Interview with Martin Upton about financial crisis

Martin Upton

Martin Upton has a background in financial markets and risk management.

1) Where did you study and where are you teaching now?

I studied at the University of East Anglia and the University of Leeds. Now I am Head of the Centre for Accounting and Finance at the Open University Business School.

2) On summer 1992 Bank of England and Bank of Italy were "fighting" against traders not to devalue british Pounds and italia Lira; since summer 2011 ECB is "fighting" against traders in order to keep low interest rates for government bonds; do you find any similarities between the 2 situations?

The similarity is that in both cases traders and investors took the view (in 1992/3) that the GB Pound and the Italian Lira were over-valued (at the ranges set for these currencies against the DM in the ERM) and that in 2011/12 traders and investors took the view that the bonds issued by the governments of Spain, Italy and Greece were over-valued (i.e. their yields were too low - and, by inference, their bond prices too high - given the background economic fundamentals of those countries). In both circumstances the view was taken by traders/investors that it was financially rational to sell Pounds & Lira in 1992 and to sell Spanish, Italian and Greek government bonds in 2011/12 since the market view was that in each case these assets were over-valued.

3) At the end of summer, on 16 th september 1992, british government decided to withdraw the british Pound from ERM (followed by italian government doing the same with italia Lira); do you think that the lesson learned is that it's useless (and a waste of money) to "fight" against traders on specific circumstances?

(Note that membership in ERM was not withdrawn but only "suspended"). I think both episodes – particularly the ERM debacle - show that trying to maintain the price of a currency or of bonds (or indeed other assets) above the levels perceived by the market as being their ‘correct market price’ is ultimately doomed to failure. The history of the UK provides plenty of examples of how the government and the Bank of England tried to defend the value of the Pound against economic logic only, in the end, to have to give way to market forces. The ERM debacle was only one such episode – see also the periods up to the devaluation of the Pound in 1949 and 1967.

4) In Europe there's a lot of talking about a anti-high yield mechanism (the ECB will buy government bonds when they reach very high yield), do you think it could solve the problems? I personally think it will be even worse: the traders could bet even more easily if they are 100% sure that the ECB will buy government bonds when they lose value.

Well such a mechanism would put a ‘floor’ on the bond prices (or ‘cap’ on the bond yields) so it would to a degree discourage those trying to make money by short-selling. Investors will also draw some comfort if they know of the maximum downside to their investments in such bonds.

5) It's been more than 2 years of talking of "saving the Euro", do u think that one currency can work with one central bank, 17 different ministries of finance and 17 different public debts?

My view has always been that you can’t have a stable single currency zone if you don’t have a single fiscal zone. The problems faced by the Euro zone show that you can’t have a single interest rate environment in a zone where member counties go ‘solo’ on their fiscal policies. Hence the rescue of the Euro has seen a move towards a greater centralization of fiscal policy decision making. Additionally the different nature of the member counties’ economies (particularly the differential importance of the housing market to them) weigh against the workability of a single currency.

6) The ECB decided to help some governments (like italian and spanish one) buying government bonds in the secondary market. Understarding that help is help, why not buying straight in the primary market ? Buying in the primary is giving money straight to the state, while buying in the secondary is giving money to the traders! So, ECB wants to "fight" traders (who bet against Italy and Spain) ... buying their devalued bonds! Don't you think that the ECB could avoid the hypocrisy and buy bonds straight from the primary market?

I suspect that the ECB only wants to act as the ‘buyer of the last resort’. If it bought primary issues the expectation in the markets would be for the ECB to be the ‘buyer of the first resort’ – and the size of the investments made by the ECB would potentially balloon. Buying in the secondary market maintains a defence against falling bond prices and helps underpin confidence in the primary market.

7) If there is a break up of the monetary union, what do you think it will happen? In the transition time, do you think people will try to use foreign currency (if there is enough of it for an area of 330 million of people) ?

Hard to speculate on this one. I suspect that the support of Germany and pressure from the US will continue to ensure that the Euro remains patched up. The worry is though that the crippling economic consequences of the budgetary restraint being applied to Greece, Spain and Italy – and Portugal and Ireland too – will create growing political and social strains. If a country does leave the euro zone its new currency (or restored legacy currency) would trade at levels implying a massive devaluation against other currencies. Additionally further support would be needed for the banking system – and not just within the country leaving the zone.

Interview with Jason Manolopoulos

Jason Manolopoulos is a greek expert of economy, he wrote the book "Greece's odious debt" about the economic situation in Greece. He studied economics in UK (short bio) and he runs an alternative investment fund.

1) When and where were you born?

I was born in 1975 in Athens, Greece.

2) In your opinion, what went wrong in Greece?

Let us recap on how we got here in the first place. The PIGS were lent massive amounts of money by institutions during the era of Greenspan, when there was ample liquidity and low interest rates.There was pressure for free flow of capital under deregulation and free markets mantra. This capital was too great for the countries to productively absorb. (Look at how some of the National Lottery winners typically spend their windfalls – poorly). Politicians misled electorates and other institutions; either by lying on statistics, breaking the Stability & Growth Pact rules, overplaying the eurozone’s inevitability, or pursuing unsustainable fiscal policies.Investors and lenders did not conduct proper due diligence on whether these debts could be paid back. Hence there were numerous events that preceded some hedge funds taking opposing bets. Institutional investors did similar things, selling bonds and going on a buyer’s strike, for the same fundamental reasons – poor credit metrics.

3) When did you start writing the book "Greece's odious debt" ?

April 2009

4) What do you think it will be the solution for Greece and/or Eurozone? / 5) Do you think there will be a future for the Euro?

The questions we should initially focus on are: Should a low value-add production economy be lumped with a high value-add or upper-end economy? Does sufficient labour mobility exist in euroland? Do all countries have flexible product and services markets? The answer to these is no. In an ideal world, we wouldn’t start from here. Exiting the euro would be catastrophic, but staying in means many years of austerity and high unemployment, and difficult conditions in which to make essential economic and political reforms, because the exchange rate is so high relative to the productive economy. Either way, Greece has lost a huge amount of national sovereignty, because we cannot bear these huge debts without default and/or surrendering autonomy to investors or other rescuers who will be in a strong negotiating position.

Too much emphasis has been put on the currency aspect per se. A currency in itself, is no silver bullet. The UK had the British pound in the dismal 1970s and still does today, yet the country is a very different place, post Margret Thatcher’s sweeping reform. Turkey was a basket case over run by corruption in the 1990s and early 2000s, having to resort to IMF bailouts. Today post reform and its cleansing process, its economy is growing strongly and has become a strong regional player. It still has its national currency, as it did previously. Sweden and Zimbabwe have independent currencies un-pegged national currencies, with clearly widely differing economic results.

Interview with Hayo about financial crisis of Eurozone

Bernd Hayo is a german Professor of Macroeconomics at Marburg Center for Institutional Economics.; he wrote several papers about ECB and Eurozone.

I asked him a short interview about the ongoing financial crisis of Eurozone.

1) According to you, after the greek situation and the irish situation, what went wrong in the European Union?

I think that it was wrong to give up the 'no bailout'-clause based on the reason that it is necessary for the survival of the euro area. From my perspective, there exists no necessary linkage between the sovereign debt crisis and the survival of the euro. Look at the situation in the US: California is bankrupt but nobody thinks that it should leave the US dollar currency union. If the EU had let Greece become bankrupt, creditors would have lost money. Nothing wrong with that. Costs of increasing Greek government debt would have risen-again nothing wrong with that. It would have made it clear to Greece that it ought to address its problem of tax evasion and corruption-this is a good thing. Now it is the EU which is seemingly responsible for the hardship awaiting Greek citizens in the future. In my view, there is one argument that would help explain why the EU was so keen on saving Greece: the continuing instability of the European banking system. But then Germany and the other relatively more solvent governments should have intervened directly in the financial markets again, as now we face two situations of moral hazard: private banks know that they will be bailed out and governments know that they will be bailed out too. This does not bode too well for the future.

2) What do you think about the decision of 3rd may 2010 when ECB decided to suspend its minimum threshold for Greek debt "until further notice"? Don't you think it's a big change in monetary policy and independence of ECB?

In practice, it is not such a big thing as Greece is small and the ECB sterilised the intervention (i.e. kept the monetary base constant). It is a violation of fundamental principles, though, and one can only wonder what is going to happen if more countries start encountering similar sovereign debt problems than Greece. If the ECB started buying government bonds from lots of countries than its mandate of keeping price stability could be in peril. This could really endanger the integrity of the European currency union.

3) What do you think about the hypothesis of expulsion or withdrawal of acountry from EMU? Do you think it could be possible, as extrema ratio, to save EMU?

First, I do not think that European monetary union is endangered by one country's sovereign debt problem in the same way as California's bankruptcy does not endanger the US dollar area. Second, there is no legal basis for a country's expulsion from EMU. A country could consider moving out on its own accord (of course, other EMU members could in principle exert strong political pressure), as I would find it unlikely that the political will of a free country would be disregarded by the other EMU members. However, the costs would be high indeed: loss of credibility, loss of deep capital markets, loss of trade, loss of ECB as lender of last resort, etc.

Number of failed banks from 2000 to 2009 in USA

The chart shows the number of failed banks from 2000 till 2009 in USA (source: FDIC)

We must not think that the financial crisis is over: in the first month of 2010, 15 banks have failed!!! The year 2010 may not reach the number of 139 failed banks (like 2009), but 15 banks in one month is a bad beginning...

Monetary policy of Bundesbank 1975-1998

German banknotes

Around one year ago a paper was released, its name was

Opting out of the great inflation: german monetary policy after the break down of Bretton Woods

and it was written by:

Andreas Beyer (ECB)

Vitor Gaspar (Banco de Portugal, special adviser)

Christina Gerberding (Deutsche Bundesbank)

Otmar Issing (Centre for financial studies)

Abstract:

During the turbulent 1970s and 1980s the Bundesbank established an outstanding reputation in the world of central banking. Germany achieved a high degree of domestic stability and provided safe haven for investors in times of turmoil in the international financial system. Eventually the Bundesbank provided the role model for the European Central Bank. Hence, we examine an episode of lasting importance in European monetary history. The purpose of this paper is to highlight how the Bundesbank monetary policy strategy contributed to this success. We analyze the strategy as it was conceived, communicated and refined by the Bundesbank itself. We propose a theoretical framework where monetary targeting is interpreted, first and foremost, as a commitment device. In our setting, a monetary target helps anchoring inflation and inflation expectations. We derive an interest rate rule and show empirically that it approximates the way the Bundesbank conducted monetary policy over the period 1975-1998. We compare the Bundesbank's monetary policy rule with those of the FED and of the Bank of England. We find that the Bundesbank's policy reaction function was characterized by strong persistence of policy rates as well as a strong response to deviations of inflation from target and to the activity growth gap. In contrast, the response to the level of the output gap was not significant. In our empirical analysis we use real-time data, as available to policy-makers at the time.

Some excerpts:

"In the period 1960-1998, German inflation measured in accordance with the Consumer Price Index, was, on average 3.1 per cent per year [...] the lowest and most stable, as recorded internationally."

"The Mark, initially (1873) created as a currency based on gold had ended its existence in the hyperinflation of 1923 which destroyed Germany's civil society. The successor of the Mark, the Reichsmark, created in 1924 ended its short life with the currency reform of 1948. People had again lost most of their wealth invested in nominal assets.No wonder that a strong aversion against inflation and a desire for monetary stability became deeply entrenched in the mind of the German people!"

It would be interesting to know more about the dispute over currency union with East Germany. The paper doesn't talk about it; according to Wikipedia, the dispute between Helmut Kohl (then chancellor of West Germany) and Karl Otto Pöhl (president of Deutsche Bundesbank) led to the resignation of Pöhl. I assume it was a blow against the famous independence of Bundesbank "of instructions from the Federal Government".

UN, Stiglitz and Blanchard about the economic crisis

Joseph Stiglitz

UN conference on the world financial and economic crisis and its impact on development
24-26 june 2009

From official site of UN:
"The United Nations is convening a three-day summit of world leaders from 24 to 26 June 2009 at its New York Headquarters to assess the worst global economic downturn since the Great Depression. The aim is to identify emergency and long-term responses to mitigate the impact of the crisis, especially on vulnerable populations, and initiate a needed dialogue on the transformation of the international financial architecture, taking into account the needs and concerns of all Member States."

In Italy the media coverage about this conference was close to zero but it's interesting to point out few things.

The Commission of Experts on Reforms of the International Monetary and Financial System, chaired by Joseph Stiglitz and informally known as the Stiglitz Commission, was convened by the President of the United Nations General Assembly, Miguel d'Escoto Brockmann, "to review the workings of the global financial system, including major bodies such as the World Bank and the IMF, and to suggest steps to be taken by Member States to secure a more sustainable and just global economic order". It presented its recommendations on March 20, 2009 and a preliminary draft of its full report on May 21, 2009. The draft is available here.

On August 18 2009, Olivier Blanchard (Economic Counsellor and Director of the IMF’s Research Department) wrote an article for IMF's F&D magazine:

Sustaining a global recovery

Blanchard on April 2009 wrote a paper called The crisis: basic mechanisms, and appropriate policies

Joseph Stiglitz (2001 Nobel Prize in economic sciences) is the chairman of the UN commission of experts and he wrote his view in an article on The Nation:

A global recovery for a global recession
---
These are the contents of the draft of that commission of experts:

chapter 1: introduction
the crisis: its origins, impacts, and the need for a global response
the institutional response to the crisis
policy responses to the crisis
a global crisis needs a global response
some basic principles
impact on developing countries

chapter 2: macro-issues and perspectives
the sources of the crisis
international responses: fiscal policy
monetary policy and restructuring financial markets
bail-outs
the role of central banks
risks and policy trade-offs
multiple and new objectives
impacts on developing countries
developing countries need additional funding
concluding remarks

chapter 3: reforming global regulation to enhance global economic stability
failure of the prevailing regulatory philosophy
the purpose of financial regulation
financial policy and regulatory policy
regulation and innovation
regulatory capture
boundaries of financial regulation
micro-prudential regulation
ring-fencing
some common principles of macro- and micro- prudential regulation
securitization
transparency
macro-prudential regulation
countercyclical regulations
capital market liberalization
capital account management for development
capital market interventions during crises
financial market liberalization
further issues in micro-regulation
lending and public banking to promote development
regulating other players
credit rating agencies (CRAs)
sovereign wealth funds
regulatory institutions
capture and voice
regulation and political processes
incentive structures
personnel
regulatory structure
global regulation
comprehensiveness
international banking centres and international tax cooperation
international cooperation on taxation
beyond financial regulation

chapter 4: international institutions
the challenges ahead - the need for new global economic governance
a global economic coordination council could lead the way forward
policy coherence for development also has to be improved on the national level
policies and instruments
the Bretton Woods institutions must support national capital account management
other international financial bodies
international lending and ODA
additional funding for developing countries is needed
aid effectiveness
expansion of resources by IFIs
the IMF needs an immediate expansion of its resources
review developing countries' debt sustainability in light of the financial crisis
establish a new credit facility
trade and investment
commodities trade and compensatory financing
appendix: the Doha round and development

chapter 5: international financial innovations
the global reserve system
sovereign debt default and restructuring
innovative risk management instruments
innovative sources of financing

Tiscali, the dream is over

Tiscali group on 2001

Tiscali has sold Tiscali UK to Carphone Warehouse Group for 255.5 million of GBP. After years of sales, the dream of a italian-based european provider is over.

Renato Soru created Tiscali on January 1998.

October 1999: IPO (Tiscali enters the stock market during the dot-com bubble). People pay 46 euro for 1 share of Tiscali.
May 2009: (after the stock split 10:1 of april 2000) the same investor would have 10 shares of the value of 0.416 euro each, never a dividend.

Tiscali, son of the dot-com bubble, victim of bad management.

Chief executive officer
1998-2004 Renato Soru
2004-2005 Ruud Huisman
2005-2008 Tommaso Pompei
2008-incumbent Mario Rosso

Hedge Funds and the Financial Market

George Soros (from Flickr)

The Committee on Oversight and Government reform held a hearing titled, “Hedge Funds and the Financial Market” on Thursday, November 13, 2008.

Here you can read some interesting excerpts:

Testimony of Professor David Ruder (Professor of Law Emeritus, Northwestern University School of Law, Former Chairman, U.S. Securities and Exchange Commission 1987-1989)

The definition of hedge fund is unclear. The SEC has acknowledged that the term has no "precise legal or universally accepted definition". The President's Working Group on the Financial Markets has called a hedge fund "any pooled investment vehicle that is privately organized, administered by professional managers, and not widely available to the public".

[...]

Hedge fund managers do not want their investment strategies to become known.

[...]

Although hedge funds have been active participants in the financial markets during the past years, they do not seem to have played a major role in the events precipitating the crisis. [...], the market participants central to the credit crisis were loan originators, investment banks, rating agencies, and sellers of credit default swaps.

Testimony of Professor Andrew Lo (Director, MIT Laboratory for Financial Engineering, Massachusetts Institute of Technology, Sloan School of Management)

If hedge funds are forced to reveal their strategies, the most intellectually innovative ones will simply cease to exist or move to other less intrusive regulatory jurisdictions.

Testimony of Houman Shadab (Senior Research Fellow, Mercatus Center, George Mason University)

First, hedge funds did not cause the financial crisis and are in fact helping to mitigate its damage and save taxpayers money. [...]

Second, hedge funds' short-selling activities have helped draw attention to the poor management and investment decisions of financial companies in recent years. [...]

Finally, existing laws and regulations should be strictly enforced against hedge funds and their managers, but changing how hedge funds are regulated could actually undermine the interests of investors and increase economic instability.

Testimony of Philip Falcone (senior managing director and co-founder of Harbinger
Capital Partners Funds)

Our investment philosophy is very simple; we study, often for months, the fundamentals of companies to identify those that are undervalued or overvalued, and we act decisively when opportunities present themselves. We are not momentum traders, nor are we day traders; we are investors. It is not magic. My analists perform thorough due diligence, rather than relying on ratings agencies or other research reports -- like many of the reports that improperly valued securitized mortgage products over the past few years.

Testimony of Kenneth Griffin (founder and CEO of Citadel Investment Group)

I am proud that in the 18 years since I founded Citadel, it has grown into a financial institution of great strenght and capability, with a team of over 1,400 talented individuals. Citadel manages approximately $ 15 billion of investment capital for a broad array of institutional investors, endowments, high-net-worth individuals and Citadel's employees.

Testimony of James Simons (chairman and CEO of Renaissance Technologies LLC)

Renaissance's investment approach is driven by my background in mathematics. Before I ever entered the business world, I was a mathematician. I have a PhD from Berkeley, won the 1975 Veblen Prize of the American Mathematics Society (given every four years for work in geometry and topology), and taught mathematics at the MIT and Harvard before becoming the chairman of the Mathematics Department at the State University of New York at Stony Brook. Along the way, I spent four years as a code cracker for the National Security Agency. Renaissance, an SEC-registered Investment Adviser since 1998, manages what are termed quantitative funds - funds whose trading is determined by mathematical formulas designed to predict market behavior. Individual trades are generated by computers, based on work continually developed by our researchers. Naturally, human beings carefully monitor the trade execution process, making sure that all parts of the system are behaving properly. We operate in only highly liquid, publicly listed securities, such as stocks, bonds, currencies, and commodities, and do this on exchanges throughout the world. This means, for example, that we do not trade in credit default swaps or collateralized debt obligations, neither of which satisfies the above criteria. In the stock trading of our Medallion Fund, we hold balanced portfolios in each country, i.e., portfolios very close to being equally long and short. Our trading models tend to buy stocks that are recently out of favor and sell those recently in favor.

Testimony of John Paulson (president and founder of Paulson & Co. Inc)

Paulson & Co. Inc is an investment advisory firm that was founded in 1994 and has been registered with the SEC since 2004. We currently manage assets of approximately $ 36 billion using event-driven strategies. We are based in New York and also have offices in London and Hong Kong. We have approximately seventy employees. Prior to founding the firm, I was a Managing Director in Mergers & Acquisitions at Bear Stearns. I am a summa cum laude graduate from New York University and graduated with high distinction, as a Baker Scholar, from Harvard Business School in 1980. Our investors include pension funds, endowments, banks, insurance companies, family offices and high-net-worth individuals in the U.S. and around the world. All of the investment funds we manage are open only to "qualified purchasers", which are highly sophisticated investors with $5 million in investable assets if they are individuals, and $25 million in investable assets if they are institutions. Our investors look to us to protect their capital, and to show positive returns in both good and bad markets. We do this by going long securities that we think will rise in value and going short securities that we think will decline in value. By constructing a diverse portfolio of both long and short positions, we have been able to operate profitably in 14 out of the last 15 years, including this year and the 2000-2002 periods when the NASDAQ index lost 78% of its value. [...] We share profits with our investors on an 80/20 basis where 80% of the profits go to the investors and 20% remains with us. We only earn performance allocations if our investors are profitable. All of our funds have a "high water mark", which means that if we lose money for our investors, we have to earn it back before we share in future profits. Some of our funds also have a "claw back" provision, requiring us to return profits earned in prior periods if we lose money in subsequent periods. In addition, we invest our own money alongside that of our clients, so we share investment losses along with gains.

We are a private company and have no public shareholders. We receive no taxpayer subsidies. All of our investors invest with us on a voluntary basis. We also use very little leverage. Over the past five years, for over half the time our base portfolios were not funded with any borrowed money, and our maximum borrowing as a percentage of equity capital over this period was 33%.

In February 2004, we voluntarily registered with the SEC as an investment advisor.

Testimony of George Soros

The crisis was generated by the financial system itself. This fact - that the defect was inherent in the system - contradicts the prevailing theory, which holds that financial markets tend toward equilibrium and that deviations from the equilibrium either occur in a random manner or are caused by some sudden external event to which markets have difficulty adjusting. The severity and amplitude of the crisis provides convincing evidence that there is something fundamentally wrong with this prevailing theory and with the approach to market regulation that has gone with it.

Investment banks and financial crisis 2007-2008

Leverage ratios of investment banks (from Wikipedia)

US Gross Federal Debt, unadjusted for inflation (from Wikipedia)

If we want to try to understand the global financial crisis going on now, we need to try to understand the role of investment banks in USA.
There is an interesting paper about investment banks, the paper was written and it's called
The Demise of Investment-Banking Partnerships: Theory and Evidence
written in 2004 by Alan D. Morrison (University of Oxford-Said Business School; University of Oxford-Merton College) and William J. Wilhelm Jr (University of Oxford-Said Business School; University of Virginia-School of Law)

Abstract:
Until 1970, the New York Stock Exchange prohibited public incorporation of member firms. After the rules were relaxed to allow joint stock firm membership, investment-banking concerns organized as partnerships or closely-held private corporations went public in waves, with Goldman Sachs (1999) the last of the bulge bracket banks to float. In this paper, we ask why the Investment Banks chose to float after 1970, and why they did so in waves. In our model, partnerships have a role in fostering the formation of human capital. We examine in this context the effect of technological innovations which serve to replace or to undermine the role of the human capitalist and hence we provide a technological theory of the partnership's going-public decision. We support our theory with a new dataset of investment bank partnership statistics.

This is a very important issue: before 1970, the New York Stock Exchange (the famous Wall Street) prohibited investment banks from going public (in USA "going public" means starting an IPO in order to enter the stock exchange).

We can read from the official site of NYSE:

Public Can Own Member Firms
March 26 1970
Public ownership of member firms is approved for the first time

And, maybe, it was the beginning of the end...

James Surowiecki wrote (29 September 2008; The New Yorker):

[...] All, then, seemed good. But, for Wall Street firms, going public was a deal with the devil, because it meant exposing themselves to what was, in effect, a minute-by-minute referendum, in the form of the stock price, on the health of their operations. This was fine as long as things were going well—the higher the stock price, the richer everyone got—but, once things started to go bad, that market referendum started to look like a vote of no confidence. And that made the problems that the companies were already facing much, much worse. [...]

and

[...] All companies, of course, worry about how their stock is doing. But for most the stock price is a product of performance, rather than a cause of it. If Procter & Gamble’s stock plummeted tomorrow, people would still keep buying Tide. By contrast, if an investment bank’s share price tumbles, it not only wrecks people’s confidence but also can lead to credit-rating downgrades, which provoke a further decline in the stock price, and so on. The downward spiral can be stunningly fast and near-impossible to escape. [...]

After 1970, investment banks could enter the stock exchange, and theese are the dates when they decided to do so (NYSE):

1971 Merrill Lynch
1985 Bear Stearns
1986 Morgan Stanley
1994 Lehman Brothers
1999 Goldman Sachs

What happened to the 5 investment banks that we can see from the first image?

Merrill Lynch: acquired by Bank of America
Bear Stearns: acquired by JPMorgan Chase (with the help of the Fed)
Morgan Stanley: changed its status from investment bank to bank holding
company
Lehman Brothers: bankruptcy
Goldman Sachs: changed its status from investment bank to bank holding
company

On 23rd September 2008 we heard:

The FBI is investigating Fannie Mae, Freddie Mac, Lehman Brothers Holdings Inc and insurer American International Group Inc and their senior executives for potential mortgage fraud, CNN reported on Tuesday.

Well, who is going to investigate the role of the Sec about the subprime crisis??

Top 2008 brands

1901 Coca Cola calendar

Interbrand announces the 2008 best global brands, they listed the top 100. Here you can see the top 10 (i added the year):

Brand - year - 2008 brand value $ mil - country of origin

1 Coca-Cola - 1886 - 66,667 - USA

2 IBM - 1924 - 59,031 - USA

3 Microsoft - 1976 - 59,007 - USA

4 GE (General Electric) - 1878 - 53,086 - USA

5 Nokia - 1865 - 35,942 - Finland

6 Toyota - 1937 - 34,050 - Japan

7 Intel- 1969 - 31,261 - USA

8 Mc Donald's - 1940 - 31,049 - USA

9 Disney - 1923 - 29,251 - USA

10 Google - 1998 - 25,590 - USA

the first british is
27 HSBC - 1865 - 13,143 - UK
the first italian is (actually today Gucci is owned by french PPR)
45 Gucci - 1921 - 8,254 - Italy

year means the year when the name was adopted

in the press release we can read:

Coca-Cola (No.1) remains the best global brand for the eighth year in a row. Yet, a notable shift in this year’s rankings was made by IBM, which took over the No. 2 position from Microsoft (No. 3). Google also moved into the top 10 brands, at No. 10, after ranking at No. 20 in 2007.

It's possible to download the full report (pdf file, 85 pages)

The brand Google: in 10 years from nothing to number 10!! It would be interesting to know how much money the corporations spent for advertising. How much money has Coca-Cola been spending since its foundation?

DAB in UK: economically or not economically viable?

GCap Media is a British commercial radio company formed from the merger of the Capital Radio Group and GWR Group. The merger was completed in May 2005. It is listed on the London Stock Exchange.

On December 20th 2007 Fru Hazlitt started working as CEO of the group.

After 53 days she presented her plans for the company's future; in the meanwhile:

- 6 January 2008: Global radio confirms interest in buying GCap

- 7 January 2008: GCap rejects the-313 million-pound bid offer from Global

- 12 February 2008: Global reserves right to raise GCap offer

The big issue is Fru Hazlitt saying "reflecting our view that DAB is not an economically viable platform for the Company"

A lot of newspapers wrote about this:

FT
8 February 2008 Ben Fenton Digital radio at critical stage
10 February 2008 Ben Fenton Global radio questions GCap plans
11 February 2008 Ben Fenton Hazlitt turns the dial from DAB radio
11 February 2008 Ben Fenton Radio waves hit remaining supporters
Guardian

11 February 2008 John Plunkett Hazlitt : DAB "not economically viable"

12 February 2008 Owen Gibson and Katie Allen
The end for digital radio - or the start of a listening revolution?
Telegraph
12 February 2008 Juliette Garside Doubt over digital as GCap pulls the plug
14 February 2008 Juliette Garside Radio bosses seek new digital map
Times
10 February 2008 James Ashton GCAP's Fru Hazlitt switches off digital radio
12 February 2008 Amanda Andrews Blow for digital radio as GCap drops stations
Independent
12 February 2008 Ciar Byrne GCap retreats from digital radio to focus on FM and broadband

Enron: huge failure for the press

The bankruptcy of Enron (Enron filed for bankruptcy on December 2, 2001) was a huge failure for the press. How is possible that journalists couldn't see what was happening?

An interesting article (Open secrets; Enron, intelligence, and the perils of too much information; The New Yorker, January 8, 2007) written by Malcolm Gladwell tells us many things, including that in May 1998, six students of Cornell University wrote a 23 page report, at page 12 you can read:

"As shown in Table 2, the 8-variable Beneish model shows that that Enron may be manipulating its earnings."

On 5th March 2001, Bethany McLean wrote an article for Fortune Magazine: "Is Enron overpriced?" and in 2003 she was the co-author of the book "Enron: The smartest guys in the room"; in January 2005 the documentary (with the same title) was aired in the USA.

Here you can read "Enron: uncovering the uncovered story" (March 2002) from Columbia Journalism Review (an academic publication providing coverage and analysis of journalism).

If a CEO doesn't say the truth, you can charge him/her; but what can you do when "the truth" is hidden somewhere in million of pages?

121 Banks help companies violating human rights

Interesting information that i've got from the blog of Foreign Policy

121 Banks invest in companies violating fundamental human rights
You can download the full report here (39 page pdf file)

You're reading this blog and i have a question for you.
Did you hear this information from tv?
Did you hear this information from radio?
Did you read this information in a newspaper?

It's up to you where you put your money

Bank Secrets Cracked
Tuesday, 11 December 2007

New report reveals alarming investment practices by financial groups

Today, the financial watchdog Netwerk Vlaanderen launches the report ‘Bank Secrets’. The dossier details the investments by 121 financial groups in companies violating fundamental human rights. The investors channel money to 13 companies selling weapons to dictators, denying people access to land and clean water, co-operating with armed rebel groups and being involved in forced relocations and heavy and irreversible pollution.

International banks involved
121 banks from 24 different countries play a role in the financing of these companies, including banks based in Abu Dhabi, Australia, Belgium, Canada, China, DRC, France, Germany, India, Indonesia, Italy, Japan, Kuwait, Malaysia, Mauritius, The Netherlands, Peru, Singapore, South Africa, Spain, Switzerland, Taiwan, the UK, the US and the multilateral World Bank.

Netwerk Vlaanderen reports that for the period 2003 – 2007, loans add up to a total of US$13 billion. Furthermore, during the period 2004-2007 banks have arranged and underwritten bond issues to a total value of US$ 28.4 billion. During the same period, the companies were assisted in issuing shares to a total value of US$ 14.8 billion.

Investors complicit to human right abuses
Although the human rights abuses are well documented, financiers keep on supporting the involved companies. The lack of sustainability standards in their investments policies, allows them to channel money to companies like AviChina, which sells military material to China, Burma and Sudan. Because of violations of human rights in these countries, the European Union decided on an arms embargo. By financing AviChina, investors undermine this embargo.

Other reported investments include the support to mining companies which systematically pollute the environment. The Australian company Emperor Mines, for example, exploits a gold and silver mine in an ecologically and culturally precious area in Papua New Guinea. Emperor Mines dumps monthly 14.000 tuns of toxic waste - containing lead, chromium, arsenic, cadmium, nickel and copper - in the local river. Thousands of people depend on the water for fishery and small scale agriculture. This does not stop several major international financial groups from backing the company financially.

Netwerk Vlaanderen promotes an environmentally and socially responsible approach to money. Netwerk gives advice on sustainable saving and investment products. And Netwerk has been running the campaign "My Money. Clear Conscience?" to show banks where their responsibilities are around human rights abuses.

Unequal pie

From NYT:

As Always, an Unequal Pie
By DAN MITCHELL
Published: December 1, 2007

THE distribution of wealth lies at the heart of political economics. Nations and empires have risen and fallen, and millions have died, as a result of humanity’s struggle to decide how (or whether) to divide wealth.

But for all that, the level of wealth inequality has remained remarkably consistent over the last 2,000 years, according to a recent study by Branko Milanovic, a researcher with the World Bank, and two economics professors, Peter H. Lindert of the University of California, Davis, and Jeffrey G. Williamson of Harvard University (economics.harvard.edu).

While “human civilization has advanced by leaps and bounds over the past two millennia, income inequality has stayed relatively the same,” Zubin Jelveh of Portfolio.com wrote about the study.

The “inequality extraction ratio” is basically the share of the wealth difference taken by “elites.” Since the United States is the wealthiest nation in history, the potential for elites taking a bigger share of the wealth (without allowing mass starvation) is greater. But they have not done so. “Thus,” the researchers write, “the social consequences of increased inequality may not entail as much relative impoverishment, or as much perceived injustice, as might appear.”

Tim Harford of Slate.com, writing about the same report, called this “faint praise for the United States, perhaps.” But, he added: “It is interesting to observe that while modern societies are rich enough to be much more unequal than their predecessors, they show similar patterns of income inequality. Perhaps — I am speculating wildly — human societies have some hard-wired tolerance for inequality?”

Or perhaps, no matter how wealthy a society, there will always be income inequality, whether or not we are “hard wired” for it.
---
The 88 page paper is called Pre-Industrial Inequality: An Early Conjectural Map

Abstract

Did our pre-industrial ancestors have incomes and life expectancies as unequal as they
are today? Or is inequality largely the result of the Industrial Revolution? For want of
sufficient data, these questions have not yet been answered. This paper infers inequality
for 15 ancient, pre-industrial societies using what are known as social tables, stretching
from the Roman Empire 14 AD, to Byzantium in 1000, to England in 1688, to Nueva
España in 1790, to China in 1880 and to British India in 1947. It applies two new
concepts in making those assessments – what we call the inequality possibility frontier
and the inequality extraction ratio. Rather than simply offering measures of actual
inequality, we compare the latter with the maximum feasible inequality (or rent) that
could have been extracted by the elite. The results, especially when compared with
modern countries the world round, give new insights in to the connection between
inequality and economic development in the very long run.

Sirius satellite radio is the fastest growing company

2007 Technology Fast 500 List

The Deloitte Technology Fast 500 recognizes North America’s fast-growing technology, media, telecommunications and life sciences companies in terms of percentage revenue growth over five years.

The year 2007 marks the 13th anniversary of Deloitte’s Technology Fast 500. Through the years, the companies that have appeared on our list have shown a remarkable ability to maintain spectacular growth, not just during the heady times of the technology boom, but also through this now increasingly competitive landscape. The five-year growth rates of the companies on the 2007 Deloitte Technology Fast 500 list, although still stellar by any measure, reflect a business environment that rewards sustained performance.

View the companies on this year's 2007 Technology Fast 500 in the PDF attached here (20 pages)

View the press realease

SIRIUS Satellite Radio Inc. was named the fastest growing technology company in North America: SIRIUS reported a revenue growth rate over five years of 79,060 percent, moving from revenues of $805,000 in 2002 to $637,235,000 in 2006.

Based in New York City, SIRIUS (www.sirius.com) is a publicly held provider of satellite radio services. The company delivers more than 130 channels of the “Best Radio on Radio,” including 68 channels of 100 percent commercial-free music and 65 channels of sports, news, talk, entertainment, traffic, weather and data services. This is its first appearance on the Fast 500 ranking.

On February 19, 2007, Sirius announced a merger deal with the competitor XM Satellite Radio. Upon government approval, the merger will combine the two radio services and create a single satellite radio network in the United States.

In addition to Number 1-ranked SIRIUS Satellite Radio Inc., the top five Fast 500 winners include:

Number 2 — SkyBitz Inc., a Sterling, Va.-based privately held communications/networking company, came in second on the 2007 Fast 500 listing. SkyBitz (www.skybitz.com), a real-time tracking and information management solutions company, reported revenues of $26,673,000 in 2006, a leap of 40,314 percent from 2002 revenues of $66,000. This is its first appearance on the Fast 500 ranking.

Number 3 — iTech US Inc., a privately held software company based in South Burlington, Vt., came in third on the 2007 Fast 500 listing. iTech US (www.itechus.com), provider of IT services and e-business operations, reported revenues of $28,434,000 in 2006, a leap of 39,392 percent from 2002 revenues of $72,000. This is its first appearance on the Fast 500 ranking.

Number 4 — First Solar Inc. (NASDAQ: FSLR), a Phoenix-based publicly held semiconductor company, came in fourth on the 2007 Fast 500 listing. First Solar (www.firstsolar.com), which specializes in renewable power generation, reported revenues of $134,974,000 in 2006, a leap of 27,446 percent from 2002 revenues of $490,000. This is its first appearance on the Fast 500 ranking.

Number 5 — ISTS Worldwide Inc., a Fremont, Calif.-based privately held software company, came in fifth on the 2007 Fast 500 listing. ISTS Worldwide (www.istsinc.com), a retail and payment technology-focused custom development, consulting and systems integration services firm, reported revenues of $10,064,000 in 2006, a leap of 19,254 percent from 2002 revenues of $52,000. This is its first appearance on the Fast 500 ranking.

Fastest Growing Companies Are Private

The proportion of private vs. public companies that make up the fastest growing businesses in the 2007 Fast 500 has completely reversed itself from 2002, with private companies now dominating the top 20 slots.[...]

Technology World Is Not Flat

The traditional technology hotspots in California and the Northeast constituted a growing share of the Fast 500, while other regions saw a general decline. Silicon Valley and Silicon Alley’s ecosystems of innovation, academia, venture capital and skilled employees are proving difficult to replicate in other regions.

Cellphones Get Cheaper, So People Pay More

From New York Times:

November 20, 2007, 12:07 pm
Cellphones Get Cheaper, So People Pay More

By Saul Hansell

There’s no place that the relentless reduction in prices for technology products is more visible than cellphones. It seems like only months between the time a phone is offered for sale at $300 and it is ready to be given away free in cereal boxes. (O.K. not quite, but that’s not a bad marketing idea.)

What’s odd about all this is that according to new data from the NPD Group, people are actually spending more on cellphones than a year ago. Americans bought 38 million phones in the third quarter up only 4 percent from the third quarter of 2006. But they spent a total of $3.2 billion on those phones, up from $2.2 billion a year earlier.

Doing the math, that means the average phone cost $82.81 this year, up 40 percent from $58.95 a year ago.

NPD doesn’t say whether the extra $1 billion spent on phones in the quarter was simply added to the nation’s credit card bills or whether people cut back spending on food, clothing or something else far less important than cellphones.

But the company does show that more people are buying phones that serve other functions besides making calls. Half the phones sold in the period could play MP3 music files, compared to one quarter a year ago. Bluetooth capability was on 72 percent of phones sold, compared to 50 percent a year ago. And 11 percent were those digital Swiss Army knives called smartphones, up from only 4 percent a year ago.

Speaking of smartphones, Apple’s iPhone hit NPD’s charts in its first full quarter of sales. NPD ranks the iPhone as the sixth most popular phone model in the quarter. The top seller remains Motorola’s Razr line (in all its configurations). Second was LG’s VX8300, a heavily promoted low-price flip phone for Verizon Wireless, with Bluetooth, an MP3 player and a host of other features, I suspect most people never use.

M.B.A. under attack

Interesting article from NYT:

The M.B.A. Under Attack
DAN MITCHELL November 17, 2007

THERE is a rising reaction against management theory, according to The Economist. A new book by the management expert Gary Hamel, “The Future of Management,” notes that several well-known executives of hot companies — among them, Sergey Brin and Larry Page of Google and John P. Mackey of Whole Foods Market — did not go to business school.

More to the point, another new book, by the Harvard Business School professor Rakesh Khurana, “charts how management science declined from a serious intellectual endeavour to a slapdash set of potted theories,” as The Economist characterizes it (economist.com).

That book, “From Higher Aims to Hired Hands: The Social Transformation of American Business Schools and the Unfulfilled Promise of Management” is “academic” and “dense,” according to Business Week, but it still manages to be scathing. Business schools not only fail to produce the best managers but also repudiate professionalism by emphasizing individual achievement over company loyalty, according to Mr. Khurana (businessweek.com).

Now come the contrarians. A study (get it here) by Nick Bloom, an assistant economics professor at Stanford University, and John Van Reenen, an economics professor at the London School of Economics, concludes that companies using the most widely accepted management theories taught by business schools outperform their peers in productivity, sales growth and return on capital. According to the authors, “these measures of better management practice are strongly associated with superior firm performance.”

“That this is at all controversial,” concludes The Economist, “shows how far management theory has fallen from its peak,” when it was expected to become a science.

Studying the dating

From Slate:
An Economist Goes to a Bar
And solves the mysteries of dating.

By Ray Fisman
Posted Wednesday, Nov. 7, 2007

Ray Fisman is the Lambert Family Professor of Social Enterprise and research director of the Social Enterprise Program at the Columbia Business School. His book with Ted Miguel, Economic Gangsters, is forthcoming next year.

When economists began broadly applying their theories of rational choice-making, love and marriage were among the first areas they colonized. Nobel Prize winner Gary Becker laid the foundations back in 1973 with his two-part article "A Theory of Marriage." Becker imagined society as an immense cocktail party with rational-minded daters searching for the most desirable partner who would have them. His analysis predicted a pattern of "positive assortative matching," where men and women of similar desirability would partner with one another.

While models of dating have proliferated in the years since Becker's pioneering work, we have not progressed very much in testing his theories, or even answering the most basic dating question, for Becker or anyone else: What, exactly, makes someone desirable? There are, of course, the answers that get regular reinforcement: Men value looks; women value brains, money, and success. But do these old-fashioned stereotypes continue to hold today (if they were true to begin with)?

To figure this out, you could do "field work" at a local bar to observe the choices people make in real dating situations or sift through archived marriage announcements to see who chooses whom. But observed dating and marriage choices are at least as much a result of whom we meet as what we prefer. Doctors marry doctors, lawyers marry lawyers, and economists marry economists, probably not because they actually prefer to do so, but because those are the people they meet in daily life. The same may be true of the tendency to marry someone of one's own race or religion.

To really understand what people prefer, you need to pair men and women randomly in an experimental dating service and document the decisions they make. And so for a couple of years at a local bar just off the Columbia campus, I ran a speed-dating experiment with two psychologists, Sheena Iyengar and Itamar Simonson, and fellow economist Emir Kamenica. Some of our findings confirm well-worn clichés. But others surprised us.

Speed dating is matchmaking on, well, speed—each male-female pair (we stuck to heterosexual couples) meets for four minutes to size each other up, at which point a whistle blows, signaling the men to get up and move on to the next woman. After each "date," participants decide if they'd like to see their partner again. For our study, we also asked them to rate their partners' intelligence, looks, and ambition after each meeting. Each event had between 10 and 20 daters of each gender, and in the course of the evening, every man met every woman and vice versa.

After two years of serving as academic love brokers, we had data on thousands of decisions made by more than 400 daters from Columbia University's various graduate and professional schools. By combining all of our choice and ratings data with separately collected background information on the daters, we could figure out what made someone desirable by comparing the attributes of daters that attracted a lot of interest for future dates with those that were less popular.

With the obvious qualification that we're talking here about a four-minute version of love and dating, we found that men did put significantly more weight on their assessment of a partner's beauty, when choosing, than women did. We also found that women got more dates when they won high marks for looks from research assistants, who were hired for the much sought-after position of hanging out in a bar to rate the dater's level of attractiveness on a scale of one to 10.

By contrast, intelligence ratings were more than twice as important in predicting women's choices as men's. It isn't exactly that smarts were a complete turnoff for men: They preferred women whom they rated as smarter—but only up to a point. In a survey we did before the speed dating began, participants rated their own intelligence levels, and it turns out that men avoided women whom they perceived to be smarter than themselves. The same held true for measures of career ambition—a woman could be ambitious, just not more ambitious than the man considering her for a date.

When women were the ones choosing, the more intelligence and ambition the men had, the better. So, yes, the stereotypes appear to be true: We males are a gender of fragile egos in search of a pretty face and are threatened by brains or success that exceeds our own. Women, on the other hand, care more about how men think and perform, and they don't mind being outdone on those scores.

Another clear gender divide, this one less expected, emerged in our findings on racial preferences, reported in a forthcoming article in the Review of Economic Studies. Women of all the races we studied revealed a strong preference for men of their own race: White women were more likely to choose white men; black women preferred black men; East Asian women preferred East Asian men; Hispanic women preferred Hispanic men. But men don't seem to discriminate based on race when it comes to dating. A woman's race had no effect on the men's choices.

Two wrinkles on this: We found no evidence of the stereotype of a white male preference for East Asian women. However, we also found that East Asian women did not discriminate against white men (only against black and Hispanic men). As a result, the white man-Asian woman pairing was the most common form of interracial dating—but because of the women's neutrality, not the men's pronounced preference. We also found that regional differences mattered. Daters of both sexes from south of the Mason-Dixon Line revealed much stronger same-race preferences than Northern daters.

Does all of this rational-choice stuff take the romance and mystery out of romance (just as some have accused my fellow economist Joel Waldfogel of taking the Christmas spirit out of Christmas)? I hope not. Our purpose is to understand how life-long relationships are formed. The first step in helping people find love and happiness is to figure out what they're really looking for in the first place.

Bubble bubble

1 week before Microsoft spent $240 million for buying 1.6% share of Facebook, 2 journalists of NYT wrote it clearly: we are in second dot-com bubble. There's no way that Facebook (300 employees, $ 100 million of revenue) is worth almost half of Yahoo (13,600 employees, $ 6.7 billion of revenue).

Silicon Valley Start-Ups Awash in Dollars, Again

By BRAD STONE and MATT RICHTEL
Published: October 17, 2007

SAN FRANCISCO, Oct. 16 — Silicon Valley’s math is getting fuzzy again.

Internet companies with funny names, little revenue and few customers are commanding high prices. And investors, having seemingly forgotten the pain of the first dot-com bust, are displaying symptoms of the disorder known as irrational exuberance.

Consider Facebook, the popular but financially unproven social network, which is reportedly being valued by investors at up to $15 billion. That is nearly half the value of Yahoo, a company with 38 times the number of employees and, based on estimates of Facebook’s income, 32 times the revenue.

Google, which recently surged past $600 a share, is now worth more than I.B.M., a company with eight times the revenue.

More broadly, Internet start-ups are drawing investment based on their ability to build an audience, not bring in revenue — the very alchemy that many say led to the inflation and bursting of the dot-com bubble.

The surge in the perceived value of some start-ups has even surprised some entrepreneurs who are benefiting from it.

A year ago, Yahoo invested in Right Media, a New York-based company developing an online advertising network. Yahoo’s investment valued the firm at $200 million. Six months later, when Yahoo acquired Right Media outright, the purchase price had swelled to $850 million.

What changed? According to Right Media’s chief technology officer, Brian O’Kelley, very little, except that Yahoo’s rivals, Microsoft and Google, were writing billion-dollar checks to buy online advertising networks, and Yahoo thought it needed to pay any price to keep up.

“I have to say I giggled,” Mr. O’Kelley, 30, said of the deal that earned him millions. He has since left Right Media and is starting another company. “There is no way we quadrupled the value of the company in six months.”

The trend is described as a return to madness (by skeptics) or as a rational approach to unlimited opportunities presented by the Internet (by true believers). Greed, fear and a desperate rush to pick the next big winner are all adding fuel to the fire that is Silicon Valley’s resurgence.

“There’s definitely a lot of betting going on, and it’s not rational,” said Tim O’Reilly, a technology conference promoter and book publisher.

Mr. O’Reilly is credited with coining the phrase “Web 2.0,” which refers to a new generation of Web sites that encourage users to contribute material. His Web 2.0 conference, which begins Wednesday in San Francisco, has become a nexus for the optimism around the latest set of society-changing online tools. But that has not stopped Mr. O’Reilly from worrying that the industry is minting too many copycat companies, half-baked business plans and overpriced buyouts.

When the bubble inevitably pops, he said, “there are going to be a lot of people out of work again.”

Putting a value on start-ups has always been a mix of science and speculation. But as in the first dot-com boom and the recent surge in housing, seasoned financial professionals are seeming to indulge in some strange instinct to turn away from the science and lean instead on the speculation.

This time around, people indulging in that optimistic thinking are not mom-and-pop investors or day traders but venture capitalists whose coffers are overflowing with money from university endowments and hedge funds. Many of those financial professionals say that this time, everything is different.

More than 1.3 billion people around the world use the Internet, many with speedy broadband connections and a willingness to immerse themselves in digital culture. The flood of advertising dollars to the Web has become an indomitable trend and a proven way for these start-ups to make money, while the revenue models of the dot-coms of yesteryear were often little more than sleight of hand.

“The environmental factors are much different than they were eight years ago,” said Roelof Botha, a partner at Sequoia Capital and an early backer of YouTube. “The cost of doing business has declined dramatically, and traditional media companies have also woken up to the opportunities of the Web.

“That does open up the aperture for a different outcome this time,” he said.

Some trace the start of the new bubble to eBay’s $3.1 billion acquisition of the Internet telephone start-up Skype in 2005. EBay’s chief executive, Meg Whitman, reportedly outbid Google for the company. This month, eBay conceded it had grossly overpaid for Skype by about $1.43 billion, and announced that Niklas Zennstrom, a Skype co-founder, had left the company.

Google’s acquisition of YouTube last year for $1.65 billion, under similarly competitive bidding, might have accelerated the transition to loftier values. Google executives and many analysts argued that YouTube was well worth the price tag if it became the next entertainment juggernaut.

It still might. More than 205 million people visit YouTube each month, according to the research firm comScore. Still, Citigroup estimated that YouTube would bring in $135 million in revenue next year. At that rate, YouTube would have to grow considerably to account for just 5 percent of Google’s annual revenue of nearly $12 billion.

“We are almost going back to year 2000 types of errors,” said Aaron Kessler, an Internet analyst at Piper Jaffray. Internet companies “are buying users instead of revenue and profitability,” he said.

The Skype and YouTube windfalls helped to give the newest batch of Internet entrepreneurs dreams of improbable wealth. They also brought back practices that had seemingly been discredited during the first boom. For example, in the first dot-com gold rush, Internet companies did not have to make money to acquire serious investments dollars. Now that once again is true.

Twitter, a company in San Francisco that lets users alert friends to what they are doing at any given moment over their mobile phones, recently raised an undisclosed amount of financing. Its co-founder and creative director, Biz Stone, says that the company was not currently focused on making money and that no one in the company was even working on how to do so.

“At the moment, we’re focused on growing our network and our user experience,” he said. “When you have a lot of traffic, there’s always a clear business model.”

That is not necessarily illogical in the current climate. A European competitor, Jaiku, which is similarly devoid of a mature business model, was acquired last week by Google for an undisclosed sum. With the competitive logic that prevails at the major Internet companies, the deal might have further raised Twitter’s appeal to Google’s rivals.

The high value placed on many start-ups and minimal requirements for financial performance are raising expectations of other entrepreneurs. Sharon Wienbar, managing director of Scale Ventures Partners, an investment firm, cited the $100 million valuation that investors gave to the Internet genealogy site Geni.com, founded last year in Los Angeles by a veteran of PayPal.

“Now every entrepreneur thinks he should get that,” Ms. Wienbar said. “I have a feeling a lot of entrepreneurs are secretly meeting for beers on the Peninsula, saying, ‘Hey, look what I got.’”

Mr. O’Kelley, formerly of Right Media, said other entrepreneurs had begun to think that the financing game is best played by avoiding actual revenues — since that only limits the imagination of investors. “It’s a screwed-up incentive structure, just like you had in the first bubble,” he said.

Another company benefiting from the exuberance is Ning, which allows users to create their own MySpace-style ad-supported social networks. It was recently valued by investors at more than $200 million, mainly because its main backer and founder, Marc Andreessen, has a successful history with the Internet hits Netscape and Opsware.

Mr. Andreessen argues on his blog that there is no bubble and that the high prices represent a rational desire to stake a claim in the potentially huge markets of the future. But he acknowledges that a seemingly inexhaustible flood of capital into Silicon Valley is helping to power the boom. Venture capitalists are flush with cash from institutional investors, eager for Internet-style returns on their money.

“The upward valuations pressure is the result of decisions being made by people wearing suits in cities like New York and Boston who would never ever meet with start-ups,” Mr. Andreessen said in an interview. “If that ever goes away, it will have consequences. But it doesn’t look like they will change their minds.”