Marc Andreesson: Strangely self-serving?

I'm not sure what to make of this very strange post on Marc Andreesson's blog. It's not by Marc, it's by Scott Kupur who works at the fund.

The post argues three points:

1. The middle class is now missing out on hot-IPO action because all the value creation is happening in private markets, and post-IPO performance is disappointing as the company is already past its prime. Therefore, we should loosen the rules barring non-accredited investors from primary markets.

2. Kickstarter, and other crowd funding projects, actually expose these individuals to seed stage investments that are the most risky.

3. We need to roll-back decimalization, so there is a larger spread in trading small cap stocks, making it easier for financial firms to profit from their trading.

I'm not kidding about the last one:

A number of policy and market changes—all with well-intentioned goals—have created a hostile environment for new IPOs and, in particular, for small IPOs. Arguably the most significant among the changes was the 2001 move to decimalization. Much has been written about the “death star” of decimalization, a phrase first coined by David Weild, former vice chairman of Nasdaq. But simply stated, decimalization eliminated all of the profits from trading small-capitalization stocks. How did this happen? Because decimalization reduced the “tick size,” the minimum increment in which stock prices can trade, to a penny (from its previous level of 25 cents). Thus, a trader who previously might have purchased a block of small-cap shares knowing that a $0.25 tick size likely represented his minimum profit potential on a trade now found his minimum profit potential reduced to a penny. Facing this uneconomic situation, small-cap traders simply abandoned the market, killing liquidity for these stocks.

It's good to be reminded how much one's position influences which side of an argument seems reasonable. I'm sure that Kupur is quite sincere in all of his recommendations, but it's also hard to miss just how blatantly self serving they are.

First, after the internet boom of the late 90s, the technology bubble has shifted to private markets where venture capitalists, and other accredited investors, are investing at too-high valuations. What's different this time is that the public markets aren't stepping up and being the bag holder, so that's trickling down to banks, VCs, and other primary market participants. Naturally, Kupur would like public money to step in and overpay for assets, so his fund could enjoy an earlier liquidity event and not have to deal with dogs like Groupon, Facebook, and Zynga.

Second, many kickstarter projects are very different from the high-potential, high-profit businesses traditionally interesting to VCs. They are things like fancy jeans, or cool font, or an indie film. People aren't investing in these hoping for a return, it's a just a cool (and very SWPL) way to shop.

Finally, the decimalization argument assumes that there should be profit in trading small cap stocks. Why? If a small cap does well and becomes a medium or large cap, then the far sighted investor should be rewarded for that, but why is there some God given right to make money off the flow? I think the crash of 2008 is still too fresh in people's minds for "liquidity" to seem like a worthwhile end in and of itself. Liquidity is never there when you need it most.

Deposit insurance in Cyprus

It looks like it is still undecided whether or not insured deposits in Cypriot banks will have to take a haircut before the ECB writes a check to Cyprus. Matt Yglesias gets both the financial mechanics and the politics complete wrong though. He says:

“Bank creditors,” as it happens, is a class of people that includes bank depositors. Everything about the rhetoric of banking is designed to obscure this. You deposit money in your bank account and you can go online 24 hours a day and check how much money is in there. But what you’ve really done is loaned the money to the bank, and the bank has promised that it’ll repay your loan. If the bank takes the money it’s been lent and squanders it on bad investments, then you’re going to be in need of a bailout if you want to get your money back. When the FDIC guarantees your bank deposit, it is essentially saying it will bail you out if your bank fails.

This is false. Banks do not lend out deposits, they create loans out of thin air, leveraging up their capital base. Equity holders, and those who have bought commercial paper in the bank are creditors. Depositors are not. FDIC insurance is a partial recognition of this reality, and unlimited FDIC insurance would go a long way to making the financial industry more sane. It may also kill the money market fund, which is a feature, not a bug.

A modest amount of deposit insurance is a socially useful way to let regular people have secure bank accounts without becoming experts in bank supervision. But the willy-nilly extension of the principle—insuring all depositors up to any amount—leaves banks overindebted and underdisciplined.

No. Poor capital controls, securitization, and an unwillingness support an economy through fiscal expansion is what leaves banks overindebted and underdisciplined.

I'm sure the EU bail out plan came with all manner of austerity rules that Cyrpus didn't like, so they included the insured depositor haircut as a poison pill to scuttle the whole thing and renegotiate from a position of strength.

A fiat currency is an extension of sovereign power, and the Euro has established the currency without the sovereignity. Germany and the ECB are walking a tightrope now, using the pain they can inflict as currency issuers to exert power of other European countries. Those countries can exert their sovereign power by opting out of the whole arrangement, so the pain cannot be too deep, but this is the essential dynamic at play.

And even if Cyprus did opt out, what's its next step? As Yglesias notes, it's a very small country with about 1M people. There is a reason it is an offshore haven for Russian money.

Long Live King Mob

Bruce Shneier has a great piece on the court of public opinion. He says:

It’s time we recognize the court of public opinion for what it is — an alternative crowd-enabled system of justice. We need to start discussing its merits and flaws; we need to understand when it results in justice, and how it can be manipulated by the powerful. We also need to have a frank conversation about the failings of the traditional justice scheme, and why people are motivated to take their grievances to the public. Despite 24-hour PR firms and incident-response plans, this is a court where corporations and governments are at an inherent disadvantage. And because the weak will continue to run ahead of the powerful, those in power will prefer to use the more traditional mechanisms of government: police, courts, and laws.

There is nothing new about the mob, but when you look at the thicket of academics, journalists, non-Governmental activists, etc. it's unclear why Shneier says both corporations and governments are at an inherent disadvantage. It may simply be more accurate to notice that those who get good PR are strong, and those who do not aren't.