Monday, January 17, 2011

From 50 Cent to $50 Billion and Beyond

As the world's economy continues to lurch forward and stumble backwards, I noticed a few stories this week that exemplify the intractability of our economic problems. Stock markets have been performing well, banks have long returned to profitability (along with their absurd bonuses) and retailers are reporting the predicted strong Christmas sales. Conversely, the price of oil has been steadily marching back towards 2008 levels, poverty levels are exploding and the mortgage crisis continues to throw millions of people into the street. Corporations and the wealthy have returned to health while the rest of us seem to be stuck in the cold, on the outside looking in. It's hard not to find three stories from the past week or so quite instructive in why this is, as Fifty Cent, Facebook and BP all made financial news in ways that demonstrate the growing divide between the haves and have-nots in the capitalism of today.

One way to get rich in America is to become a crack dealer at age twelve, turn to rap, get shot and then discovered by Eminem. Once you get famous, dabble in film and TV, lend your name to every product imaginable, from video games to deodorant and most importantly, get in early on investment opportunities. When those investments start to look bad, no problem, just order your followers to come to your aid via one of today's favorite lemming leading social media platforms, Twitter. Yep, appropriately enough, the man who added to the get rich or die trying mantra plaguing America, Curtis Jackson, AKA Fifty Cent has completed the morality full circle, going from drug pusher on the streets of the Bronx to penny stock pimping Wall Street promoter  Around the end of November, he invested $750,000 in the penny stock, H & H Imports, a company involved in the launching of his own version of headphones, Sleek by 50 Cent, an unapologetic rip-off of Dr. Dre's Beats.

In addition to the 30 million shares received in the private placement equity offering at the end of November, Fifty also picked up warrants for another 22.5 million shares at prices of $0.15, $0.25, and of course, $0.50. Predictably, as the company was operating at a loss and carrying a deficit of $3.3 million as of November 23rd with only $198,000 cash on hand, the shares plummeted from 17 cents to under 5. Fitty turned to his 3.8 million followers for help with the following tweets:
"HNHI is the stock symbol for TVG sleek by50 is one of the 15 products this year. If you get in technically I work for you. BIG MONEY”
“TVG’s stock went from 5cent to 10 in one day. You can double your money right now. Just get what you can afford.”
“HNHI is the stock symbol for TVG there launching 15 different products. they are no joke get in now.”
“You better get in now TVG I’m never saying this again. Watch how this company blows up.”
“Ok ok ok my friends just told me stop tweeting about HNHI so we can get all the money. Hahaha check it out its the real deal.
The result? An $8.3 million profit for 50 Cent as the stock price quadrupled, from 10 to 40 cents. Love the intentional (?) spelling error (there instead of they're) to save character space in the attention span deprived age of Twitter. Oh, and like his other tweets pimping the stock, all of them have been scrubbed, another word symbolic of our new doublespeak age. So far, no pump and dump has been proven yet and with the regulators at the SEC having to worry about the next private placement stock offerings we'll discuss, its seems no harm, no foul. Besides, if you're taking stock advice from a rapper, you deserve what you get, right?

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If you wanted to write a script bringing together three of the most evil characters imaginable, you couldn't do much better than the evil banking empire, the Russian investment firm and the megalomaniacal psychopath. Ok, maybe the Empire from Star Wars, Connery as Bond-era Russians and Blue Velvet's Frank Booth. In real life we've got Goldman Sachs and DST Global pumping $500 million into Mark Zuckerberg's Facebook, pushing its value up to $50 billion. This is supposed to be real life, yet these guys get to write their own script in the battle for wealth and eyeballs. Only in America could such a world exist, where problems are always made worse instead of being fixed.

In fact, we love these movies so much we choose to further empower the bad guys. As a reward for helping bring the world's economy to its knees, Goldman Sachs was given access to the Federal Reserves discount window. By converting itself into a commercial bank and member of the Federal Reserve system during the chaos at the onset of the financial crisis, Goldman can now borrow near-unlimited amounts of cash at near zero interest. Feeding what Matt Taibbi called "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money" zero cost of capital so they can turn around and give it to Facebook in order to better exploit our shrinking attention spans doesn't seem like a private placement equity offering good for the rest of us. Not only did they garner a $13 billion payout at one hundred cents on the dollar for its outstanding credit default swap contracts with AIG and $12.9 billion in direct bailout money, they now get practically free money from the FDIC Temporary Liquidity Guaranty Program. Goldman simply takes this money from us, gives it to Facebook in exchange for a slice of equity, then turns around and sells their piece of the $50 billion pie it just baked to chosen investors. Chosen meaning really rich, as in order to be invited to dessert and take part in Goldman's $1.5 billion private offering you need to be a multi-millionaire.

So, only Goldman and friends have a shot at the riches they've created by borrowing money from the public to create a company worth $50 billion. In exchange, Zuckerberg gets a two year window before he'll be forced to go public in an IPO (Initial Public Offering). Imagine that, forced to make a few more billion dollars at the cost of losing complete financial privacy as a public stock offering would entail opening up the books to public scrutiny. Poor Mark. Additionally, Goldman has virtually guaranteed themselves to be the lead bank in all the future IPO's that will be pumping up the next market bubble thanks to the spin-off of all Facebook's inter-connected businesses (more on them in the next paragraph). Told you the SEC was busy as this script has everything, aiding and abetting by the US government, a battle for billions of eyeballs and even a Russian angle. In fact it is the Russian company that brought Facebook and Goldman together that does a lot of the selling on Facebook already, Digital Sky Technologies and its co-founder, Yuri Milner.

DST has been investing early and aggressively in some of the biggest names in the latest tech bubble boom. They first invested in Facebook in May 2009, as well as Zynga (the company that makes Farmville for Facebook), and Groupon (the dudes that just turned down Google's $6 billion). DST also tried, but failed, to be lead investors in Twitter's latest financing round too, but don't worry there will be another shot. In case you missed it, in addition to his 10% share in Facebook, Yuri was in for a third of the $403 million owners' stake in the $876 million IPO for Mail.ru in November and still holds onto much of the company. Needless to say, all this buying and selling is done in a closed circuit of hedge funds billionaires for banker benefit. With over 500 million monthly users and the recent surge in popularity in Asia, Facebook's control over the second billion eyeballs may come even quicker, so who can blame people for climbing over each other to take part, bubble or not. Good thing we've got financial regulators making sure nothing improper is happening!?!

Some may have picked up on the similar role Goldman Sachs is playing in the promotion of this bubble to the last when they were at the center of creating the housing bubble. Looking to feed the next frenzy after the dot-com bubble burst in 2000, Goldman and other investment banks found a new gimmick, credit derivatives such as CDOs. To make mountains of moolah, all they had to do was stuff toxic subprime assets into pretty packages, chop them up and hawk them to the gullible, greed-driven Gordon Gecko wannabees of the world. It's like deja-vu all over again, as this time they are also raking in fees while pawning off overpriced goods in a market of their own creation. Goldman invested $75 million in Facebook early through one of its hedge funds at a low valuation in the same way they got CDOs rolling, this time making $60 million in up front fees from clamoring clients. Once again, the clients will have virtually no idea what they are getting while agreeing to give up over 5% of any possible gains on top of the 4% placement fee and 0.5% expense reserve fee. Yep, quite a privilege to be down 10% before the opening bell in a private company that won't have to disclose any financial information to investors or regulators for at least another 15 months while Goldman gets its guaranteed eight-digit windfall.

Best yet, they've shown that although they might not have learned any lessons about bubbles, they have learned to protect themselves as Goldman has reserved the right to cash out anytime they want right up front "without notice to the fund or investors in the fund". So, investors who must put up a minimum $2 million investment aren't allowed to sell until 2013 but will never know when Goldman starts betting against them. Goldman learned from the Abacus deal in which they shorted shares at the same time they were selling to clients and wound up costing them $550 million in fines. Their notice means this time the SEC can't touch them. CDOs were private, unregulated, overvalued, disclosure-lite, fee-intensive deals. The Facebook deal is private, unregulated, overvalued, disclosure-lite, and fee-intensive; insider trading in the public markets made upfront and legal here. As Goldman CEO Lloyd Blankfein infamously said, he's just "doing God's work".

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What do you get when you have the biggest country in the world, one with vast reserves of natural resources and without any qualms about doing what it takes to get what they want joining forces with a giant oil company with a history of destroying the environment in a relentless drive for short term corporate profits? One more bit of financial news sure to help in bringing about the end of the world. Now that the Gulf of Mexico has magically cleaned itself and BP has returned to profitability, it has turned its sights north toward the abundant resource riches of the Arctic. Yep, seeing as the world has already forgotten it's last catastrophic environmental disaster, BP has announced a partnership with Russian energy firm Rosneft, 80% owned by the Russian government. The deal announced Friday will give Rosneft 5% of BP's shares in exchange for approximately 9.5% of Rosneft's.

Uh huh, so? Well for starters we're talking about BP gaining access to the fragile Arctic ecosystem through the back door. The company who just half a year ago had the world glued to a video feed of the gateway to hell opened up by the Deepwater Horizon oil rig explosion. It cost them a few bucks in cleanup costs but BP's still worth three Facebooks, a cool $150 billion. This deal is needed to help get it back to its pre-Gulf of Mexico destruction value. In exchange for giving Russia, a country notorious for its capricious application of the rule of law, a piece of BP and its strategic US holdings (BP was the biggest petroleum supplier to the US military last year), world consumers will get a shot at what is estimated to be enough oil to meet global demand for more than four years. Russia's piece of the Arctic pie could be 51 billion tonnes of oil, but sucking it like a straw from under the Arctic will take BP's "expertise" at this type of work. With peak oil and prices approaching the $100/barrel mark on their way to the $143.37 it reached in July of 2008, there's no wonder the business press is pumping this deal too.

Both former BP CEO Tony Hayward, who was just sorry because he wanted his life back, and current boss Bob Dudley had ties to Russia in the past. Strangely, or not, Dudley was forced to flee Moscow in 2008 after the last BP venture into Putin's playground went bad. Dudley claims the Russian billionaire oligarch co-owners in the TNK-BP joint venture waged what he called a campaign of harassment. Of course the business press can't even read newspapers from 2008 to question why they then wrote that Dudley had been barred from working in Russian before they started running with his current song and dance that "this is a historic moment for BP". It is historic as the race for control of the Arctic shelf has been kicked up a notch, with another oil war coming clearer into focus. Our dependence on extracting as much oil as possible, regardless of the difficulties or dangers, is driving us ever faster to our doom. Yet, it is the companies like BP who drive part of this rise as prices mount partially thanks to the disasters they've brought which causes uncertainty about regulation and whether we've finally reached the limit of environmental degradation.

So, the deal is sold as a good thing that the firms will explore in three areas - known as EPNZ 1,2,3 - on the Russian Arctic continental shelf in an area that covers 125,000 square kilometres in the South Kara Sea. BP's technology matches with Russia's oligarchs or something like that. The cost of doing business is the possibility of Putin putting someone in jail or taking what he wants but BP's growth is dependent on Russia. Besides, it can't be any more environmentally damaging than the tar sands or fracking, so what the hell, let's burn more fossil fuels to heat things up faster to melt the ice caps to make it easier to get the oil. In a world where war, support for authoritarian regimes, oil company run governments and destruction of ecosystem and entire countries is acceptable in the pursuit of cheap power, why would we worry about a little thing like the Arctic? What's an addict to do?

The go-go 90's of Yeltsin's Russia resulted in transferring the wealth of the nation from the people to a selected few in a neoliberal wet dream. It created a billionaire aristocracy by handing over the economy's most important, profitable sectors, free of charge - literally granting a license to loot. Sure this resulted in huge inefficiencies with estimated losses to corruption of $318 billion annually but whatever kept the oil and gas flowing west was fine. Vladimir Putin's Russia still has the graft but is a slightly different place. Although the rule of law isn't applied evenly and basic rights such as political expression, freedom of speech and the press are often brutally repressed it has become a land where even the 16th wealthiest man in the world can find himself behind bars. Mikael Khodorkovsky and his oil company Yukos were the biggest winners of the unfettered markets created by the IMF in the 90's but the biggest losers in the power struggle with Putin in the oh-oh's. The 'liberal' western press decries arbitrary prosecutions at the whim of the Kremlin while ignoring the real story. The looting by the likes of Khodorkovsky was given a free pass in exchange for not challenging the government. As soon as he started funding and supporting opposition groups, that unspoken agreement was breached. You won't read in the NY Times about how Khodorkovsky used his Communist era position to enrich himself, stealing from the state and unwary investors enough to buy Yukos for $300 million in 1995. In 2003, its market value was $30 billion, a 100-fold ill-gotten gain.

In a dizzying about face, the media has gone from condemning Russia's business climate of fear three weeks ago when judges added six years to Khodorkovsky's eight year prison term, to jubilantly embracing the marriage of BP and the Russian government's Rosneft. The hypocrisy of western attitudes is revealed on multiple levels; defending predatory capitalism's rapaciousness and its own criminal class but attacking Russia's IMF-built system while giving its approval to the signing of business deals with them in the name of corporate growth. For decades, a government-corporate cabal has been shifting trillions in public wealth into private hands, specifically to omnipotent Wall Street. At issue is shielding them at all costs so corrupt practices can continue until everything worth owning is stolen. Of course the charges against Khodorkovsky are ludicrous and his trial was politically motivated but even more ludicrous is a world that sits back and cheers a company that was just shown to have caused the Gulf of Mexico disaster by cutting corners to boost profit being handed the keys to explore, exploit and extract resources in the most fragile ecosystem in the world. In the words of Britain's energy secretary Chris Huhne, "BP is very much open for business." Unfortunately for us, their business of stealing from humanity's commons to add value to their stock price can only end badly. BP, Beyond Petroleum, searching for petroleum so we can keep living beyond our means.

2 comments:

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