What Kind of Company is Microsoft?

Microsoft”™s past conduct demonstrates its ability and willingness to engage in unlawful acts to the detriment of consumers, and awareness of its history is valuable today in understanding Microsoft”™s ongoing business practices and strategies.

The European Committee for Interoperable Systems (ECIS), part of the European Commission, produced a white paper which outlines Microsoft’s monopolistic and unlawful conduct:

For more than two decades, Microsoft has engaged in a carefully designed and extremely successful campaign to protect and extend its monopolies. Microsoft has repeatedly made market allocation proposals to its competitors and has used a broad range of other anticompetitive and unlawful tactics to eliminate potential rivals, including tying, predatory product design, and intentional deception.

The paper, which you can download here, was passed over to me by a friend. My view of Microsoft has changed over the years as the company became fixated on total domination of the market at any cost. Microsoft’s behavior was focused not on delivering better products but on eliminating competitors. The result has been poor quality products for consumers culminating in bloatware like the multiple versions of Windows Vista.

Reading the history of Microsoft’s anticompetitive behavior and the harm it created for consumers highlighted that the values of the company were flawed from the very beginning.

If I Had a Trillion Dollars

Sometimes a few pictures can help put things like a trillion-dollar bailout into perspective.

For example, a packet of one hundred $100 bills less than 1/2″ thick can contain $10,000.

stack1

A million dollars would look something like this. Seems pretty modest.

stack2

$100 million would need a stacking pallet and looks a bit more impressive.

stack25

And, the trillion dollar number that gets a lot of media attention these days, would need a few more stacking pallets. That is a lot of money.

stack3

A Big Number

The estimate for the loss in worldwide stock and bond market value is $50 trillion. That number is equivalent to a full year’s global gross domestic product. That number also happens to be approximately twice the aggregate profits earned by U.S. companies since 1929.

The Financial Chaos Explained

A friend of mine passed me his explanation for the current economic mess. Makes perfect sense to me.

Heidi is the proprietor of a bar in Berlin. In order to increase sales, she decides to allow her loyal customers — most of whom are unemployed alcoholics — to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans). Word gets around and as a result increasing numbers of customers flood into Heidi’s bar.

Taking advantage of her customers’ freedom from immediate payment constraints, Heidi increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively.

A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Heidi’s borrowing limit. He sees no reason for undue concern since he has the debts of the alcoholics as collateral.

At the bank’s corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items.

One day, although the prices are still climbing, a risk manager of the bank (subsequently fired, of course, due to his negativity) decides that finally the time has come to demand payment of the debts incurred by the drinkers at Heidi’s bar. However, they cannot pay back the debts. Heidi cannot fulfill her loan obligations and claims bankruptcy.

DRINKBONDs and ALKIBONDs drop in price by 95 %. PUKEBOND performs better, stabilizing in price after dropping only 80 %.

The suppliers of Heidi’s bar, having granted her generous payment due dates and having invested in the securities, are faced with a new situation. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor.

The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties. The funds required for this purpose are obtained by a tax levied on the non-drinkers.

Economic Chaos

I was reviewing the current economic situation with some people at work the other day and it was evident that two things were pretty clear to them: one is that we are in a big mess and two is that most people do not understand how we got into this mess.

Vanity Fair has a really good piece on the cause of the economic turmoil which you can read at length here.

My read of the major causes of the economic chaos from their article:

  • Real Estate: flawed U.S. government policy, or social engineering dogma, that every citizen should own a house
  • Securitized Debt: converting debt like mortgages, car loans and derivatives into securities which made it difficult, if not impossible, to assess the value of the loans
  • Subprime Mortgages: the securitization of mortgages made it possible to take on riskier loans such as subprime mortgages, as long as they were bundled with better risk loans. This strategy worked for as long as real estate prices kept rising and interest rates remained low.
  • Quantitative Analysis and Options: securitized debt was insured by swap options based on the irrational belief that everyone in the market would behave rationally
  • Cheap Money: China had high savings rates and that money was loaned to the U.S. where the money was then used to make bad loans

Buffet Writes

Warren Buffet’s 2008 letter to shareholders can be found here. One of the best quotes from the letter:

Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas.

And, on the events at the end of 2008:

By the fourth quarter, the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country. A freefall in business activity ensued, accelerating at a pace that I have never before witnessed. The U.S. ”“ and much of the world ”“ became trapped in a vicious negative-feedback cycle. Fear led to business contraction, and that in turn led to even greater fear.

This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone “all in.”? Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone”™s guess, though one likely consequence is an onslaught of inflation.

Don’t Worry, Be Happy

Some cheery news from George.

Money quotes:

The economy went into freefall and is still falling and we don”™t know where the bottom will be until we get there and there”™s no sign that we are anywhere near a bottom.

The scale of the problem is more than in the Great Depression because of the leverage involved. The ratio of debt to gross domestic product has increased from 160 percent in the 1920s to 350 percent last year, and is set to rise to 500 percent.

We”™re in a crisis, I think, that”™s really the most serious since the 1930s and is different from all the other crises we have experienced in our lifetime.

BMO Yield Hits 10 Percent

Hard to believe. From the Globe and Mail:

Although all Canadian banks have been beaten up and bloodied, Bank of Montreal remains the most unrecognizable casualty. On Wednesday, BMO touched a new multi-year low of $26.81: Its dividend yield rose above 10 per cent, making it the only Canadian big bank to join the double-digit club.

26.81 takes the share price a very long way back in time. Lots of lost value in that stock.

bmo