FunctionalAmbivalent

Today's Lesson: On the Web, Everything Is a Commodity Business

Last week I ordered a used, out-of-print book from an Amazon vendor. For some reason, Amazon sent the vendor the wrong shipping address, which I caught immediately on the order confirmation. I contacted the vendor with the correct address, but it was too late. The amazingly efficient vendor had already shipped the book.

As it happens, the address to which the book has been shipped is my old office, which no longer exists. I notified the vendor that the book would be returned, and that they should re-ship it to the correct address. I made it clear that I would pay whatever extra shipping and handling charges the mix-up incurred. Problem solved, except: they don't reship returned orders. That's their policy. They bill you for shipping and a 15% restock charge and that's that. Even if I agree to pay the additional charges, they won't re-ship.

I'm sure there's a reason for that. I'm sure they got screwed in the past by people who make mistakes and, smugly believing that as customers they're always right, demand free shipping and all kinds of other things that make serving them unprofitable. But this isn't one of those cases. I seriously don't think I made a mistake in the order; I deleted the old address a couple of months ago. But even if you assume the mistake was mine, I offered to pay the extra shipping and handling. I just want the book.

I order about 30 books a year through Amazon, most of which are used, out-of-print titles from associated vendors. (If you haven't used Amazon to buy used and rare books, you're missing one of the best things about the web.) The books vary in condition and cost, and because of that I prefer to buy from vendors I've done business with before. I generally buy the books for research; this particular book, for example, has an account of the life of the Marques de Riscal that I need for my book proposal. My credit cards work fine, I don't make a fuss and I'm not real price sensitive. I am, I think, a good customer to have.

In this case, I'd used the Amazon vendor about a month ago, buying a copy of Robert Louis Stevenson's Silverado Squatters -- research for the book proposal, again. The transaction went just fine. But this time, something got screwed up. The vendor was nice and everything, but didn't care even a little about helping me solve the problem. They cared about enforcing their policy.

Well, I have a policy, too. My policy is that vendors in commodity businesses who are more interested in their policies than solving my problems don't get my business again. For the record, when they emailed saying, once and for all, they weren't re-shipping the book, it took me exactly 45 seconds to go to Amazon, find another vendor, and place my order. In less than a minute I'm back on track and they no longer exist for me.

No hard feelings; I wish them well. But the web commoditizes almost everything and in that environment, you'd better not piss a lot of people off. If you do, it's not like they have to drive across town to find someone else selling the same thing. All it takes is 45 seconds and you're out of business.

I Think One of the Lessons of the Last Few Years Is That Some People Shouldn't Get Credit

I thought this was the worst credit offer ever. MSNBC found one worse: a card where the up-front and annual fees total more than the card's credit limit, an effective annual interest rate of infinity, plus 9.9% on any money you might actually manage to borrow.

First Premier bank of South Dakota markets the card to college students.

Like every other bottom-trolling bank, they have a vision and mission statement that makes them sound like they're more admirable than heroin dealers. They're not.

Twitter Sells an Ad

One. But at least it's revenue.

A Partial Defense of AIG

About 18 months ago I was driving with a friend of mine who's a risk management professional, and we were talking about "the sub-prime thing," as I referred to it back then. Out of nowhere, he brought up AIG, saying, basically:

Watch AIG. If AIG goes down, it takes everything with it. If AIG goes down, buy ammunition and canned goods and head for a cave.

His reasoning was that AIG insures the bonds that every bank and insurance company in the world invests in. (A lot of public debt, too.) If the financial industry stopped believing in that insurance, it would mean the end of the financial world.

AIG and companies like it are among the alchemists who help turn BBB-rated mortgage-backed securities into AAA-rated collateralized debt obligations, which are at the center of all of this. They do this by insuring the underlying debt from default. AIG has insured trillions of dollars worth of AAA-rated bonds against default, on the assumption that the bonds would never default, because housing prices always go up.

Banks and insurance companies buy the AAA-rated securities -- the safest investments in the world, remember -- with your life savings. When you look at your bank account or pension or 401(k) statement, you're generally looking at your little slice of the bond pie.

When the sub-prime thing struck, everyone was suddenly afraid of anything backed by mortgages. The re-sale market for those securities collapsed. Different kinds of businesses accounted for that collapse in value different ways. The culprit here is something called "mark-to-market accounting." If you buy a bond for $1,000, and the market for it collapses, accounting rules may require you to mark its value down to whatever the current market value is, whether you intend to sell it or not. Or acocuntign rules may let you continue to carry the bond on your books at $1,000, depending on what kind of business you're in. Banks, in general, have to mark-to-market fast, and insurance companies mark-to-market more slowly, usually when some precipitating event happens. An example of a precipitating event would be a ratings downgrade of a particular bond.

The market for mortgage-backed securities is way, way down, but the assumption is that as things straighten out and the economy improves, mortgage-backed bonds will recover some or all of their value. And while banks are in trouble because they had to mark-to-market quickly, insurance companies -- which also do things like annuities and pensions -- are more solvent because they mark-to-market more slowly. (This makes sense because people tend not to withdraw their annuities and pensions the way they'll dip into their bank accounts.)

If AIG were to fail, most of those securities that AIG has insured, and that will likely regain a lot of their value as the economy recovers, would be downgraded by the ratings agencies. Downgrades, remember, are one of the events that causes insurance companies to have to mark-to-market. Those securities -- which are generally used to back long-term retirement savings that people will not need access to for 10-20 years -- would suddenly be assumed to be worth nothing or, at least, substantially less, regardless of whether they will recover value in the future. The whole banking/insurance/pension system would go instantly broke -- even though we know those bonds are going to be worth a lot when they're actually needed, years from now, to fund retirements.

This is the doomsday scenario. Banks and insurance companies would go broke first. Privately managed pensions (basically, everything but Social Security) would follow.

The federal government could cover the banks by printing money, but insurance companies are backed by states, most of which are constitutionally required to balance their budgets. On the hook for billions upon billions of dollars, states would have to radically slash budgets or raise taxes, either one of which would deal a crushing blow to the economy, compoundin the problem. (More mortgage defaults, more uncertainty in the bond market, lower bond prices...)

The scale of the event is cataclysmic. For state government, covering the trillions of dollars in losses would not be just a matter of dismantling the welfare state, putting up with potholes, and closing parks. It's the kind of deficit that could mean significant cutbacks in schools, police and fire protection for a decade to come.

All of those cuts would, of course, echo through the economy, and the terrible downward spiral that's keeping us all up at night would become even steeper and longer lasting.

The government's propping-up of AIG gives the whole system a fig leaf of security that keeps the doomsday scenario from happening. Bonds do not need to be downgraded right now, which gives them time to (hopefully) recover value in the marketplace, which will cover obligations that would otherwise have to be covered, in cash, by taxpayers. 

I don't like bailing out AIG any more than anyone else. It offends me to the bone. But we'd be fools to let our anger make this decision for us. Every billion we shovel into AIG buys us time, and time is our friend because it's a reasonable assumption that the market for securities will recover, with time. Every percentage point recovered in bond value represents tens of billions of dollars we won't have to pay in real money. In order to protect ourselves, we really have no choice but to bail out some of the same people who caused the problem in the first place.

In the real world, that's where we are.

As Opposed To Being the Premier of a New National Marketing Strategy

A Walmart customer in Falmouth, Massachusetts, opened a wallet on sale there and found in it: 10 human teeth. The teeth were adult-size, and one had a filling in it. A Walmart spokesman, skilled in the art of the inadequate response, described the happenstance as "an isolated incident."

An Inspiration To Us All

NFL Commissioner Roger Goodell, faced with falling revenues, is taking a pay freeze for 2008 and perhaps even a cut in 2009. An NFL spokesman explained:

The commissioner believes it will take a collective sacrifice of everyone to get through this difficult economic environment.

The commissioner's sacrifice will be subsisting on his $11 million salary.

First Ft. Knox, Now This

Louisville is rapidly (in geological time) become the security capital of the world. Since 1936, America's gold bullion has been stored at Ft. Knox, just past the strip joints out on Dixie Highway. And now, Kentucky Fried Chicken has built a new vault in which to keep the recipe for Colonel Sanders' secret blend of 11 herbs and spices.

The iconic recipe is now protected by an array of high-tech security gadgets, including motion detectors and cameras that allow guards to monitor the vault around the clock.

"It's like an onion of security — many layers," said security expert Bo Dietl, who brought the recipe back to the building.

Thick concrete blocks encapsulate the vault, situated near office cubicles, that is connected to a backup generator to keep the security system operating in times of power outages.

The Internet, of course, doesn't believe in secrets, and according to this site, which relies on chemical analysis done for the book Big Secrets (part of which is excerpted here), claims that the 11 herbs and spices have more to do with marketing than reality:

The surprising discovery was that instead of identifying eleven herbs and spices, the analysis showed only four ingredients: flour, salt, pepper and monosodium glutamate, a flavor enhancer. The cooking procedure is believed to be the other half of the secret.

KFC franchisees, according to the book excerpt, have been complaining for years that the whole secret recipe claim is a scam that forces them to pay a lot to buy the mix from the corporation rather than a little to mix it up themselves. McDonald's founder Ray Kroc claimed the secret recipe was "a lot of crap."

It's worth mentioning that there are those who have claimed that there's no real gold in Ft. Knox, either.

Whether it's a marketing stunt or critical corporate intellectual property -- and there's really no reason it can't be both -- it is now the best-protected yellow sheet of paper in the world, right there at KFC headquarters on the way to the airport.

Which is better, I suppose, than being just past the strip joints.

Further Evidence, If Any Were Necessary, That Rich People Shouldn't Be Allowed To Handle Money

The Yellowstone Club, which bills itself as the "world's only private ski and golf community," is bankrupt.

The Yellowstone Club for the ultrarich had only been partially developed when it fell more than $400 million in debt last year. The nearly 14,000-acre club near Yellowstone National Park has 340 members, including Dan Quayle and (Bill) Gates.

The club was founded in 1999 by billionaire Timothy Blixseth (#380 on the Forbes 400), who made his money swapping timberland for ski slopes in Montana.  On a wine-swilling picnic in the outback with his wife, Edra, he had a grand vision -- or maybe Edra had it, accounts vary. Anyway, the Yellowstone Club was born and Edra provided the purple prose:

I love the fact that YC expresses who I am and what is important to me in life. After all, my children and grandchildren have had a very positive impact on the evolution of the Club. It’s all about the multi generational opportunity to share a one-of-a-kind, year round Montana outdoor experience with others and watch the joy it brings. I love watching Members, their families and friends come together as a community and feel like they are real part of the fabric of Yellowstone Club – and they are!

I, personally, would never buy into a real estate development that depends on exclamation points to get it's point across, but then, what do I know? I'm stuck in a fixed 6% mortgage that I can afford and don't get to hobnob with the right-wing likes of Jack Kemp, Dan Quayle and Peter Chernin, who sit on the "honorary board" of the resort.

Got the scenario? Billionaire real estate developer...blond bombshell wife...grand vision...serious name-dropping? If the name "Trump" comes to mind, you're in the right neighborhood. Granted, the Blixseth's seemed not to have the vulgar touch any and all Trumps bring to a project, but they share with The Donald the ability to piss money away at a fantastic rate. Blixseth started things off with a $100 million lodge, named it after ski film maker Warren Miller, and went to work courting the rich and famous to make his home theirs.

Back in the heyday, prospective members had to show a net worth of $3.0 million, put down an initiation fee of $250,000, pay $16,000 in annual dues and buy property. An average-size lot is 2 acres and costs $1.4 million, to which would be added the cost of building a home.

Blixseth's business plan was predicated on finding 864 members, amassing a pile of nearly $14 million which would fund the running of the private ski resort and Tom Weiskopf-design golf course. Membership topped out, however, at under 350, and now the club is $400 million in debt with no way out. Blixseth and the Mrs. have split -- remind you of anyone? -- and the Yellowstone Club went to the wife as part of the divorce settlement.

And now, it's going to creditors and the rich-guy members are up in arms because there's no telling what the nefarious private equity capitalists in line to buy the place will do with it. Those private equity guys are hard -- just ask Dan Quayle, who made his fortune as the face man for private equity firm Cerberus Capital Management, which owns, among other things, Formica, Inc.

None of which, you can be sure, covers the countrtops of the 25,000 square foot palaces of the Yellowstone Club.

It's Like Vegas, But With Tax Money

Wall Street comes up with a new derivative.

Right Now

I haven't said a lot about the $50 billion swindle of rich people in New York and Palm Beach because I'm not really interested in rich people in New York and Palm Beach. Seriously: if they want to give all their money to one person to manage and demand no accountability or documentation and then put on their pouty faces and expect all of us who never had any money in the first place to feel sorry for them because they might have to get a job or something when they discover that all those eggs in that one basket are gone, well, I'm not going to pay that much attention. Screw 'em. Secretly, I kind of like it when rich people get swindled.

But this over at TPM caught my eye.

The Journal says that the SEC IG investigation mentioned below will likely scrutinize the relationship between Madoff neice, Shana Madoff, who was the firm's chief securities compliance counsel and Eric Swanson, a senior inspections and compliance official at the SEC until he left in 2006.

Madoff and Swanson married last year.

That's it. That's all I can take.

I've been a good sport, God. I've accepted my lot in life and gone forward with a smile on my face, but this is the last straw. I want to be rich and I want to be rich right now. What was it about these buffoons that made you think they could handle wealth? Their cheekbones?

I deserve to be rich. I've been an attentive father and loyal employee and productive member of my community. I taught Sunday school for six years and did two terms as president of the Congregation Council and I hit my monetary pledge to the church in October, for heaven's sake (literally), and I want what's coming to me.

I want to be able to marry the cop who's investigating me and have no one think that's a problem. I want to make a few phone calls and get a seat in the United States Senate for my trouble. I want designers to give me custom-made clothes just so I'll be seen in public wearing them. I want a tax-free charitable foundation with my name on it and midtown office space that gives all of its money to me so I can eat lunch at three in the afternoon and dinner at 10 at night and not have to do one single productive thing in between.

Right now, God. You know where to find me.