Cruising along at 30,000 feet, you peer out the window. Nothing to see here. Just limitless pale blue sky and the glare of the all-too-close sun hitting your eyes. The in-flight movie is silently playing out in front of you. You’d hoped to catch Iron Man in the theater, but the idea of paying $7 to see it in its edited-for-airlines glory isn’t as appealing.

There’s nothing free to do on airplanes anymore.

Even the peanuts and the soda come at a price. The ticket is more expensive, the flights are less frequent. Somehow, flying has become even less fun. For the more experienced travelers, whose miles are being voided as they spend the majority of their days sitting idly on a tarmac, this probably doesn’t seem possible. It is.

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But wait — there is good news. There is still one ounce of fun that hasn’t been drained from your flight. It’s still free, and even a slowing economy can’t ground it. You know it’s there. It’s been right in front of you the entire time. Just reach into the seat pocket and pull it out. Right behind the racially and gender-ambiguous cartoon safety instructions and right in front of the People magazine the previous passenger left behind.

It’s the SkyMall catalog, and it’s all yours for the rest of the flight.

196 pages filled with the latest in gadgets and gizmos. The products you assumed did not exist, but now can’t resist. Your tickets to a quasi-futuristic world await. A world where digital cameras come on key chains. Where movies are projected inside your sunglasses. Where watches wind themselves — in cherry oak cases with silent motors.

And everything has a sensor. There’s no need to ever use your hands again. This is the life you’ve imagined for yourself, and SkyMall will help you get there. While you’re crammed into your ergonomically incorrect seat, wishing you were anywhere else, SkyMall opens the door to an easier, luxurious, and better life.

In case you haven’t been on a domestic U.S. flight in the past two decades, SkyMall is a catalog that sells “innovative merchandise” manufactured by a consortium of producers. SkyMall prints 20 million catalogs per year that are annually seen by more than 620 million travelers. The products in the catalogs range from inventively practical to laughably unnecessary.

Back on the ground, the economy is still in a slump. As you furiously rip through your catalog, most Americans are going through a period of conservation and saving. Gas is expensive, food is expensive, and more and more people are unemployed. That’s no secret. We see the headlines every day.

So why are people still buying frivolous items? Many retail chains around the country are closing stores and cutting back staff, and some are even filing for bankruptcy. Yet somehow, SkyMall has gone through one of its most profitable years. Estimates put SkyMall’s 2007 revenue at over $100 million.

Maybe things aren’t as bad as they seem. Over the past month, gas prices have begun to come back to Earth. Demand is down, and consumer confidence is actually nudging its way up. Sure, gas is still expensive, but maybe consumers are just accepting that. Maybe they can afford $4 gas. If they can’t, how can they afford to buy snow cone makers from SkyMall?

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Airlines are in trouble. Fuel prices have destroyed profits, and tickets are more expensive than ever. On the ground, shipping rates have risen because of the high fuel costs. Yet SkyMall, a company whose target market consists almost entirely of airline passengers, and whose products are available only through delivery, is flourishing. Maybe consumers have more money to spend than we think.

Sure, a lot of people are cutting back on little expenses here and there. Starbucks (NASDAQ:SBUX) has been forced to close a number of its stores because people are learning to live without $4 lattes. But can they live without the Dough-Nu-Matic home doughnut maker ($129.99)? Or what about the Double Chocolate Fountain ($119.99)? You never know when a spontaneous wedding reception might erupt.

So what should we believe? Should we look at the consumer confidence index and infer that the economy is at an all-time low? Maybe we should look at SkyMall’s sales, which tell us that consumers still have plenty of disposable income to blow on unnecessary impulse items. After all, what do consumers know, anyway?

Most consumers are not economists, and the majority have absolutely no clue what is going to happen. So why do we care what they think? Instead of assessing how consumers feel about the economy, we should be looking at how they contribute to it. They’re still spending their money, no matter what the headlines say.

Historically speaking, consumers polled for confidence indexes are mostly misguided. In 1992, confidence numbers were about as low as they are now. But that was after we had pulled ourselves out of a recession and poised to enter a sustained period of growth. Consumers might not have seemed too confident when asked their opinions, but their feelings and emotions had little effect on the actual economy.

Speeding through the air at 500 miles per hour, the average consumer may not feel very confident about the economy. They may perceive the current situation to be as shaky as the ride, but SkyMall sales show that they do have pretty high self-confidence. They’re confident they can afford impulse purchases on an already expensive flight. Confident that $89.99 isn’t too much for a pen that can hold 1,000 MP3 songs.

And SkyMall’s consumers also show a life-affirming confidence in airlines themselves. SkyMall’s sales may come from impulse purchases, but customers have to put up with some delayed gratification, waiting to receive their orders. They may think that the economy is in a free fall, but they have faith they’ll touch down safely and be able to enjoy their new purchases in the future.

Now, that’s confidence.

Source: Confidence Game

Tonight, after nearly four months of competition and thousands of possible contestants, the winner of American Idol will be announced on live television. This year’s contest, seen by hundreds of millions of viewers who accounted for even more votes via phone calls and text messages, has been one of the most popular of the show’s successful seven-season run.

So after all that, America will choose between 17-year-old wide-eyed wunderkind David Archuleta and 25-year-old Kansas City rocker David Cook. While the chance to win the competition looms large for both contestants, both will undoubtedly enjoy lucrative careers.

Over the past seven seasons, American Idol contestants have posted as many as 71 singles on the Billboard Hot 100 chart. The show has produced successful recording artists, multiple Grammy winners, and even an Academy Award winner. There is no denying the overwhelming achievement of what some consider nothing more than a glorified karaoke contest.

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Since becoming one of the most successful reality television shows of all time and the flagship program of the Fox network, American Idol has established itself as a marketing monster and moneymaking machine. With lucrative sponsorships from companies like Coca-Cola and AT&T, along with millions of dollars pouring in from other miscellaneous sponsors, American Idol has made many people very rich.

One of the ways Idol has been able to generate viewership and buzz is through the songs the contestants are able to perform. Over the years, performances on the show have evolved from classic standby numbers your grandmother may even strain to recall to many of today’s chart-topping hits. Even the elusive Lennon-McCartney songbook was opened for this season’s show.

The success of the show has opened up a dual incentive and revenue stream between the show’s producers and the owners of the songs they sing. The simple reason for this is royalties. Each time a song is performed on American Idol, the show’s producers pay the owner of that song’s rights a royalty fee. This creates a mutually beneficial, symbiotic relationship between Idol and the songwriters and recording artists who lend their work to the show.

The concept of royalty fees is simple, while the application is quite complex. But for our uses, simply imagine already incredibly wealthy musicians and writers sitting back and collecting checks for seemingly doing nothing. On last night’s finale performance show, popular songs by artists such as U2, Elton John, and John Lennon were performed. These performers have (or had) an unimaginable amount of wealth and fame, and last night’s performances simply added to that. Not only that, but recordings of the Idol contestants performing the songs are then sold as downloads in the Apple iTunes music store. You can bet that Bono, Elton, and Yoko will be picking up checks for those sales, as well.

The relatively new relationship between American Idol and Apple has generated even more money in royalty fees and more exposure for the original artists. This season, popular performances of Leonard Cohen’s biblical ballad “Hallelujah” and Lee Greenwood’s patriotic anthem “Proud to Be an American” boosted the sales of the original recordings on iTunes, as well as millions of downloads of the Idol versions.

For doing nothing, Cohen and Greenwood collected handsome royalty checks thanks to the popularity of American Idol.

For many people, the concept of royalty fees is exclusive to the entertainment field. We’ve all heard the story of Michael Jackson outbidding Paul McCartney for the rights to The Beatles recordings and the amount of money he has been able to make from the royalty rights alone.

But did you know that regular, everyday investors like yourself could also get in on the royalty game? It may not be as glamorous or public as sales of your song on iTunes, but you can still mint a pretty penny from collecting royalty fees.

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The royalty fees I’m talking about are not in the entertainment sector at all, but rather from the same oil and natural gas, gold, silver, and resource stocks we discuss all the time. These fees are paid by royalty trusts companies, and many investors have made a lot of money by, in essence, doing nothing.

With a royalty trust, you, essentially, own a piece of land that is rich in oil, gas, or any of these resources if you become a shareholder. These companies then rent that land to developers and miners who do all the dirty work of extracting the resource from the ground. The royalty fee is paid back to the trust, and a share of that money is then passed on to you.

There is no set of qualities that defines a rogue trader. There is no profile, no red flags to search for. Rogue traders have earned their telling nickname because they are just that, maverick scoundrels who act outside of the normal rules and procedures that govern the rest of us.

So how can you spot a rogue trader before he strikes? You simply can’t. There seems to be no amount of regulations, checks, firewalls, or risk management systems that can thwart an intelligent mind bent on mischief. There have been several rogue traders in recent history — two notable examples just this year — yet rarely do they ever overlap. The markets, the incentives, the motivation, and even the schemes themselves are often as unique as the men who carry them out.

That is what makes the story of a rogue trader so fascinating. We can all understand the motivation and diabolical mind behind most financial crimes. When massive financial fraud takes place, greed and power are usually the driving factors. We have seen Enron executives, inside traders, and just plain evil, money-obsessed villains who will stop at nothing to steal from others. The image of a powerful, fast-talking broker often comes to mind when we think about financial frauds. A Gordon Gekko type that is ruled solely by greed. But just a look at recent history shows us that the actual perpetrators don’t fit any one profile.

The national attention that has been focused recently on rogue traders was sparked by the actions of Jerome Kerviel, 31, a low-level trader at France’s Societe Generale. At the time, SocGen was France’s second largest bank. The story of Kerviel and his actions that cost the bank over $7 billion is now well known.

The company ID picture of Kerviel, which must be his only released photo, has been familiarly visible in every major newspaper and magazine over the past six weeks. The mug shot-esque photo tells an ominous story. Kerviel was a relatively unknown commodity at SocGen at the time. He joined the company in 2000, working in the back office dealing with the bank’s security systems.

A low-key and mild-mannered young employee, Kerviel did not attract much attention, good or bad, from management or his co-workers while working in security. This seemed to be the story of Kerviel’s life. People seemed to know he was there, but few actually cared. Maybe that’s why he did it.

Kerviel joined SocGen after graduating from the University Lumiere Lyon 2. He was considered one of the financial world’s low-flyers due to his background.

“I was held in lower regard than others because of my educational and professional background,” Kerviel complained.

After being promoted, Kerviel became a low-level trader on the futures desk at SocGen. Low-level again. Everything in Kerviel’s life seemed to be low-level, except his profession. He worked at a powerful bank, surrounded by powerful and wealthy people. Kerviel must have wondered if he would ever reach another level. Perhaps that explains his curious photo. His brow furrowed with an almost sinister glare, Kerviel appears as if he knows something the rest of us don’t. As if hatching his plan while staring into the camera’s lens, Kerviel morphed his innocent good looks — friends and co-workers often compared him to Tom Cruise — into a much less forgettable identity: the villain of the French bank.

Kerviel’s plan was as simple as it was fiendish in its intricacies. With his knowledge of the bank’s security system and his new position as a trader, Kerviel was able to make huge bets, largely exceeding the risk positions the bank allowed him, and to hide any losses. He made his bets on the Dow Jones Euro Stoxx 50 Index and the German DAX. Every bet he made was largely bullish, as the trader hoped European shares would move up.

For a while, he was right. But soon, as the rest of us have already seen, many markets around the globe began tanking. Kerviel was able to hide his losses using imaginary accounts and stolen IDs and passwords that he had attained from his days at the back desk. He used these accounts to show fictitious trades that would have hedged his large risk.

Kerviel’s plan was working, but only for a time. Like many sinister plans that seem just so simple, Kerviel’s was eventually unraveled just in time for more global market collapse. SocGen finally began unwinding Kerviel’s positions on Jan. 21, the same day that European and Asian markets took a dive that prompted Fed Chairman Ben Bernanke to issue an emergency rate cut the following morning. Why would Bernanke act so decisively after a day when the U.S. markets weren’t even open — all U.S. exchanges were closed due to the Martin Luther King Jr. Day holiday? Perhaps Bernanke knew of Societe Generale’s problem, perhaps not. At this point, it doesn’t really matter.

Societe Generale will survive, but with more trouble related to failed positions in subprime mortgages in store, the French institution has been greatly injured. Kerviel did not stand to gain from his scheme. The only possible gain he could have gotten would have been a very modest personal bonus. So why did he do it?

Fame? Infamy? Perhaps, merely for the respect and adulation of the people around him. At this point, no one knows what motivated this seemingly forgettable Frenchman to forever etch his name in the history books. A long prison sentence seems unlikely. But for now, the judgment of many has already been passed on Kerviel. The Wall Street Journal recently offered a sentence for Jerome, placing him in Malebolge, Dante’s eighth circle of hell, as its “new French master.”

Like that of Kerviel, the story of Yasuo Hamanaka is a curious one. Hamanaka was the senior manager responsible for copper trading for Sumitomo Corp., Japan’s largest trader of physical copper. Like Kerviel, Hamanaka was a trader that did not have a great deal of attention paid to him. Unlike Kerviel, however, this was not due to his lack of a professional reputation. In fact, Hamanaka was so respected that the higher-ups at Sumitomo didn’t even bother to regulate his activity. Hamanaka had such a reputation in his field that he was almost completely left to his own devices.

Hamanaka’s devices proved to be much more dangerous than anyone at Sumitomo could have predicted. A man of many nicknames, Yasuo Hamanaka was widely regarded as one of the most powerful men in the world of copper. Known by his peers as the Hammer, Hamanaka was also referred to as Mr. Copper and Mr. Five Percent. The latter name was a reference to his believed control of 5-10% of the world’s copper.

Unlike Kerviel in regard to his success, Hamanaka was very similar to the French banker in terms of personality. Despite his great power and image, Hamanaka was an introvert who was much more comfortable trading alone in his office than anywhere else.

Also known as the Man in a Gray Suit, Hamanaka’s life did not mimic the image many people had of him. Despite being promoted more quickly than anyone else during his 26 years at Sumitomo, Hamanaka earned a very modest living. It is a Japanese custom for employees to be paid on the basis of seniority, rather than performance. Hamanaka was rewarded the same as any other 26-year Sumitomo veteran. Yet he still took the enormous risk to keep his positions and reputation as high as people assumed.

For 10 years as a copper trader for Sumitomo, Hamanaka attempted the unthinkable. He attempted to corner the copper market and wage his influence over the price of the world’s copper. With the autonomy and resources granted to him by Sumitomo, Hamanaka began acquiring large amounts of copper in an attempt to create a shortage. If the market believed copper to be in more of a demand than it actually was, the price would artificially rise.

Also like Kerviel’s, for a while, Hamanaka’s plan worked. Hamanaka continued to accumulate copper while most commodities were priced very low due to poor economic conditions. Keeping much of his copper off the market, the price quickly shot up and Sumitomo could then begin selling its copper reserves at a much higher price. Not everyone was fooled by his ploy, as Hamanaka was twice accused of creating a copper “squeeze,” in 1991 and 1993.

As the price of copper grew, more mining companies and facilities began cropping up to take advantage of the boom. This new glut of copper on the market made the copper that Hamanaka had purchased worth less than he liked. This is the part of the story where greed got the best of him. Hamanaka refused to let his positions go, and he continued his plan to prop up the price of copper.

With his losses accumulating, perhaps the Hammer bought into his own hype a little too much. Hamanaka had been striking off-exchange futures contracts that paid handsomely when the price of copper was high. Unfortunately, these profits came at a much higher cost to the company. These losing deals were recorded in a secret account that Sumitomo claimed only Hamanaka knew of. Throughout his decade of deceit, Hamanaka seemed to be the master of his trade, while losing $2.6 billion for Sumitomo. His entire plan was finally unraveled in 1996, after two documents forged by Hamanaka were sent to a unit of Merrill Lynch. So why did he do it?

Once again, Hamanaka did not stand to gain from these dealings. There were no mansions or luxury cars on the horizon. His was not a get-rich-quick scheme. Quite the contrary. Hamanaka’s scheme was a slow and labor-intensive one that gave him no personal fortune. Until his eight-year prison sentence began, Hamanaka lived in a small, modest house on a plot of land he had inherited from his father. Hardly Gordon Gekko.

Did he do it for the fame? The infamy? Hamanaka was already well known and well respected in his field. While his story is a footnote in the history of financial crimes, Hamanaka has not received nearly the coverage already bestowed upon Kerviel. Many insist that Hamanaka was acting in cahoots with his employer. While this theory certainly makes a lot of sense, nothing formally has ever been done on the matter.

If Kerviel is the new French master of Malebolge, perhaps Hamanaka can be given a nice cozy office there, where he can feel at home, next to his rogue colleagues.

Kerviel’s and Hamanaka’s staggering losses dwarfed those of any who had come before them. The deceit with which they were carried out suggests a malefic intent. Kerviel and Hamanaka knew they were doing wrong, and no matter what the motivations, they continued to deceive.

This is not the case with our newest rogue. Forty-year-old Evan Dooley, a Memphis, Tenn.-based commodities trader for MF Global, an ETF and options broker, has recently earned the dubious title of rogue trader. Dooley was a day trader for MF Global, making trades on behalf of clients in the futures markets. Dooley was a low-level employee who did much of his work from home.

Despite his years in finance, Dooley had only one client who had not made any trades in some time. Despite his relatively nonexistent roster of clients, Dooley stayed busy, trading for his own personal account. This is not unusual for MF Global, which collects a commission from any trades made on behalf of its traders’ personal accounts.

What is unusual is for a trader to blatantly overextend his own capital to make trades based on seemingly nothing more than a hunch. In the early hours of Wednesday, Feb. 27, Dooley began making his ill-fated trades.

Dooley purchased and sold short more than 15,000 wheat futures contracts. The money he used for this was not his own — it was MF Global’s. The profit, however, would have almost all belonged to Dooley, had his hunch been correct. Unfortunately, his hunch not only failed, but it failed catastrophically. Just hours later, Dooley abandoned his trade and left MF Global holding a $141 million bag. In just a few more hours, Dooley’s employment was terminated.

Dooley made the mistake of believing the wheat market was overpriced. His hunch wasn’t completely unfounded. Wheat futures have been gyrating violently as of late, with the grain reaching record levels. Yet Dooley was not as bright as he thought he was. He believed he knew more than everyone else, and he bet someone else’s money trying to prove it.

So how could one trader get access to all that money? MF Global puts limits on the amount of money traders can use for their personal accounts. Since MF Global has to pick up the tab for any losses, it wants to make sure that it has some say in what’s being bet. However, these limits cause the transaction time to slow considerably. In a high-pressure futures trade, sometimes a matter of seconds can make the difference between a successful trade and a colossal failure. Dooley’s risk controls were abandoned in an effort to give him more agility to trade for his clients.

When friends and family of Dooley were tracked down for questioning, they all gave expected responses. Apparently, Dooley was the last person you would expect to do something like this. He’s a devoted husband and father, active in his church, and as mild-mannered as his rogue brethren. His father claims he was a low-flyer who was interested in basketball and fishing. Funny how normal a person seems when you mention their hobbies. After all, Hitler enjoyed drawing cartoons. John Dillinger collected cars.

Dooley’s actions cannot be compared with villains of that order, but his actions were despicable, nonetheless. Dooley believed in himself too much and may have let his arrogance get the best of him. Unlike Hamanaka and Kerviel, it is not hard to figure the motives of Evan Dooley.

Why did he do it? For the money.

Dooley’s name will be printed alongside those of Kerviel and Hamanaka in the coming weeks, yet history will most likely forget him. He didn’t hatch a fiendish plot to deceive, only to have it unraveled in the public eye. He simply made a bad bet. He made a bet that lost, and he was fired for his mistake. Malebolge would not be fit for someone of Dooley’s stature. Dante would have Dooley spend eternity with Plutus, toiling endlessly in the fourth circle with the other covetous criminals.

When all is said and done, the sad sordid tale of Jerome Kerviel will most likely stand the test of time. Like Nicholas Leeson before him, Kerviel seems destined to be immortalized on the silver screen. Hamanaka was too bland. Dooley, too low-level. But Kerviel went for it all, and lost even more. Kerviel’s story has not had its ending written, but the moral is easy to figure out. We haven’t seen the end of rogue traders, and we could someday see Kerviel’s dastardly losses bested. But we can expect that the story will be unique, the perpetrator hard to spot, and the punishment often not fitting the crime.

Until next time,
Jamie Ellis

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