Category Archives: World

Will the Facebook IPO Ruin Facebook?

With Facebook’s IPO today, the big question has been how Facebook is going to raise revenue to fit with stock valuation. There are several options, and many of them involve more ads: pushing more ads onto mobile interfaces, more ads in general, more narrowly targeted ads, more back-end data sales, further expanding Facebook Connect, and further expanding Facebook Payment. In all, though, I think Facebook’s best option is to reconcile revenue and valuation the other way around. Don’t raise revenue to fit with valuation. Instead, let the bubble burst.

So much of Facebook’s success has to do with network effects, not with the quality of the site itself. Just as a telephone represents little value to you until and unless people you want to talk to have telephones as well, so too Facebook is valuable to users primarily because a great many other users are also there. Now, surely, there are things Facebook could do that would drive more users away, and there are things that Facebook has done very well, but for the most part we go to the site because of network value (we want to talk with our friends and share pictures with family), not because of intrinsic value (the site itself is good per se).

This gives Facebook something of the character of a utility. We just want it to work, and for the company itself to be as unobtrusive as possible. The only good conversation with your cable provider is no conversation. Nobody likes thinking about their phone plan.

Facebook’s encroachment into the user experience and into user data is precarious, and perhaps already overextended. If Facebook were one site among many, from which we could freely choose what we preferred, there would be little issue with cutting new bargains with users—but the fact that what Facebook primarily offers to the user is nothing other than its own wide adoption means that it has a de facto monopoly. So if we don’t like the deal they offer us—e.g. the tradeoff between data privacy and number of ads—we can’t just walk away from it to another service provider (unless we convince most or much of our network to walk away with us).

The monopolistic, public-utility-like aspect of Facebook’s business model of trading on network effects ought to make users concerned that they may be exploited or abused. And so they should be! Where network effects inhibit competition that might otherwise bring about market-based regulation of corporate behavior, we are left with little recourse but to hope that a company will simply choose to treat users fairly. And indeed, there seems to be more and more anti-Facebook sentiment, even in college kids; my students today are usually wary of or troubled by Facebook, where only a few years ago my students were generally uncritical of it. The fact that discomfort with Facebook is so often expressed on Facebook itself is neither ironic nor hypocritical; instead it is simply reflective of the problem: the fact that it’s the only place to have a conversation along with several hundred friends and contacts makes it both deserving of concern and discussion, and at the same time an unparalleled location to voice that concern and to have that discussion.
Facebook has managed to maintain this precarious position so far, but a step in any direction risks a fall. More ads on either the standard or the mobile site will most certainly annoy users. They likely will be perceived by some as crass and trashy, although users will, I’m sure, tolerate them so long as there remains no real alternative. A further complication is the targeting of ads. Right now, most everyone seems to be getting “dumb” ads: broadly-based ads, not the narrow targeting that Facebook’s data analytics promises; no more demographically well-informed than a billboard in one section of town rather than in another. Combined with the abysmal click-through rate of online ads, this is not a terribly impressive sort of ad to sell. But, as Target reportedly discovered in the recent Case of the Pregnant Teen, well-targeted advertising can quickly become creepy.

Selling data from the back end presents its own problems. Facebook has to let purchasers and investors know what kind of saleable demographic trends and correlations they can mine from their unprecedented data stores—but the more valuable that information seems to be, the more Facebook will draw the scrutiny of regulators and the ire of users. There’s a similar catch-22 with Facebook Connect and Facebook Payment: as Facebook further leverages its de facto monopoly into increased ubiquity and indispensability, the perception of its economic value will be tied to awareness of its anti-competitive effects. How much further can Facebook expect to expand before conversations about the Sherman Antitrust Act arise again?

It’s true enough that a public company has certain obligations, both legal and moral, to shareholders. These obligations, notably, do not include sacrificing long-term profits and viability in the name of short-term return on investment. Many companies no longer exist today because they learned too late that working for the quarterly report is a poor form of stewardship. (Or, put more cynically: the public LLC structure is built to focus on the short term, and executive compensation through stock options encourage cycles of overvaluation and collapse.) With the large percentages of shares being retained by Mark Zuckerberg, Eduardo Saverin, and other previous owners—along with Zuckerberg’s values-based letter accompanying the IPO—it seems like Facebook is welcoming public ownership on its terms rather than being transformed by an imagined need to sacrifice fundamentals in the service of the stock ticker.

And so I suggest to Facebook: stick with what’s working. Don’t offend users’ sensibilities and make Facebook feel tacky and unfriendly and monetized through a new barrage of ads. Don’t creep users out by mining and selling ever more detailed data about user demographics. Don’t make users feel trapped by expanding out Connect and Payment and making Facebook ever-present, unavoidable, and stifling. Do not build a tower on these shifting sands, pushing revenue to reach ever-greater heights, but instead let the stock values fall to earth. Push us too far, and we will break you or abandon you; you will go the way of either Ma Bell or MySpace.

The articles was originally published on http://blogs.wsj.com byD.E. Wittkower is a philosopher of technology at Old Dominion University, and editor ofFacebook and Philosophy and iPod and Philosophy.

JPMorgan’s Trading Loss Is Said to Rise at Least 50%

BY NELSON D. SCHWARTZ AND JESSICA SILVER-GREENBERG

The trading losses suffered by JPMorgan Chase have surged in recent days, surpassing the bank’s initial $2 billion estimate by at least $1 billion, according to people with knowledge of the losses.

When Jamie Dimon, JPMorgan’s chief executive, announced the losses last Thursday, he indicated they could double within the next few quarters. But that process has been compressed into four trading days as hedge funds and other investors take advantage of JPMorgan’s distress, fueling faster deterioration in the underlying credit market positions held by the bank.

A spokeswoman for the bank declined to comment, although Mr. Dimon has said the total paper trading losses will be volatile depending on day-to-day market fluctuations.

The Federal Reserve is examining the scope of the growing losses and the original bet, along with whether JPMorgan’s chief investment office took risks that were inappropriate for a federally insured depository institution, according to several people with knowledge of the examination. They spoke on the condition of anonymity because the investigation is still under way.

The overall health of the bank remains strong, even with the additional losses, and JPMorgan has been able to increase its stock dividend faster than its rivals because of stronger earnings and a more solid capital buffer.

Still, the huge trading losses rocked Wall Street and reignited the debate over how tightly giant financial institutions should be regulated. Bank analysts say that while the bank’s stability is not threatened, if the losses continue to mount, the outlook for the bank’s dividend will grow uncertain.

The bank’s leadership has discussed the impact of the losses on future earnings, although a dividend cut remains highly unlikely for now. In March, the company raised the quarterly dividend by 5 cents, to 30 cents, which will cost the bank about $190 million more this quarter.

A spokeswoman for the bank said a dividend cut has not been discussed internally.

At the bank’s annual meeting in Tampa, Fla., on Tuesday, Mr. Dimon did not definitively rule out cutting the dividend, although he said that he “hoped” it would not be cut.

John Lackey, a shareholder from Richmond, Va., who attended the meeting precisely to ask about the dividend, was not reassured. “That wasn’t a very clear answer,” he said of Mr. Dimon’s response. “I expect that shareholders are going to suffer because of this.”

Analysts expect the bank to earn $4 billion in the second quarter, factoring in the original estimated loss of $2 billion. Even if the additional trading losses were to double, the bank could still earn a profit of $2 billion.

And many analysts and investors remain optimistic about the bank’s long-term prospects.

Glenn Schorr, a widely followed analyst with Nomura, reiterated on Wednesday his buy rating on JPMorgan shares, which are down more than 10 percent since the trading loss became public last week.

What’s more, the chief investment office earned more than $5 billion in the last three years, which leaves it ahead over all, even given the added red ink.

But the underlying problem is that while these sharp swings are expected at a big hedge fund, they should not be occurring at a bank whose deposits are government-backed and which has access to ultralow cost capital from the Federal Reserve, experts said.

“JPMorgan Chase has a big hedge fund inside a commercial bank,” said Mark Williams, a professor of finance at Boston University, who also served as a Federal Reserve bank examiner. “They should be taking in deposits and making loans, not taking large speculative bets.”

Not long after Mr. Dimon’s announcement of a dividend increase in March, the notorious bet by JPMorgan’s chief investment office began to fall apart.

Traders at the unit’s London desk and elsewhere are now frantically trying to defuse the huge bet that was built up over years, but started generating erratic returns in late March. After a brief pause, the losses began to mount again in late April, prompting Mr. Dimon’s announcement on May 10.

Beginning on Friday, the same trends that had been causing the losses for six weeks accelerated, since traders on the opposite side of the bet knew the bank was under pressure to unwind the losing trade and could not double down in any way.

Another issue is that the trader who executed the complex wager, Bruno Iksil, is no longer on the trading desk. Nicknamed the London Whale, Mr. Iksil had a firm grasp on the trade — knowledge that is hard to replace, even though his anticipated departure is seen as sign of the bank’s taking responsibility for the debacle.

“They were caught short,” said one experienced credit trader who spoke on the condition of anonymity because the situation is still fluid. The market player, who does not stand to gain from JPMorgan’s losses and is not involved in the trade, added, “this is a very hard trade to get out of because it’s so big.”

He estimated that the initial loss of just over $2 billion was caused by a move of a quarter percentage point, or 25 basis points, on a portfolio with a notional value of $150 billion to $200 billion — in other words, the total value of the contracts traded, not JPMorgan’s exposure. In the four trading days since Mr. Dimon’s disclosure, the market has moved at least 15 to 20 basis points more against JPMorgan, he said.

The overall losses are not directly proportional to the move in basis points because of the complexity of the trade. Many of the positions are highly illiquid, making them difficult to value for regulators and the bank itself.

In its simplest form, traders said, the complex position assembled by the bank included a bullish bet on an index of investment-grade corporate debt, later paired with a bearish bet on high-yield securities, achieved by selling insurance contracts known as credit-default swaps.

A big move in the interest rate spread between the investment grade securities and risk-free government bonds in recent months hurt the first part of the bet, and was not offset by equally large moves in the price of the insurance on the high yield bonds.

As the credit yield curve steepened, the losses piled up on the corporate grade index, overwhelming gains elsewhere on the trades. Making matters worse, there was a mismatch between the expiration of different instruments within the trade, increasing losses.

The additional losses represent a worsening of what is already the most embarrassing misstep for JPMorgan since Mr. Dimon became chief executive in 2005. No one has blamed Mr. Dimon for the trade, which was under the oversight of the head of the chief investment office, Ina Drew, but he has repeatedly apologized, calling it “stupid” and “sloppy.”

Ms. Drew resigned Monday and more departures are anticipated.

This story BY NELSON D. SCHWARTZ AND JESSICA SILVER-GREENBERG was originally published on http://dealbook.nytimes.com.

 

thumb

RBI’s ‘massive’ intervention sparks rupee gains

The rupee strengthened on Tuesday from a near record low against the dollar after the central bank stepped in with what various dealers described as “massive” intervention, signalling an intent to defend the beleaguered domestic currency.

Some dealers said the dollar sales via state-run banks was to the tune of $400-$500 million, and continues a pattern of aggressive interventions this month as the rupee has threatened to touch a record low of 54.30 hit in December.

Traders widely believe the Reserve Bank of India is looking to defend the psychologically key level of 54, which the rupee breached early on Tuesday morning by falling to as low as 54.15 to the dollar, sparking the central bank action.

A worsening global risk environment and concerns about India’s fiscal and economic challenges have pounded the local currency, forcing the Reserve Bank of India to also adopt surprise measures such as forcing exporters to convert half of their foreign currencies in their accounts.

The RBI is offsetting the impact on rupee liquidity from its dollar sales by purchasing bonds via open market operations. On Monday it said it would buy up to 120 billion rupees in debt on Friday, its second such action in as many weeks.

“RBI will keep up the intervention though ongoing Greek impasse and broad dollar strength will keep USD/INR biased for gains,” said Radhika Rao, an economist at Forecast Pte in Singapore.

“As a backstop to alleviate liquidity strain, OMOs could become more frequent.”

The Indian rupee ended at 53.79 to the dollar, above a session high of 53.5 but below its 53.9750 close on Monday.

Analysts have doubts about whether the RBI can continue to succeed in defending the rupee in the face of steep global risk aversion and a lack of confidence in India’s fiscal standing.

A Reuters poll out on Tuesday showed respondents were split about whether the measures taken so far by the central bank would be effective in stemming the falls of the rupee.

“RBI is looking to contain any panic in INR by intervention and we expect this to go on ’til political developments in Europe see stability,” said Ashtosh Raina, head of foreign currency trading at HDFC Bank.

Despite the interventions, the RBI is mindful of liquidity, given the severe cash crunch in the banking system, which has sent repo borrowings to above 1 trillion rupees regularly since late April.

Its OMO announcement on Monday sent bond yields lower on Tuesday, with the benchmark 2021 bond yields ending down 2 basis points at 8.50 per cent.

Interest rate swaps eased as well. The 1-year settled down 1 basis points to 8.03 per cent and the 5-year fell 3 basis points to 7.45 per cent.

[Source: The
Economic Times]

2G spectrum case: A Raja gets bail, to walk out of Tihar jail after 15 months

Former telecommunications minister A Raja was on Tuesday granted bail in the 2G spectrum allocation case. He is the last of the 14 individuals charged in the case still in prison.

The bail was granted by Central Bureau of Investigation (CBI) special judge OP Saini. Raja has been in Tihar jail since February last year.

Raja’s counsel told reporters that the judge called Raja towards him and told him: “Your bail application is allowed.”

“The bail application is allowed,” Special CBI Judge O P Saini said.

The court granted bail to the DMK MP on a personal bond of Rs 20 lakh and two sureties of the like amount. The court while granting bail imposed conditions on Raja that he will not visit Tamil Nadu without its prior permission and will not go to the office of the Department of Telecom (DoT).

The court, in its 14-page bail order, also said that Raja would not try to influence any witnesses while on bail. Raja was arrested on February 2, last year.

The announcement triggered wild slogan shouting and cheering by his DMK supporters mainly from Tamil Nadu, who raised slogans in Tamil like: “Raja, vazhga!” (Long Live Raja!)

Besides the 14 individuals, three companies were also charged in the case.

“Thirteen people had already got bail, and Raja was the last to get bail,” the counsel said.

“Raja had not moved bail until all other 13 were granted bail,” he added. “Now all the accused are on bail. The case will go on.”

The counsel pointed out that Raja had got bail despite the CBI’s opposition.

The CBI had opposed Raja’s bail application, saying he faced charges of accepting bribes of Rs 200 crore, which makes his case different from former telecom secretary Siddharth Behura, who was granted bail by the Supreme Court last week.

Raja, in his bail application, has requested the court to release him on the ground of parity.

The agency said that important prosecution witnesses of department of telecommunications and other private people, especially connected to alleged bribe transaction of Rs. 200 crore from DB Group companies to Kalaignar TV, are yet to be examined.

It told the court that if the accused was released on bail at this crucial stage of trial, then he may influence the vital witness as some of them belong to his state Tamil Nadu.

Raja resigned as minister Nov 14, 2010 in the wake of the Comptroller and Auditor General reporting that his 2008 decision to allocate 2G spectrum on a first-come-first-served basis had caused the exchequer a presumptive loss of Rs 1.76 lakh crore. The CBI arrested him Feb 2, 2011.

The Supreme Court in February cancelled 122 spectrum licences allocated during Raja’s tenure. It also ruled that all natural resources should be allocated through an auction, which the government is now preparing to do in the case of the cancelled licences.