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.

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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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.

Microsoft makes Accounting free for small businesses

My pals over at Download Squad wrote about this yesterday:  Microsoft is offering Office Accounting Epxress 2007 for free.  It’s the first time I can recall Microsoft offering a business focused application for free.  I’ve been beta testing the new Accounting 2007 for the last 2-3 months, and it seems to have a nice flow and is certainly better than an underpowered Quicken for Home & Business – and nicer than the awkwardly designed Peachtree applications.  I’m going to download this free version and give it a test run.  The early comments on DSQ seem to indicate that it is definitely worth a try.

PearBudget: An elegant alternative to managing personal budgets

It seems like every new edition of Quicken (or Microsoft Money) adds another needless layer of complexity to the personal expense management process. While it is nice to be able import your bank transactions into those applications, most of the time a quick entry into a spreadsheet is faster, more elegant, and more likely to be used on a regular basis. All the fancy pie-charts and 3D graphs are useless if you don’t maintain your expenses in a centralized location. Enter PearBudget. I stumbled upon this nice spreadsheet via LifeHack and find it to be really easy and simple to setup. The author of this spreadsheet does a great job of breaking out the key budget areas into regular expenses, irregular expenses, and variable expenses. By sub-categorizing your expenses, it is easier to enter them as soon as you incur them. There are pre-built tabs for each month, and you simply enter your expense as you incur it. Being a spreadsheet, all calculations are automatically done, and you can monitor your behavior for any given month, or through a Year-to-Date analysis tab.

The nice part about a tool like PearBudget is that it can be used on portable devices that can open spreadsheets.  I was able to open the sheet on my Treo 650 using Docs-to-Go.  PearSheet is also being developed into a Web 2.0 application, but I think this is a great answer for those looking for simplicity in their financial management lives.  Quicken and Money are great but, despite their claims on ease of use, they require a level of rigor that many people can’t commit to.  PearBudget, which by the way is a free download, is much simpler, but gets the job done.

Mainstream migration of Podcasts

Fidelitypodcast

Steve Rubel, over at Micro Persuasion, makes a brief mention of new podcast downloads at Fidelity Investments’ Registered Investment Advisor Group.  While not in the true podcast spirit (To access the actual audio, you have to go through a registration process), the fact that Fidelity is offering this service is worth noting.

I think we’re just beginning to see this type of audio-on-demand ‘brochure-ware.’  As more and more people bring podcasts (and vodcast – videocasts) into their daily lives, the medium will serve as a powerful replacement (possibly enhancement) to mass marketing vehicles like brochures and radio advertising.