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November 24, 2003

Foolish Banking

Do you remember me? I was the wet blanket during the dot com boom. I was the one who was saying that The Motley Fool was adept at catching fools. I was the guy who was repeating the old quote that when shoeshine boys are giving out stock tips, it was time to get out of the market. I was the guy who got booed at Amazon because I wrote the following review of Secrets of the Street: The Dark Side of Making Money:

Fortunately I read this book before dot com fever took over the world, and although I have participated in buying into a few IPOs I've done so wisely thanks to Marcial. If more people understood what appears to be common sense on Wall Street, there would be fewer investors willing to call themselves Fools with pride.

In time, this book and others like it will become the lingua franca of a sobered investing public. These days it seems like only a sober few know. I'm glad I do.

So my new pal Rob tells me a story of a business that was grown to 200 million in revenues over a ten year period that some web company paid 500 million for. The buyer, some 24 year old kid, was made CEO of the company. He convinced bankers to front the entire 500 million. He sprinkled on some dot com fairy dust and flew around to the likes of Barry Diller and others in the movie industry and says, you better buy me out or I'm going to run you into the ground.

The movie companies didn't spit in his face, they spit into a time machine that held the gob in suspended animation for six months. Apparently, the bank wanted its money back in six months. (Now how did the movie companies find that out?). In that time, the brilliant 24 year old ran the business straight into the crapper, but not before paying himself a one million dollar bonus.

There is no moral to this story other than this. If you're not a highly skilled worker, you'd better work for a publicly traded company. That's the only way you know your boss's boss's boss isn't screwing you royally. The notable exceptions being Enron, Worldcom et al. I learned that moral a decade ago when the private company I worked for got bought and my hundreds of stock options turned out to be worth dozens of Happy Meals. What's making me raise my eyebrows on this, thanks to Rob's prodding, was what were the bankers thinking?

You see a lot of piss and vinegar gets thrown into the air about corrupt companies and all that yada that disappointed Marxists tell us. And as often as I get upset that managers of all sorts demonstrate their gross incompetence time after time, what really galls me is how it is that those yokel CEOs get the banks to pony up the dough? How do you get a half billion dollar loan when you're 24 years old?

Somebody is going to explain to me someday how I can work bankers, but for the moment they seem to be a distant and incomprehensible breed. But now that I know that they are subject to enthusiasm, I feel there's hope.

Posted by mbowen at November 24, 2003 10:12 AM

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It was all about money supply -- interest rates were so low that all the banks were awash in cash and needed a place to put it. They took a portion of it (FAR too much in retrospect) and threw it at a big basket of "growth" companies.

When the Fed jacked interest rates back up, it was like getting a margin call from a broker. The money dried up, and buh-bye boom!

We're still paying for the grossly inefficient allocation of resources during that time; we've just pushed the payments off futher with the latest rate cuts.

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