I was with Sam over on his Go Big Always blog on what it takes to go big right up until he made Jimmy Carter the poster child of great execution.  Yes, Carter has built a lot of houses, but he sure didn’t accomplish much during his Presidency.  If you need a political figure, how about Gandhi or someone that really changed the world by executing?

Who should the Einstein of great execution be?  Demming?  Not a recognizable face.

Tough day in the markets today.  One of my favorites, Apple, is way off, along with almost everything else.  Why?  Because everything is so interconnected that when a potential disaster (evolving rapidly to being a real disaster) is big enough, it gets everyone’s attention.  Everyone starts figuring out what it might mean so they can get ahead of everyone else.  Before you know it, Apple’s earnings are revised downward without much comment from the company just because there is so much smoke that it looks like Rome is Burning.

The sick irony is Rome may very well be burning.  Everyone plays the same game.  Whether they feel the pain personally, they watch how others are reacting and decide they’d better take steps right now.  That rapidly spirals into everyone pulling in their horns while they wait to see if the pain reaches them.  Unfortunately, it virtually guarantees the pain will reach them.  First, by not buying, they insure sellers feel the pain.  Second, whatever assets we all have that make us feel flush enough to buy more than perhaps we should are being rapidly devalued.  In some cases we may regard the earlier value as inflated, perhaps in housing.  In others, perfectly good stocks still making as much money as they had the day before are dinged for fear of what might happen.

The group of bloggers I participate in, the Enterprise Irregulars, has been discussing whether they feel the impact of this “nuclear winter” economy yet.  The vast majority said no, many said best year yet, but everyone was universally worried about it and expected it would have an impact and 2009 would be a tough year.  Jason Calcanis is apparently predicting the nuclear winter will kill 50-80% of all startups, though he later asked the posts on this be taken down (thanks to Loic LeMeur for that inside and screen capture).

Welcome to the world of crowd hysteria and feedback loops.  Ain’t it wonderful?  Over the weekend I read a note by JJ Cramer (you have to pay for a subscription to see it, so I won’t link) where he was making the point that the time to punish those responsible has either passed or has yet to come.  Rather than punish them, the issue to focus on at the moment is survival. 

Unfortunately when a wounded animal is crashing through the forest, it is sometimes hard to think in those terms, but it sure seems like we are dealing with matters of survival.  I hope we can get it together to stem this negative spiral before it destroys so much wealth that it becomes impossible to avoid a massive depression. 

I wish I had more confidence we weren’t just playing political football and that our leaders had a clue.  It’s depressing to read Phil Windley speculate that Nancy Pelosi knew the vote wouldn’t pass, wanted it not to pass, and wanted it to be seen not to pass for political gain.  If true, and if others are playing this game, I’m all for clearing that slate at the earliest opportunity and getting some people in who care a little more about who suffers on the sidelines.  More realistically, we may be our own worst enemies if we’re telling Congress not to pass this bill without giving them anything better to work with.  It gets back to Cramer’s survival issue again.

The news is not all bad.  Mathew Ingram writes that while it was the biggest point drop in the Dow’s history, percentage-wise there have been much worse.  We lost 7% versus 23% in 1987, and we had gone up by 7% when the bailout was first announced.  I read that as there is still time to fix it.

That’s essentially the case the RIAA brought against Jammie Thomas.  Because she listed 24 copyrighted titles on a peer-to-peer network, and because the judge issued an order to the jury that they did not need any proof that anyone downloaded those titles, she lost her original trial to the tune of a $222,000 penalty.

Interestingly, the same Judge Davis who presided went back and reviewed the case again and has declared a mistrial.  As Wired points out, this means the RIAA has never yet won a case in its 5 year campaign.  Davis became uneasy about that directive to ignore whether the theft had occured, calling it a “manifest error of law.”

Was justice served?

On the one hand, clearly music has been stolen using these peer to peer networks.  There can be no doubt.  On the other hand, it feels to me an awful lot like what I said.  Jammie had the opportunity to steal, we know things were stolen, we have no specific proof she did steal (i.e. no proof anyone downloaded her titles), but in the original trial she was “convicted.”

I recognize this is a Civil and not a Criminal case, yet it still seems wrong under our system to convict on that basis.  The RIAA argues its impossible to tell with these systems how exactly the theft is going down, but that does not seem to me a reason to waive the rights of the defendant. 

My view of our system has always been that we adopted a fundamental principle that it is better for many guilty men to go free than it is to convict a single innocent.  The system is intentionally designed to overwhelmingly favor the defendant, even though it means many of the guilty go free.  That’s okay, because we’re a nation that favors individual rights.  The Home of the Free.

There are many areas of our legal system that have escaped this simple principle.  Patent litigation egregiously favors the plaintiff.  When I was involved with a recent Patent Troll case, I was told by our counsel that it would cost us $1M to get to the first court room appearance if we fought it.  I asked what it would cost the plaintiff and was told, “about $150K.”  There is an asymmetry for you!

Counsel went on to advise us that proving a patent was invalid, whether because it was overly broad or that there was prior art, was prohibitively expensive.  They estimated the defendant could spend upwards of $4 million on that task and still might not be successful.  Because of that, their counsel was that to fight a patent at all would generally require one to demonstrate that what they were doing did not infringe the patent in any way as it was drafted.  That’s nearly impossible too with the junk patents that are out there these days. 

So the trolls get paid.  There are public companies that make their business on nothing but this sort of practice.  It has gotten so lucrative that individuals once engaged in creating intellectual property are increasingly being lured into the business.  Nathan Myhrvold’s Intellectual Ventures owns 20,000 patents and has so far returned over a billion dollars to investors.

This sort of thing is much more damaging to innovation and IP rights than anything the RIAA is up to.

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If you agree with the sentiment here, be sure your representatives in Washington know that you DO NOT supoort the Enforcement of Intellectual Property Rights Act of 2008 (EIPRA).  That ridiculous piece of proposed legislation would force the DOJ to sue both criminally and civally against private individuals on behalf of the RIAA and others, and then give the proceeds to the RIAA and others.  In short, it makes the DOJ a pro bono lawyer paid for by you the taxpayer to act against you the taxpayer.  Ars Technica has more on this.

ReadWrite Web on the matter.

Mathew Ingram notes that the judge also implores Congress to reduce what he sees as egregious penalties.  He sees a $200K plus penalty as out of line with sharing just 24 titles.

Many are watching with horror as venerable financial institutions in our country collapse one by one due to the demise of the sub-prime lending industry.  But this is nothing new, though perhaps bigger more public names are being dragged down.  The financial world regularly flirts with this kind of disaster because they’re drawn like moths to the flame of using leverage to deliver increased returns.  It’s their business, but it’s a dangerous one.

When an industry makes its revenue collecting “Golden Crumbs” (I love that line from Bonfire of the Vanities), it takes extremely large transaction volume for the crumbs to amount to much.  The only way to achieve those volumes is through ridiculous amounts of leverage.  It starts with the financial firms needing the leverage before the spread on extremely low interest rates adds up to interesting revenue.  It moves on from there to extending leverage to allow customers to do more and larger transactions so the market can grow further.  Pretty soon the PhD quants have analyzed it, bought the appropriate derivatives with more leverage, and decided there is no way to lose, even the Nobel prize winners like Long Term Capital (which precipitated a crisis involving major bank bailouts in 1998).  Eventually these enterprises become indistinguishable from a garden variety Pyramid Scheme if enough capital is leveraged. 

“Dear Customer, if you’ll give us your banking information we’d like to deposit a large sum of money there that you may use to buy a valuable asset.”   Hmmm, I get something very similar from Nigeria that is outright fraud. 

People think it is incredibly reckless to buy stocks on the margin.  Yet, part of this crisis involved buying an asset with ridiculously more margin (right up to 100% margined zero money down).  Worse, it’s an asset you have to own if you want a roof over your head.   As we all remember from discussion of stock market margin, the margin compounds our losses.  It magnifies them, just as it magnified profit for the financial institutions.  If we could not afford to put much money down on a house (because we bought a ridiculously expensive house thinking you can’t lose on real estate in a time when the stock market has been fickle), how can we afford those losses?

So now we have a problem fixing it.  There are too many snared in the web to just make it go away any time soon without lots of casualties on both the customer and vendor side.  Wealth is being destroyed much faster than it was created.  It’s a non-linear system that can dish out results much worse than a zero sum game.  In a zero sum game, somebody gets to keep the wealth, it’s just a matter of who plays the game well enough.  In this game, the wealth simply evaporates.

Meanwhile, I like Fred Wilson’s “Leave Wall Street, Joins a Startup” post.