As IF Times

link Why Groupon Is Poised For Collapse.

Lurking underneath the hype of crazy valuations for ‘social networking’ companies recently are some sobering realities of their business models.  Talk abounds now of a $100 billion dollar valuation for Facebook for example.  Ahem.  Groupon has seen a meteoric rise from only 3 years ago to achieve some real eye popping valuations in advance of their much anticipated IPO.   But what are people buying?  This article gives a revealing look at the mechanics of the Groupon model.

For those not steeped in finance, it’s essentially a mechanism to give short term loans to small businesses, which, under the right terms, is a good thing.  It’s somewhat eerie to consider that the financing model looks strikingly similar to the whole housing mortgage disaster which crippled the American economy just recently.  In both cases, money was essentially lent on favorable terms in advance to people on the financial fringe on the expectation that the carrying cost would be offset by rising house prices or by increased sales volumes in the case of the Groupon model.  Now that I think about it, that’s the same model used to sell Government treasury bonds.  Hmm.

This all works as long as things go as expected.  What are the odds of that not happening?  I’m sure the flinty eyed MBA’s and actuaries at the big investment firms have done their risk calculations to arrive at a resultant valuation for the IPO.  After all, to float a $100 billion market cap company, you’d have to convince a lot of smart people, not just the rubes buying 100 shares for their grandkids.  The truth is, many investments are good investments only because everyone else thinks they are, not neccesarily because of fundamental reasons.  Stock investing is prone to the dictates of fad just like accesories in the fashion world.  Compounding that is the reality that many investment professionals drink from the same cup as far as market wisdom; the Bernie Madoff scam proved that just recently.

Actually, I think the Groupon founders are geniuses for creating such a finance model since it obviously fulfills a need in the marketplace.  The reality is that no one gets something for nothing in business.  Consumers may get goods at a discount using their services, but definitely not to get their stock.  If it were me, I’d wait for the discount.

link UPDATE 1-GM to acquire AmeriCredit for $3.5 bln | Reuters.

Unless you happen to be paying attention, this news item would be just another of those boring finance stories.  If you whittle the story down to the basic elements, then an amusing scenario becomes more obvious. 

As some may recall, not too long ago, General Motors wound up in a bit of a financial pickle.  The short story is, they were not selling enough cars at  prices that people were willing  to pay for their products.  Not that they didn’t make good products, it was just that for a similar amount of  money, many other manufacturers offered arguably better products.  General Motors was saddled with a legacy of costs that eventually overwhelmed the company.  Principally, the main culprits were the very generous pay and benefits packages given to working and retired employees.   You would often hear the joke that GM was more of an extended care and benefits company than an automobile company.

So along with large debt payments to bondholders, GM was unable to pay it’s bills with the income from car sales.  Luckily, the federal government  decided that the fate of GM was tied to the fate of many workers and therefore America.  They would be bailed out of their financial woes.  The amount of money involved was so big that only governments had the might to write the big cheque.  Ultimately with all of the restructuring, the government OWNS GM.  So now, GM is now Government Motors, or the people’s car company.  This solved a short term debt problem, but the company still had to sell cars. 

Since the economy overall is still not as robust as the administration would have you believe with unemployment still ratcheting upwards, people didn’t have the capacity to finance car purchases.  Ironically, many of the unemployed became that way because GM and Chrysler were forced to close down hundreds of car dealers throwing those people out of work.  Todays’ news is that GM will spend $3.5 billion dollars to buy a company involved in the financing of cars.   Not just anybody, but particularly people with ‘subprime’ credit.  Hmm, this sounds oddly familiar.  In case anyone noticed, the money used to purchase AmeriCredit is actually government money, or public money.  So in essence, the public is subsidizing other people to buy cars that they otherwise couldn’t afford with their own money.  I think in real life, that’s called a circle jerk.  Nevertheless, the UAW union at GM, also a major stakeholder post restructuring, have managed to keep their members employed albeit at the expense of everyone else.  Bernie Madoff in his ponzi schemes at least bilked the rich.  In this latest government scheme, the people who can least afford to pay are getting roped in.

This is but the first of these types of ingenious rescue schemes to see the light of day.  In scenarios throughout the country, the same dilemna will surface again as public pensions for teachers,postal workers, firemen, police etc have to be funded.  An agency will have to be established in order to offer financing to people who cannot otherwise afford teachers, fire or police protection: some means of allowing people to pay money regularly in order to recieve these services…hmm how to do that…if only there was a way…