPDATE:  It looks like Einhorn’s pressure on Lehman has led to the ouster of some senior Lehman management earlier today.