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Investing

All Ponzi’s disciples

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Madoff story continues to occupy the news these days (e.g., this one from NYTimes). Yesterday, Satyam, the No. 4 Indian IT outsourcer, broke the news with giant accounting scandal (BBC news, wiki: Satyam).

But the story does not end here. In my mind, there are many other ponzi schemes in our lives, and sometimes people just ignore it for various reasons (don’t want to face reality; irrational exuberance etc).

Big ones
Dot com technology bubble: new stock holder (trader) bail out previous stock holder (trader);

Housing bubble: new home owner (speculator) bought high from previous home owner (speculator).


Note in both cases the wall street played a central role, pumping hot IPOs in the dot com era, and pumping mortgage backed securities (MBS) all over the world in housing bubble. The only difference is second time the MBS (along with CDO and CDS) brought down the house (notably, Bear Stearn, Fannie and Freddie, Lehman Brothers, and AIG; Citi Group, Merrill Lynch, Goldman, Morgan Stanley etc. also got hurt).

Potential
Social security and Medicare: the new contributors (working people you and me) pay monthly for the elder people, there is a forecast that social security and medicare will run out of money by 2017/18 if the current payout and pay-in schedule keeps in the same.

Small ones: Focus Media?
This one is more subtle. Focus Media (Nasdaq: FMCN) was doing very well in last few years since its IPO, in terms of earning and stock price. Then it hit a wall last March when its wireless subsidiary “spam messages” story broke. And more recently Sina (Nasdaq: SINA) announced the acquisition of Focus Media core media assets. But how did FMCN do well since its IPO? Well, one way to do it is acquisitions, a lot of acquisitions. Another more subtle tactic in the acquistions, is FMCN sold ad. to distributors at high prices, then bought all those distributors at higher price? One may ask how can they fund this? Well, we know companies have mainly two ways to fund its expansion: equities (issuing stocks) and borrow from banks (debt). FMCN did secondary offering twice after its IPO (if my memory is correct), at pumped up share price. While its CEO and founder selling this holdings left and right, ordinary investors were left holding the bags. Sounds like a ponzi scheme?

Of course now the bag is left to the Sina shareholders. Of course the management of Sina must think there are other naive investors are willing to hold that bag as long as the management tells a compelling integrated media/ad. story.

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