When Apple & Facebook Plotted Finance’s Downfall

Apple was unhappy. Despite giving the world a slew of droolable products and doing its bit to improve quality of human life, there seemed to a growing chorus of voices against the technology industry. Stung by what it thought were unfair allegations, Apple came to believe that this wave of vilification was perpetrated by the Finance industry.

After years of being castigated publicly, Finance had fallen in the eyes of the world. Apple thought that in a bid to redeem its deteriorating image, Finance was inappropriately employing tools of new-age technology – its own products, Facebook, Twitter – to spread the Word. Something had to be done before matters got out of hand.

Apple had nearly $100 billion in cash in its bank. On desultory evening walks, it frequently scratched its half-bitten head for avenues to put this money to work. During one such errand, Apple bumped into Facebook. After hastily exchanging pleasantries, an evidently excited Facebook filled Apple in on its upcoming share offering. Would Apple be interested?

A plan took shape in Apple‘s smart head. It seemed the perfect idea. So designed that all parties involved would walk away with a smile. And, Finance would be dealt a striking blow. As Finance was using Technology to spread its word, Apple decided to employ complex Finance to exact revenge. It felt that the best strike against Finance would be to employ speculation for immediate gains, at the expense of folks who took the opposite side in the proposition. Finance would then be blamed.

Apple suggested that it would be interested in taking Facebook‘s entire share issue on offer. Facebook gloated but it didn’t appear to express much gratitude.

Facebook was looking to raise $10 billion. Apple would spend $10 billion acquiring this stake, a fraction of its $100 billion cash hoard. Things seemed simple so far. But motivated by considerations of vengeance, it decided to unleash complex instruments of Finance. Apple thought of Exchangeable Bonds*.

* Exchangeable Bonds are debt instruments that pay a coupon/interest, and give bondholders the option of converting the bonds into shares of a company nominated by the issuer. Apple, in this case, would be the issuer.

Apple would then make an offering of Exchangeable Bonds for $14 billion. Further, it would offer holders the right to convert their Exchangeable Bond into shares of the hot Facebook. Facebook‘s happiness grew some more on hearing this. Apple investing in Facebook would further fuel euphoria. Besotted by the prospect of its IPO, Facebook did not pause to appreciate Apple’s ingenuity in this innocuous offer. For the Exchangeable bondholders, this would be an indirect way of getting their hands on Facebook‘s shares, which would otherwise be difficult to obtain given the euphoria. Moreover, Apple would pay them (interest payment) to have the right of owning Facebook shares!

Apple felt this would be a coup. Scores of eager beavers wanted a piece of Facebook‘s IPO. Euphoria was so high that no price was deemed too high for Facebook’s shares. The shares would sky-rocket, when they began trading. As shares soared, Apple would let its exchangeable bondholders have their Facebook shares. Meanwhile, it would have discovered a way of making $4 billion without investing a dime ($10 billion spent on Facebook, offset by $14 billion received from its Exchangeable Bond). The money made could be fuelled to creating new products that would sell on (more) euphoria.

To execute these transactions, they would engage every known investment banking company on the planet. Always warm to the prospect of making doubloons, no investment bank would spurn their proposal.

Apple would be happy. Facebook would be happier, and Apple’s shareholders would be the happiest. An alluring prospect, indeed.

The strategy played out as planned. To a point.

…then everything began going awry.

The numerous Likers on Facebook grew tired and spent less and less time on it. Its shares tanked.

Apple’s ingenious transaction was predicated on Facebook‘s shares rising in value. When the share price fell, Apple was in a hole. Its $10 billion investment in Facebook‘s shares went underwater; and it had to pay interest on its Exchangeable Bond plus the $14 billion principal when it fell due.

Apple had orchestrated a euphoric strike on Finance but was promptly consumed by it. As revenge overcame reason, Apple failed to consider the consequences if things went wrong. Finance provided a means of laying off this risk, but in an atmosphere of euphoria, prudence died a quiet death.

The world, once again, pilloried Finance as the Great Evil. Anti-Finance voices added adherents and decibels. The same voices chorused against Facebook and Apple. The latter were blamed for fanning hype and euphoria, leading to widespread distress.

In the Great Battle of Technology and Finance, there was no winner.

Meanwhile, the central protagonists in the drama of euphoria, who were now railing against the above ills, never paused to point a finger at themselves.


How To Create A Financial Crisis…By Tapping The iPad

In the past century, affluence increased greatly, eager parents could send their future Newtons to big-name schools, which tried furthering education. Schools did a commendable job of schooling folks in tailoring individual actions to suit immediate self-interests but did not teach the art of contemplating the consequences of collective individual efforts. We began believing in the limitless powers of our knowledge. Soon Hubris came knocking and Prudence made a quiet exit.

Not content with building bridges and railroads, man extended ingenuity to other areas. Financial instruments were one such serendipitous invention. Real assets – land, gold, metals – were gradually superseded by paper assets. The benefits of this transition, while real, gradually fostered excesses which began ending disastrously. Attempts at plugging holes only led to creation of new ones. Nobody had/(s) solutions but that does not dissuade us from creating the illusion of finding one.

…and so it is fashionable today to vilify finance as the root cause of our woes. Given this, it is our humble duty to do our bit in furthering this notion. What better way to make a case than engender a crisis?

Yours truly offers a prospect that carries a high probability of culminating in a disaster of gargantuan proportions.

Since gadgets have come to be considered yardsticks of coolness today, we begin with Apple’s battery of products. The launch of the latest iPad was a widely watched event. Even as the price of the latest gizmo was announced, prices of earlier versions of the iPad dropped.

One of the near maxims in the technology world is that a launch of a newer version causes prices of older versions to drop, sometimes precipitously and permanently. The first step would involve creating instruments that derived values from the prices of various versions of the iPad. Once such derivative instruments come into existence, one would buy the instrument that mirrors the latest product (we’ll refer to the derivative instrument as IPD 3, for simplicity) and simultaneously sell the instrument that mirrors the older versions (IPD X).

Crowds, apart from mongrels, are among man’s best friends and should be tapped appropriately. Generally, anything new in the technology world evokes frenzied interest. As flashing the latest gadget seems to have a direct bearing on one’s societal and social media standing, demand for iPad3 would be immense; accompanied by a concomitant decline in demand for older versions. Prices of IPD 3 would increase, while IPD X would fall. The above suggested trade would yield juicy, almost-certain gains. Near risk-free arbitrage.

Fools do in the end what the wise do in the beginning. Once the earliest adopters of this trade make out with handsome gains, the crowd would, as they always do, latch on to the operation. Soon demand for IPD 3, the paper product, would outweigh demand for iPad3, the real product, leading to divergence in prices of the real and paper instruments. The seeds of disaster would begin to sprout…

Demand would then increase to a point where frenzied people would find it difficult to get in on the trade. The concept could then be extended to other competitors. Blackberry and Samsung, for instance. Keen technology watchers would have, no doubt, followed Blackberry’s recent tale of woe with alacrity. Instruments similar to IPD 3 that mirror prices of Blackberry’s slew of products would be created and pumped into the system to satiate demand. Smart folks would, for instance, buy Apple’s paper derivative instruments and simultaneously sell Blackberry’s.

We could utilise another fashion of the present day. Social media. Twitter and Facebook would be helpful in creating Like-able pages and spreading the word. Crowds would be useful here too. As most of us revel in indulging in you-lick-my-back-I-lick-yours activity in the social networking world, the above idea could go viral, till a great number of people joined the juggernaut. Gradually, so many would be dabbling in the trade that nobody would remember the original idea or the mode of execution.

Just to ensure that the crisis would be one of gargantuan proportions, we could introduce another instrument suggested by yours truly earlier. Fortune Default Swap: Hedge Your Misfortunes Away, that is designed to safeguard against attacks of misfortune.

Once enough people line up on one side of a boat, not much is needed to tip the boat over.

Crowds would serve as catalysts that would trigger the disaster. Prices of the real and paper instruments would get so far out of whack that a group of smart early bunnies would look to cash out. All at once. These would be the original boat rockers. Once enough folks rushed for the exit, all at once, the process of crisis creation would be complete. By then, the above instruments would have become so big that they would qualify for too-big-to-fail.

At this point, governments would get involved and orchestrate a bailout to save the crowds, so they could indulge in similar activities in the future.

Finance would be vilified.

…and the crowds would live (un)happily ever after.

The Wisdom of Borrowed Wisdom

A pie chart depicting Original Ideas and a multitude of its variants (a.k.a: copycats, plagiarism, borrowed wisdom) would predominantly show one colour, with a tiny slice marked ‘Originals’.

Yes, Adams (and Eves, equally, of course) have evolved from make-shift undergarment adornments to sophisticated forms of camouflaging reproductive essentials. Yes, Einstein broke new ground – and many hearts, particularly, the long-dead Newton’s – with his Relativity Theory. Yes, the Wright brothers gave bored humans an interesting pastime of craning their disobedient necks up to the skies. Yes, my hat doffs itself to the fellow(s) who invented wheels. And the lamp. And the telephone. And corruption. And…

The writer in me often experiences epiphanies and the associated bursts of delusional happiness triggered by the serendipitous discovery of an ‘original’ thought. It is an exhilarating feeling…that lasts till realization dawns that the original thought is a concoction-of-a-choice-mix-of-interesting ideas, which, in turn, are concoctions-of-a-choice-mix-of-interesting ideas; originally developed by lethargic human beings experimenting with novel ways of befriending weekends. The illuminating discovery of one’s ignorance is a profoundly humbling experience for the discoverer.

The paucity of original ideas is the norm rather than the exception. A patient search through history almost always culminates in a heart-breaking discovery. That most seemingly ‘original’ things had already been discovered by a forgotten someone in some forgotten century. Particularly in the BC era, one may learn that the original discoverers lacked the means to tap the ever-ready-to-please-and-be-pleased media (which were sadly non-existent), or, were generally inept at advertising/propaganda, or, were busy procreating in an effort to save humanity from the devil of extinction, or, plainly, couldn’t care less.

Newton and Leibniz were locked in a long war over ownership of Calculus. Before reluctantly foraying into the World of Dangerous Symbols, I preferred focusing on the battle between the heavyweight math jocks. Apart from taking apple hits to his intelligent head, Newton was a top salesman, a master at the art of propaganda and Machiavellian politics. (But he still lost money speculating in the Tulip mania, giving birth to the adage: You did a Newton. But, I digress).

Centuries have passed since the invention of Calculus. And the majority of successive generations of students have, at various points and with varying intensity, detested Newton for his ‘original’ idea. Of what use is an original idea when it only manages to leave mentally damaging effects on a large section of humanity? (Yes, there are calculus lovers. But they inhabit the tiny slice of a pie depicting lovers and non-lovers). It is safe to posit that the sum of benefits derived by humanity from original ideas have not justified the labours of the inventor(s). At best, the return has been negligible, with benefits accruing to a small set of humanity; and at worst, it has been collectively deflating.

Can you imagine a scenario where a group is forced to discuss truly original ideas every single time they meet? Borrowed wisdom serves multiple purposes. Apart from freeing up vital brain-time to indulge in idle endeavours, it confers on the ‘discoverer’, an appearance of rare intellectual endowments. Plagiarism/borrowed wisdom greatly aids social interaction by enabling adherents to tout their intellectual wares in a refined manner. This is particularly pleasing to a large section of humanity that delights in assuming credit for ideas painstakingly discovered after a few quick Google Searches, auto-corrected for typos. Of course, they accept praises with equanimity and an admirable sense of monkish detachment.

Borrowed wisdom often sets off a self-perpetuating cycle that ends with the Original Plagiariser. The idea, subjected to several creative iterations, arrives at the Original Plagiariser in an unrecognisable form. This serves to elevate the stature of the Penultimate Messenger in the eyes of the Original Plagiariser. The process continues till a critical mass is reached when the group grows bored at the collective level of originality.

Well, the innovative plagiarists are quick to remind me that the very act of re-bottling old wine is itself an ‘original’. Philosophical, indeed. Admittedly, many in the plagiarists’ camp are truly ignorant folk without an inkling of the existence of vast amounts of findings in the past. And ignorant folk cannot be accused of plagiarism on moral grounds. Ignorance and its sibling – delusion – provide some unforgettable moments of amusement.

The pursuit of a path-breaking idea, with its massive investments of time, mind and papers of value; for an uncertain return and a likely position in the annals of the Hated and Ignored, just does not seem appealing to me. Borrowed wisdom, on the other hand, is a very lucrative proposition, flush with monetary and non-monetary payoffs. So whenever I feel the urge to dream up something original, a quick rehash of the past and (dubious) mental accounting of the costs and benefits, lead me to seek refuge in the large slice of the Originals and Non-originals Pie.

PS: I honestly disclose that I have no idea if the theme behind the above is an original or a case of repackaged wisdom. I’d be delighted if it’s the former. And in case it’s the latter, I hope the post succeeds in conveying an appearance of originality.