The ActiveRain Addiction

Why Start A Company In A Bad Economy?

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Sun, 19 Oct 2008 18:51:52 -0500

This question has been in my mind a lot lately. Anybody who reads my blog knows my outlook on the economy over the next several years in pretty bleak. I believe and have believed for some time now that we're not just heading for a protracted recession, but a downturn that will fit the definition of a depression before it's over. I believe the stock market declines are far from over, despite any any short to intermediate term rallies we may get. I believe the biggest asset bubble, the bond bubble has yet to begin it's collapse and I believe we've yet to see the true economic fall out of our credit market issues.

Pretty pessimistic, right? Yet, I left my secure position to start a new company where I don't have a secure paycheck for who knows how long. Doesn't sound like something a pessimistic person would do, does it :)

My belief is the best opportunities to build a business occur in the down times. Today an essay was passed onto me, Why To Start A Startup in A Bad Economy by Paul Graham, that I thought was an interesting read and echo's some of my thoughts.

"When Microsoft and Apple were founded.

As those examples suggest, a recession may not be such a bad time to start a startup. I'm not claiming it's a particularly good time either. The truth is more boring: the state of the economy doesn't matter much either way.

If we've learned one thing from funding so many startups, it's that they succeed or fail based on the qualities of the founders. The economy has some effect, certainly, but as a predictor of success it's rounding error compared to the founders.

Which means that what matters is who you are, not when you do it. If you're the right sort of person, you'll win even in a bad economy. And if you're not, a good economy won't save you. Someone who thinks "I better not start a startup now, because the economy is so bad" is making the same mistake as the people who thought during the Bubble "all I have to do is start a startup, and I'll be rich."

Less Competition

In bad economies only the strong survive while weak companies will often flourish during booming times. Not only will competitors begin dropping like flies but new competition will have problems getting funded or be so scared they go an hide in their bunker. Advertising/Marketing budgets will get slashed by big competitors allowing the smaller, more innovative people to flourish.

Startup/Operational Costs Become Lower

In a sinking economy the pool of potential employees increases significantly, and this will reduce the cost of bringing in talented people, often pretty significantly. Other types of costs such as office space will also be reduced and there is opportunities to buy things much cheaper from companies that didn't make it.

Better Business Plans

Being in a economic downturn forces you to be much more conservative and rational in your business planning. Too many companies built in the upturns, plan around an ever increasing market opportunity and cheap capital, which leads to many unsustainable companies being built. Think back to all the idiotic business plans that turned into well funded companies in the dot com boom and even more recently in the web 2.0 and real estate bubbles.

Now almost everyone here on ActiveRain can think of themselves as a startup, since pretty much all real estate agents work for themselves. Educate yourself, be realisitic in your analysis of what is happening, and use that to look for opportunities that others who simply hide in their bunkers will miss.

Read this post on BigStartups.com...

My new startup Timu officially launches

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Thu, 11 Jun 2009 15:03:56 -0500

Yesterday was a big day for me, after 8 months of planning and product development work finally launched my new startup, Timu. Timu gave me a chance to apply many of the lessons learned with designing and building ActiveRain to another market, amateur sports.

It's a social networking platform specifically built to solve the communications problems encountered by athletes, sports teams and their fans. Online social networking is a natural way to solve many of these problems. Yet, existing social networks provide disjointed solutions that do not handle sports specific features, such as player rosters, game results and statistics. At the same time existing sports web site offerings provide little interactivity and user engagement.

Individual athletes can setup an profile on Timu in minutes. Profiles can be customized with information about the sports they participate in, teams they play on, and their competitive highlights. Photos, videos can be uploaded, and various “widgets” can be added or modified. These profiles serve as one center of communication within Timu.

Coaches, players, or parents can create a team center for your team on Timu. Team centers provide many features like team news, schedules, player rosters, photos, game results, statistics, statistics and a wide range of commmunication tools. All of the people associated with the team can be invited to become members of the team center, which can then function as a hub for team communications.

A few examples of team centers: http://bellevueblaze.timu.com http://dreadsox.timu.com http://baseball.timu.com

Currently Timu supports about 30 different sports ranging from baseball and soccer to unicycling. Each of these sports has it’s own section or hub on Timu including photos, videos, game results and discussions. Timu members can participate in the conversation at these hubs about their sport. As Timu grows we will be providing the ability to view these hubs by region, subsection of a sport, or even by sporting venue.

Create a Sports Profile

Setup your Team on Timu

Jobs Report - Damn Lies and Statistics

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Sat, 08 Aug 2009 18:35:16 -0500

Thursday evening I noticed something very interesting going on within the "financial media". All of a sudden the evening before Friday's big jobs report many of the media outlets started to run stories about how great the jobs report on Friday was going to be, and how it was clearly going to show our economy had turned the corner. Several financial analysts (and I use the term analysts lightly) suddenly downgraded their predictions for job losses to around 250k from much higher numbers and CNBC even took the effort of running a 1/2 hour special on how great the numbers were going to be.

Pumping up impending economic numbers in the financial media is not uncommon but this went FAR beyond anything I'd ever seen before. It was pretty clear there was some type of coordinated leak. The media outlets would have not stuck their necks out to the degree they did the evening before the numbers came out if they weren't sure of the outcome. It's not uncommon for gov. administrations to influence the media this way, by leaking reports to create positive press but this tactic seems is being taken to an extreme level lately.

Sure enough Friday morning the jobs report came and we only had 247k job losses a huge improvement from previous months, <sarcasm>clearly a sign the recession is nearing it's end</sarcasm>. Simply the that fact you saw unemployment rates decline at the same time you had 200k job losses should be a tip off that unemployment statistics are not all that they are cracked up to be. In fact when you look inside the internals of the report you see a lot of interesting number fudging to make the headline number look much better than it should have been. The report on the whole was certainly not what I would label as proof that our economy is on the mend.

One thing that pops out was the insanely huge number (422k) of people that "exited the workforce" in July. Due to the method unemployment statistics are calculated, they don't count. One reason for this is many of the layoffs, particularly at large unionized companies happen through "early retirement" programs and thus don't effect the unemployment stats in the same way. The other is as people use up their unemployment benefits without finding a job they drop off the reporting. From the standpoint of economic health, it's still less people working, earning less money to spend and paying less taxes. In fact if the US has a shrinking workforce at the same time our population is still expanding that is really bad news economically.

There were also some other one time items that added a positive influenced the jobs report more positively such as a large number of the jobs created were census workers, who will only be on the job for a couple months. The birth-death model a model that's supposed to account for creation of jobs via new companies that otherwise don't show up in the statistics also showed by far and away the largest job creation during a July in history. Never mind this is a completely ficticious number that just comes out of a computer model, not from any actual data. These numbers get revised at the end of the year based off real tax withholding data. So far tax withholding data from the first six months of the year suggests we had 500k-1m more job losses than the computer models say.

There seems to be a huge and coordinated initiative to spin and scew any economic data being presented right now, to increase public confidence. It's really starting to bother me, I don't like being lied to or manipulated. True, this happens all the time, but to the degree it's occuring right now makes me think there maybe a lot more fear in the gov. about our economic situation than they are letting on.

Cap and Trade: Yet Another Scam

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Tue, 28 Jul 2009 14:48:08 -0500

I'm a couple weeks behind this one, as all the media focus lately has been on the health care bill. I've had several interesting discussions around cap and trade lately that inspired me to put my thoughts down into a blog post.

Disclaimer

I consider myself a fairly environmentally conscious person, I do believe based on data and observations human activity is creating a huge and very negative impact on the global climate. I'm extremely worried about the this planet over the next several decades. To me the health of this planet overrides any economic impacts of decisions, but at the same time I believe doing what is right for the planet can be done in ways that is also very economically beneficial in the long run. I'm not writing this post to debate these points...

Cap and Trade is a Wolf in Sheeps Clothing

The idea behind the bill sounds fine based on the highest level talking points, incentivize investment in alternative energy and at the same time disincentivize the polluters. Once you look under the hood though, the best phrase I can use to describe it, is "financial scam".

What got me looking at, and thinking about the impacts of the cap and trade bill was when I noticed the biggest supporters throwing the most lobbyists and money behind it was not the alternative energy industry but the Wall Street investment banks. Why?

It comes down to the whole "trade" part of the bill where carbon credits received can be traded/sold to carbon producers. It's been estimated that this could create the largest derivatives market, larger than the CDS's (credit default swaps). These credits would trade on an exchange (partially owned by Goldman Sachs) and would be a multi-billion dollar windfall for the investment banks.

Since the number of carbon credits available is fixed, and is reduced each year this creates a made in heaven market for large traders and speculators (hedge funds, investment banks). The carbon bubble will become the new credit bubble, as speculators suck productive money from the system.

Destructive Impacts on the Alternative Energy Industry

I've got a lot of friends involved in the alternative energy industry who believe this bill is a windfall for the industry and will spark the next big revolution in alternative industry. Be careful what you wish for, the long term impact on the industry may in fact be very destructive.

It's analogous to what happened with the housing market and credit bubble in 02-06 with all these new fangled mortgage products, CDO's, CDS'. Everybody touted these products as being great for the housing industry as they made housing more "affordable" and accessible to the masses. We now realize the truly destructive nature of these products, which incidentally were created by the same Wall Street banks behind the cap and trade bill.

Particularly as the price of carbon credits in driven up by speculators, it will become extremely profitable for companies producing them. The catch is the total number of credits is limited and there really isn't a direct tie between a technology being beneficial long-term, and producing carbon credits. You will see hundreds of companies pop up, simply built to capture huge profits from carbon credits, with technologies that otherwise would not make any sense.

In much the same way as imprudent lenders pitching alternative mortgage products forced prudent lenders out of the mortgage business, viable alternative energy technologies will be squeezed. Investment will be redirected from the productive to the speculative, with very negative consequences. Of course this bill is practically designed to create a "carbon bubble", who's popping in a few years, will sow yet another round of economic destruction laying waste to a whole industry while the pig men walk away with their sacks of money.

The case against inflation

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Sat, 04 Jul 2009 15:19:29 -0500

My in my last blog post a mid-year update to my 2009 market and economic predictions I got multiple comments about the economic threat of inflation or even hyper-inflation rearing it's ugly head.

"It will be interesting to see how those TARP funds play out and what the aftermath will be. My guess will be massive inflation.... think about it this way."

"One thing is for certain. If inflation rears its ugly head, interest rates will increase to combat that."

"Still have you noticed how no one is talking about the inflation rate? We know that in order to spend the "trillions" that more money will have to be printed."

This also seems to be the common thread in the media and much of the financial world, everybody is expecting or thinks we are currently experiencing a huge, hidden inflation. I'm going to lay out the case, why I not only don't any evidence of it, I expect the opposite, a very deflationary outcome, over the next several years.

Truth be told the central banks around the world, including our FED, are desparately trying to return to an inflationary environment. There is nothing they fear more than deflation, but their efforts to reignite the inflationary engine can only be described as an epic failure.

We already had the massive inflation through credit expansion

For about a 5 year period between 2002-2007 and maybe a little bit before the US went through a massively inflationary period, not represented by the standard government inflation or money supply numbers. It was caused by what many sometimes refer to as the "shadow banking" system (because it doesn't show up in the numbers) that drove massive credit expansion.

Not that it was exactly very hidden. It drove speculative bubbles all around us, both residential and commercial real estate, commodities, corporate debt fueling leveraged buy outs and equities. If you believed the CPI numbers published you saw inflation rates of around 2-3% during this period. Several economists have calculated the real inflation rate was actually somewhere between 10-15% annually during this period. This lead to both real interest rates that were very negative, and also a very negative real wage growth.

The last year and a half we've seen the exact opposite, a massive credit contraction, driving deflation across almost all asset classes. Just as the government numbers as an artifact of what they measure severelly understated the inflationary period they are massively understating the amount of deflation that is ocurring. Look around at real estate, stocks, bonds, commodities. Do you see rising or falling prices over the last two years?

Credit destruction is MANY times larger than credit creation

The most common inflationary argument is the FED and other central banks are printing trllions, upon trillions of dollars that are being pumping into the system. While there has been a couple trillion in money put into the system, the actual amount used to monitize debt through quantitative easying is only around a trillion or less. Now counter balance a trillion vs. over $50 trillion in global wealth destruction in 2008 alone. What's the bigger number? To put in bluntly the FED and other central banks are merely pissing into the wind with their efforts.

The money isn't moving

Now here is the real crux of the problem for central banks why money supply creation and stimulus are not having their intended inflationary effect. While the technical definition of inflation is size of the money supply, all the inflationary effects people worry about are instead driven by the velocity of money. A small amount of money moving very fast through an economy creates more inflationary effects than a large amount of money sitting on a balance sheet plugging holes.

In fact the velocity of money has completely collapsed as it's being used to pay down and service debts or cover losses. The last time the velocity of money was this slow, was heading into the Great Depression. Below is a chart of MZM the broadest measure of monetary velocity.

The hyperinflationary setup

For those people worried about imminent hyper-inflation, it might be worth looking historically at characteristics of hyper-inflationary collapses. There have been dozens of well documented ones throughout history, some of the ones that come of most peoples minds first are the Weimer Republic in 1920's Germany and recently in Zimbabwe.

Hyperinflation almost always occurs following a severe deflationary collapse. While I've made my case we are experiencing deflation right now, we are no where near what would be considered a collapse, yet. It also ocurrs in a countries that base purchasing power on a stable foreign currency. In other words if you have the world reserve currency like the US dollar, it is near impossible to get hyperinflation. It's much more likely you see hyperinflation in foreign countries that attempt to peg their currencies to the US dollar, which would result in a relative strengthening of the dollar.

I could see us, creating a setup for hyperinflation if the dollar looses reserve currency status, and we experience a deflationary collapse, but it would take us several years to get there.

Interest rates rising without inflation

Ok, so I've gone on record saying I expect rising interest rates and possibly a crash in the US Treasury market within the next year. If rates are rising doesn't that imply inflation? Well not exactly...

Inflationary expectations are only one component of what sets interest rates, the other major one is risk of default. The higher the risk of default the higher rates must go. It's this rising risk of default that I expect to significantly push up rates not inflation. In fact the rising rates may have a highly deflationary impact as it will further choke off credit, stalling economic recovery.

More charts, "Dude, where's my inflation?"

Mid-Year Update - 2009 Market and Economic Predictions

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Wed, 01 Jul 2009 13:48:24 -0500

We are now officially half way through the year so it's time for me to do an update to my 2009 market and economic predictions, also known as, Matt is being a buzz-kill again. The quick scorecard is, four have already occured, four I'm still predicting will happen, one I still think will occur but probably not this year and one is DOA.

The media has become fairly delirious from smoking few too many of those "green shoots" as of late along with 90% of economists calling for the recession to end shortly. It should be noted that a similar number of economists were confident we'd avoid a recession in the first place. They are latching onto month to month fluctuations in data claiming the economic recovery is upon us, while almost all trending and forward looking data is continuing to paint a fairly pessimistic outlook.

Another main factor in my continued pessimistic outlook is the attempt by those in charge to play confidence games instead of solving problems. If we believe things are getting better, they will, right? Confidence without the foundation to support it, is not a very good economic base to build from.

1. The "Credit Crisis" morphs into much wider economic crisis

Ok, I think this one is playing out as we've moved from people claiming we're just having financial system and housing issues to seeing dramatic drops in employment and even more dramatic drops in tax revenues (corporate, income, sales). While the official government reported unemployment rate is now up to 9.6% the broader unemployment measure like U6 has now skyrocketed to 16.4% the highest since the 70's.

The data shows job losses are actually accelerating, not decelerating. With the unbelievably dramatic drops across the board in tax revenues, we are just beginning very extensive layoffs from the nations largest employer, the local, state and federal governments. We also have not seen the layoffs happening in the automotive industry show up in the official numbers yet.

2. The recession gets an upgrade

While I didn't expect an official pronouncement this year my prediction is that we'd meet the criteria for a depression not just a recession, which is defined by more than a 10% total loss in GDP. I still think this is going to happen, and in fact I think the forward looking data makes this almost a lock to happen. Though, this quarters GDP coming in flat or even just slightly positive wouldn't surprise me.

For some great visuals on how bad the economic trends really are check out this post on Nate's Economic Blog.

http://economicedge.blogspot.com/2009/04/economic-cliff-diving-by-charts.html

3. Pension funds, the biggest non-story of 2008 becomes THE STORY of 2009

Ok, I'll give myself about 1/3 of a point for this one. The story is huge, it's just getting almost no play in the main stream media. Many of the largest pension funds in the country are in deep trouble shifting into riskier and riskier investment strategies to make up shortfalls. For example CALPERS the largest pension fund in the country shifting large portions of their assets to real estate right at the top of the bubble and then stocks right at the top. They are in a massive hole, and have stated they are relying on being able to borrow from the state of California to fill the massive hole. Yes, the state who tomorrow will start issuing IOU's in lieu of checks to pay bills.

Not to be outdone by California, PBGC (Pension Benefit Guaranty Corporation) which insures pension funds including those at GM and Chrysler followed suit. Why are the pension funds pursuing such a risky strategy that would once have been looked upon as insanity?

He said the previous strategy of relying mostly on bonds would never garner enough money to eliminate the agency's deficit. "The prior policy virtually guaranteed that some day a multibillion-dollar bailout would be required from Congress," Boston Globe article on PBGC

As they say, when in a hole, keep digging, or something like that...

4. House prices continue to fall, but in most regions not as fast

Not much to add here, the Case-Schiller data showed a 19% year over year price drop first quarter, with declines in all 20 major markets they track. Anecdotal the declines in many markets appear to be slowing but historically in housing downturns the steepest declines occur in the first 2 years, where the average overall length of price declines in 5-7 years. There's also still a huge backlog of foreclosures sitting on bank balance sheets which have been held back from the market. This will keep inventories in most markets elevated for some time and keep the downward pressure on prices.

Update: Just saw the updated Case Schiller data released today, basically shows what I expected. Still declining across the board but at a much slower pace.

5. The stock market is far from seeing a long term bottom

My prediction was that we'd see the November lows of 738 on the S&P500 broken this year, and we saw that happen in the first quarter of this year ominously putting in a low at 666 on the S&P 500. Despite a several month, 35% straight up rally since then I don't believe we've seen the lows for this bear market, and see a high probability of the S&P500 going under 500 later this year. Simply put we are still in a deleveraging phase and we've seen a massive drop in corporate profits making the stock market extremely overvalued at it's current level by almost all metrics. These profits by and large were driven by the credit bubble, particularly in financials and unless we are able to blow another massive bubble they are not returning, like some are placing bets on.

6. Where does the bailout money come from when it's time to pay up?

We'll have to see, they just started issuing the debt a couple weeks ago, and we're now issuing as much treasury debt per week as we were per year less than a decade ago. This is at the same time the major foreign buyers are slowly inching their way to the door, buying shorter and shorter duration debt, as the FED tries to hold back the flames through quantitative easing.

7. A crash in the US Treasury market?

This was the prediction I said I was the most hazy on last year, and now I think it's inevitable due to the insane government spending we've seen coupled with the gigantic collapse in tax revenue. The FED has been pulling every trick in the book trying to surpress rates and support the treasury market through quantative easing. History shows these types of efforts are simply fingers in the proverbial dike that inevitably bursts. If the treasury market does crash you'll see double digit interest rates on mortgages within a few months.

On a related note, the consensus of late seems to be for rising interest rates but due to (hyper)inflation. I simply don't see the case, all of the data points to massive deflation. Oh, the FED's monetizing debt and printing. The problem is the deflationary pressures and wealth destruction is dozens of times larger. Also, the FED pumping money is only inflationary if the money moves, as inflation really is the velocity of money not the size of the money supply. A small amount of money moving very fast through an economy is more inflationary than a large amount of money that sits on a banks balance sheet plugging holes. The fact it's being used to plug holes that are not magically going away, is exactly why I don't see it suddenly becoming inflationary.

8. GM files for bankruptcy despite the automaker bailout

My prediction was that both GM and Chrysler would file for Chapter 11 bankruptcy this year despite their bailout at the end of 2008 with the goverment providing massive DIP (debtor in possession financing). Check...

9. Regional bank failures and consolidation accelerate

We're up about 50 regional bank failures this year compared to 25 all of last year. Technically I guess this counts as acceleration but it's still well below the hundreds I was expecting. It has nothing to do the increased stability in the banking system and more to do with the FDIC and OTS not doing their job to protect depositors and tax payers.

A good example of this is Bank United a large regional bank in Florida that collapsed about two months ago, at an estimated cost of about $10 Billion. This bank was on my list of dead men walking back in April of 2007, due to the how badly their loan portfolio had already depreciated. Two years ago it was clear from their balance sheet without pulling accounting tricks they were insolvent. Every Friday for nearly two years I was shocked when I didn't see an announcement his bank had been seized due to how far gone it was. Had it been seized two years ago it's likely there would have been very little, if any cost to the FDIC and US taxpayers, instead it cost us $10 billion.

Then two weeks ago the head of the OTS resigned after it turned out he had ordered the Bank United to falsify financial statements to cover up their insolvency. Yes, the top banking regulator was ordering banks to fudge their financials so they would appear solvent and would not be seized. Bank United is not an isolated case, not by a long shot. In fact, 2 other high ups at the OTS resigned or were fired in the last year for pulling similar stunts with other banks. There is a organized effort to avoid failures at all costs by covering up the problems and hoping they go away. This just makes the ultimate failure many times worse.

The government banking "stress tests" meant to prove to the public and investors how sound are banking system was a similar sham. We're already well past the loan default rates used in their most stressful scenarios, banks were asked to provide the valuations for complex securities like CDO's, and provided values many times above current market prices. Commercial real estate, who's impact on bank balance sheets is likely to be worse than residential mortgages, showed almost no losses in the stress test numbers.

Suffice to say, I expect the next "unexpected" banking crisis to rear it's head this fall at the latest and this time I'm not sure if there's the will political will to throw a few hundred billion more at it.

10. A revolt against corruption

Grrrrrrrr... Where's that change Mr. Obama... Must stop writing here or I'll launch into a rant and this post will be 20 pages before I know it...

The "No Banker Left Behind Act" of 2008

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Sat, 20 Sep 2008 21:23:59 -0500

With the situations in the credit markets becoming increasingly dire on Friday and threatening the systematic collapse of many large financial firms the US Treasury and Federal Reserve held an emergency meeting with Senators and Congressman. According to Senator Dodd, "The Oxygen went out of the room" when after the situation was explained and there was a silence of 10-15 seconds in the room as what had been said sank in.

“When you listened to him describe it you gulped," said Senator Charles E. Schumer, Democrat of New York.

As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”

Mr. Schumer added, “History was sort of hanging over it, like this was a moment.”

The Treasury then presented their proposal for "solving" the crisis and told the convened Congressmen and Senators time was at the essence to pass the legislation. This legislation many have started referring to as the "No Banker Left Behind Act". Basically the bill would setup a $700 Billion trust buy the bad debt from banks and other financial institutions. This would be paid for by tax payers at a price tag of about $6,000 per tax payer plus somewhere around $300/year in interest per tax payer. Of course this is on top of the estimated $800 Billion in bailouts made during the previous weeks.

Now there are several sections of this bill that are just plain scary and remind me very much of how the Patriot Act was jammed through as the nation was dealing with a crisis with little thought to the true consequences because everyone was in a panic. A couple of the really troubling items.

"Sec. 8. Review. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency. "

So like one of the main problems with our financial system there would be ZERO transparency and oversight to how that fund was managed. The act explicitly forbids courts or government agencies from reviewing how the funds are used. WHAT?!?! You want to give the Treasury department who's mismanaged this crisis for years full control with no oversight by anyone? Remember it's the Treasury who wrote this bill not Congress, the power grab by the Federal Reserve and Treasury during this crisis has been stunning and our elected officials are just going along with it, with barely voicing a concern.

"Sec. 6. Maximum Amount of Authorized Purchases. The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time"

While it's being sold as a $700 Billion dollar bailout the actual language actually provides a very purposeful giant loophole that makes it limitless. The fund may only have $700 Billion outstanding at once. They may purchase this bed debt, liquidate it into the secondary market at huge losses to the taxpayers and turn around and purchase more, a big revolving door. There is no cap on the total price tag.

"(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;"

So lets see this fund is going to be managed by the same financial institutions it's going to be tasked with bailing out, can we say conflict of interest.

There is NO language in the act that provides any penalty for companies to take advantage of this bailout. Basically tax payers get stuck with all the losses, bond holders, stock holders, management don't take a loss. One of the biggest problems with this bill is the absolutely huge hazard it causes as it will result in many of the companies most responsible for this mess surviving when they should have failed and continuing to operate in an imprudent manner. It does nothing to solve the root causes of the crisis, just bails out the perps.

While everybody seems to be smiling patting themselves on the back and saying crisis averted I'm not so sure this will actually solve the systematic risk much less provide significicant help to the economy. In fact while it will save many financial insititutions it may actually have a negative impact on the broader economy due to the massive issuance of new debt which could substantially drive up interest rates. At the very least the four problems above MUST be addressed in this bill before it's passed or it will simply end up going down as the biggest robbery of US taxpayers by corporate interests in all time.

More articles:

Bloomberg:Bush Seeks $700 Billion to Save Banks, Treasury Power Unchecked by Courts

WSJ: U.S. Bailout Plan Calms Markets, But Struggle Looms Over Details

Krugman: No deal

Timu goes beta

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Fri, 06 Mar 2009 17:30:33 -0600

Over the last several months I left a couple of semi cryptic posts Timu, the startup company that I left ActiveRain back in the fall to found. Obviously from the logo I posted people were able to correctly guess what industry it was in, sports. This inspired some guessing around ActiveRain about how exactly Timu was related to sports and what if anything Timu stood for.

After several months of development work, we finally opened Timu up this week in a private beta test. Unlike how so many web 2.0 companies slap a beta sticker on a product (cough, Google) and launch it like that this is an actual beta test with a small group of users to work out the kinks before a real launch in the not so distant future.

So what is Timu?

While Timu isn't yet open to the public, we are finally letting the cat out of the bag about what Timu is. Timu is a communication and social networking platform for sports teams. Whether it's little league, high school or adult rec. leagues Timu allows teams to take advantage of social networking concepts to help teams to schedule, coordinate, organize and share.

I've played on and still play on several sports teams, and team communication away from the game has always been a problem. How do you know when practices are, who's going to make it to games, is the game rained out? These are some of the core problems that Timu will help to solve.

We're initially launching the platform for baseball and softball teams but will be adding in all the other major sports over the next year.

And what does it stand for?

I've seen plenty of guess about with Timu actually stands for, a couple of my favorites have been "Tetherball in my utopia", and "Teams in Motion United". Sorry to ruin the guessing, but Timu isn't an acronym for anything, but it does have a relevant meaning. Timu means "Team" in Swahili, plus it was a short, easy to remember and acquirable domain name :)

Looking for some beta testers

While Timu is not yet open to the public, we are still looking for a few additional beta test teams. If you play on, organize or coach a baseball/softball team and would like to participate and help shape the direction of a really cool application, let us know.

And it's name is Timu

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Tue, 09 Dec 2008 23:10:48 -0600

About two months ago I announced my departure from ActiveRain full-time to found a yet to be announced start-up outside of the real estate industry. I've been pretty silent around here, for a little bit but have been hard at work on the new venture. While I'm still keeping most of the details under wraps, but I think it should be pretty obvious from the logo what industry it's in :

Who Could Have Seen This Coming?

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Tue, 23 Sep 2008 19:43:12 -0500

Much of the blame for the current financial crisis our country is suffering through can be traced back to de-regulation that occurred in the banking and finance industry over the last 20 years. The majority of this regulation was put in place in the 1930's to prevent a recurrence of the events that lead up to The Great Depression. The single biggest piece of deregulation that took place in 1999 was the repeal of the Glass-Steagall Act.

The Glass-Steagall Act created many banking reforms designed to control speculation and against a systematic event in the banking system, basically what we are facing now. Specifically it required for the separation of many financial activities such as investment banking operations, deposit activities, insurance, etc to reduce the potential for this domino effect that could ripple through the financial systems. This is exactly what we are being warned may occurr now.

In a very prophetic speech made in 1999, representative John Dingell delivered the following remarks opposing the repeal of Glass-Steagall.

Madam Speaker, I yield myself the remaining time for purposes of closing. Madam Speaker and my colleagues, I think we ought to look at what we are doing here tonight. We are passing a bill which is going to have very little consideration, written in the dark of night, without any real awareness on the part of most of what it contains.

I just want to remind my colleagues about what happened the last time the Committee on Banking brought a bill on the floor which deregulated the savings and loans. It wound up imposing upon the taxpayers of this Nation about a $500 billion liability. That is what it cost to clean up that mess.

Now, at the same time, the banks by engaging in questionable practices wound up in a situation where the Fed and the Treasury Department had to bail them out also at the taxpayers' expense. But it did not show.

Having said that, what we are creating now is a group of institutions which are too big to fail. Not only are they going to be big banks, but they are going to be big everything, because they are going to be in securities and insurance, in issuance of stocks and bonds and underwriting, and they are also going to be in banks. And under this legislation, the whole of the regulatory structure is so obfuscated and so confused that liability in one area is going to fall over into liability in the next. Taxpayers are going to be called upon to cure the failures we are creating tonight, and it is going to cost a lot of money, and it is coming. Just be prepared for those events.

You are going to find that they are too big to fail, so the Fed is going to be in and other Federal agencies are going to be in to bail them out. Just expect that.

Yes, who could have seen the events now unfolding before us coming?

Monday Bailout Comments and A Solution

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Mon, 29 Sep 2008 17:54:56 -0500

I got off my flight down to Los Angeles a few hours ago and was pleased to see that Congress had rejected the bailout bill, woops I mean Financial Stability Act. I would not be surprised though to see it come back from the dead, given the fear today's large stock market drop will put into many politicians.

In many previous posts I've talked about how this proposed bill simply was throwing money into a fire and would do nothing to solve the fundamental economic problems or even unfreeze the credit markets. I've referenced many alternative plans by various economists and financial experts to address the root causes of this crisis, but I wanted to take my time to articulate a plan in my own words.

First Define the Problem

One of the things I noticed in talking to offices of dozens of Senators and Congressmen over the past several days is very few of them knew what problem they were trying to solve. The only common theme was, they were afraid of something really bad happening and felt like they had to act now to prevent it or be blamed later. Just remember, panicked people often do stupid stuff.

So, lets define the problem. It is no exaggeration that the situation in the credit markets and financial system is dire, bordering on a collapse. There are a number of ticking time bombs in the financial world, some commonly known and some still below the surface. The fear and uncertainty has caused the credit markets to lock tight, banks won't lend to each other and credit is quickly being cut off to consumers. These problems in the credit markets spread throughout our entire economy. Without a healthy credit market you can't have a recovery in the housing markets.

Most critically we've got to defuse these bombs that haven't exploded yet to keep the situation from getting MUCH worse, and we've got to solve the fundamental trust problems so the credit markets can start recovering that will lay the ground work for a broader economic recovery. Too many politicians, are doing what is akin to trying to rebuild a house while it's still on fire.

Acceptance

Just like a recovering alcoholic needs to accept that they've got a drinking problem, we need to reach acceptance of our financial problems. We've been binging on credit the last ten years and this country at almost every level is deeply in debt. This credit bubble fueled what we now call the housing bubble as well as similar bubbles in several other asset classes. Our whole system is over-leveraged and way out of equilibrium. A common principal in many physical sciences as well as economics is systems, that are out of equilibrium will snap back, no matter how hard we try to prevent it. The harder we resist the more violent this correction ultimately is. For example many of today's problems can be linked to steps we took in trying to prevent a recession after the dot com collapse.

We've got accept that to return to a healthy financial system, economy, and housing market is going to require a deleveraging of the system and that implies a vast amount of "wealth" will evaporate. Just accept it, it's going to happen no matter what we do. What we do have control over how orderly or unorderly this process is and thus how hard it is for the average American. Do we have a hard recession, depression or worse? That's the choice we're making, right now.

The Plan

Below is my articulation of a plan to move down the path of solving this problem and minimizing economic damage. This is not intended to outline economic stimulus steps, or some specific housing related problems which I do believe also need to be addressed once the big problem has been dealt with. Almost all the points in it are common themes in plans from various financial experts and economists and ALL of them are missing from the current plan being discussed by the government.

1. Introduce regulations to defuse the bombs threatening to make things much worse and restore the trust needed to unfreeze intrabank lending.

Right now everybody is afraid to lend. It's not that no one has any money, they just don't think they'll get it back because they don't know who's solvent. These three critical pieces of legislation will help restore trust and expose the insolvent institutions so they can be dealt with.

a. Get rid of the accounting loopholes, no more level 3 assets, no more off-balance sheet crap. When an investor looks at a balance sheet they need to be able to trust it. It's gotten to the point everybody is now assumed to be lying about their financials and nobody will invest.

b. Restoring sane leverage requirements on in banking system. Prior to deregulation about 5 or 6 years ago leverage, for financial institutions was capped at maximum of 12:1. Many of the companies that are failing (Bear Stearns, AIG, Lehman, Fannie, Freddie, etc) are ultimately failing because they over levered themselves over the last several years. They were running leverage ratios of 30:1 or worse. When you are running 30:1 leverage that means, if you loose about 3% on you investments you are wiped out.

c. Regulate the derivatives market by forcing all derivatives onto an exchange where margin requirements can be monitored. People are fixated on the mortgage problems, that could just be the blasting cap that sets off the derivative bomb.

2. Recapitalize the financial system

Simply buying assets from banks is possibly the most inefficient way to recapitalize these institutions. The most successful recapitilzation strategy in past financial crisis' has been debt to equity swaps. Basically companies proven to be insolvent (see point 1 above) are brought into conservatorship, stock holders get wiped, bond holders become equity holders, and new bond holders can now come in and recapitalize an essentially debt free company. For institutions where they are still insolvent after a debt to equity swap they go through an expedited Chapter 11 process, where assets are liquidated. This recapitilization would require almost no tax payer funds, investors who made bad investments will take the losses, while at the same time the financial system will remain operational.

3. Immediately recapitalize the FDIC

If people loose trust to store their money in a bank and everything breaks down. The FDIC is severely under capitalized to handle the coming bank failures and people are starting to catch on. If banks start failing in mass and the FDIC is disorganized and can't efficiently make good on insurance, you will have REAL "in the street" panic. Congress needs to move now to shore up the FDIC, and this is going to require a lot of capital which politicians are trying to hand to Wall Street firms right now. If needed to restore trust, temporarily raise FDIC insurance limits on existing deposits. Trust in the banking system is critical right now, and it's quickly evaporating.

Finally broke down and joined Twitter

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Fri, 25 Jul 2008 15:57:43 -0500

Somewhat ironically given my background with technology tend not to be a bleeding edge adopter. Most people I know have more electronic gadgets on them at anyone time than I have in my whole house. I sent my first text message EVER when I broke down and got an iPhone about 6 months ago. Yes, I know gasp!!!

But, I've finally decided to make the plunge and join Twitter. There goes any hope of productivity. I've always found Twitter very fascinating, and have been looking at ways to integrate more closely into ActiveRain to provide a much more real-time interactive experience. I've just avoided jumping into the pool myself up til now. I guess I just like being able to tune out from technology in my personal life.

If your curious my Twitter ID is ActiveRain_Matt

Update: Twitter ID is now Timu_Matt

The TRUTH Behind The Credit Market Lockup

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Wed, 15 Oct 2008 22:47:32 -0500

The truth behind the credit market lockup has nothing to do with liquidity or lack of capital in the system, it is literally about TRUTH itself. Let me list a few examples that illustrate my point.

In March, Bear Stearns' CEO goes on national TV and claims they are well capitalized and don't have a liquidity problem. This statement is backed up from the SEC a regulatory agency in charge of monitoring Bear Stearns. Only a week later Bear Stearns collapses and we later learn, they did not just have liquidity problems but were in fact insolvent (effectively bankrupt) by a wide margin.
In July, Indymac issues a statement saying they are well capitalized to handle there problems. The OTS/FDIC issue a similar statement saying they don't see any problems with Indymac's capitalization. Only about a week later IndyMac fails, is seized by the FDIC, and we later learn as their assets begun to be liquidated, that they are in fact insolvent by over $8B. This is against total assets of only $32B, so that is not even close to being solvent.
Fannie Mae and Freddie Mac along with regulators repeatadly issue statements that they are in a solid financial position and well capitalized. In September the government seizes and nationalizes these two GSE's and the truth comes out that the bailout is going to cost tens of billions if not hundreds of billions of dollars. In fact they were no where near solvent or well capitalized as claimed.
Lehman Brother's makes numerous statements on their capital adequacy throughout the summer and early fall. When they finally blow up the CDS auctions show that bond holders are only expected to receive about 9 cents on the dollar once assets are liquidated. They were insolvent by a huge margin.
Washington Mutual and Wachovia, two of the largest banks in the US, effectively fail and received arranged shotgun marriages with the help of the FED and FDIC. As part of these shotgun marriages they each write down tens of billions of dollars in bad loans they'd been holding on their books and claiming in financial statements were good.
Wells Fargo's CEO gets on national TV and claims Wells Fargo has never done risky lending such as subprime, stated income, interest only, no ratio. Cough, cough, bullshit, they're sitting on a metric ton of that stuff.

Starting to see a pattern here? Not only are companies repeatedly cooking the books and lying to everybody involved about their true financial state, but the regulatory agencies are not calling them on it and in some cases helping to cover it up. These regulatory agencies have literally had staff inside these corporations monitoring their financial state on a day to day basis so you are left with two choices. Either the regulators are more incompetent the Michael Brown of Hurricane Katrina fame or they are flat out lying to the same public they are supposed to protect.

So here's my point. Now that we've had a few major failures and people realize that not only are companies lying about their financials, but regulators are not making them come clean, everybody is assumed guilty by players in the financial system. That is why the credit markets are locking tight, LIBOR skyrocketing and spreads blowing out.. It has nothing to do with companies not having capital to lend, in fact there maybe more liquidity in the system than ever. It's the fact that lenders don't trust that they'll get the money back if they do lend it. The government can throw as much liquidity into the tornado as they want but they can't force the institutions to lend.

This is why despite the absolutely massive liquidity injections, backstopping and bailouts the credit market lockup continues to get worse. More liquidity can not solve a trust problem. The ONLY way you can unlock the markets is to force transparency in the system, expose those companies who are insolvent and deal with them. If you don't you don't do this, all companies will be assumed to be lying and insolvent whether they are or not and nobody will lend. This is why the government's expensive bailout plans are literally doomed to fail.

Look At The Dollar Rocket

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Tue, 21 Oct 2008 23:24:35 -0500

One of my 10 predictions at the start of the year was despite the forecasts of most, was the US dollar was going to strengthen against foreign currencies during the year. Well in the last couple weeks the dollar has been on an absolutely impressive tear against almost every currency in the world. The ferocity of this move has simply been amazing, with it moving almost nearly 3% against a basket of currencies in just the last 24 hours. Think of it this way, your dollar in your pocket just got 3% more valuable in the last day, even if it may not seem like it to you.

Basically we're seeing signs of mass liquidations of risky assets (stocks, bonds, commodities, derivatives) around the world and the resulting money is flowing into US dollars, strengthening the dollar against other currencies. While our banking/financial system has it's problems the simple fact of the matter is it's in better shape than many around the world.

The speed at which this move is occurring will likely generate significant effects (problems), but it's very tough to predict in what form they might be. One of the many things that's got my radar up in the last couple days, trying to determine what's likely to happen.

Rubbernecking at the Lehman Brothers train wreck

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Sat, 13 Sep 2008 20:45:30 -0500

Hot on the tail of the governments massive bailout of Fannie Mae and Freddie Mac another crisis (actually several) has now taken center stage is it appears very unlikely Lehman Brothers the nations 4th largest investment bank will survive through the weekend or at least EOD Monday. They were the obvious candidate next inline to blow after Bear Stearns failed back in the spring. They both had a very similar, and relatively undiversified business model, sat atop a literal mountain of bad mortgage debt, and were significantly under capitalized and over-leveraged. To be fair almost all the investment banks have been operating under the same ponzi'ish business plan, which generates massive profits for investors/management until, well it blows up in your face.

Lehman was able to stay afloat, thanks to the help of newly created short term lending facilities from the FED as well as some Enronish accounting moves where bad assets were shuffled around to SIV's and conduits with funny names in an attempt to show investors they were safe and sound. Look, I waved my magic wand, $40B in bad mortgages just vanished. Smokescreens only work to cover up massive problems for so long, and as the markets caught on (boy they are slow), Lehman's stock price plummeting, access to capital markets became impaired and large investors made a run on them pulling assets from management.

While Bear Stearns received a government backed shotgun wedding to JP Morgan, with tax payers chipping in $29B to cover the reception and honeymoon, a similar scenario is looking highly unlikely for Lehman Brothers. Treasury secretary Hank Paulson has adamantly stated the tax payer money won't be used in this situation (not that he's exactly has a record of telling the truth), due to the significant political backlash from Bear Stearns. There's also the more than slight trouble on the horizon of several very large regional banks on the ropes as well as a potential blow up at AIG, which is probably distracting from the Lehman situation.

According to reports, emergency talks went on Friday night and are continuing throughout the weekend to try to find the least disruptive solution. Without the government willing to chip in significant funds, there are no buyers that would or even could take on Lehman as their value to significantly negative. We're talking many, many billions here, but no one, probably not even Lehman knows the real number. So according to reports there are basically two options left on the table:

1. A bankruptcy filing come Monday, that would almost certainly unhinge our financial system and credit markets.

2. A consortium of Wall Street firms would chip in $30B to buy a bunch of Lehman's bad assets, making a purchase of Lehman by someone like Bank of America and/or Barclays feasible. The motivation to do this would to prevent the dire consequences of a bankruptcy and save their own skins in the process.

Of course as you can imagine Wall Street firms aren't exactly in a charitable mood when it comes to parting with billions, even if they had a few spare billion laying around. As one Wall Street exec was quoted "Why should we give up capital so Barclays and Bank of America can buy a clean bank," So there appears to be a standoff continuing over the weekend as the bankers try and force the governments hand to chip in funds to prevent the possible consequences.

It should be interesting to watch, and I personally hope the government holds their position. Honestly, the blowup is coming, the time to prevent it ended one or two years ago. If Lehman isn't the trigger, it's going to be someone else. The problem with the bailouts are they extend the crisis, allow us to bury our head in the sand a bit longer and pretend the real issues have gone away. As the bailouts add up, more of the burden shifts to the tax payers from those central to creating the mess. The biggest trick of all from the ponzi financers pulled is convincing the public they are a critical cog that the US economy can't operate without, so they must be saved at all costs.

Articles:

CNBC: Fed, Street Draft Deal To Buy Lehman's Bad Assets

WSJ: No Deal Reached Yet to Decide on Lehman's Fate

Bloomberg: Paulson, Bernanke Brave `Raptors,' Resist Lehman Aid