Dear Government – Help us help America

Dear Government,

It is with great pleasure and unbridled optimism that I submit our application for the Profits Privatized – Losses Socialized or PPLS program. SIG is an insurance start-up that provides social network insurance. Simply put, we insure electronic friendships on social networks.

Social networks are very much like a combination of a dictaphone and a Rolodex, only the communications are conducted through a computer connected by a series of tubes to other computers. As such, we are sure that no one in America can afford to lose their portfolio of electronic friends. Our insurance products will be a vital part of insuring American society against friendship defaults.

Unfortunately, our ability to raise capital is being unfairly impinged upon by market forces. People are refusing to lend us money based on our potential fundamentals. We appreciate the government’s proactive approach in removing such irrationality from the market. Only the goodwill and general ignorance of the American taxpayer can rescue us at this time.

Our business will be huge. We will be providing social network insurance to over 600 million Americans (yes, this is 200% of the US population; some people have multiple accounts proving how vitally important SIG will be to our economy.) If SIG defaults on the insurance that we hope to one day underwrite, it will cause catastrophic systemic failure that could spread to societies worldwide. This will lead to another Depression. Please note that we do not mean a technical Depression as defined by economists; we just mean that a lot of people will be very depressed in the psychological sense. Which will be catastrophic.

America cannot afford this. By allowing SIG to prequalify for the Profits Privatized – Losses Socialized program, we will be able to use the guarantee of the government’s beneficence to raise capital from private sources. It seems clear to us that for market forces to function properly, massive government intervention is required.

As a company that will insure far more people than AIG, you will be pleased to learn that SIG will only seek $5 billion if and when we are at the risk of default. If we exercise our option to draw upon the bridge loan, we will provide the Federal Reserve with warrants for 79.9% of our equity. I can assure you that there is almost no risk of us defaulting. It is absolutely unforeseeable. Please don’t worry.

I thank you in advance for allowing the taxpayers of America to promote the interests of free market capitalism in the only way possible: Government support. Once PPLS leaves the pilot-stage, the consequences are profound. American business can be perpetually protected against losses. Imagine a thriving economy where businesses simply refuse to lose. Every decade or so, the government can simply grant a lifeline to a troubled sector and simply roll in the entire cost as a part of our national debt. This is the only way to encourage responsible practices in our economy.

SIG is excited to be part of the Profits Privatized – Losses Socialized program. From our perspective, it seems like a win-win proposition.

Yours truly,

SIG Business Plan

SIG – Social International Group

When Friends are no longer friends, you get money.

Confidential

Market Overview:

There are over 20 billion users of social networks. Over 300% of the world’s population currently uses social networks providing a fundamental aspect of the world’s happiness. Social networks are where people connect with each other. Since connections between friends are valuable, SIG provides the ability to insure people’s friendships in the event of default. If someone defaults on friendship, policyholders get money as compensation. In addition, we provide a variety of social network insurance products including Social Default Swaps, Collateralized Social Obligations, and Structured Social Products.

Social Default Swaps

- We insure against people defaulting on social obligations to each other. For instance, let’s say you text message a buddy 10 times, then Twitter this ‘friend’ an additional 50 times, post comments on this counter-party’s blog, attempt to Skype them, and even e-mail them a joke or two, and you receive absolutely no response from them within 1 week, they would have socially defaulted on you. SIG will insure against the risk of electronic friends socially defaulting with our new product, the Social Default Swap. For a mere $5 per year, we will insure $100 against your sub-prime friends and acquaintances socially defaulting on you. In the event of default, we will pay you the value of the insured friendship in increments of $100. If SIG pays on the policy, we simply take over the collateral, in this case the rights of electronic friendship with the socially defaulting party.

You might be asking yourself, don’t a lot of people default on electronically communicated testaments of friendship? Do we really want to sit on this type of risk. No worries. That’s why we will have a group to securitize individual Social Default Swaps and roll them into the following:

Collateralized Social Obligations -

For the purposes of our operations, these are pools of individual Social Default Swaps. We can segment and and bundle 100,000 Social Default Swaps as one group (we can segment by income, marital status, sexual orientation, hobbies, race, and taste in music). We can sell these Collateralized Social Obligations to ad networks, companies like Microsoft, WPP, Jerry Yang, hell, just about anybody that wants the defaulted friendship rights of social network users. Considering that a social network user is worth as much as $500 by pre-money valuations seen lately, this will work. This means even if the policy pays $100 to the spurned friend upon default, the value of even a deadbeat electronic friend can be marked to market at $500 in accordance with FASB rule 157. We will be acquiring users for just $100 each in the event of default that are worth $500 each to another party that needs users. Because the value of the friendship rights of each defaulting friend is so high, instead of paying to have someone to takeover and reinsure this Social Default Swap obligation, we might actually be able to collect another premium on the sale of the CSO. This is because even in the event of default, the buyer of the CSO gets the friendship rights of the user worth far more than $100.

Let’s say we can sell one CSO of 100,000 potentially defaulting sub-prime friends to MSFT for $300,000. (The friends are in good standing, but OMG, they could default with the next unreciprocated Twitter or text message.)  

Let’s say 10% of these friends default, MSFT pays 10,000 spurned friends $100 each and takes over the eFriendship of 10,000 people. Owning 10,000 friends for just $1 million! That’s a bargain.

On 100,000 policies, we just collected $300,000 ($3 per) from MSFT on the CSO and $500,000 ($5 per) from individual policyholders insuring against being spurned. In either of these cases, we cannot lose. We have offset our risk completely and cleared $800,000. But I am afraid this limits our profit potential. Seems boring even if highly profitable. We need to make some moves. Introducing the Structured Social Products Group.

Structured Social Derivatives Group

This is the division that insures companies like Slide, LinkedIn, YouTube, and various other user-generated content start-ups and widget manufacturers from counter-party risk…copyright issues, access denial, closed APIs, mass migration, anything. For instance, if Slide were to get booted from Facebook, we would pay Slide. If Digg could no longer link behind the Wall Street Journal paywall or if headlines are no longer considered “Fair Use”, we would pay Digg. These innovative start-ups can insure against catastrophic risk. Let’s say Slide pays us $5 million per year to insure against Facebook shutting them down. We will pay $150 million to Slide in that event. It is possible that the CEO of Slide, as someone with self-professed mathematical aptitude, might ask some questions about our ability to pay the $150 million. I’m afraid there is only one credit-worthy party in America that will satisfy Max Levchin: The Government.

If the government can come in as a partner under the Profits Privatized – Losses Socialized program, we can absolutely make this happen. Our structured products group is where we can make the most money. It’s like free money. What are the chances of any of these individual events actually happening? Exactly. Zero. It has never happened before so the probability is zero. Regardless of our optimism and irrefutable logic, we still need money to commence operations.

Thankfully, the Federal Reserve and US Treasury are operating under a new doctrine for the new century: The Social Doctrine. Under this doctrine, companies will be able to preemptively socialize their potential catastrophic losses with the government in order to prevent actual catastrophic losses from occuring in the future. After 9/11, the risk of doing nothing while risks gather is no longer an option.

This is the best part of the SIG business. If for some unbelievably unforeseen reason the Structured Social Products Group causes us to be in risk of default on our obligations, under the government’s Profits Privatized – Losses Socialized program (PPLS), no one needs to worry about our balance sheet or counter-party risk. The only caveat is that we need sufficient scale to prove that catastophic systemic risk will exist in the event of our failure. This means we need scale at all cost. We need to be “too big to fail.”

This also means that if we price our policies incredibly aggressively, we can achieve this scale and not be on the hook if we misprice the risk. If our counter-parties do not default, we make money. In case we face excessive defaults, we will have the following arranged in advance: Just as they did with AIG’s $85 billion loan, the government’s PPLS program offers to take a 79.9% warrant position in exchange for a 2-year $5 billion bridge loan provided that we meet certain “Too Big to Fail” triggers such as massive user-reach at the time of the loan. (Note to self: Let’s think viral marketing.)

With a preemptive PPLS guarantee protecting the downside risk, we can probably raise at $1 billion pre-money.

Here’s the best part, if we fail, the PPLS guarantee kicks in with far better terms than we can get on Sand Hill Road in any economic climate, even during bubbles. Imagine a massive cash infusion on a failed business model a couple of years from now and the stockholders still retain 20%; I’ve never seen anything like it. It’s too good to be true in the figurative sense. Fortunately for us, it really is true in the literal sense. Quite frankly, this government program is the best thing that’s happened to American business since steel tariffs.

Anyway, we need you to endorse our letter to certain government leaders while everyone is still in panic mode. We have a window of opportunity, my great friends.