John Standerfer

In light of the recent incident on the Northwest international flight from Amsterdam to Detroit where the supsect tried to ignite some type of incendiary/explosive device, the TSA has reacted with even more restrictive security precautions.  Similar to the initial reaction to the Shoe Bomber and the scare of mixing liquids to create an explosion, the primary concern continues to be a person, our group of people bringing on board a device capable of generating enough energy to create a fire/explosion capable of crashing or disabling an aircraft in flight.

My concern is that at some point in the near future someone will try a similar attack using some variation of a laptop battery.   Under “normal” conditions, they can already be volatile (just search the web for exploding laptop batteries) and I can only imagine what someone with more advanced knowledge could do to create a modified one.  In addition, with it being the status quo for almost everyone on board to have a laptop, it leaves open the possibility of a coordinated plot that combines multiple batteries into one conflagration.

If this does come to pass and the TSA bans laptops as carry on luggage for flights, it will be the end of business travel as we know it.  Without the ability to work on the plane, in the airport, etc. the vast majority of business trips will no longer have enough value to offset the incredible time sink they are.  I know from personal experience that for a 1 night trip I spend more time in transit than in business meetings and for a 2 night trip, it’s about equal.  Those are numbers I can live with when I have my laptop on the plane and airport as I do some of my best work on the plane.  However, in the non-laptop scenario those numbers become untenable not only for myself but for many business travelers.  The idea of flying into a city for a meeting and them flying back no longer makes sense.

I really hope I’m wrong about this, because if I’m not, it’s only a matter of time before they ban anything with batteries (cell phones, nintendo’s, DVD players, etc.), thus making the average American passenger (and citizen) even more miserable when they travel by air.

At the Federal Reserve Bank of Atlanta’s conference on short selling, there was a fascinating paper presented by professor Nadia Massoud of York University. In it she provided compelling evidence that hedge funds actively short the shares of companies they loan money to directly before the announcement of the loan becomes public and directly before the loan covenants are violated and the terms are made more negative. What I found interesting is that their ability to short on this obviously inside information likely allows them to lend money to companies at a lower rate than a traditional bank as the profit they make from the shorting helps offset the fact that the default likelihood is higher than the rate reflects.

This means that they’re able to win business away from banks by offering a lower rate and then subsidize that rate by basically stealing money from individual investors by trading on the insider information. Based on the research in this paper, which included a robust sampling of hedge fund loans I think it’s extremely likely that the Galleon case is merely the tip of the iceberg.

I’ll be presenting at the Atlanta’s Federal Reserve Board conference on the costs and benefits of short selling next week.

S3 continues to grow and hire.