The Bonnie and Clyde of Karmabanque

Smart boycotts: redistributing wealth away from social irresponsibility

Feature story - 4 June, 2003
The boycott was invented in 1880 in Ireland. It's been a staple of labour, human rights, and environmental activism ever since, in basically the same form as when a group of Irish tenants refused to sell to, buy from, or otherwise deal with an English landowner, Capt. Charles Cunningham Boycott, because of his eviction policies. Well-run boycotts have been successful in enforcing government and corporate responsibility for more than a century. But if Max Keiser and Stacy Herbert have their way, the traditional boycott is going to make room for a new and improved formula: the internet-enabled, market-savvy, hedge-fund leveraged "smart boycott." It's the founding concept behind a new web community called "Karmabanque."

Stacy Herbert and Max Keiser

Karmabanque describes its audience as "Activists, Anarchists, and Hedge Funds." It's a stock exchange of sorts, but with a brilliant and maniacal twist: it trades on the strength of boycotts.

If you're an activist, you can research a corporation's vulnerability to a boycott by using the Karmabanque "Boycott Profitability Ratio." The Boycott Profitability Ratio (BPR) roughly measures the impact that every dollar you DON'T spend with a company will have on its market capitalisation. A company like Exxon is highly insulated from a retail boycott - only a small percentage of its profits come from consumers at the pump. A campaign, like Greenpeace's, to encourage people to not buy Exxon has to be global in reach and expect a long, hard haul before it sees results. Coca Cola, on the other hand, derives almost all of its value from how often consumers buy Coke, and a boycott of Coke can hit the company very hard very quickly.

Anyone can start a boycott of any company. By doing so, you create a new 'security' and the KbQ database calculates where it stands in the KbQ index, taking into account the company's vulnerability, and the level of support from other Karmabanque members for the boycott.

Karmabanque members can keep a maximum of three boycotts in their 'portfolio'. They can monitor the performance of all boycotts on the index in real time and decide to 'sell' one boycott (that is to say, decide to stop boycotting one company) and 'buy' another boycott, (that is to say, start boycotting a different company).

At Karmabanque, a portfolio is most successful when the companies it holds are having their share prices hammered. The more a stock goes down, the more the value of the Index goes up.

Over the last twelve months, Karmabanque's KBQ index of boycott holdings has outperformed most of the multinationals it targets, and outside of a small elite, the majority of professional money managers.

The secret to its success is the most primordial force in what Max calls "modern American-style capitalism:" greed.

When a company gets listed for a boycott at Karmabanque, the object is to turn it into what Stacy calls "Hedge Fund bait." Hedge Funds will "sell short" a stock if they believe its share price may be heading south.

Like all investment, it's a gamble: if the stock goes down, the hedge fund's short position goes up in value. If a hedge fund has reliable information that a boycott is going to hurt a company's sales, and knows that the stock value of the company is vulnerable to retail loss, it will take that bet. The fund will gain on the success of the boycott and the consequent decline in the company's stock.

If enough funds are betting that a stock is going down in value, shareholders and investment analysts begin to bail out of their long positions on the stock. Stock value further collapses, and by now any good activist is talking to the company about how it can make changes that will end the boycott.

Max and Stacy want to be known as the Bonnie and Clyde of the Internet. They're each in their way specialists in two of the most powerful forces on earth today: information and money. Max was a Wall Street wunderkind during the internet boom, made a fortune, got out of the market before it collapsed, and retired to France in his early thirties. For fun, he then founded the Hollywood Stock Exchange, an internet-based virtual market for the film industry. Stacy is a script writer for film and television, and a self-described information activist.

We talked to Max and Stacy about Karmabanque, activism, capitalism and Rock and Roll recently at the Greenpeace international Headquarters in Amsterdam.

Q: Max, you talk about "smart boycotts" at Karmabanque. What's dumb about traditional ones?

There are three basic problems with traditional boycotts. The first problem is there's no retention of anger. They tend to have short half-lives. When a boycott is launched and is successful, there's no central repository of information about what made it work, and no continuation beyond the boycott's end. Why can't those people be repurposed for another boycott? I think that needs a fresh look. If you're willing to voice your dissent with a boycott against Exxon, you ought to be willing to shift your resistance to another target. Karmabanque gives you the chance to manage your "boycott portfolio." We think that the dissent is the key quantity, not the boycott target. So we aim to retain dissent at Karmabanque.

A second problem is that it is very difficult to create and maintain momentum around a boycott. You get a lot of people expressing their dissent in multiple boycotts in diverse areas, but little or no feedback loop about who else is participating and how effective you're being. There's also a sense that boycotts are outside the mainstream. There's this image of an activist as a hippie who doesn't wear Nikes and doesn't eat meat or drive an SUV because he doesn't have any money. At Karmabanque it's very egalitarian - you may have no money, or you may have a billion dollars, all that matters is are you angry? Do you have some reason to dissent? If so you open a portfolio of the boycotts that you feel make sense, and then get feedback from the market.

Say an exposé comes out of a particularly heinous activity by Nike. Everybody on Karmabanque, no matter what boycott they've indicated interest in, can switch to this Nike boycott. That decision gets picked up by the database, spooled back to the community, and then you have an aggregation: dissent becomes accretive, to use another financial term. Then you've got momentum. Before you know it this Diaspora is singularly focussed on the most effective use of their dissent dollar.

Thirdly, Karmabanque offers a way for you to personally monetise your dissent. This to my thinking is a huge breakthrough, but also controversial. We just took out ads saying "Attention Arabs: Make Money Boycotting Coca-Cola." This is a twist to the boycott model that has been hitherto non-existent. Typically boycotts are about sacrifice - but we've created a model where an individual can profit from an effective boycott, and ideally turn over those profits or a part of those profits to the organisations working to change those companies that are being targeted.

There's a famous money manager on Wall Street named Peter Lynch who says that investors spend too much time getting technical in analysing their investments. He basically says if you like shopping at Home Depot, invest in Home Depot. The same can really be said to activists: if you think Coke sucks, sell Coke short.

Q: So you're recommending that hedge funds put their money where the boycotts are, and bet against the success of socially irresponsible multinationals?

It's a way to do well by doing good. The KBQ index is up 13 percent over the last 12 months. And as of May, it's up 9.89 percent this year. It's performing better than any socially irresponsible business and better than almost any money manager outside of a very small elite. So if at the end of the day somebody wants to say I agree with your politics but I've got mouths to feed and I can't afford to invest according to the Karmabanque index, the reality is you can't afford NOT to do it. And it's only going to go up. Global dissent is simply going to become more focussed, and more intense due to the war in Iraq.

Oh, and by the way... for as little as $500 and a cheap on-line brokerage account any activist can become their own hedge fund if you piggy back what the hedge funds are doing. If an activist spots that hedge funds have taken their lead, and are shorting a socially irresponsible stock, they can play along too, and short the stock themselves. But this of course means that the activists is taking some economic risk, which most probably won't want to bother with.. The beauty of KbQ is that it works without money. The hedge funds put up the money, the activists put up the dissent in the form of boycotts.

Q: So the future isn't bright for bad companies?

I like to think there's no such thing as bad companies, just conflicted ones that haven't had their social irresponsibility monetised yet.

Q: We at Greenpeace have tried for decades now to "monetise" environmental harm by ensuring that the whole cost of a product is reflected in its price -through government regulation, trade restrictions, and cradle-to-grave responsibility for a product's harm. You're really talking about pitting a corporation's greed against the public perception of harm.

The stock price for a commodity should reflect the interests of not only the shareholders but the stakeholders and the global community in which it operates.

There's nothing wrong with greed in itself - it's just a force of nature. So Karmabanque tries to take Karmabanque-style capitalism and use that force to power a more equitable distribution of resources - primarily wealth.

I was re-reading Adam Smith's the Wealth of Nations, supposedly the book that predicates the enlightenment in modern finances. The whole beginning of the book is dedicated to trying to create an economy that mirrors nature. Smith recognised nature as the ultimate market-maker: photosynthesis is the perfect frictionless market that exists between the sun and plants in converting carbon dioxide, and the goal he sought was to replicate that in goods and services. The system that was produced from that insight is horribly warped, however, by the advent of modern banking derivative products. They allow corporations to separate the bearing of risk from the reaping of reward.

Enron was the perfect illustration: the insiders kept all the reward, the shareholders ended up holding the risk. Warren Buffet recently said that modern derivative products ought to be considered "weapons of mass financial destruction." It used to be nearly impossible to separate risk from reward - it was as difficult as splitting the atom. But these products do just that - they're the nuclear weapons of the financial world.

For the past thirty years, with the aid of those derivatives, US-Style capitalism has come to dominate institutions such as the IMF and the World Bank. They've created huge problems, huge dislocations because they're driven by the unchecked self-interest of their funders. The Asian financial collapse of the late 90s was a direct result, as was Russia's transformation into a US-style Mafia capitalist market.

The war in Iraq was a by-product of that system.

Q: But environmentalists have won significant victories against the IMF and the World Bank using traditional tactics - what is it that you want to improve on there?

Corporations are appeasers. They are never going to respond to activism in any way except that which is necessary to call off the dogs. Governments, similarly, are never going to act in the pure public interest as long as their elections are tied to the Corporations that fund their campaigns. So the real challenge is how you bring an economy of scale to activism. When you look at the commercial world, the model for economy of scale is the consolidation play, in which a thousand little mom and pop establishments get swallowed up by a single conglomerate that then becomes fantastically successful. There must be 16,000 Non-Governmental Organisations, and within that community talk of economy of scale is probably anathema to people who don't want to see themselves as penny-pinching bottom line capitalists. Yet somewhere between all of these dissent groups becoming one organisation and all of them running 16,000 different boycotts there is a middle ground, and I think that's what Karmabanque has established.

Q: Stacy, what's your role at Karmabanque?

I'm the Chief Anarchy Officer.

Q: You can't be an Anarchy Officer, that's an oxymoron.

All right, my official title is President. But I'm the information side of the operation. There are two ways that markets are manipulated today. With money, and with spin. Max is the money guy, I'm the one with the inside track on spin. [Stacy was involved in a high-profile tabloid-fuelled sex scandal last year which led to the sacking of "Have I Got News for You" host Angus Deayton]

The tabloids are money-making machines, fuelled by the fact that nobody wants to hear the truth. Working with Karmabanque I saw this incredible parallel between the guys who run Exxon and the guys who run the information machines. Rupert Murdock is polluting a global commons, which is the infosphere, with oil slicks of misinformation, just as badly as Exxon is polluting the planet. Truth has never traded at a lower value than it does today.

Q: Max, your move has been the real world markets of Wall Street to the creation of virtual markets on the Internet, both with the Hollywood Stock Exchange and now Karmabanque. Why the Internet?

I think what we're seeing as a result of the Internet is a social and political upheaval unlike anything since the 1960s, when it was drugs and free sex and free thinking that challenged the status quo.

The internet is a new kind of LSD -- it gives everyone a sense of euphoria and global understanding and vision, it's being outlawed the same way, by the same people who see it as a threat because it's just too liberating. It's too much free speech, free software, free music, free thinking... it's just too free.

The technology of the 60s was vinyl. For a couple hundred bucks, a band could cut a record. That was rock and roll, the freedom of expression of the 60s. Now, anybody can publish on the web for free, be a part of something like Karmabanque or Linux or Napster or Kazaa, and be a part of this revolution. And we definitely need a new revolution. Rock and Roll has become occupied territory - it's stopped, it's seized. You have punk rockers from the 70s saying nothing about war at the induction ceremonies at the Rock and Roll hall of Fame, because their record label told them not to. Cultural history in the US has come to a halt except for some rebel pockets - and they're all on the Internet.

Q: But there was a belief in the 60s that a new morality, or a new spirit, was somehow going to change the world and make it a better, fairer place. You seem to be coming from a more pragmatic, or a more cynical, point of view when you say it's plain old greed that will determine the future.

Capital is the most overwhelming force on the globe. It will seek its highest point of return. Nothing can stop that, but that doesn't mean it can't be harnessed. George Soros has proven this brilliantly. He basically shorted the English Pound, he made a billion dollars, and then he distributed a lot of that in Eastern Europe. He was his own sovereign entity. So I say, "let a million George Soros' bloom." Let's get this revolution started. That's what Karma Capitalism is all about - redistributing wealth away from socially and environmentally irresponsible corporations and into the hands of the people who oppose them.

There's 2.6 trillion dollars that moves between banks every day. It's a tossing sea of money out there in which the entire market capitalisation of the world turns over every 23 days, and activists need to be out there in fast, manoeuvrable crafts that can outrun the big boats. Hedge funds are looking for absolute rates of return any way they can, and one of them is capitalising on the cost that we can apply to socially irresponsible practices through boycotts.

What happens to stock prices is the ultimate arbiter of what anyone's going to do. The final battle for what our planet's future will look like will happen on the stock exchange."

You can join Max and Stacy's Bonnie and Clyde act, and be a part of the Karmabanque revolution, at