Is There Any Good News in Business?

S&P’s downgrade of US debt, stocks plummet 600+ points, double dip recession worries, housing market continues to slump, Europe debt crisis deepens, it seems that today above all others was chock full of bad/horrible business news. Flipping from news site to news site got so depressing after a while that I decided to search far and wide for 3 good business news stories to share:

1. Airlines cut ticket prices as federal taxes return. Cheaper plane tickets from Southwest, AirTran, Jet Blue and American, definitely counts as good news.

2. Oil prices drop below $80 a barrel. Great!.. Though, why was oil that high to begin with?

3. GM profits double as global sales rise. This last one took quite a few google searches, but it certainly counts. A growing GM is good for a large portion of the US economy.

Is the Deal to Raise the Debt Ceiling Good or Bad?

Finally, we have resolution in Congress over the debt ceiling fiasco, that feels likes its been going on for years and years. Now that its over, I have to wonder was it a good thing or a bad thing to allow the government increased access to the national credit card?... In the short run this was definitely a good thing. Defaulting on our debts during this tender period of anemic economic recovery, would most certainly have produced horrifying results, which I believe few reasonable people would have wanted to witness. There is no doubt that the United States government has a duty to meet all its obligations as they come due, especially given that they’ve all been incurred on behalf of the American people.

However, over the long run the debate does become a little more grey. In essence, is it a good idea to allow the government to continue relying so heavily on credit cards to pay its bills. The answer is yes, however a change in behavior is necessary over the long run. The United States is a country of vast resources and means, it can afford to maintain an over-sized credit card balance, over an extended period of time. However, I view this debate more as a question of fairness. I don’t believe its fair for a generation to be spending resources that will not be available to the generations that follow them, or even worse, become a burden for them. It should be the responsibility of each of us to leave a better tomorrow for those who follow. Where I disagree with some people in power is that we live in a society that has a large population of wealthy people, and I believe its absolutely unfair to not be asking them to contribute in accordance to their means. Over the long run, societies are fairly judged by how they treat the weakest amongst them, and in this debt ceiling package, there are vast cuts to social programs that disproportionately benefit the poorest amongst us, while neglecting to collect any revenues from the wealthiest amongst us.

There is little doubt that as long as the nation fails to collect as much as it spends, the credit card balance will continue to sky rocket. However, this unending focus on spending cuts takes away from the real solutions to the nation’s fiscal issues, which lie in collecting more money from those amongst us who have been the biggest beneficiaries of this society.

News Corp.'s Phone Hacking Scandal In a Nut Shell

Its been about a month since the world of Rupert Murdoch came a sudden halt due to the phone hacking scandal (although the story feels likes its been going for a lot longer than that). The business and reputation of both Rupert Murdoch and News Corp. have suffered some very serious damage, which in a nut shell can be summarized as follows:

• In 2007, a reporter and private investigator who worked for the News Corp.-owned News of the World tabloid, were both convicted of phone-hacking. The company at the time claimed that the incident was limited to those rogue individuals.

• Investigations in 2009 suggested that phone-hacking was a more widely used tool at News of the World than initially thought. The story continued to remain in the backwaters of major news events, until a report by UK’s Guardian newspaper a month ago alleged that other victims included the families of British troops killed in combat and murdered schoolgirl Milly Dowler. The public outrage immediately catapulted the story to front page status, and sent News Corp. into full blown crisis mode.

• The dramatic fallout, loss of advertisers and public anger forced Rupert Murdoch to shut down the 168 year old newspaper, which once held the title of being the biggest selling English language newspaper in the world. The paper’s former executive editor, Neil Wallis and former editor, Rebekah Brooks have both arrested in relation to on-going investigations.

• Members of both the UK government and parliamentary opposition called for News Corp to abandon its $12 billion bid to buy the 61% of satellite broadcaster BSkyB that it did not already own. The company initially resisted the move, however on July 13th they finally relegated and withdrew their bid.

• The company has continued in its attempts to contain the public fallout, including publishing public apologies in a number of British newspapers on July 16 and 17. The apologies provide further details on what steps the company is taking to address its systematic abuses of privacy laws.

• Though the phone hacking allegations have to date been primarily limited to the UK, the company is starting to see effects on its worldwide business. The ratings agency, Standard & Poor's, placed News Corp.'s BBB+ rating on a negative watch stating that its credit rating could be cut as the snowballing British phone hacking scandal threatened to claim more victims, and lasting damage is done to its business franchise.

• To date, no senior management company executives have been implicated in the scandal.

What Should Facebook Do Next?

Following last week’s blog post, I’ve had some hands on time with Google+. Though I consider myself to be a relatively mild user of social media, its already become clear that Google’s enthusiasm for conquering social media has not been dismayed one bit but all their failures. In fact, it seems that their mishaps have merely strengthened their resolve at finally cracking this media market. I have absolutely no way of knowing if this latest attempt will finally succeed (although I can say from my limited experience so far, its yet to disappoint me), but I am pretty confident in concluding that succeed or fail Google will be banging on this door for quite some time, and its reasonable to assume that at some point they will have some form of measured success.

Which then got me thinking, if I was a Facebook executive what on earth would I do next?... The answers I believe are pretty straightforward:

• Go public... ASAP! Facebook has had a meteoric rise, but is yet to reap any true financial rewards. Given that the 500Ib gorilla of technology wants a piece of its action, I would stop all the hesitation today, and pull the trigger on the IPO. Who knows when this window of opportunity will close?

• They copied your product, and you should copy theirs. Its obvious that Google liberally ripped off Facebook’s highly regarded spartan-yet-functional design layout. If I were Facebook I would be dissecting and lifting all those nifty features Google seem to be hanging their hat on. The best of which are, segmenting your friends into groups that you can individually share things with, and the ability to conduct group video/ text chats.

• Prepare for the worst, and prepare to fight... Perhaps all the biggest mistakes ever made by technology companies have really only ever boiled down to one thing, they never took looming threats seriously enough. IBM, Dell, Palm, Myspace all failed to really guard their territory with equal ferocity to their baby-faced competitors. Facebook have the home court advantage, they are the current masters of this field, and they should be doing everything humanly possible to guard their territory against this possibly gathering storm.

Why Google Wants To Rule Social Media

So another week and another attempt by Google to crack the social media game. Its latest salvo is named Google+ and from all the reports that I’ve read so far, the service is a very close copy of Facebook, its most obvious target. Google in recent times has had a bumpy time trying to work the social media landscape. Google Wave was released last summer with promises that it would redefine email communication amongst groups, and that service turned out to be a very big flop, put out of its misery earlier this year. Then came the much maligned Google Buzz, which seems to have mostly been the victim of a very, very poor roll-out and communication strategy. The early reviews with Google+ are pretty positive, especially surrounding a few features that seem to separate it from the competition. Although time will be the ultimate judge, its pretty safe to say that this latest effort is the company’s best start yet.

However, the real question for me is why does Google, with an almost monopoly-like market share of the internet search business want a piece of social media so bad? Well, the answer clearly has something to do with money. If reports are to be believed, Facebook is set to generate $5 billion in revenue this year, which is more than double what they generated last year. Those are not numbers Google can afford to sneeze at, especially when you consider that Google brought in $30 billion in revenue last year, which is only 6 times more than 7-year old Facebook. The writing on the wall is pretty clear, there are big bucks to be had in social media, and Google clearly wants a piece of the action.

A bigger and more important reason however might be that whomever is able to ultimately rule social media, will become the ultimate gatekeeper of what people do on the internet. Primarily as a result of Facebook’s advent, a growing number of people have begun to think of the internet as what happens within their social networks. Facebook users in January spent an average of 2hrs and 12 minutes sharing updates, news, pictures, and general items of interest with everybody in their network. This 6.5% increase over last year represents a growing trend of internet users using their social portals to decide where on the web they want to go. It is this gatekeeper power that I believe Google is most interested in wrapping its large arms around.

The Fall of BlackBerry

What a fall for a once high flying company. BlackBerry once represented the very cutting edge of mobile technology, that little device with a cartoonishly miniature keyboard somehow managed to change how entire segments of the workforce went about the daily lives. Becoming a “crackberry” was seen as a necessary badge of honor by those who harbored any desires of one day conquering the corporate jungle.

Then it all came crashing down. In retrospect it wasn’t quite the slow downward draft that’s sometimes been described, but rather it all happened in one fell swoop on June 29, 2007. That was the day Steve Jobs held up the very first iPhone and showed the world his latest and soon to be greatest creation. BlackBerry certainly did not flinch on that day, or the next for that matter, or as its turned out very much ever since then. The company continued to churn out its stalwart, tried and tested products that were so beloved by big, safe institutions, but ignored by consumers. The company seems to have been blindsided by the fact that people run corporations, and that they’re consumers first, corporate clients second.

Their lack of imagination has certainly cost them dearly. In recent years, they’ve pretty much all but tried everything. Nothing has worked. BlackBerry apps are about as popular as a BlackBerry diet. The sleekest blackberry phones are about as attractive as a prostitute with missing teeth. In an effort to not make the same mistake twice, they released the BlackBerry playbook soon after the iPad’s debut, but forgot to build something usable. The reviews have been harsh, sales have been even harsher. And last week, the final death march begun. The company announced earnings that were far below their own estimates, and just to add insult to injury, they also reported delays to the very products they need to work their way out of this mess. So, just like many that have come before, BlackBerry seems to be a company whose 15 minutes are up and the countdown has begun...

Throwback To 5 biggest dot-com failures

With the successful IPO of LinkedIn, and all the social media frothiness that is sure to follow, here is a look back at the 5 biggest dot-com failures of the turn of the century:

1.  Webvan (1999-2001)
Business Idea: Online grocery delivery business.
Key Mistake: Grew too big, too fast, in the wrong industry. The initial idea was seriously flawed, but may not actually have been as bad as one might initially think. The company’s real mistake was using all the capital raised from its much hyped IPO to start building out a huge warehouse infrastructure (initially planned for 26 cities), long before it had a sizable customer base.

2.  Pets.com (1998-2000)
Business Idea: Online pet supply store.
Key Mistake: Pets.com more than any other company symbolized the silliness of the entire dot-com era. The idea was horrible to begin with (who buys pet food on the internet), with a seriously dysfunctional business model (they lost money on every single order they took), and then spent $11.8 million on advertising (against 1999 revenues of $619,000). But no matter how big the disaster ended up being, one thing is for sure, the sock puppet was pure genius!

3.  Flooz.com (1998-2001)
Business Idea: Internet currency company. (This was seriously shaky from the get-go!)
Key Mistake: Trying to create an internet currency... and perhaps having Whoopi Goldberg as your spokesperson.

4.  eToys.com (1997-2001)
Business Idea: Online toy store.
Key Mistake: This is one of the few dot-com era companies that went through the boom-bust cycle and found new life post-bankruptcy. The company actually had a pretty solid idea, though far from original, however it collapsed for pretty the same reasons as everybody else. Too much money spent on advertising, technology and a bunch of other hype-type activities, while too little revenue was getting generated on the other end.

5.  Boo.com (1998-2000)
Business Idea: Online fashion retail store.
Key Mistake: Another company that actually had a pretty solid idea, as a whole host of internet retailers have proven since then (see Bluefly.com). This British company was sabotaged more by inept managers who spent most of their time expanding globally and dealing with language barriers, pricing issues and various tax legalities, while at the same time agreeing to pay postage on all returned items.

US Hits Debt Ceiling - 3 Things That Could Happen

The US Government finally hit the debt ceiling everybody in Washington seemed to have been waiting for. Though this doesn’t spell disaster in the immediate future, it does spell opportunity for all those in Congress who can’t wait to get on their high horses and provide endless solution-less lectures on the nation’s credit card addiction. I suspect that after a little political posturing everybody will eventually get in line and raise the debt ceiling for one simple reason, we have no choice!

I was however still interested in what the various possible outcomes are, so I dug around a little and this is what I found:

1. The government selectively pays some of its bills. Congress basically has until August 2nd to raise the debt ceiling, or else it would force the Obama administration to choose between paying the nation’s creditors, or paying for the 2 wars we’re currently in, Social Security, Medicare and all other household bills.

2. Reduce spending drastically. Rebulicans want any debt ceiling increase directly linked to cuts in government spending of at least equal measure. The real kicker here is that they have ruled out any significant cuts in defense spending, or an increase in government revenue (i.e.) raising taxes.

3. U.S. defaults. Though unlikely, its entirely possible that everybody commits to a crazy game of chicken, and both the Obama administration and Congress fail to increase the debt ceiling, forcing a national default.

My only hope is that amidst all the hoopla going around, a serious look is taken at how to responsibly manage a government over the long haul that has very real obligations to its citizens, worldwide partners, and its future unborn generations.

Thoughts on World’s Most Valuable Brands

Today I read a list of the world’s most valuable brand’s published by a consulting company called Brand Finance (I guess there really are consultants for just about everything). Basically its a ranking of the 500 largest companies in the world sorted by an estimation of their brand’s value. The core of their methodology uses a modified discounted cash flow technique to arrive at an estimated figure of royalty revenue generated by every brand. A little guesswork is definitely employed, but the logic seems reasonable enough given they’re trying to measure the somewhat unmeasurable.

Well, after perusing through the list here some of the thoughts I had:

• Apple overtakes Google for first time in 4 years. My last blog post talked about the fascinating rivalry that’s developed between these two companies. I’m certainly not surprised that Apple is more valuable than Google. In fact, I’m left questioning why Google was ever ahead of Apple to begin with? Its difficult to imagine how in terms of revenue, public awareness, customer loyalty or any other reasonable branding measure I can think of, Google would ever rank ahead of Apple.

• Google more valuable than McDonald’s or Coca-Cola? Not sure I buy this one. I very well could be the last person on earth who still believes in the power of old school brand’s, but I really can’t see how Google is more valuable than either McDonald’s or Coca-Cola... Do you think people in Zambia have ever heard of Google? Cause I’m pretty sure people living under rocks have heard of Coca-Cola.

• China Mobile more valuable than Verizon? No way. I’m pretty sure I would not be alone in calling shenanigans for this call. I understand that China have way more people than the western world, and I understand that everybody seems to assume they will all one day magically buy everything under the sun. But even when looking through rose colored glasses, I am pretty sure that Verizon is a more valuable brand than China Mobile.

• Blackberry is more valuable than Disney... Nonsense!

• Top 10 brand’s look just about right. With the exception of Google in the 2nd spot, and China Mobile in the 9th spot, I would say they otherwise have the top 10 list right about where I would expect them to be.

Google vs. Apple: Thoughts On Who Wins

Is it just me or has the rivalry between Apple and Google blossomed into one magnificent heavyweight title bout? Could there be a better match up than the arrogance of Steve Jobs vs. the collective arrogance of every living soul at Google? And yet it wasn’t too long ago that these two behemoths were locked in a BFF embrace, that just like peanut butter and jelly, or Brad and Angelina seemed so perfectly suited.

If my understanding of the story is reasonably accurate, the rift came about as a result of Apple’s iPhone success and Google’s desire to get in on the act. Can’t say I blame them, especially since Eric Schmidt was a member of Apple’s board at the time and probably peeked at the secret recipe. No hard feelings, its just business.

However, the big question of the day remains, who will ultimately rule the mobile world:

1. Google is the new Microsoft... The good news for Apple is that Microsoft have officially deserted the battlefield. The bad news is that Google have entered the arena, and they are awfully well prepared. Let’s not make any mistake about it, the mobile market is likely to remain more competitive than the PC market ever was, so Google are high unlikely to achieve Microsoft’s overwhelming market dominance. However, according to Morgan Stanley’s research, the mobile internet market is expected to reach twice the size of the desktop internet market. And since Google already rules the internet, its logical that Android will eventually rule mobile. In truth, Apple’s iOS doesn’t offer much of a defence against the fast evolving Android.

2. Apple is the king of profits!.. Popularity is a pretty cool thing to have, however when all is said and done at the end of the day, its the $$’s that count! And in this arena, Apple is clearly the king of the hill. These pie charts say it all:

Last year Apple sold 17 million mobile handsets, compared with the 400 million pushed by Nokia, Samsung and LG (23 times greater). Yet Apple earned 39% of the entire industry's profits, more than the 32% earned by the three largest handset makers, combined!

Google’s estimated revenue from Android this year is expected to top $1 billion. Apple’s iPhone revenue in the 1st quarter of 2011 alone topped $11 billion!.. No matter how popular Android becomes over the next 5 years I just can’t see how they catch up to Apple’s big bucks.

Bottom Line

So, all in all, who wins? My short term vote (next 5 yrs) has got to be Apple, they simply have too much cash on their side. However, in the long term I think its possible that Android’s popularity may sideline them to such an extent that they become an irrelevant niche player...

3 Reasons To Keep Goldman Sachs Around

If there is one company that has really seen its reputation tarnished from the recent economic crisis, its gotta be Goldman Sachs. I’ve always had great respect for high achievers, and over the past decade no company in finance has achieved like Goldman Sachs. But just like Tiger Woods, a lot of that respect has disappeared since the sausage factory was pried open.

Though Goldman Sachs are a pretty dirty company, in a very dirty business, I still think there are 3 good reasons to keep them around:

1. If someones gotta be dirty, it may just as well be the biggest and RICHEST!... As long as capital markets, greed and the promise of quick riches continue to exist, Wall Street will always be around. Its almost guaranteed that really smart people will forever prey on the ignorance of the not-so-smart. With Goldman Sachs we at least have a known enemy, an entity whose pockets are so deep they can be flogged forever!

2. Just like an effective psych ward, they contain the madness... Just try and imagine the devastating effects of unleashing all those Harvard and MIT types out to regular, run-of-the-mill corporations. Enron clones would swamp the land in no time at all.

3. As much as it hurts to admit it, we still need them... As long we have an economic system built on layers and layers of debt, we will always need someone creatively digging new holes. And no matter what their faults are, the evidence still suggests that Goldman Sachs are the best in their trade.

Should Insider Trading Be Legal?

Last week I read a pretty good synopsis on the insider trading trial of hedge fund manager, Raj Rajaratnam, a case I somewhat familiar with but haven’t followed very closely. For those of you who’ve been out of the loop, he is the Sri Lankan-born founder of New York hedge fund company, Galleon Group, a fund that was amongst the world’s largest at its peak with over $7.5 billion in assets under management. The hedge fund collapsed in October 2009 shortly after the arrest of Mr. Rajaratnam, who’s been charged with trading on non-public information for several companies, including Berkshire Hathaway’s $5 billion investment in Goldman Sachs. His alleged crimes netted him a total of $45 million.

The story itself is a pretty boring, plain vanilla tale of a hedge fund manager who probably ran out of ideas on how to legitimately beat the market, so he resorted to cheating. Nothing new... However, this story did get me thinking about whether insider trading itself should just be legalized. After all, what better way to even out the playing field between those in the ropes and those outside the building, than to allow the free movement of stocks in the marketplace based on all information. Based on my brief study, it seems that the benefits of legalized insider trading can be summed in these 3 points:

• The more information available, the more efficient prices become. The buying or selling of stocks by investors based on any kind of factual information would lead to more “correct” prices for those stocks.

• Fraud would get exposed earlier and in real time. The general argument here is that insiders who know of fraud, or as may commonly happen, are the perpetrators of fraud would sell their holdings of affected companies. Investors tracking the activities of insiders would not only know that something is amiss far quicker, but authorities could use this as a possible crime indicator.

• Insider trading happens in the market, its very difficult to prosecute, there are few deterrents against it, so why not just legalize it and thereby reduce the marginal advantages it brings insiders... Gotta admit this is a good point!

Although, I find these points to be pretty compelling, especially the last one, I have come to the conclusion that it would still be a wrong headed move. I think that a purposefully rigged market system, even if done under the strictest controls, would only work to undermine investor confidence over time. After all, if insiders were able to legally trade on information only they knew about, then might it not make sense that they would create information for which to trade on?

What Was Warren Buffett’s Top Lieutenant Thinking?

Last week came news that David Sokol, the ex-CEO of Berkshire Hathaway subsidiaries NetJets and MidAmerican Energy Holdings Company, resigned after revealing that he’d traded shares in a company recently purchased by Berkshire Hathaway. Mr. Sokol first purchased 2,300 shares of Lubrizol the day after a meeting with Citigroup bankers in December 2010, where they presented various companies as potential takeover targets for Berkshire Hathaway (upon his apparent request). He soon thereafter sold those shares, but then purchased 96,060 shares of Lubrizol for approximately $10 million in early January. Approximately one week later Mr. Sokol pitched the idea of acquiring the company to his boss, Warren Buffett, who on March 14, 2011 announced an agreement to purchase Lubrizol for $9.7 billion.

Whether David Sokol’s actions were illegal or not remains to be seen. But the big question on my mind is: WHAT ON EARTH WAS HE THINKING?... I mean, this is a man who by all accounts was on a very short list of possible successors to take over the CEO throne at Berkshire Hathaway (the operations portion of the business at least). He was head of not one, but TWO major Berkshire subsidiaries! And judging from Warren’s own words in his annual shareholder letters, Mr. Sokol seemed to have the full trust and faith of his boss... I just don’t understand why he would throw away the opportunity to manage one of the greatest companies on earth, certainly amongst the most prestigious, for a payday that can only pale in comparison to what might have been?? Maybe I’m just being naive, but I just don’t get it...

Did Ma Bell Just Come Back to Life?

AT&T just agreed to acquire T-Mobile USA for $39 billion, and I don’t understand why regulators are allowing this re-organization of Ma Bell. I was under the impression that the 1982 settlement with the U.S. Department of Justice was supposed to ensure that this anti-competitive behemoth would not be coming back. But given today’s news, and the fact that AT&T has completed over $100 billion in acquisitions over the past decade, it seems to not only is Ma Bell coming back but she’s stronger than ever.

There will now be just 3 major telephone carriers in the entire United States down from a measly 4. To put that into context, Italy with a population of 60 million has 9 major telephone carriers. The United States with a population of 300 million has 3 major carriers, which works out to be 100 million people per carrier! These guys (and by these guys I really mean AT&T and Verizon) have little to no reason to compete, become more efficient, lower prices, or do anything that a healthy competitive environment encourages, simply because they’ve bought everybody.

Based on today’s market moves, shareholders from both companies seem to be quite giddy. Deutsche Telekom shareholders are especially delighted given that in 2001 they paid $50.7 billion for VoiceStream (which later became T-Mobile). But like a lot of the crappy deals made at the turn of the century, things did not quite work out as planned. The unit was recently valued at between $15 and $20 billion, so the $39 billion acquisition price gives them 19 - 24 billion new reasons to be in a good cheer... AT&T shareholders on the other hand are probably excited for a very different reason. They just became the top dogs in a field of 3, with plenty of cats to chase! Consumers, prepare for the screwing to begin.

Thoughts on the Forbes 400 List

Here are my thoughts on the recently published Forbes 400 ranking of the world’s wealthiest people:

• Last year saw the list grow to the most billionaires ever. This seems like a great omen for a looming worldwide economic recovery. Though I’m not a professional economist, I’m going to venture a guess that wealthy people tend to be the first to see the benefits of an upswing in economic activity. So if a lot of them got wealthy last year, then the rest of us are sure to follow.

• Last year also saw the largest combined wealth of all on the list. This probably just speaks to the unevenness of global wealth creation. Those in the know not only make far more, but make far more far quicker!

• Carlos Helu Slim’s wealth = $74 billion. Wow! Who would have ever thought that the heir to the Bill Gates throne would be Mexican? It absolutely tickles me that this investment wunderkind has had such a meteoric rise to the top. I just wonder if he’ll top the $100 billion mark...

• China has 115 members on the list. Though a lot has been said and written about China’s growing prominence, there’s nothing like having a triple digit number of billionaires to validate a shift in the earth’s axis.

• America still rules! 413 billionaires, 1 out of every 3 billionaires, 18 of the top 50... yep its true, these shores are still awash with cash.

• Facebook spawns 6 newcomers to the list. I have to admit it, I am absolutely baffled but yet marveled by the success of this little website. Facebook is a toy, albeit a somewhat addictive one, whose primary contribution that I know of is its amazing ability to kill time. Not sure how it makes the leap to billionaire creating machine à la Microsoft, Google, Berkshire Hathaway... but there are 500 million people who would probably vehemently disagree.

The Battle For Libya’s Wealth

The battle for Libya seems to be slowly turning into a protracted civil war that pits the government forces of Colonel Muammar Gaddafi against the will of anti-government protesters. One thing that’s becoming pretty clear is that Gaddafi does not plan to collapse in the manner of Hosni Mubarak as he’s clearly prepared to use military force in a manner that few of the other troubled autocratic regimes have shown a stomach for.

As the world mulls over what will happen to Gaddafi whether he wins or loses, another battle is brewing over the country’s wealth, specifically that owned by the Libyan Investment Authority (LIA). As I stated last week, this $70 billion sovereign wealth fund has been Gaddafi’s primary source of wealth. The fund was founded in 2006 by his son, Seif al-Islam el-Qaddafi, as a means of opening up Libya to the west while simultaneously diversifying the country’s dependence on oil revenues. Over the years, powerful western figures have been drawn into Mr. Qaddafi’s orbit, including the Rothschild family, Prince Andrew of Britain, and the American private equity investors Stephen Schwarzman of Blackstone and David Rubenstein of the Carlyle Group.

Amongst the fund’s listed foreign assets include a 15% oil exploration and production partnership entered into with British Petroleum (BP), an ownership stake in the Dutch-Belgian bank of Fortis (acquired in 2008 as the global credit crunch was getting underway), and a 7.5% share ownership of the Juventus Italian football club.

Over the past couple of weeks, individual countries have begun taking steps to freeze the assets held by LIA or of those held by the directors and managers of the fund. Austria widened a national asset freeze list to include a top official at the Libyan Investment Authority (LIA) because of possible links to Muammar Gaddafi's inner circle. Meanwhile, the UK government froze approximately $3 billion of assets belonging to the LIA, after having initially frozen $1.6 billion in assets linked to Gaddafi and his children. The assets frozen in London include the fund’s $360m stake in Pearson (owner of the Financial Times) and a $480m property portfolio in London.

Not to be left behind, US Treasury secretary Tim Geithner announced last Thursday that they had seized nearly $32 billion in Libyan assets, including those held by the LIA... Despite these efforts, the question remains, what does the seizure of these assets mean for the people of Libya in the long run? If Gaddafi’s government were to prevail and remain in power, would these frozen assets eventually be returned to him? Or what if the Gaddafi’s government collapses, how would all these individual governments ensure that the funds are returned to their rightful owners, the citizens of Libya?

The Wealth of Arab’s Collapsing Autocrats

What a tough couple of months its been for the autocratic regimes of of the Middle East. Who would have thought that a frustrated Tunisian fruit vendor who had been trampled on by his government for the last time, would light himself on fire and start a revolution spanning 11 Middle Eastern countries.

So how much wealth have these autocratic, and presumably corrupt, leaders amassed for themselves and their families?... I did a little digging around, and though its difficult to verify how accurate any of these numbers are, here are some of the figures I came across:

Hosni Mubarak -- According to U.S. intelligence estimates, former Egyptian President Hosni Mubarak and his family are believed to have a fortune ranging from $1 billion to $5 billion, a significantly lower figure than most estimates of the wealth accumulated by Mubarak during his 30 years in power. Most of his money is believed to be stashed away in foreign banks, real estate and business holdings.

Muammar Gaddafi -- The current (for now at least) Libyan leader Colonel Muammar Gaddafi, who has ruled the country for over 40 years and his family are believed to a fortune of approximately $20 billion. Again this figure comes from intelligence sources and is far below some recent rumors that peg his wealth at over $100 billion. The primary vehicle for his wealth accumulation has come from the Libyan Investment Authority (LIA), a $70 billion sovereign wealth fund whose founding purpose was to diversify Libya’s oil dependent economy.

Zine El Abidine Ben Ali -- The ex-Tunisian President whose downfall got the whole revolution started, was estimated to have amassed wealth exceeding $5 billion. His family’s fortune was amassed amid a more mafia-style form of corruption, where they demanded significant stakes in most of the country’s shopping centers, trading firms, property development companies, banks, media and telecommunication companies. Perhaps one of the more astonishing acts that occurred under the ex-President’s regime was when two of his clan members reportedly stole a yacht from a leading French banker. A story that came to light from some leaked U.S. embassy cables published by WikiLeaks.

3 Facts About the Hedge Fund Industry

Given all the hoopla this segment of the investment world gets, I thought I’d continue from last week’s blog post with a few facts about the hedge fund industry that you may or may not know:

1. $2.5 trillion in assets under management

Though the precise size of the industry is unknown (since so much is kept so secret), there are approximately 10,000 hedge funds that manage an estimated $2.5 trillion in assets. By comparison, there are just under 8,000 registered mutual funds companies in the United States who collectively manage $11 trillion.

2. Average pay is substantially higher than mutual funds

The average junior hedge fund portfolio manager earns a base salary of $150,000 while senior managers earn $180,000. Their bonuses however make a world of difference, with junior managers seeing average annual bonuses of $400,000 while senior managers average $500,000. Mutual fund managers by comparison earn an average of $144,000.

3. The industry beats the market... just

Between 1994 and 2005, the aggregate US stock market produced an average annual return of 10.6%, this return was marginally outpaced by the hedge fund industry which saw average annual returns of 11%. Mutual funds prodded along with 8% average annual returns. It should however be noted that in 2009, hedge funds charged average management fees of 1.65% and another 18.89% in performance fees, far more than the cost of either index or actively managed mutual funds.

Hedge fund manager earns record $5 Billion

Earlier this month I came across an article in the Wall Street Journal that reported on how hedge fund manager John Paulson earned $5 billion in 2010. Though I initially found the story some what interesting, it did not really capture my imagination. After all, what’s new about a bunch of really rich people throwing buckets of cash at a flavor-of-the-day hedge fund manager, who in the process becomes even richer than they are! The 2% asset management fee and 25% cut of profits is probably seen as a fairly small price to pay for the privilege of having Gordon Gekko be your personal banker.

However, after giving it some thought, I realized that the really were some compelling aspects to this story. For those of you who don’t know, John Paulson is the founder and president of New York-based hedge fund, Paulson & Co. which manages approximately $36 billion in client assets. His reputation was earned in 2008 when he made an extremely well timed (some say too well timed) wager on the impending collapse of the sub-prime mortgage market. In 2008, Paulson recorded investment gains of 590% and 350% in two of his funds within the firm through the purchase of credit default swaps, earning himself $3.6 billion, a then-record payday for any hedge fund manager in history.

Paulson’s ascent into the stratosphere of alpha male earners was slightly blunted in 2009 when he took a slightly slimmer pay check of $2.3 billion. His funds saw investment returns of 12%, which was highly respectable given the armageddon chaos that rocked the market for most of that year.

Come 2010 and John Paulson really made up for that 36% income decline. The $5 billion he personally netted in 2010 trumps the record he set in 2007-2008 betting against sub-prime mortgages. To put that figure into perspective, consider that Goldman Sachs, Wall Street's most profitable and notorious bonus machine, paid all of its 36,000 employees a total of $8.35 billion last year. A mere $3.35 billion more than Paulson got paid!

So you’re probably wondering, how did he do it? Well, approximately $1 billion came from the 20% performance fee his hedge fund charged on $5 billion in investment profits, as well as the annual management fees clients pay to keep their assets at the firm. The remaining $4 billion came from investment gains he saw on his own personal holdings, (i.e.) from being his own best client. At the beginning of the year, Paulson had approximately $10 billion invested with the firm, a sum that rose by $4 billion throughout the course of the year.

Though Paulson did not hit any out-of-the-park home runs in 2010, given that two of his primary funds rose 11% and 17% respectively, he juiced his returns by creating leveraged gold-denominated versions of his five funds. Paulson & Co. borrowed 20 cents for every $1 invested in its funds which was used to buy exposure to $1 of gold futures. This meant that investors had $1 of gold exposure for every $1 invested in other strategies. The 30% rise in gold prices last year resulted in the gold-denominated versions of Paulson’s funds seeing gains of as much as 45%.