Customers who refused to send copies of their personal tax returns to American Express have had their accounts closed with prejudice.  They lose any reward points they may have accumulated, are required to immediately pay off the balance of any revolving credit, and have a negative report sent to the credit rating agencies, which results in a drop in their credit score.  If they fail to immediately pay off the revolving credit in full, they are sent to collections and face additional penalties.

“Do You Know Me?”

In many cases, these demands have been sent to cardmembers of more than 20 years, who have never missed a payment, or carried excessive balances.  These are not delinquent cardholders.  They are ordinary people with accounts in good standing who were simply customers of the wrong company.

For years Amex held out that it was not a bank, and so it was not subject to the same regulation as ordinary banks.  This allowed them to offer financial services (including credit cards and investment products) which would not ordinarily be possible at a bank, and without the unpleasant government oversight.  However, when the banks were being bailed out, Amex changed their tune and applied to become a bank, in order to get bailout money.

It’s pretty reasonable for Amex to want to reduce their risks.

But it is also reasonable for consumers to want to reduce their own risks.  And choosing a vendor who may suddenly make unreasonable demands under threat is a risk many people may not want to take.

You have a choice of what company to use for credit services.  Choose wisely.  Choose someone else.

The 2000 film Boiler Room depicts the seedy world of the “pump-and-dump” scam.  In it, a broker purchases a large block of public stock in a shell (i.e. empty) company.  The firm then calls potential clients to pitch them the same stock.  This drives up (“pumps”) the price, making it appear to be a runaway stock, thus attracting more buyers and driving the price higher.

When the price is high enough, the broker “dumps” their own shares at a huge profit and walks away.  The result is that the buyers are left holding stock in a worthless, basically non-existent company, which promptly falls back to zero, wiping out the investors.

Which brings us to Silicon Valley.  Over the past decade or so, Silicon Valley has morphed from a region that was the builder of great companies (Apple, HP, Intuit, Cisco, Oracle, etc), into perhaps the greatest generator of “pump and dump” stocks.

Many people who live in Silicon Valley have complained about the changes that have taken place over the past decade.  Venture Capitalists still like to claim that their primary interest is building great companies. Many of  Silicon Valley’s founding VCs (Art Rock, Tom Perkins, etc) used to believe that if they built great companies, the money would follow.  So they focused on building great companies.

But now it s

eems the VC community is more interested in pumping up their companies, getting “an exit” (i.e. dumping), and moving on.  Today, if they happen to buil

d a great company along the way, that’s terrific.  But it is far from the primary motivation.

Any entrepreneur can tell you about the emphasis VCs place on having a solid “exit strategy.”  But while VCs will sometimes ask about a “business model” how many ask about the company’s “business strategy?”  (Answer: None.)  And no, a business model is not a business strategy, any more than an exit model is an exit strategy.  The model is just the form it will take, such as “selling tickets”, while the strategy is how you are going to go about doing it successfully (e.g. “door-to-door with a fleet of hourly workers familiar with the people who live in the neighborhood, hired from local churches.”)

And the entrepreneurs aren’t much better.  Although many entrepreneurs are still driven by a desire to see their products come to market, the reality is that, faced with a potential multi-million dollar lottery win, most entrepreneurs will abandon the dream in a heartbeat.

I have a little more sympathy for the entrepreneurs as they often don’t have much money, so the temptation has got to be big.  By contrast, a successful VC typically has a much larger personal net worth, and has made a decision to pursue this business model.  Of course, their decision must recognize the difficulty of raising follow-on funds if their prior fund shows sub-standard results.  So the focus on financial results is understandable.

But the net result is an emphasis in Silicon Valley that has moved from building great companies, to pumping up new companies or technologies just long enough to gather a large user base, show a potential for greatness (but not actual greatness), then dumping the technology or company on the highest paying buyers they can find, regardless of long-term value.

And that’s a shame.  Because it makes a few people very wealthy, but at the expense of the system that allowed them to get there.  And in the end, is there any moral difference between them and the seedy brokers in Boiler Room?

]]> http://www.economicsforone.com/blog/2009/04/21/high-tech-boiler-room/feed/ 0 http://www.economicsforone.com/blog/2009/03/11/generation-x-gets-a-double-whammy/ http://www.economicsforone.com/blog/2009/03/11/generation-x-gets-a-double-whammy/#comments Wed, 11 Mar 2009 19:52:20 +0000 rick http://www.economicsforone.com/blog/?p=94 Sometimes the timing of recessions in your life matters.  If they occur at the end of your career, you should have enough cushion to ride things out.  If they are early enough, you can reduce your expenditures, move in with your parents or friends, and seek low-paying jobs to hold you over.

But what happens when you get hit with two recessions back-to-back when you are starting a family, just buying your first house, and just beginning to build a career?  You can only reduce expenses so much, especially with kids.  And you don’t have much cushion.

Here’s an interesting little bit about the effect of the current and past recession on Generation X (born 1961 – 1981).

www.msnbc.msn.com/id/29497408/