SEC

When Investment News asked John Bogle, Vanguard's founder and the father of indexing, about my "Indexing into the Ditch" thesis (that indexing is one of the root causes of the financial crisis) he said: it “is nuts! Last time I looked, index funds accounted for about 0.4% of all stock trading ... Just perhaps the other 99.6% might bear a teeny-weeny bit of the responsibility.”

Let me first respond to Mr. Bogle's points in order.

The thesis "is nuts! "I must admit I smiled at the ad hominum implication that my thesis was "nuts" and not worth listening to; I remembered that Bernie Ebbers called me the "idiot Washington analyst" because my research was the first to charge that WorldCom's business simply did not add up.

With all due respect to Mr. John Bogle, legendary founder of Vanguard and de facto leader of the American index fund movement that now manages ~$1.5 trillion, I must respectfully challenge, on the merits, Mr. Bogle's, and others, ongoing mischaracterization of indexing as "investing."

This is an introduction and background for my new multi-part research series on diagnosing the root causes of the Financial Crisis.

Does Google warrant the current exceptional leap-of-faith in the integrity of its dominant ad auction model, given its near total lack of openness, transparency, independent auditability, or third party oversight? There is a growing body of evidence that Google does not.

• The New York Times article today by Miguel Helft: "The Human Hands behind the Google Money Machine" is a must read for anyone following Google or concerned about the openness and transparency of public markets. It is also a little treasure trove of fresh information on Google.

Why a lack of openness sullies the integrity of Google's ad auctions.

First, it is widely accepted that public markets operate best when open and transparent.

Google's ad auction model has become one of the world's most important public markets. Google is increasingly becoming the world's primary public information broker. Google brokers: 

• Information for over 700 million search users worldwide, over three to six times their nearest rivals;
• Advertisement placement for over a million advertisers several times more than their nearest competitors;
• Monetization for over a million websites several times more than their nearest competitors.

Google is also not open or transparent.

There were three proverbial "elephants in the room" that the media and analysts largely missed in discussing Google's stock slide and recent concern over a slow-down in paid clicks. 

Elephant #1 -- Click Fraud: 

I was stunned that no one connected-the-dots with the slow down in paid clicks with Google and Yahoo's "dirty little secret" of addressing raging click fraud. 

The big question for investors is why?

• Why has Google felt the need to rapidly build up a new lobbying operation in D.C. (rivaling Microsoft's in size) and why did Google just unveil, with great fanfare, its new cutting-edge office space in DC with a party that attracted 650 people and many VIPs?
  • What does Google know that investors may not?

Google's Regulatory Outlook:

Federal Trade Commission: 

Antitrust:

Richard Waters of the FT produced a very insightful and newsy article on how Google reportedly passed on buying DoubleClick two years earlier over internal concerns about how that alignment of businesses could clash with Google's famed "don't be evil' highmindedness.

• It's a must read article for Googlephiles.

My big takeaway from this article was an undercurrent of Google's struggle over internal controls to ensure Google's "ethics" are carried out in practice.  

Liberal blogger Matt Stoller of OpenLeft has a post at Save the Internet that lamely tries to rewrite "the history of net neutrality" in his commentary about his interview with FCC Commisioner Michael Copps.

Google turned in another awe-inspring financial performance in 1Q07. Pick your news report for the basics. All you need to know is revenue growth was up 63%. Wow!

• Derek Brown of Cantor Fitzgerald said in the Washington Post today:
• "I am basically convinced that no company in history has put up the type of finanical performance that Google has put up from a growth and financial perspective for as long as they have done it."
• It's hard to disagree with him. There is no other example.
• They are a jugernaut.
• What I questioned in my recent 10-page analysis of the Google-Doubleclick merger, was whether all of that success is legitimate given rampant click fraud and Google's systematic theft of its core inputs -- copyrighted content.

Let me translate some of the earnings call: