<nettime> Gamblers in the casino capitalism

[Felix Stalder <stalder@fis.utoronto.ca>]

[[From an email exchange between David Mandl, Dough Henwood, Ted Byfield,
David Hudson and myself in preparation of the Tulipomania conference
<http://www.balie.nl/tulipomania/>. Felix]]


The following is an excerpt from Herb Greenberg's column on TheStreet.com
yesterday. I've seen several letters like this on that site alone in the
past few days. Not to make light of this poor guy's suffering, but I was
wondering when we'd start seeing stories like this. I'm sure there are
many more. Sad. 

-----------------------------------------

Which brings us to some guy named Martin, who posted: "I'm writing with a
heavy heart and tears in my eyes. I have worked hard all of my life,
always trying to do the right thing for my family, friends and the world
in general. I have never taken advantage of another person in any way. I
have scrimped and saved over the years as I did not have the luxury of a
company pension or retirement plan. When I became aware of CYBR and the
EHC, I did voluminous amounts of research and only after I was totally
convinced, I started buying. I admit that I probably got caught up in all
of the good repartee being bantered about the boards and violated some of
my own basic rules of investing, but I really believed and in fact, still
do. 

"I have literally lost everything I have worked for my entire lifetime. A
woman whose husband bought into CYBR on my recommendation called me this
morning in tears as she thinks her husband is going to kill himself, as he
did what I have done. We are both 62 years old and cannot recover from
this. I called their son and told him to get over there. This is one of
the most decent human beings you could ever hope to know. His life is
ruined now. They are both sick and have less chance than I do of
recovering from this. ... 

"I did make a giant mistake by buying on margin. I have had to liquidate
shares several times for margin calls and thought that the nightmare was
finally over. Then this week happened. I am now so far in the hole that
even if I liquidate totally, I still owe! Now that's incredible and shows
the dangers of margin. I have until tomorrow and I don't know what to do,
other than hope for a miracle." 


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>The following is an excerpt from Herb Greenberg's column on 
>TheStreet.com yesterday. I've seen several letters like this on that
>site alone in the past few days. Not to make light of this poor guy's
>suffering, but I was wondering when we'd start seeing stories like 
>this. I'm sure there are many more. Sad.

It is sad, but you've got to wonder what people were thinking when they
bought these turkeys. Well one thing they were thinking is: 30% annual
returns! The Next Microsoft! Sure there were, are, and always will be a
lot of carnival barkers hawking crappy stocks, but the buyers are often
not wholly innocent, except maybe in retrospect. 

My friend Gregg Wirth, who used to cover stock scams for TheStreet.com,
interviewed lots of people who fell for pump & dump schemes. He asked them
why they bought the financial equivalent of vaporware. They repeatedly
said, "Because the broker said they were going to triple!" Sorry to be so
hard-hearted, but at least some people should know better. 


	------][------


Totally agree, Doug, and I think most people on this list are aware of my
"fuck 'em all" attitude to New Economy greedbags. I'd be lying if I said I
wasn't looking forward to this Big Correction. And I agree that lots of
people who were drooling over 300%-returns-at-any-cost will now try to
rewrite history and portray themselves as wittle innocents. 

But, I don't know, I think there are SOME number of people who were
basically trying to jump on the bandwagon and not be left behind, just
thinking that hunting for the Big Hot Stock is what you need to do to make
money nowadays (true, to a certain degree--a bank CD ain't gonna cut it
anymore). The problem is figuring out who they were. Not easy. 

I'll tell you one thing: I have zero tolerance for people who sue their
brokers, claiming that they hadn't been told about the risks. There've
been a bunch of these, and I bet there'll be many more now. I'm sure most
of these people are full of shit, and I have about as much sympathy for
them as I have for the people who sue lumber yards for not warning them
not to eat sawdust. 

	------][------


>But, I don't know, I think there are SOME number of people who were
>basically trying to jump on the bandwagon and not be left behind, just
>thinking that hunting for the Big Hot Stock is what you need to do to
>make money nowadays (true, to a certain degree--a bank CD ain't gonna
>cut it anymore).

Here's where I reveal my bleeding heart a bit and say, yes, I sympathize
with *some* of these people. My father, in the US, for example, is
convinced inflation will be back and that mere savings won't be able to
keep up. Being 'left behind' wouldn't be just, you know, embarrassing --
some are genuinely worried about going under while the economy roars off
without them. 

More broadly, people are simply convinced -- in the same way that they're
convinced that the streets are more and more dangerous every year or that
there's no such thinng as a nuclear threat anymore -- that this is the new
way of the world, that investing is "smart" and what could be smarter than
investing in stocks that promise the greatest returns? 

Here in Germany, one out of five folks are playing the markets all of a
sudden. Risk has never been so attractive to the Germans. One week, Die
Woche is warning of the dangers of 'Glückspiel Börse' (the stock market
gamble) on its cover, but the next, Stern puts a "How to Play the Markets" 
package on its cover. 

*Most* people are aware of the risks now that we've had our little
'corrections,' but before this spring, serious-looking guys in suits with
serious-sounding degrees and titles were telling them that there were no
signs on the horizon that this wouldn't go on indefinitely. 


	------][------

The question is, what will be the fallout of these sob-stories?

While I'm not sure if suing your broker is it hitting the right target,
it's clear that there were significant interests in the hype, and that,
like in any pyramid scheme, the ones who came late and with limited
resources are the ones who get hurt the most. Keeping with the pyramid
scheme metaphor, who were to ones who got in big and early? They must have
known the bubble character of all of this, or are the markets really run
by 23 years olds who cannot remember what they had for lunch yesterday? 


	------][------


> 23 years olds who cannot remember what they had for lunch yesterday?

as opposed to us 35-years-olds who can't remember what we had for lunch
yesterday? 

but more to the point, i disagree. that's not to say i'm sym- pathetic to
people who got burned: i'm no more sympathetic to them than they were to
others who didn't pile on the money- grubbing rollercoaster. you can look
at it as a matter of personal greed, but it was structural; that's why
things like rent are going through the roof, hurting everyone. 

but since i sympathize with the people who never lost because --very
likely--they didn't have the resources or knowhow to get involved, i might
as well sympathize with the suckers who got burned. besides, that way i
can save all my venom for the rats who won big by ripping off the unwashed
masses whichever way the markets went. 

these freshly minted losers may prove to be a political force not to be
trifled with. not because they understand what hap- pened, but because
they'll be legion--and pissed. 


	------][------


> Keeping with the pyramid
> scheme metaphor, who were to ones who got in big and early? They must have
> known the bubble character of all of this, or are the markets really run by
> 23 years olds who cannot remember what they had for lunch yesterday?

It's always been very clear who the winners were (by design):

- The investment banks underwriting the IPOs: They made billions no
  matter what, both in underwriting fees and on the shares they
  received (dirt cheap), which they almost always flipped right after
  IPO day for massive profits.  They were much too smart to play the
  game at all.  Their money was guaranteed.

- The principals of the startups: The companies were always brought
  public at artificially low prices (at the companies' expense, if
  that matters to you), guaranteeing the principals huge gains
  immediately.  Many of them sold stock as soon as as they could or
  used sophisticated hedging strategies to lock in their gains.  Those
  who didn't have lost their money too.  (They're not as smart as the
  bankers.)

Other people might have made money here and there, but basically anyone
who bought in on one of these hot IPOs (TheStreet.com, TheGlobe.com,
iVillage.com, drkoop.com, etc., etc.) on IPO day lost it all. 

	------][------


>It's always been very clear who the winners were (by design):
>
>- The investment banks underwriting the IPOs: They made billions no
>  matter what, both in underwriting fees and on the shares they
>  received (dirt cheap), which they almost always flipped right after
>  IPO day for massive profits.  They were much too smart to play the
>  game at all.  Their money was guaranteed.

I'm an ignorant in these matters, but isn't there something like a
hold-period in which people who get preferred stock (or whatever the
technical terms is for those who can buy it before it goes public) cannot
sell it, exactly to prevent this kind of speculative behaviour? 



	------][------


Ah, yes and no: Yes for the principals of the company, but no for the
brokerage firms. Think about it: When a company goes public, brokerage
firms are allocated a bunch of shares FOR THE EXPRESS PURPOSE OF SELLING
THEM. They're the ones who actually peddle the stock to the public. They
MAY also keep some for themselves if they think it's a good investment. 
It'd be interesting to see what these firms thought these companies were
REALLY worth, based on how much of their own money they risked on the
stock. 

And getting back to the holding-period question: That's why fancy hedging
strategies were invented for principals to use. These people couldn't
legally sell the stock, but they could use option "collars" that locked in
the gains for when they did eventually sell. There was a very good paper
floating around the net last year with statistics on how popular these
strategies were (i.e., how little confidence the principals had!). I work
with equity derivatives quants who know the ins and outs of this stuff
pretty well. 


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