I am an optimist by nature. But the events of the last week could, if unchecked, lead to the greatest financial collapse since the Credit-Anstalt failure that caused the last Depression 70 years ago. .
The trigger may have been the bankruptcy of Enron Corp. The cause of that collapse was Enron's online trading in energy, and the false assumptions that changed the b2b market at the height of the last boom. Unless the market problems are addressed, Enron is just the tip of a very large iceberg and all of us are on the Titanic.
There are Enrons in every commodity market. In every industrial marketplace, from paper to chemicals to trucks looking for loads, a "b2b marketplace" was created in the 1990s to facilitate trading. Most were created by entrepreneurs who understood the technology but not the financial implications of what they were doing. They saw profits in enabling trades, and the last thing they wanted was regulation.
What they missed in all this were the basics of market-making. At the New York Stock Exchange "specialists" provide this liquidity, buying when there are no buyers and selling when there are no sellers, putting their own capital at risk to keep orders flowing.
The initial impact of b2b market-making was great transparency. It also served to drive down prices paid to suppliers, shifting risk from buyers to sellers. (Freemarkets.Com and others even ran TV ads bragging about this - remember the guy in Texas muttering "dohmo arigatoh" as he undercut Japanese suppliers?)
Large suppliers like Enron figured that if they ran the markets, on the other hand, they could profit on every trade and use their inside information to essentially corner their markets. This is what happened - the neutral "market makers" were replaced by the markets' biggest participants.
Placing bets in your own casino, however, destroys transparency and puts whole markets at risk. Stock, bond, and futures markets are regulated to foster transparency and provide an important service, raising capital and letting producers hedge against changing market conditions. A farmer can sell next year's crop at this year's price by trading in futures. A school district requires transparent bond markets to build schools. All companies need the stock markets.
B2B marketplaces can extend these benefits into every commodity and industrial service, not just determining tomorrow's prices but today's. They can only do this if they're transparent and run fairly. Unfortunately, in the last few years nearly every industrial commodity has gotten its own participant-based marketplaces, and thus (because government didn't step in to regulate) its own Enrons. (The Clinton Administration moved to look at regulation, but went no further. ) There are still Enrons in the energy market, like Williams Companies, there are Enrons in every other market, and the only view government has of these operations lie in quarterly financial statements.
That's not good enough. To gain the benefits of b2b marketplaces for all, they must be transparent, with all trades based on the same basic information. The mechanism for doing this is regulation, on the SEC and CFTC model. We need capital requirements so no player can bet more than he has, and so every trade will go through. We need impartial operators for all markets so manipulation can be prevented. We need brokers and bankers who are trusted by buyers and sellers.
When b2b marketplaces first developed the entrepreneurs who built them figured they could play this role. Market players saw the profits and the largest suppliers took this role for themselves. But they are not, and can't be, honest brokers. It's not "socialism" to say that real-time markets need the same regulation as futures markets and stock markets, unless you think the New York Stock Exchange (http://www.nyse.com) is socialist. I don't.
Unfortunately neither the government nor the media has understood the lesson of Enron's fall. Unless b2b marketplaces are made transparent, by law and by regulation, we will have dozens of Enrons in the next year. That would collapse the world economy. That's my fear, and it should be yours as well. Preventing such collapses should also be your cause.
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Takes on the News
IBM vs. Windows
Celebrating Windows' dominance and inevitability has become a cottage industry, akin to sucking up to a President. As with the sucking-up it's a short-term strategy, because Presidents and politics are always changing just as business conditions do.
But take a look at this chart . It shows that if you put $100 into IBM and Microsoft stock two years ago, you'd be better off with IBM.
Surprised? Now consider the fact that IBM has committed enormous resources toward pushing Linux and other projects related to open source technology, including peer-to-peer networks and distributed computing . Even the geeks at Slashdot have noticed .
All this is part of a strategy "cookie monster" Lou Gerstner put in place soon after he took the IBM chairmanship in 1993. It's no secret - the "e-business" strategy is the highlight of his own personal Web page. It is described in detail in "Net Attitude," the new book by Gerstner's vice president for Internet Technology, John Patrick .
While a lot of companies talk about "owning" the Net (and it's a great topic for reporters to discuss) IBM has gotten behind all the advances that define modern computing. With its Linux servers you're not totally dependent on IBM when something goes wrong. With IBM parallel processing, peer-to-peer, and distributed computing are not dangers to be feared, but technologies to be embraced.
The empire, in other words, is striking back, and this time they're on the side of the angels. It will soon dawn on millions that IBM is where computing is going while Microsoft is where computing has been. The results of that realization will be interesting to see.
The Next Big Bankruptcy?
Some of the biggest and most surprising bankruptcies in an economic cycle occur as the economy starts heading higher. These failures are evidence that old business models are firmly dead and new ones must be put in place.
My candidate for failure at the end of this recession is Federated Department Stores . This despite the fact that it has actually outperformed most other stocks over the last year .
My guess is the company is being hammered right now. Its department stores are empty compared to aisles of "big box" retailers like Wal-Mart. Its Fingerhut acquisition was a complete bust, evidenced by the fact it's starting to close its online operations , which are supposed to be the center of its strategy . Analysts expect Federated to earn nearly $2/share this quarter - it won't come close. That failure will lead people to analyze the assets again and find there's really nothing there - just a bunch of failing department stores with empty aisles.
Then things will get ugly, with politicians noting how many of Federated's stores anchor city centers, and how many of their ads anchor major newspapers. But business doesn't care what politicians want.
Ads That Delay Recovery
Every Web site is treading the line with ad formats. How far can you go in forcing sponsor messages before your audience before they leave your site entirely or (worse) the medium?
It's very much a hit-and-miss affair. The "hits" occur when brand advertisers put some creativity into the mix. An example was seen recently at Weather.Com, which ran a campaign for State Farm that "flooded" pages for 10 seconds before disappearing, leaving the banner above the content. Once the campaign ended, unfortunately, the site was left with a Casino on Net pop-under.
Here's the problem. The advertisers who've been paying the bills this year, like Casino on Net, demand tactics like pop-unders and mouse-trapping that annoy users .
They demand more than that, according to a study by Cyveillance . Sites are now meta-tagging brand names to lure people to non-brand ads, downloading advertisers' software to users without authorization, changing home page settings and framing outside content inside their advertising. One-fourth of the most popular sites are now using one or all of these tactics, Cyveillance says. Even The New York Times has been caught, sending e-mails which look to contain its trade dress on behalf of "pump-and-dump" stock touts
Every site that engages in scandal for the sake of today's direct advertisers risks the goodwill of their readers. The future lies with brands and brand-building ads, high on creativity and reasonable on the annoyance factor. Sites that cheat users now risk not seeing the brand-builders later.
Clued-in is the Federal Trade Commission, which is insisting on pursuing a privacy agenda at odds with the perceived short-term self-interest of many in the industry , represented best by those Clueless folks at Forrester.
Clueless is the State of Georgia , which recently sought and won an indictment against David McOwen for the "crime" of putting distributed computing software on university computers. McOwen now faces the possibility of spending 120 years in jail. Please help him.
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