Friday, August 22, 2008
New blog Location: www.paranoidbull.com
Please visit the new location for my blog: www.ParanoidBull.com
Thursday, July 31, 2008
Creative Destruction: The Old GDP and the New SEC
The schism between the old and the new in the economy was highlighted today as those who have been resisting the concept of an inevitable U.S. recession were forced into capitulation by the revision of 4th Quarter 2007 GDP, which showed a decline rather than a gain. Although the 2nd Quarter of ‘08 showed a gain of 1.9%, or $106B, this included government transfers of $145 B and defense expenditures of $29B. In other words, without these amounts GDP would have declined in Q2 this year as well.
Perhaps more importantly than whether we have satisfied the text-book definiton of a recession, we are entering a prolongued period of economic hardship characterized by continued housing declines, increased job losses and a slow-down in the Economy. As Greenspan stated today, we are nowhere near a bottom in housing prices, which has been the leading indicator of the downturn.
The continued weakness in the economy is the inevitable result of the excess liquidity of the early-2000’s and unfortunately this pain is inevitable.
However, I have recently been introduced to the economic concept of Creative Destruction which was popularized by economist Joseph Schumpeter.
Basically, the concept, as articulated previously by Hegel in more general conceptual terms, suggests that in order to create the future we must first negate the past. In Economic terms it means that sometimes in order for innovation to occur, we must first sometimes experience the destruction of old ways of doing things.
What we may be witnessing today is the failure of some of the more challenged parts of our economy as individuals are forced to make tough choices as they suffer the cut-backs required by a retrenchment in the amount of leverage in the system. As people's incomes are squeezed, they are at the same time choosing to drive more fuel efficient cars, utilize more technological tools rather than paper products that consume trees and produce waste, and eat less unhealthy foods. As a result, companies that rely on the old way of doing things are suffering.
Even the SEC, the stodgy old guard of the federal government responsible for the regulation of publicly traded companies, today announced that Blogs can now serve as an outlet for public disclosure in certain cases. The innovation, which is a positive for social media ventures like Twitter and others, is discussed here:
SEC To Recognize Corporate Blogs as Public Disclosure. Can We Now Kill the Press Release?
This move, in the midst of another challenging day in the markets, suggest that progress, creativity and technological innovation will continue, no matter how dark the current environment becomes.
Unfortunately, there is more bad news on the horizon for home values, financial institutions, and the economy. However, if we keep this concept of creative destruction in mind, perhaps the silver lining becomes easier to see.
Perhaps more importantly than whether we have satisfied the text-book definiton of a recession, we are entering a prolongued period of economic hardship characterized by continued housing declines, increased job losses and a slow-down in the Economy. As Greenspan stated today, we are nowhere near a bottom in housing prices, which has been the leading indicator of the downturn.
The continued weakness in the economy is the inevitable result of the excess liquidity of the early-2000’s and unfortunately this pain is inevitable.
However, I have recently been introduced to the economic concept of Creative Destruction which was popularized by economist Joseph Schumpeter.
Basically, the concept, as articulated previously by Hegel in more general conceptual terms, suggests that in order to create the future we must first negate the past. In Economic terms it means that sometimes in order for innovation to occur, we must first sometimes experience the destruction of old ways of doing things.
What we may be witnessing today is the failure of some of the more challenged parts of our economy as individuals are forced to make tough choices as they suffer the cut-backs required by a retrenchment in the amount of leverage in the system. As people's incomes are squeezed, they are at the same time choosing to drive more fuel efficient cars, utilize more technological tools rather than paper products that consume trees and produce waste, and eat less unhealthy foods. As a result, companies that rely on the old way of doing things are suffering.
Even the SEC, the stodgy old guard of the federal government responsible for the regulation of publicly traded companies, today announced that Blogs can now serve as an outlet for public disclosure in certain cases. The innovation, which is a positive for social media ventures like Twitter and others, is discussed here:
SEC To Recognize Corporate Blogs as Public Disclosure. Can We Now Kill the Press Release?
This move, in the midst of another challenging day in the markets, suggest that progress, creativity and technological innovation will continue, no matter how dark the current environment becomes.
Unfortunately, there is more bad news on the horizon for home values, financial institutions, and the economy. However, if we keep this concept of creative destruction in mind, perhaps the silver lining becomes easier to see.
Tuesday, July 29, 2008
On the Markets, Twitter, and Leading a Public Life
The markets are up today…and a few companies that I was concerned about beat earnings. This ordinarily should be good news, and in a lot of ways it is. I am very glad that oil is starting to show some signs of cracking. Whether this is sustainable will surely take some time to decipher, and the bad housing news unfortunately does not bode well for the economy.
However, today’s moves in the markets happened to coincide with an exchange that I had with a senior, and brilliant, investor that ended with us coming out on the opposite sides of an issue. The thing is, I feel strongly about my view, and even after considering his perspective I stand beside my own. The challenge for me is that when I am faced with information suggesting some of my views are mistaken, it becomes difficult to remain confident in other parts of my thesis…
How does any of this “markets” talk relate to Twitter?
Twitter for me represents a new form of social interaction. Yesterday at the #smcla event, I experienced a now somewhat usual event: I met someone I have “known” on Twitter for months for the first time “in person.” She was as charming face-to-face as expected, and although I have had a few of these online-offline merges over the last few months, it is still somewhat jarring for the first few seconds of the conversation as the impressions from the textual communications are fused with those of the voice, image, and in person mannerisms.
Twitter has allowed me to interact with a whole new group of people that I likely would have never met if not for its existence. These interactions have also created a new “public” image of myself, where I talk about my daily-goings-on, share small observations on life, and recently, I have even linked my Twitter to this venue of more extensive expressions.
In doing so, I have *opened* myself to the world, and as a result I am now living a more public life than ever before. Even when involved in student government and other apparently public activities, I never really put my opinions out for examination in a public forum – speeches and meetings were scripted, thought out, and muted.
But on this blog, on Twitter, and now in my career, I am stating my opinion publicly – putting a stake in the ground, on the record so to speak. And in doing so, I am subject to observation, disagreement, and often I am wrong for the entire world to see.
This feeling of public mistake and the observation of it has been difficult to digest…
But the benefits that come from Twitter, and from having a conversation with those of you who read this blog are worth the angst.
Plus, we just had an earthquake here in Los Angeles – sometimes life helps to put things in perspective.
So I will continue to participate in these conversations, meet new friends on Twitter and elsewhere, and I will even take chances in my career. As the brilliant Marshall Mathers once observed, “You only get one shot...”
However, today’s moves in the markets happened to coincide with an exchange that I had with a senior, and brilliant, investor that ended with us coming out on the opposite sides of an issue. The thing is, I feel strongly about my view, and even after considering his perspective I stand beside my own. The challenge for me is that when I am faced with information suggesting some of my views are mistaken, it becomes difficult to remain confident in other parts of my thesis…
How does any of this “markets” talk relate to Twitter?
Twitter for me represents a new form of social interaction. Yesterday at the #smcla event, I experienced a now somewhat usual event: I met someone I have “known” on Twitter for months for the first time “in person.” She was as charming face-to-face as expected, and although I have had a few of these online-offline merges over the last few months, it is still somewhat jarring for the first few seconds of the conversation as the impressions from the textual communications are fused with those of the voice, image, and in person mannerisms.
Twitter has allowed me to interact with a whole new group of people that I likely would have never met if not for its existence. These interactions have also created a new “public” image of myself, where I talk about my daily-goings-on, share small observations on life, and recently, I have even linked my Twitter to this venue of more extensive expressions.
In doing so, I have *opened* myself to the world, and as a result I am now living a more public life than ever before. Even when involved in student government and other apparently public activities, I never really put my opinions out for examination in a public forum – speeches and meetings were scripted, thought out, and muted.
But on this blog, on Twitter, and now in my career, I am stating my opinion publicly – putting a stake in the ground, on the record so to speak. And in doing so, I am subject to observation, disagreement, and often I am wrong for the entire world to see.
This feeling of public mistake and the observation of it has been difficult to digest…
But the benefits that come from Twitter, and from having a conversation with those of you who read this blog are worth the angst.
Plus, we just had an earthquake here in Los Angeles – sometimes life helps to put things in perspective.
So I will continue to participate in these conversations, meet new friends on Twitter and elsewhere, and I will even take chances in my career. As the brilliant Marshall Mathers once observed, “You only get one shot...”
Monday, July 28, 2008
Notes from Social Media Club LA, #smcla
Here are the notes from the Social Media Club LA meeting at Mahalo.
@BrianSolis, @NicoleJordan, @JackiePeters, @Richman17 and @Chiropractic were the panel.
Define "Social Media":
Anything that facilitates conversations online.
3rd wave of communications - 1 direct, 2 interaction with site, 3rd - interaction with each other.
Shift away from email. Analogy to business is becoming more about "fun" and "social".
Still a whole world who hasn't come on board yet. Broaden the definition to get wider adoption.
We should broaden the definition.
But remember that we are left hand side of the curve - We should think broadly about the socialization of content.
Yelp! Changing the game about influence.
Normal people who have influence and something to say. Power of influence is broadening.
Jay Rosen - we are the people formerly known as the audience.
What is SocialMedia beyond the technology? How people are using it.
Social tools are old: Deja News, Yahoo!Groups.
People are thriving off interaction - but how can we use these for the greater good?
Different tribes - different cultures - immersion and observation are crucial. Conversational marketing is bs...it is not empathetic. You need to listen.
Medium defines the message - blogging platforms (LiveJournal let's you personalize and privatize, vs others that don't). Twitter changes our communication.
Some brands are just about crashing and make the dialogue focused on them vs contributing to them. Pushing vs not actually being part of the conversation.
Are we all experts here?
No. We are all learning.
Is Comcast actively listening to people?
Test. @comcastcares. He replied to the email. Us this a bs strategy? He replies: yes. But we have 5 - 7 people...facilitating all this stuff internally and 1 guy has saved company money. Improving brand and relationships.
Game changer for brands?
HealthCare is notorious for not helping people.
Some people are starting to change.
Old way - you have no real way of knowing if it works. Example of Nissan and flashy ads with no results.
People are now creating ads for other companies and winning awards - brand hijacking. Smarter companies are looking at this.
A lot of big brands are adriad of negative feedback. You can embrace this feedback to make it into a positive experience. See Zappos and how he balances corporate with the humanity. We are revealing more about ourselves on a personal level.
It is about the socialization of this. Tony of Zappos.
Power of positive influence. Reputation matters.
See Virgin - anti-social.
Key is to be social.
How do you do this in a big company?
Play it safe: keep it in marketing.
See SEO...are you ok if Tony from Zappos is not a real person? Maybe. See Obama.
Issues of sincerity.
Example of real people representing a real company.
Power of real people. They connect.
People don't interact with companies - they interact with people.
Which department owns social media?
PR? In 100 percent of actual cases it comes out of customer service. They are willing to understand that social media is worth it because it is a "cost center".
All employees should keep an eye on it. PR people should keep an eye on it though a they can have a big picture understanding. But it should permeate the organization.
PR doesn't get paid to listen. Trend - outsourcing "listening" to India or Jamaica.
It all goes back to business fundamentals. AAPL - service.
Don't forget it is about people - whole foods? Buy what about fake identity?
Not trustworthy.
If social conversations are getting shorter, where are deeper conversations happening?
Conversation is thinning and spreading. Comments on variety of networks and networks - 36 hours just to respond.
Conversation is changing shape.
Social media and authenticity. Seth Godin - be remarkable, and don't be authentic. If you game the system, it is only a matter of time until you become found out.
Online conversation does get carried offline. Take in person relationships to another level.
What do we do to keep this from becoming hype? What is being done to scale it?
Sociology of this is important. Number? 50 percent? See Forrester - scale of public participation.
But we are still on the left side of the bell curve.
There is no audience anymore. Companies need to go find people and find out how they are being discussed. Are people where you are targeting. Start by listening.
Targeting is important but different for different companies and different brands.
Hard question. Fast-forward. Everyone has socialized everything to death. What happens? Are we buying minds? Do we have employees and customer service?
We will all always be on the left side of the curve. This will eventually be mainstream and we will move onto semantics and predictive markets. Predictive and semantic intersection with social world will be off the hook.
Pay attention to who the linkerati is out there. Let the people do the work...to carry your message further.
Search the key words that matter your business. Google: Essential Guide to Social Media.
Example: competitor went first to answer the questions. Outbound resource center for the people.
Smart companies are trying to do this but the various different groups are not coordinated. Internal HR issues make execution difficult. This is a key problem to address.
People think it is a campaign. BlairWitch of 2.0. They need a "social media" officer. Need it to do it 1 company at a time. What about "community manager"? They have more trust than CMO's.
Make us a viral video - it is the People that make it viral.
Analytics make it powerful.
Key is to smart small - see Google.
HomePage of Digg is still only 4,000 people.
Check out Help A Reporter: http://shankman.com
Old school people are not going to get on Twitter....son got off Facebook when she got on. Individual here can't even get her company (BigCo) to even participate in "viral" marketing.
How do we educate the masses? "But that's just online."
Question: What is your content?
Answer: Be interesting, compelling and valuable.
But we aren't even there yet. See JohnEdwards - it should not be a one-way broadcast mechanism.
Conversations are King.
IBM's social networking platform: how will we monetize this?
Answer is difficult.
Metrics matter. In corporate context - filter content. What metrics matter most? Talk later.
We all have a currency that other people don't have.
Check out Mahalo.com.
Etc.
Thanks to an excellent panel!
www.socialmediaclub.la will be the Blog.
Sunday, July 13, 2008
Keep Learning - Admit Failure
One thing I admire about older people is when they continue to stretch their minds and learn new subjects into their later years. I hope that no matter what happens to me physically or otherwise that I can retain the curiosity that makes life interesting and inspires me to keep digging into new subjects.
One of the key elements of learning that I have been reflecting on of late is the ability to admit when you are wrong. As a somewhat arrogant "A-type" guy, I have never been one to accept defeat lightly - on way too many subjects.
However, this blog has been a place where I can not only spout my theories about the financial markets, which have unfortunately played out correctly for the most part, but they have also publicly highlighted my mistakes - leaving little room for backtracking.
Case in point was my blog post almost one year ago (August - 2007) praising IndyMac for its transparency as the credit crisis first began to worsen:
Transparency Is Sometimes Scary
Although I did not explicitly state that the company would be OK at the time, I did complement the CEO and the company itself for being upfront with investors about how bad the situation was at the time - a time when CFC had yet to crack and few were acknowledging just how bad things were in the market.
The mistake I made was trusting transparency as enough for the continued viability of Indymac. I thought that the company would be able to make it through the difficult times by remaining open and honest with its investors.
Friday, the FDIC shut down Indymac in the second largest bank failure in history:
IndyMac Bank seized by federal regulators
The depositors will get their funds, and the taxpayers (through the FDIC) will ensure that the repercussions of this failure will be as muted as possible.
However, when I look at the implications of this for the housing market and the continued challenges of our economy a darker picture emerges...one that begins to call into question my continued hopes for optimism echoed over the last few months here on this blog.
If the second largest mortgage originator is closed and Freddie and Fannie are barely viable (for those interested, Paulson today announced that the government may have to pour more funds into these entities to ensure their viability, discussed here:
Paulson Seeks Authority to Shore Up Fannie, Freddie) how is the housing market going to rebound?
Sure the Senate announced a $300B bill to help stem foreclosures, but this has yet to be jibed with the House version, and even then it is unclear Bush will sign it.
But what about going forward? All indications are suggesting that the innovation of securitization is dead if not on life support...and this means that the promise of a new paradigm of global liquidity may be gone with it.
A world with less capital floating around is less comfortable for all of us, as we are forced to start making choices again that perhaps we were able to refinance only two years ago. And homeowners can't refinance or finance at all without a bank to lend to them.
With these dark clouds looming, I am nevertheless retaining a nuggest of optimism for the innnovations of social-media and green energy as two areas where tangible and exciting things continue to happen.
Whether in the announcement that:
SunPower (SPWR) Selected By FPL To Build Largest Solar Photovoltaic Power Plant in US
or in the 3G Iphone global launch on Friday, exciting stuff continues to happen even as the clouds on the global economy continue to darken.
So I will continue to fuel the flames of my curiosity by exploring those two areas...and probably too many more.
And I will continue to look into the mirror and honestly admit my mistakes - as much as I can while keeping my head just high enough.
One of the key elements of learning that I have been reflecting on of late is the ability to admit when you are wrong. As a somewhat arrogant "A-type" guy, I have never been one to accept defeat lightly - on way too many subjects.
However, this blog has been a place where I can not only spout my theories about the financial markets, which have unfortunately played out correctly for the most part, but they have also publicly highlighted my mistakes - leaving little room for backtracking.
Case in point was my blog post almost one year ago (August - 2007) praising IndyMac for its transparency as the credit crisis first began to worsen:
Transparency Is Sometimes Scary
Although I did not explicitly state that the company would be OK at the time, I did complement the CEO and the company itself for being upfront with investors about how bad the situation was at the time - a time when CFC had yet to crack and few were acknowledging just how bad things were in the market.
The mistake I made was trusting transparency as enough for the continued viability of Indymac. I thought that the company would be able to make it through the difficult times by remaining open and honest with its investors.
Friday, the FDIC shut down Indymac in the second largest bank failure in history:
IndyMac Bank seized by federal regulators
The depositors will get their funds, and the taxpayers (through the FDIC) will ensure that the repercussions of this failure will be as muted as possible.
However, when I look at the implications of this for the housing market and the continued challenges of our economy a darker picture emerges...one that begins to call into question my continued hopes for optimism echoed over the last few months here on this blog.
If the second largest mortgage originator is closed and Freddie and Fannie are barely viable (for those interested, Paulson today announced that the government may have to pour more funds into these entities to ensure their viability, discussed here:
Paulson Seeks Authority to Shore Up Fannie, Freddie) how is the housing market going to rebound?
Sure the Senate announced a $300B bill to help stem foreclosures, but this has yet to be jibed with the House version, and even then it is unclear Bush will sign it.
But what about going forward? All indications are suggesting that the innovation of securitization is dead if not on life support...and this means that the promise of a new paradigm of global liquidity may be gone with it.
A world with less capital floating around is less comfortable for all of us, as we are forced to start making choices again that perhaps we were able to refinance only two years ago. And homeowners can't refinance or finance at all without a bank to lend to them.
With these dark clouds looming, I am nevertheless retaining a nuggest of optimism for the innnovations of social-media and green energy as two areas where tangible and exciting things continue to happen.
Whether in the announcement that:
SunPower (SPWR) Selected By FPL To Build Largest Solar Photovoltaic Power Plant in US
or in the 3G Iphone global launch on Friday, exciting stuff continues to happen even as the clouds on the global economy continue to darken.
So I will continue to fuel the flames of my curiosity by exploring those two areas...and probably too many more.
And I will continue to look into the mirror and honestly admit my mistakes - as much as I can while keeping my head just high enough.
Thursday, July 10, 2008
Save Our Neighbors' Homes
One area that has yet to "bottom" in any sense, and one that unfortunately does not appear to be improving anytime soon is the housing market.
This news today from Bloomberg is unsurprising, but nevertheless sad to hear:
Foreclosures Rose 53% in June, Bank Seizures Triple
Unlike statistics about big companies taking billions of dollars in writedowns, these home foreclosure statistics are about real people losing the most important tangible things in their lives...their homes.
Some self-righteous "free-marketers" I have met like to get on their high horses and say stuff like: "They shoulda' known better before gettin' in that house they couldn't afford" or even worse "It serves 'em right for overextending themselves", but such a view is not only insensitive, it is also borderline unintelligent at a macro level.
Very simply: if the most sophisticated investors and financial analysts in the world, including the Federal Reserve, could not anticipate the possibility that the housing market might implode like it has, how could an average American with a moderate education do so? In other words, why was it so unreasonable for homeowners to buy into the same hype about the housing market that is now coming back to bite the creators and sellers of residential ABS, CDO's and other securities?
To me it seems almost irrational to have such a double standard, but perhaps more importantly it is insensitive and un-American.
We live in this country as fellow-citizens relying on one another for things from as simple as our city streets and services to things more complex and difficult like war and peace and finally for our financial system including the real estate mortgage market. That the mortgage finance market is important is beyond debate given how central the concept of 'home ownership' is to the American Dream. Its importance is reflected in the ongoing discussions in Washington about what should be done to help Fannie and Freddie as well as the government's intervention in preventing the failure of Bear Stearns.
While relying on the government to do something to help here while shaking our heads at our neighbors is surely an easy thing to do, it is, as I stated above, an unAmerican way of dealing with the situation. As citizens who help one another in a myriad of ways, a better way of dealing with the foreclosure crisis would be to literally go next door and talk to your neighbor about the challenges she faces. Those of us who happen to be graced with a more comfortable situation should try to think of ways to help those who are feeling the strains of the housing crunch just like we tie yellow ribbons around trees to support our troops abroad or stop on the side of the street to help someone with a flat tire.
I know such a statement is amorphous and perhaps idealistic, but as millions of our fellow citizens continue to lose their homes, it seems to be important. Maybe writing your government representatives in Washington is enough given the realistic strains on your time and energy.
But in the mean time, before you or someone you know makes an insensitive or irrational comment about how homeowners should have known better, consider this fact:
Warren Buffett's Berkshire Hathaway's stock is down 35% since November of last year.
If Buffett can't navigate the current markets, how can we expect more from homeowners?
I am hopeful that we will come together, perhaps through Congress, to do something to help here. In the mean time, good luck with your mortgage payment and your portfolio.
This news today from Bloomberg is unsurprising, but nevertheless sad to hear:
Foreclosures Rose 53% in June, Bank Seizures Triple
U.S. foreclosure filings rose 53 percent in June from a year earlier and bank repossessions increased the most since RealtyTrac Inc. began collecting data in January 2005 as deteriorating property values forced more people to give up their homes
Unlike statistics about big companies taking billions of dollars in writedowns, these home foreclosure statistics are about real people losing the most important tangible things in their lives...their homes.
Some self-righteous "free-marketers" I have met like to get on their high horses and say stuff like: "They shoulda' known better before gettin' in that house they couldn't afford" or even worse "It serves 'em right for overextending themselves", but such a view is not only insensitive, it is also borderline unintelligent at a macro level.
Very simply: if the most sophisticated investors and financial analysts in the world, including the Federal Reserve, could not anticipate the possibility that the housing market might implode like it has, how could an average American with a moderate education do so? In other words, why was it so unreasonable for homeowners to buy into the same hype about the housing market that is now coming back to bite the creators and sellers of residential ABS, CDO's and other securities?
To me it seems almost irrational to have such a double standard, but perhaps more importantly it is insensitive and un-American.
We live in this country as fellow-citizens relying on one another for things from as simple as our city streets and services to things more complex and difficult like war and peace and finally for our financial system including the real estate mortgage market. That the mortgage finance market is important is beyond debate given how central the concept of 'home ownership' is to the American Dream. Its importance is reflected in the ongoing discussions in Washington about what should be done to help Fannie and Freddie as well as the government's intervention in preventing the failure of Bear Stearns.
While relying on the government to do something to help here while shaking our heads at our neighbors is surely an easy thing to do, it is, as I stated above, an unAmerican way of dealing with the situation. As citizens who help one another in a myriad of ways, a better way of dealing with the foreclosure crisis would be to literally go next door and talk to your neighbor about the challenges she faces. Those of us who happen to be graced with a more comfortable situation should try to think of ways to help those who are feeling the strains of the housing crunch just like we tie yellow ribbons around trees to support our troops abroad or stop on the side of the street to help someone with a flat tire.
I know such a statement is amorphous and perhaps idealistic, but as millions of our fellow citizens continue to lose their homes, it seems to be important. Maybe writing your government representatives in Washington is enough given the realistic strains on your time and energy.
But in the mean time, before you or someone you know makes an insensitive or irrational comment about how homeowners should have known better, consider this fact:
Warren Buffett's Berkshire Hathaway's stock is down 35% since November of last year.
If Buffett can't navigate the current markets, how can we expect more from homeowners?
I am hopeful that we will come together, perhaps through Congress, to do something to help here. In the mean time, good luck with your mortgage payment and your portfolio.
Wednesday, July 9, 2008
Positive Signs?
Although it is hard to think we are nearing a bottom in the credit crisis when Bridgewater comes out with estimates that losses will reach $1.6T (topping Mr. John Paulson's estimates of $1.2T this Spring), there are emerging signs that the "crisis" has become consensus and that perhaps we are nearing some kind of bottom or inflection point.
One such sign is that the following comprehensive report from Wharton details much of what has been discussed here and on other blogs over the last year:
Inside the Subprime Crisis
In other words, now that the knowledge and details of the various components of the fall-out in the credit markets is being understood and discussed, it seems logical to conclude that the collective masses can now start to address and stop the underlying cause. One such cause - the lack of understanding itself - is clearly mitigated by discussions like this.
Another sign, on the absurd front, was this article yesterday on Bloomberg:
Toxic CDOs Given Up for Dead Coming to Life With Pension Funds
In the "a rose by any other name would smell as sweet" category, it appears that Wall Street may have found a way to resurrect the securitization market:
The aburdity of the Re-Remics' name underscores the challenges the credit markets are facing and at the same time it highlights the innovative spirit of capitalism.
And it is this spirit that brings optimism...the thousands of brilliant (yes - these dudes are mad-smart) men and women on Wall Street are not going to roll over and play dead as the markets grind to a halt. Instead, they will and have been doing the opposite. They will fight tooth and nail to find a way to jump start the machine of credit.
Given that Uncle Ben has made it clear that he is going to continue to reach out a welcoming hand to pull the crew along, I can begin to see a scenario where the losses from residential mortgage lending and buy-out finance don't spread to consumer loans, commercial real estate, and corporate credit en masse...
But then again, I am somewhat of a dreamer.
One such sign is that the following comprehensive report from Wharton details much of what has been discussed here and on other blogs over the last year:
Inside the Subprime Crisis
In other words, now that the knowledge and details of the various components of the fall-out in the credit markets is being understood and discussed, it seems logical to conclude that the collective masses can now start to address and stop the underlying cause. One such cause - the lack of understanding itself - is clearly mitigated by discussions like this.
Another sign, on the absurd front, was this article yesterday on Bloomberg:
Toxic CDOs Given Up for Dead Coming to Life With Pension Funds
In the "a rose by any other name would smell as sweet" category, it appears that Wall Street may have found a way to resurrect the securitization market:
Collateralized debt obligations that helped drive banks to $400 billion of writedowns and credit losses are finding buyers under a different name: Re-Remics
The aburdity of the Re-Remics' name underscores the challenges the credit markets are facing and at the same time it highlights the innovative spirit of capitalism.
And it is this spirit that brings optimism...the thousands of brilliant (yes - these dudes are mad-smart) men and women on Wall Street are not going to roll over and play dead as the markets grind to a halt. Instead, they will and have been doing the opposite. They will fight tooth and nail to find a way to jump start the machine of credit.
Given that Uncle Ben has made it clear that he is going to continue to reach out a welcoming hand to pull the crew along, I can begin to see a scenario where the losses from residential mortgage lending and buy-out finance don't spread to consumer loans, commercial real estate, and corporate credit en masse...
But then again, I am somewhat of a dreamer.
Saturday, July 5, 2008
Aspen Ideas Festival - President Clinton
Here are my notes from President Clinton's excellent speech at the Aspen Ideas Festival. Also, if you are interested here is a video of the speech: A Conversation with President William J. Clinton. I should also note (due to a comment below) that these notes, while extensive, are obviously incomplete.
Intelligence and effort are evenly distributed. Systems are more important than we think. You would be shocked if the lights went off.
In the developing world you can't take that for granted.
Mr. Powell was able to succeed because there was a system that was predictable.
We need to create systems that are predictable that allow them a chance to understand the outcomes of their effort - we need to give every child an "arc" for their effort.
How important is ingenuity?
It is very important. Premise of military - leaders are made as well as born.
Leadership matters.
Kyoto.
Many did sign it. 155 countries had to try to reach Kyoto targets.
6 to 8 will make it.
Leaders were not willing to stay poor.
To mobilize the economic resources of the country to make money.
Denmark, UK and others treated it as an opportunity to make money and they have done well.
Why don't we capture the wind between Texas and Canada.
Leadership is important but not enough. You need systems also.
Mr. Mandela
Mr. Mandela gave up his own freedom to prove that Freedom is a Universal commodity. He invited all of the leaders of his oppressors into his government because he knew that he needed them. You don't have to be in office to do public service. You can do it as a private citizen - used his stature to help others even later in life. He showed us all how to live. When he was released, "I felt anger, and hatred and fear, when I left, I let go of the hatred because I wanted to be free".
Every living soul on the planet has a justified reason to be angry.
He disciplined his mind and heart and spirit to overcome it every day.
What will happen in the aftermath of Mugabe's going?
Mr. Mandela gives us a universal lesson: we should all live from a place from forgiveness.
Itzak Rabin the other greatest person he ever knew.
HIV AIDS.
2002 AIDS conference in Barcelona - if you were rich you could get meds. 6mm needed it but only 200k could get it.
Mr. Mandela saw what was needed. He told a story about a young woman who had AIDS, and he paid for this woman's medicine. He had no connection to her, he wanted her to be a beacon.
Mr. Mandella said: this is what you should be doing.
Mr. Clinton realized this was important. Started doing it. 2.8 mm take medicine now. 1.4mm from Clinton-negotiated contracts.
Generic Drugs,
Cut the price structure for all drugs by driving up volumes. (got kids drugs from $600 to $60). Chris and Jamie Cooper Hahn negotiated a deal to do more.
Best thing the French have done - created a minor charge on intl flights - this money is used to fight problems for kids globally.
Did the same thing with fertilizer in Rwanda and Malawi...similar things with building equipment.
Simple change in business models can do a lot.
Food Crisis
Within 30 years if not before, people will be consuming more local produce (within 150 miles of home). Agricultural self-sufficiency is a national security issue and energy issue.
Alliance for a Green Revolution in Africa
When you change productivity, there are issues but we need to increase productivity here.
1 - replicate results of millenium development initiatives and
2 - change the way we deliver food aid. Now, has to be grown in America and delivered by American flag ships. Canada gives cash close to crisis. President Bush has been trying to do this here, but the Dems and Republicans are holding it back. Crazy that people are fighting this.
GMO Crops - safety is important. Let people continue to debate the issue. Look at the evidence and see what the data tells us. There are a lot of unanswered questions here. We should win the debate in an old-fashioned and honorable way.
One new experience - we have tripled the number of people who have autism in 15 years. No one knows why.
Mr. Clinton was shocked. Doesn't know what the answer is here.
Climate. What should we do to retrofit cities? Are "green jobs" an opportunity?
Almost 75 percent of greenhouse gas emissions are emitted in the U.S.
We should pick the low hanging fruit.
If the U.S. India, China and Russia were to reach Japanese levels of efficiency, we would be 25 percent of the way to 80 percent reduction.
Low hanging fruit is in efficiency.
We should look for systematic ways to change things.
Only $5b in the whole world was being used for retrofits - raised more than that in a day and now have started with public and now moving to private to analyze and determine what best low-hanging fruit initiatives. For instance, NYC public housing, cutting annual cost from $500 mm to 350 mm per year. Energy Service Organization guarantees underwriting of these projects and banks will fund this with the proceeds from energy savings go to service debt.
Sears Tower, etc. are doing this. Jim Rogers (Duke Power) says everyone should offer this because it will allow the power companies to better utilize existing system. Just use current stuff more efficiently - can prevent building new power plants.
The money is there to be made, we are not organized to make it.
This is not just a thing for the rich. Ethiopia can grow sugar just like Brazil.
Everybody can do it and make money out of it.
Thomas Jefferson said: Education is the bedrock of Democracy.
World - everything we want to do is complicated by the massive urban population growth. Given the various issues around controlling population growth, the most clear way to do this is to put every single girl in the world in school. 60 percent of the unschooled are girls.
If you put them in school and give them access to work, there is always a reduction in birth rates.
Key: support education of girls.
In America, we have great colleges and universities and not as good at k-12.
We have most diverse classrooms (by any metric), and we have made up the delta by sending tons of people to college, having immigration, and other issues.
We should not continue to dump more money into bad schools.
Issues: leadership and governance
We are good at 4th grade level. Gap emerges at 8th grade level and then splits massively.
Sure there are lots of social issues.
We need to move towards local operational control, but national movement for better trained and compensated teachers, real oversight for Superintendants and Principals.
We should move to a more generalized national test. Needs to be a national crusade.
We need to go more school, pay teachers more and remove beaurocracy.
Find the 20 schools that are great and replicate it.
We have stubbornly refused to replicate excellence and we are paying the price.
Spirit of Optimism.
Next generation has an idealism. What do you see in my generation?
Be optimistic.
Climate Change - something bad is gonna happen, but we don't know when. Something like this is always lurking.
The young generation is the most connected to the internet, the most active socially through NGO's and other, he has never seen this many motivated young people.
Every young person should recognize that this is not an "option".
In an interdependent world, every citizen, the definition of citizenship will include: What can you do to join with likeminded people to do Good in the world?
Public service is key to citizenship.
If we do it, I am optimistic.
These problems are hard. They require dialogue. It is easy to say "we hate the Taliban". We can
Book recommendation: The Big Sort, Bill a Texan.
We are becoming more isolated in our debates because we are able to self-select into likeminded groups.
In 1976, very close election...there was a raging debate about who should win, and very few had 20 percent margin of victory. Were trying to build a national debate. In 2004, 48 percent of the counties voted by a 20 percent margin (a developer recently created a gated community).
One piece of advice to young people.
Do public service with someone who looks and thinks differently than you.
Be worried about the increase in inequality. 90 percent of the benefits have just gone to 10 percent of us. Think about those who are desparate. Don't get smug about how enlightened we are.
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Aspen Ideas Festival - Web 2.0 and the Future of the Internet
I just left a panel discussion on the challenges of the future of the Internet and how the government might be able to address it.
The most promising data point from the talk came after it was over. Clay Shirky told me that the Navy Seals are using a mashup of Twitter, Google Maps and Facebook to track the status of operations.
Here are the notes from the panel.
Shirky - Internet Guru and author of Here Comes Everybody.
Fran Townsend - former Homeland Security chair
Paul Tumi - President of ICANN
What they mean by web 2.0 - new forms of social interaction. "future of a webbed community"
Tensions - preserve "open" internet as a conduit for global commerce and prevent identity theft, protection of intellectual property and internet. Sustain dominance, etc.
Previous revolution - industrial revolution - key outcome, ability to wage war on a global basis.
Information revolution - what are global "war type" issues emerging out of this.
Shirky - dissolution of cyberspace. Among the population of grad students. It is seeping into everything we do - partly mediated and partly not.
Augmenting of the "real world" by a smear of cyber and not.
Transition not from A to B, but instead from one to many.
Society is becoming less predictable. More like the physics of weather than the physics of gravity.
Obama has run into a pt where individuals would want more influence - we know it, just not when.
Paul - Internet is going Asia.
73 percent penetration here. 14 percent in Asia and it is growing at triple the rate.
Internet has developed a view that is global, but over next 5 to 10 years, how to you deal with Asia?
3 layers of the internet. 1 transit - telecoms and pipes, 2 - routing and addressing, 3 - applications and content. Level 3 is the most controversial.
Fran - token "non geek" on the panel. Responsible for cyber security policy as related to the government.
President signed a directive saying we will have a better understanding of intrusions, and investigative capabilities, but this is focused on govt getting its own house in order.$7.2 B budget here. Government knows this is important. So far hackers / enemies have not used it to infiltrate or attack. Instead using it for media / propaganda and pictures. Govt is focused on vulnerability of information systems. FBI agent got info and sold it. Govt has its own internal IS problems. Both before and after it is "connected" to the Internet.
Security must have redundancy, etc. Must manage risk.
Paul - who controls it. No one. It is a spider's web on steroids. ICANN regulates .com and IP systems. In terms of security, the Internet is always a dialogue between me and someone else. Key is supply chains.
Analogy to public health - it is an ecosystem.
Benefits outweigh the costs. Risk management is important here.
Private sector has to take care of this themselves.
Fran.
People need to fundamentally change the way they look at risk.
Estonia last year - series of attacks that brought them to their knees.
Could this happen to the US?
Paul - yes.
Concentration in Estonia made it easier. This isn't unique.
Fran - not just a security issue. It is a redundancy and resiliency issue.
Government alone can't deal with this.
Must be more than this.
Shirky - horseless carriage? No. Most actors are not states.
Many groups are more powerful than many states.
War footing around Estonia?
Not really. Under attack is not necessarily about one state to another.
Many more groups can become powerful and act now.
How do you attribute attacks then?
Shirky -
"letters of mark and reprisal" - pirates were ok if we get a cut.
Licensing and supporting groups...as analogy.
When an attack happens. Do I know these people? Can I attribute them?
If I can't, this is a big issue.
Fran -
Attribution is a challenge. Is it a "State"? If not, how for we respond?
Paul - Fire drill analogy.
"Risk" analysis.
Public people have more risk because they are public targets.
Issue - private actors don't get it.
Lots of people bring laptops into foreign countries and their data gets hacked.
Loss of IP is a big issue here.
Trends:
Shirky -
Advantage - explosion of creativity. Site of Leggo figurine mod-ing community. They love what the do. Doing it worldwide at no cost. Multiplied by a billion. Is massive.
Household economics - parents feed their children for free. Household economics going global. People sharing because they like it.
Paul - Internet is the ultimate expression of American Values. Bottom up, free expression of democratic values. Impact around the world that people inside the beltway don't get.
China - internet has become the social dialogue of china. More users than the US. They are using it to find what the people want / need. Dialogue between the community and government.
One of the worst things that could happen would be to try to slow it down.
Fran -
There is almost no risk of US trying to control it.
Have been (for 15 yrs) collaborating. Better approach is to understand and navigate it.
Q+A - our computers got stolen.
How much technology does the government really have?
Government laughs at 24. Govt suffers from Hollywood's interpretation.
Shirky - intelligence community opening up. Key issue - can't even retain people.
What the government needs is a "Manhattan-like project"
Need to have a big announcement and grow it.
Attribution?
Paul - whois? How much should we use this? But problem is that it is very expensive and hard to maintain this system. But also European Privacy commission...you can't track me!
That is just at the domain name level.
No "Secretary of Communications" in our country.
Maybe a privacy director.
Every group in govt has a privacy - bipartisan board.
Paul - you only have 4 to 8 years left. China is going to be massive soon.
Bidu over Google, etc.
If you are going to cement in these values - you only have a short period of time to have power here.
Shirky - people are now writing about "near future" fiction.
Things go from "gee whiz to go hum" fast.
Aggregating "collective intelligence" will be on fire.
Aggregations of data - same thing.
Mobility is the future. How do we do adapt to this?
8 mm handsets per month in India and 4 mm in Egypt.
Government using open source?
They are already. Will do it more. Invested $100's of mm of dollars on open source initiatives. Public discussion of this has taken place and will continue. Because it is more cost-effective.
Multiple internets?
Yes. This already exists. Question is how different this becomes?
Groups already create their own networks but they can't compete with main internet.
Problem is protocol and cross platform communication.
Eastern European - advertising excludes those who aren't advertised to?
Is it going to be forever closed?
No. Closed people will be losers.
Only group large enough to ensure openness is everybody.
Net Neutrality - need competition on local industry aggregation by service providers.
Imbedded devices?
Adam greenfield - EveryWear.
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Sunday, June 29, 2008
Black Gold
With the price of oil hovering around $140 per barrel, the commodity boom can no longer be ignored.
The price of oil is one area where I have been consistently mistaken and dumbfounded over the years. When it first peaked to $60 back in 2005, I openly told friends that I thought it would fall within the year. I even went so far as to investigate options for betting against its continued rise.
Mistakes are human and, though humbling, they are also one of life's gifts because they give us the opportunity to learn.
In the case of oil, what I missed over the last 2 years was that contrary to my naïve intuition, which suggested that oil would be mean reverting like other asset classes, oil's rise is being driven by at least a belief that the supply and demand dynamics have fundamentally altered.
Whether pointing to the industrialization and modernization of China and India, the excess consumption of Americans, or the growing global population, commentators have many options for identifying the "root" of a world where oil is demanded at a greater rate than even a decade ago. At the same time, with a rising Russia, a hawkish Venezuela, and an unstable Middle East, supply has become less certain. Furthermore, doomsday "peak oil" theorists have continued to clamour that we have reached Hubbard's Peak and that as a result we will literally start running out of oil sometime soon.
One reason I have continued to expect oil to decline is that I believe that the economics of scarcity is dynamic and reactive. In other words, I believe that technological innovation can help make previously scarce resources either obsolete (through innovative replacement), less important (through efficiency) or more abundant than we previously believed (through exploration and discovery).
I continue to believe that these factors will help to address the supply-side constraints when we look at the world's oil markets. However, the perhaps accurate market's assessment of the current future demand growth as well as the market's perception of supply issues have combined with the technical dynamics of the financial markets to create the rapidly increasing price of oil we have witnessed over the last two years.
This rise has been exacerbated by the failure of other asset classes, as investors have - like good sheep - chased the positive returns offered by commodities as other previous staples like real estate and financial companies have proved to be unreliable sources of income.
All of this leads me to believe that the price of oil will come down at some point, but given the difficulty in predicting the various factors influencing its rise (including the irrational behavior of herds) it is very hard to say when.
Now is truly a moment where the Keynesian axiom - the market can stay irrational longer than you can stay solvent - is being put to the test.
Positive side effects like a concerted (albeit sometimes insincere) embrace of alternative fuel technologies, a consciousness of consumption, and an awareness of our dependence on other nations make this situation more bearable than it otherwise would be.
However, the rising ticket prices at the airports may make $2.00 increase in gasoline prices seem insignificant as they threaten to slow down the very globalization that has driven demand to the point where it is today...
But then again, perhaps this is Mr. Smith's invisible hand and scarcity rearing its head.
Time will tell. Until then, enjoy your moped.
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Sunday, June 8, 2008
The Turmoil Continues
As if a surprise, The WSJ reported yesterday that those who were worried about CDO ratings at Moody's (and likely the other agencies) turned out to be correct, and if those with decision making authority had listened to their warnings some of the ongoing market turmoil could have been averted.
This is surely correct in hindsight, and judging from the many commentators who anticipated the cracks in the credit system, perhaps one should shake a finger at those responsible for ignoring such pleas.
At the same time, it is difficult to predict the future with any consistency, and if the current market volatility and conflicting headlines tell us anything it is that a lot of smart people disagree about the next step in the cycle from this point.
One highlight of this increased uncertainty (besides the stomach wrenching moves in the major indices last week) are the massive volume increases in the derivatives markets over the last quarter as reported by Bloomberg here: Exchange Traded Derivatives Rise 30% to $692 Trillion, BIS Says.
The notional value of over the counter credit derivatives has now approached $600 Trillion, a number I cannot comprehend, but as most of you know, this amount overstates the impact this market has on investors as what matters are the fluctuations in this exposure. This equates to a lot of smart money vigorously disagreeing with one another.
My own take is that with the price of oil and commodities continuing to move up as the dollar continues to buckle, it seems very difficult to posit a scenario where consumers are not squeezed to the breaking point under these and credit strains over the coming months. In plain English: it seems that the real people underlying this financial mess will likely continue to have hard times in the short term which isn't a good sign for those who make money by selling and financing stuff to them.
My eyes remained focused on technology, efficiency and mobility as innovation points to lead us forward out of these tough times.
This is surely correct in hindsight, and judging from the many commentators who anticipated the cracks in the credit system, perhaps one should shake a finger at those responsible for ignoring such pleas.
At the same time, it is difficult to predict the future with any consistency, and if the current market volatility and conflicting headlines tell us anything it is that a lot of smart people disagree about the next step in the cycle from this point.
One highlight of this increased uncertainty (besides the stomach wrenching moves in the major indices last week) are the massive volume increases in the derivatives markets over the last quarter as reported by Bloomberg here: Exchange Traded Derivatives Rise 30% to $692 Trillion, BIS Says.
The notional value of over the counter credit derivatives has now approached $600 Trillion, a number I cannot comprehend, but as most of you know, this amount overstates the impact this market has on investors as what matters are the fluctuations in this exposure. This equates to a lot of smart money vigorously disagreeing with one another.
My own take is that with the price of oil and commodities continuing to move up as the dollar continues to buckle, it seems very difficult to posit a scenario where consumers are not squeezed to the breaking point under these and credit strains over the coming months. In plain English: it seems that the real people underlying this financial mess will likely continue to have hard times in the short term which isn't a good sign for those who make money by selling and financing stuff to them.
My eyes remained focused on technology, efficiency and mobility as innovation points to lead us forward out of these tough times.
Thursday, June 5, 2008
Transient
As I stood in line this afternoon, waiting to pick up a prescription at Walgreens, the person in front of me joked: "which address, I have so many" as the pharmacist sought to verify the nurse's identity.
When it was my turn, I scanned the memory to guess which of my various "addresses" Walgreens would have in its system. I guessed right, and thankfully I only keep one phone number so I was set.
But the experience stood out to me not only because I have been bouncing from city to city lately having arrived in LA for my summer job Sunday, but also because I think this relative "homelessness" is becoming more common across our society (including among humble billionaires: The Homeless Billionaire).
As the Internet allows us to connect and become more mobile while retaining the productivity and communication we require, I would imagine that such home-mobility will continue to become more common.
Maybe Walgreens should start asking for websites or email addresses...maybe the idea of "home" will continue to be de-constructed and become defined more by those we care about and share our lives with, than by wherever we may physically be located.
Don't worry, mom, your cooking will always mean home to me. And Texas will probably be the State...at least until my imagination completely takes over.
When it was my turn, I scanned the memory to guess which of my various "addresses" Walgreens would have in its system. I guessed right, and thankfully I only keep one phone number so I was set.
But the experience stood out to me not only because I have been bouncing from city to city lately having arrived in LA for my summer job Sunday, but also because I think this relative "homelessness" is becoming more common across our society (including among humble billionaires: The Homeless Billionaire).
As the Internet allows us to connect and become more mobile while retaining the productivity and communication we require, I would imagine that such home-mobility will continue to become more common.
Maybe Walgreens should start asking for websites or email addresses...maybe the idea of "home" will continue to be de-constructed and become defined more by those we care about and share our lives with, than by wherever we may physically be located.
Don't worry, mom, your cooking will always mean home to me. And Texas will probably be the State...at least until my imagination completely takes over.
Tuesday, May 13, 2008
Leveraged Cubed
This is just plain shady if true: leveraged, leveraged buyouts?
From the sounds of this article Guy Hands Rejects Bank LBO Debt Offers, Sees Subprime Parallels it seems that banks are participating in a ridiculously sketchy-sounding practice: they appear to be bridging sales of bridge-loans that they can no longer sell to the same private equity firms to whom the loans were originally pledged.
In effect, they are loaning money to the same firms to whom the original loans were made.
This is analogous to a 2nd Mortgage Holder on a home loaning a home buyer money to buy the mortgage on their own house.
It is unclear from the article if the bridge^2 are coming from CLO's but if so, this is really 3 layers of leverage to consumate these transactions.
I am hoping the author either misunderstands or is mistaken about the financing for these deals, but given the last year's events, it is probably accurate. Especially when considering that all involved get paid fees based on a percentage of the total $ value of these transactions, there are issues beyond issues all wrapped up in a shady looking box here.
From the sounds of this article Guy Hands Rejects Bank LBO Debt Offers, Sees Subprime Parallels it seems that banks are participating in a ridiculously sketchy-sounding practice: they appear to be bridging sales of bridge-loans that they can no longer sell to the same private equity firms to whom the loans were originally pledged.
In effect, they are loaning money to the same firms to whom the original loans were made.
This is analogous to a 2nd Mortgage Holder on a home loaning a home buyer money to buy the mortgage on their own house.
It is unclear from the article if the bridge^2 are coming from CLO's but if so, this is really 3 layers of leverage to consumate these transactions.
I am hoping the author either misunderstands or is mistaken about the financing for these deals, but given the last year's events, it is probably accurate. Especially when considering that all involved get paid fees based on a percentage of the total $ value of these transactions, there are issues beyond issues all wrapped up in a shady looking box here.
Monday, May 12, 2008
Signs of the Apocalypse
I am willing to bet that there is a group of radicals huddled up in a cave somewhere with half-eaten cans of beans muttering to one another "see...we were right!".
According to them, the horrible earthquake in China today, the tragic storm in Burma, and the financial calamities on Wall Street are all part of the same massive scheme...
And they are right! Only the scheme is wrong.
One of the things I noticed today as news of the horrors surrounding the earthquake in China started hitting my Twitter-stream a few minutes after it happened is that it is pretty amazing how fast news travels nowadays. It is only recently with services like Twitter and blogging before it that we have started to utilize this sweet tool called the Internet to its fullest potential.
So, I think the crazy dudes watching the TV screen are witnessing something revolutionary, just they are like those in Plato's cave watching shadows. You and I, reading these words together on these devices and sharing them with "strangers" half-way around the World - we are outside in the light making that revolution the great thing it is.
Now we need to figure out how to use it to help our friends in China, Burma and elsewhere. Then maybe we can even convince those dudes to get out of the cave.
According to them, the horrible earthquake in China today, the tragic storm in Burma, and the financial calamities on Wall Street are all part of the same massive scheme...
And they are right! Only the scheme is wrong.
One of the things I noticed today as news of the horrors surrounding the earthquake in China started hitting my Twitter-stream a few minutes after it happened is that it is pretty amazing how fast news travels nowadays. It is only recently with services like Twitter and blogging before it that we have started to utilize this sweet tool called the Internet to its fullest potential.
So, I think the crazy dudes watching the TV screen are witnessing something revolutionary, just they are like those in Plato's cave watching shadows. You and I, reading these words together on these devices and sharing them with "strangers" half-way around the World - we are outside in the light making that revolution the great thing it is.
Now we need to figure out how to use it to help our friends in China, Burma and elsewhere. Then maybe we can even convince those dudes to get out of the cave.
Tuesday, May 6, 2008
Mark To...Nothing
I guess another way to stop the bleeding is just to stop valuing assets.
Merrill Says Level 3 Assets Jump 70% in First Quarter
As the article goes on to discuss, these so-called "level 3" assets have continued to spike across the street, including at places like GS, which is well known for having very large private equity interests - a major component of its' level 3 exposure.
One should note that among the $82.4 billion at MER includes a 20% stake in Bloomberg - in other words it is not all toxic hard-to-hold paper.
Though enough of it probably is that I keep holding SKF as an insurance policy as there are surely some shoes plummeting from far above just waiting for an unsuspecting chart-following optimist.
But nevertheless I am keeping the positive hat on another day.
Merrill Says Level 3 Assets Jump 70% in First Quarter
Merrill Lynch & Co. said so-called Level 3 assets climbed 70 percent in the first quarter, as the largest U.S. brokerage reclassified commercial mortgages and other assets as hard to value.
Merrill's Level 3 assets, the firm's most difficult to value, rose to $82.4 billion as of March 28 from $48.6 billion at the end of December, according to a regulatory filing today. The New York-based company's ratio of Level 3 to total assets rose to 8 percent from 5 percent.
As the article goes on to discuss, these so-called "level 3" assets have continued to spike across the street, including at places like GS, which is well known for having very large private equity interests - a major component of its' level 3 exposure.
One should note that among the $82.4 billion at MER includes a 20% stake in Bloomberg - in other words it is not all toxic hard-to-hold paper.
Though enough of it probably is that I keep holding SKF as an insurance policy as there are surely some shoes plummeting from far above just waiting for an unsuspecting chart-following optimist.
But nevertheless I am keeping the positive hat on another day.
Saturday, May 3, 2008
May Rain
One might wonder how a rainy May afternoon in the midst of finals produces optimism, but somehow this afternoon, as I trudged through an overly-gloomy Cambridge afternoon, I felt another twinge of optimism start to bite.
It was surely not hindered when I turned down to my "device" a few moments later to see yet another optimistic headline from our good friend Mr. Buffett (Buffett Says Credit Crisis Ebbs for Wall Street Firms). However the causation was from another source, with this being yet another example of easy mistakes when like outcomes correlate in expected ways.
Instead, the source of this optimism arose from a somewhat unusual source; in the midst of a recent revisit to the existentialist angst of my undergraduate years over the last few weeks, I realized that one of the implications of the imperfect system of our financial markets is that one can err both on the downside and the upside. The same inability to predict the markets that caused quantitative hedge funds driven by the minds of brilliant PHD's to crack creates the possibility for better than expected outcomes if we all band together in optimism.
Whether characterized in terms like: consumer confidence, irrational exuberance, or more simple ones like enjoying the weather; people's perception of world events have very real impacts on how those events materialize in the world. One can see this in concrete terms in the area of quantum mechanics where our observations of subatomic particles literally impacts where they appear in the world. So if we can impact particles, why can't we make waves in the financial markets?
I would argue that we can, and we will. Whether through the herds that almost submerged Lehman after Bear broke or the dot-com mania of people's first introduction to the Internet, we have clearly observed that crowds move markets - both on the upside and the downside.
So although we will surely see way too many people lose their homes over the next year, and unfortunately we will also see friends and neighbors lose their jobs. Maybe we can reach out a helping hand to brush off our collective dirty knees...and get back to making this country the great place that it is. Because you never know, it might be sunny tomorrow, or it may rain.
It was surely not hindered when I turned down to my "device" a few moments later to see yet another optimistic headline from our good friend Mr. Buffett (Buffett Says Credit Crisis Ebbs for Wall Street Firms). However the causation was from another source, with this being yet another example of easy mistakes when like outcomes correlate in expected ways.
Instead, the source of this optimism arose from a somewhat unusual source; in the midst of a recent revisit to the existentialist angst of my undergraduate years over the last few weeks, I realized that one of the implications of the imperfect system of our financial markets is that one can err both on the downside and the upside. The same inability to predict the markets that caused quantitative hedge funds driven by the minds of brilliant PHD's to crack creates the possibility for better than expected outcomes if we all band together in optimism.
Whether characterized in terms like: consumer confidence, irrational exuberance, or more simple ones like enjoying the weather; people's perception of world events have very real impacts on how those events materialize in the world. One can see this in concrete terms in the area of quantum mechanics where our observations of subatomic particles literally impacts where they appear in the world. So if we can impact particles, why can't we make waves in the financial markets?
I would argue that we can, and we will. Whether through the herds that almost submerged Lehman after Bear broke or the dot-com mania of people's first introduction to the Internet, we have clearly observed that crowds move markets - both on the upside and the downside.
So although we will surely see way too many people lose their homes over the next year, and unfortunately we will also see friends and neighbors lose their jobs. Maybe we can reach out a helping hand to brush off our collective dirty knees...and get back to making this country the great place that it is. Because you never know, it might be sunny tomorrow, or it may rain.
Monday, April 28, 2008
The Invisible Hand
Today's announcement by Bank of America is the second in a series of recent rational decisions by private entities seeking to address some of the concerns that exist in the markets.
Bank of America to Modify Mortgages, Help Homeowners
While clearly different in many ways than the industry-wide announcement of a privately orchestrated derivatives clearinghouse (discussed here), BofA is also pro-actively responding to the financial crisis facing millions of American homeowners that has had ripple effects across the globe.
A cynical perspective might suggest that these measures are simply an attempt to prevent direct intervention by regulators in a system in obvious need of repair, or perhaps they just want the merger to be approved.
However, if one considers that such a move is not only the right thing to do, but also economically-rational, then it appears more likely that this was purely an example of the free-market working. Private market participants are nimble and knowledgeable, and at least if we take BofA at their word, they sometimes do the right thing.
While helping 265,000 homeowners is not going to solve the foreclosure crisis we are facing, it is surely a step in the right direction. Now let's hope they follow through.
Bank of America to Modify Mortgages, Help Homeowners
Bank of America Corp., seeking approval of its Countrywide Financial Corp. takeover, said it will modify at least $40 billion in troubled mortgage loans over the next two years to keep customers in their homes. The move would help as many as 265,000 homeowners...
While clearly different in many ways than the industry-wide announcement of a privately orchestrated derivatives clearinghouse (discussed here), BofA is also pro-actively responding to the financial crisis facing millions of American homeowners that has had ripple effects across the globe.
A cynical perspective might suggest that these measures are simply an attempt to prevent direct intervention by regulators in a system in obvious need of repair, or perhaps they just want the merger to be approved.
However, if one considers that such a move is not only the right thing to do, but also economically-rational, then it appears more likely that this was purely an example of the free-market working. Private market participants are nimble and knowledgeable, and at least if we take BofA at their word, they sometimes do the right thing.
While helping 265,000 homeowners is not going to solve the foreclosure crisis we are facing, it is surely a step in the right direction. Now let's hope they follow through.
Thursday, April 24, 2008
Bad Housing But Good E-Coli
Although this is unsurprising, it is now official that the housing slump is entering into record territory nation wide.
New-Home Sales Fall to Low Last Seen in 1990s
The NYTimes today said:
One thing that the article does not mention is the growing amount of foreclosures that are continuing to squeeze homeowners, reduce the demand from future buyers and create an even greater amount of excess supply.
Lets hope innovation can pull us out of this mess.
On that note, I had an interesting, but random conversation with a researcher this evening who told me about the use of genetically modified bacteria to make biofuel.
Perhaps best known for food poisoning, E-coli, have apparently been modified by scientists to make biofuel.
I never thought I would be blogging about E-coli, or that if I was it would be good news, but sometimes life surprises you in unexpected ways:
Efficient Biofuel Made From Genetically Modified E. Coli Bacteria
Here's hoping creators keep creating.
New-Home Sales Fall to Low Last Seen in 1990s
The NYTimes today said:
Buyers vanished from the housing market in March, as sales of new homes plummeted to the lowest level since the housing recession of the 1990s, the government said on Thursday.
Builders are now faced with the biggest backlog of unsold homes in more than a quarter century, a sign that home values may continue to drop.
One thing that the article does not mention is the growing amount of foreclosures that are continuing to squeeze homeowners, reduce the demand from future buyers and create an even greater amount of excess supply.
Lets hope innovation can pull us out of this mess.
On that note, I had an interesting, but random conversation with a researcher this evening who told me about the use of genetically modified bacteria to make biofuel.
Perhaps best known for food poisoning, E-coli, have apparently been modified by scientists to make biofuel.
I never thought I would be blogging about E-coli, or that if I was it would be good news, but sometimes life surprises you in unexpected ways:
Efficient Biofuel Made From Genetically Modified E. Coli Bacteria
Here's hoping creators keep creating.
Intelligent CDS Reform
The WSJ has a great article today suggesting the benefits of a central clearinghouse for derivatives contracts that are currently traded over the counter.
Here is the article: Street Seeks Credit-Default Safety Net: Banks, Exchanges Speed Effort to Launch Clearinghouse to Back Derivatives Swaps
For those of you who have been reading this blog for awhile or have talked to me for more than 10 minutes about the credit crisis, you probably know that my biggest fear for the markets involves a doomsday scenario where a major institution fails, leaving a variety of counterparties holding CDS contracts without anyone on the other side (earlier post: The Fan).
It seems like one step towards averting such a potential disaster is to have more transparency in this very opaque market so that people can have a better idea about what risks their counterparties are taking.
According to the article:
While there are issues around continued innovation (e.g. the creation of new derivatives), standardization (e.g. which contracts would be used), and internationalization (e.g. people could potentially trade elsewhere), this concept sounds promising.
It is also an excellent example of the market offering a solution to a regulatory failure. Let's just hope that the Fed keeps their hands off or at least encourages these sophisticated players as they develop this promising market-based solution.
Here is the article: Street Seeks Credit-Default Safety Net: Banks, Exchanges Speed Effort to Launch Clearinghouse to Back Derivatives Swaps
For those of you who have been reading this blog for awhile or have talked to me for more than 10 minutes about the credit crisis, you probably know that my biggest fear for the markets involves a doomsday scenario where a major institution fails, leaving a variety of counterparties holding CDS contracts without anyone on the other side (earlier post: The Fan).
It seems like one step towards averting such a potential disaster is to have more transparency in this very opaque market so that people can have a better idea about what risks their counterparties are taking.
According to the article:
More than a dozen firms including investment banks, brokerage firms and futures exchanges are accelerating efforts to create a clearing entity that would function as the middleman between firms on both sides of a credit-default swap. The clearinghouse would guarantee payment on the contracts it handles, reducing the risk of a catastrophic ripple effect if one or more firms were unable to make good on their trades.
While there are issues around continued innovation (e.g. the creation of new derivatives), standardization (e.g. which contracts would be used), and internationalization (e.g. people could potentially trade elsewhere), this concept sounds promising.
It is also an excellent example of the market offering a solution to a regulatory failure. Let's just hope that the Fed keeps their hands off or at least encourages these sophisticated players as they develop this promising market-based solution.
Tuesday, April 22, 2008
Former Telecom CEO And Mobile Internet
Today I had the great privilege of having lunch (along with a group of fellow students) with the former CEO of Chunghwa Telecom, Dr. C.K. Mao. He genuinely was one of the most impressive people I have met in a long time, and I don't think I will be able to do it justice in this post.
He had a very clear and calm charisma about him, yet was able to slice through incredibly complex concepts and articulate brilliant answers in a very meaningful and precise way - all in a second language.
The key takeaway from his various years in leadership across a wide variety of sectors both in government and outside was:
Domain knowledge is not as important as having a tool kit that you can bring across various industries. His kit includes "decision making" and "change management". You should develop your own
To communicate big ideas at the transition point in an industry (for Dr. Mao at CHT this was in the transition from landlines to broadband/DSL): get people involved in *doing*: half will get involved and feel motivated, 30 percent will follow their lead, and 20 percent will probably quit or leave the firm.
He also had some very interesting thoughts about the future of mobile and phone services generally, which he sees progressing towards mobile IP-based data-transmission.
As I can attest to by the fact that I am drafting this note on a blackberry mobile device, I strongly believe in the future of the mobile internet. I am convinced that mobile is the future in more ways than one. Our fixed screens will be cool and good for media content, but lots of content will be easily accessible and text/image based along with us all the time. We will be able to interact socially in ways that make holding the device in our hands just part of the way things are done...and you guys will stop getting annoyed at my typing away...maybe that last bit is a bit too far-fetched, but there are exciting times ahead.
He had a very clear and calm charisma about him, yet was able to slice through incredibly complex concepts and articulate brilliant answers in a very meaningful and precise way - all in a second language.
The key takeaway from his various years in leadership across a wide variety of sectors both in government and outside was:
Domain knowledge is not as important as having a tool kit that you can bring across various industries. His kit includes "decision making" and "change management". You should develop your own
To communicate big ideas at the transition point in an industry (for Dr. Mao at CHT this was in the transition from landlines to broadband/DSL): get people involved in *doing*: half will get involved and feel motivated, 30 percent will follow their lead, and 20 percent will probably quit or leave the firm.
He also had some very interesting thoughts about the future of mobile and phone services generally, which he sees progressing towards mobile IP-based data-transmission.
As I can attest to by the fact that I am drafting this note on a blackberry mobile device, I strongly believe in the future of the mobile internet. I am convinced that mobile is the future in more ways than one. Our fixed screens will be cool and good for media content, but lots of content will be easily accessible and text/image based along with us all the time. We will be able to interact socially in ways that make holding the device in our hands just part of the way things are done...and you guys will stop getting annoyed at my typing away...maybe that last bit is a bit too far-fetched, but there are exciting times ahead.
Monday, April 21, 2008
Peter Lynch Visits Harvard
The Harvard Investment Club hosted Peter Lynch today to offer some basic advice on investing in public equities. Mr. Lynch is one of the most well known and likely one of the most successful investors in history judging from the track record of his Magellen Fund at Fidelity, which returned 29% compounded over the 23 years he managed the fund while growing it from $18 million to the $14 billion in assets when he retired from the fund in 1990.
He gave very commonsensical sounding yet insightful advice to future investors. The notes from the talk follow below:
---------------
A. Know what you own.
When a stock goes down and you don't understand what the company does, you don't know whether to sell or buy more. Don't buy things that are complicated. He bought stocks like Dunkin Donuts.
Keep in mind, the average stock has had a range of 100% from high to low. If you don't know what you own, you are likely to "turf it" (sell it right before it goes up). People should employ their advantages, and buy stuff they know a lot about.
B. It is futile to predict the economy, interest rates and the stock market. (*ignore this point* ;-))
You just don't know what is going to happen. Predicting the future is a waste of time. If you spend 13 minutes on economics you have wasted 10 minutes. Small economics...asking questions like: how much does aluminum cost? and does a recession impact used cars or new car sales? are a good idea.
C. You have plenty of time.
When WMT went public they were a 15 year old company. 10 years later they were up 10x and after 15 more years 30x more (300x total). There are good companies, but not a lot of them. Fortunately, you don't need to find a lot of them just a few over a career.
D. 10 most dangerous things people say about stock prices:
1. If its gone down this much already it can't go any lower.
One of his favorite stocks went from 15 to 12.5 to 9 all the way to 3. He was still confident thinking that he was "a little early". With a level head, he bought more and ultimately did well on the investment.
2. If it has gone this high, it can't go higher.
This is simply not true. MCD, MSFT, GOOG are all examples.
3. Eventually they always come back.
Sometimes they don't.
4. It is trading at $3. How much can I lose?
All of it.
5. Its always darkest before dawn.
It is darkest before complete blackout.
6. When it rebounds to $10, I'll sell.
Numbers don't matter. They are arbitrary.
7. What me worry? Conservative stocks don't fluctuate much.
Things change. See the electric utility industry.
8. Look at all the money I've lost, I didn't buy it.
Don't look at the ones you miss.
9. I missed that one. I'll catch the next one.
Maybe not.
10. The stock has gone up/down I must be right/wrong.
Don't start buying because stocks go up. There is a 100 percent correlation between earnings and stock performance over time.
E. Avoid Long Shots.
The company says "If this works and that works it goes up 20 fold!" But now...no sales. Mr. Lynch was for 30 on these.
F. Importance of Management.
Management is important, but if you have a bad industry and terrific management, you can't win. But simple businesses don't need much management. Mr. Lynch wants to buy a company that any fool can run, because eventually one will.
G. Be Flexible.
Even when industries are successful, you can still lose. MCD, Outback, etc. made money in the restaurant industry even when it was growing at 2%. Even shrinking industries are OK. An industry not going anywhere but where you have a monopoly makes money. Bankruptcy is OK.
H. When to Sell.
When to sell is exactly when to buy. Always write down the reason why you made the investment decision. What is the story?
Stick by the reasons. If the story changes or you are wrong, sell...unless you can come up with a new story.
I. There is always something to worry about!
The organ in the stock market is not the brain. It is the stomach. There is way too much news now.
Key example was in 1991: Recession was imminent, 1st War in Iraq was starting (big concerns about major losses), Banking system was on the brink, etc. But...it all turned around. You can't get too distracted by background noise.
After Caesar died, the market in Rome probably crashed. In the year 1 BC, people worried about Y0k. In 1999 it was Y2k. People overreact. There is always something to be nervous about.
The news today is the depressing channel and the super depressing channel. But look at Brazil, Philippines, Chile, Eastern Europe...there is good news out there.
--------------
This last piece is music to my ears as I seek to ignore the horrible news coming out of the banking sector today. At least for another day or two we will stay on the bright side...but watch out for that other shoe.
He gave very commonsensical sounding yet insightful advice to future investors. The notes from the talk follow below:
---------------
A. Know what you own.
When a stock goes down and you don't understand what the company does, you don't know whether to sell or buy more. Don't buy things that are complicated. He bought stocks like Dunkin Donuts.
Keep in mind, the average stock has had a range of 100% from high to low. If you don't know what you own, you are likely to "turf it" (sell it right before it goes up). People should employ their advantages, and buy stuff they know a lot about.
B. It is futile to predict the economy, interest rates and the stock market. (*ignore this point* ;-))
You just don't know what is going to happen. Predicting the future is a waste of time. If you spend 13 minutes on economics you have wasted 10 minutes. Small economics...asking questions like: how much does aluminum cost? and does a recession impact used cars or new car sales? are a good idea.
C. You have plenty of time.
When WMT went public they were a 15 year old company. 10 years later they were up 10x and after 15 more years 30x more (300x total). There are good companies, but not a lot of them. Fortunately, you don't need to find a lot of them just a few over a career.
D. 10 most dangerous things people say about stock prices:
1. If its gone down this much already it can't go any lower.
One of his favorite stocks went from 15 to 12.5 to 9 all the way to 3. He was still confident thinking that he was "a little early". With a level head, he bought more and ultimately did well on the investment.
2. If it has gone this high, it can't go higher.
This is simply not true. MCD, MSFT, GOOG are all examples.
3. Eventually they always come back.
Sometimes they don't.
4. It is trading at $3. How much can I lose?
All of it.
5. Its always darkest before dawn.
It is darkest before complete blackout.
6. When it rebounds to $10, I'll sell.
Numbers don't matter. They are arbitrary.
7. What me worry? Conservative stocks don't fluctuate much.
Things change. See the electric utility industry.
8. Look at all the money I've lost, I didn't buy it.
Don't look at the ones you miss.
9. I missed that one. I'll catch the next one.
Maybe not.
10. The stock has gone up/down I must be right/wrong.
Don't start buying because stocks go up. There is a 100 percent correlation between earnings and stock performance over time.
E. Avoid Long Shots.
The company says "If this works and that works it goes up 20 fold!" But now...no sales. Mr. Lynch was for 30 on these.
F. Importance of Management.
Management is important, but if you have a bad industry and terrific management, you can't win. But simple businesses don't need much management. Mr. Lynch wants to buy a company that any fool can run, because eventually one will.
G. Be Flexible.
Even when industries are successful, you can still lose. MCD, Outback, etc. made money in the restaurant industry even when it was growing at 2%. Even shrinking industries are OK. An industry not going anywhere but where you have a monopoly makes money. Bankruptcy is OK.
H. When to Sell.
When to sell is exactly when to buy. Always write down the reason why you made the investment decision. What is the story?
Stick by the reasons. If the story changes or you are wrong, sell...unless you can come up with a new story.
I. There is always something to worry about!
The organ in the stock market is not the brain. It is the stomach. There is way too much news now.
Key example was in 1991: Recession was imminent, 1st War in Iraq was starting (big concerns about major losses), Banking system was on the brink, etc. But...it all turned around. You can't get too distracted by background noise.
After Caesar died, the market in Rome probably crashed. In the year 1 BC, people worried about Y0k. In 1999 it was Y2k. People overreact. There is always something to be nervous about.
The news today is the depressing channel and the super depressing channel. But look at Brazil, Philippines, Chile, Eastern Europe...there is good news out there.
--------------
This last piece is music to my ears as I seek to ignore the horrible news coming out of the banking sector today. At least for another day or two we will stay on the bright side...but watch out for that other shoe.
Friday, April 18, 2008
Jeff Bussgang of Flybridge Capital Visits HLS
My VC seminar at HLS had a real treat Monday evening, when serial entrepreneur and venture capitalist, Jeff Bussgang (of Flybridge Capital, formerly IDG Ventures) took time out of his busy schedule to share some of his experiences and lessons learned from his time working on start ups and in the Venture Capital Industry.
Mr. Bussgang, who is an active blogger (visit his blog here) was incredibly down to earth and gave mostly common-sensical sounding but nevertheless insightful advice in plain English. He reminded me once again that speaking with clarity is a sign of true understanding.
My notes from the talk follow below. The post is long, but there are lots of good nuggets of wisdom, first on being an entrepreneur and then on being a VC:
He knew that he wanted to be an entrepreneur from the beginning. Resisted the temptation (and active recruiting) of a V.C. firm who saw value in his undergrad computer science degree and MBA.
Thoughts on Entrepreneurship:
Start-up 1: Athena
In the early 90's (while at HBS) first start up was an app trying to replicate Lotus 1,2,3 for the emerging OS2 platform. It ultimately was not successful, primarily because they were squeezed by IBM.
Lesson 1): Technology is only as good as the platform.
Takeaway: In developing mobile apps today, we should think carefully about choosing I-phone or Android (or other) as the platform. I personally like Android, but Mr. Bussgang suggests I-phone, as the ramp up for Android will be long and unpredictable.
Lesson 2): Be careful who you are beholden to...they were squeezed by IBM because of their total dependence on 0S2.
Lesson 3): Weak team = weak outcome.
Takeaway: Find the right people for the given project.
Start-up 2: Open Market
Again pursuing his passion for entrepreneurship, Mr. Bussgang turned down another rational offer at a consulting VC firms to join a small firm called Open Market. The firm caught the wave and had a $1.2B IPO with $1.8 mm of revenues at the time. When he left in 2000, the firm was still worth $2.0B and had $100mm of revenues.
Lesson 1): Speed wins. Be First. Be Fast.
Lesson 2): Focus is important. Making the incremental improvements from 80% to 90% and on to 100% of quality is hard...but worth it.
Takeaway: Key is to get BOTH sides of the brain working. Be creative and a dreamer, but bring that down to focus and analytics. Be methodical.
Lesson 3): PR vs PE ratio. Keep the news coming.
Lesson 4: At some point the "grown ups" need to come in to run the company.
Lifetime of the company goes from: Jungle, to Dirt Road, to the Highway. And you need different skill sets (and likely different people) at each stage.
Start up 3: UPromise
In another somewhat "irrational" decision, he left a very large sum of unvested stock options on the table to join a company. It had a very attractive valuation though and had a solid team that raised money with 7 people and 20 slides.
Lesson 1: Great People + Great Idea + Great Comps = Great Valuation (comps were trading at 100x revenue at the time)
UPromise ultimately became a $100 MM revenue company. If multiples stayed as high, it would have become a $10B company. In reality, it was still a nice deal with a $300 mm exit in 2006.
Lesson 1: Save TIME not money. (However, time the market. In a down market, take your time).
Lesson 2: Brand is powerful. Difficult to differentiate between "network effects" of something like UPromise, Ebay, and others, but perhaps the early Amazon where network effects were limited shows a pure "brand" power.
Lesson 3: Build a business using "other people's money" in the sense that unlike NetFlix, which must use its own balance sheet to promote its brand, you want to find ways to get others to promote your brand.
Lesson 4: Founder transitions are crucial to consider. Bringing in an outside CEO is sometimes necessary but may rock the boat.
General Thoughts:
Patents don't matter. People, team, and timing trump any piece paper claiming a patent.
Being Mission Driven from the beginning to the end is crucial.
Thoughts on Venture Capital:
Two typical on-ramps to being a venture capitalist:
1) Apprenticeship Model: Join out of school. Work your way up.
2) Entrepreneurship Model: Make VC's money by being a successful entrepreneur. Get invited to join them.
Differences between Entrepreneurs and VC's:
Entrepreneurs are very focused. Narrow and with deep expertise.
VC's don't really execute. They find opportunities and match them with people. A mile wide and an inch deep.
VC industry has changed dramatically since 1999 when there was about $40B of capital available. Today that number is closer to $250-300B.
This means there are more funds, with greater capital bases, making funding small deals uneconomical.
IDG Ventures (now Flybridge) saw this as an opportunity and was launched with a smaller fund to address the needs of smaller start-ups.
The dispersion in VC is massive - even higher than in private equity or mutual funds, which makes picking a great fund even more important for institutional investors. By staying focused, Flybridge can stay in the top tier.
Flybridge is focused on being a true service provider and having a high level of customer service to entrepreneurs. From my perspective this makes a ton of sense.
The reputation market for Venture Capital is highly efficient. Reputation is everything.
In general, the Venture Capital business has had an outsized impact on the world and the economy. Approximately 1,000 partners of venture capital firms have invested in companies that employ 10 million employees and represent 18% of the GDP.
Venture Capital and Entrepreneurship are about as American as it gets. Ben Franklin was one of the first great entrepreneurs and we have not stopped since.
Mr. Bussgang, who is an active blogger (visit his blog here) was incredibly down to earth and gave mostly common-sensical sounding but nevertheless insightful advice in plain English. He reminded me once again that speaking with clarity is a sign of true understanding.
My notes from the talk follow below. The post is long, but there are lots of good nuggets of wisdom, first on being an entrepreneur and then on being a VC:
He knew that he wanted to be an entrepreneur from the beginning. Resisted the temptation (and active recruiting) of a V.C. firm who saw value in his undergrad computer science degree and MBA.
Thoughts on Entrepreneurship:
Start-up 1: Athena
In the early 90's (while at HBS) first start up was an app trying to replicate Lotus 1,2,3 for the emerging OS2 platform. It ultimately was not successful, primarily because they were squeezed by IBM.
Lesson 1): Technology is only as good as the platform.
Takeaway: In developing mobile apps today, we should think carefully about choosing I-phone or Android (or other) as the platform. I personally like Android, but Mr. Bussgang suggests I-phone, as the ramp up for Android will be long and unpredictable.
Lesson 2): Be careful who you are beholden to...they were squeezed by IBM because of their total dependence on 0S2.
Lesson 3): Weak team = weak outcome.
Takeaway: Find the right people for the given project.
Start-up 2: Open Market
Again pursuing his passion for entrepreneurship, Mr. Bussgang turned down another rational offer at a consulting VC firms to join a small firm called Open Market. The firm caught the wave and had a $1.2B IPO with $1.8 mm of revenues at the time. When he left in 2000, the firm was still worth $2.0B and had $100mm of revenues.
Lesson 1): Speed wins. Be First. Be Fast.
Lesson 2): Focus is important. Making the incremental improvements from 80% to 90% and on to 100% of quality is hard...but worth it.
Takeaway: Key is to get BOTH sides of the brain working. Be creative and a dreamer, but bring that down to focus and analytics. Be methodical.
Lesson 3): PR vs PE ratio. Keep the news coming.
Lesson 4: At some point the "grown ups" need to come in to run the company.
Lifetime of the company goes from: Jungle, to Dirt Road, to the Highway. And you need different skill sets (and likely different people) at each stage.
Start up 3: UPromise
In another somewhat "irrational" decision, he left a very large sum of unvested stock options on the table to join a company. It had a very attractive valuation though and had a solid team that raised money with 7 people and 20 slides.
Lesson 1: Great People + Great Idea + Great Comps = Great Valuation (comps were trading at 100x revenue at the time)
UPromise ultimately became a $100 MM revenue company. If multiples stayed as high, it would have become a $10B company. In reality, it was still a nice deal with a $300 mm exit in 2006.
Lesson 1: Save TIME not money. (However, time the market. In a down market, take your time).
Lesson 2: Brand is powerful. Difficult to differentiate between "network effects" of something like UPromise, Ebay, and others, but perhaps the early Amazon where network effects were limited shows a pure "brand" power.
Lesson 3: Build a business using "other people's money" in the sense that unlike NetFlix, which must use its own balance sheet to promote its brand, you want to find ways to get others to promote your brand.
Lesson 4: Founder transitions are crucial to consider. Bringing in an outside CEO is sometimes necessary but may rock the boat.
General Thoughts:
Patents don't matter. People, team, and timing trump any piece paper claiming a patent.
Being Mission Driven from the beginning to the end is crucial.
Thoughts on Venture Capital:
Two typical on-ramps to being a venture capitalist:
1) Apprenticeship Model: Join out of school. Work your way up.
2) Entrepreneurship Model: Make VC's money by being a successful entrepreneur. Get invited to join them.
Differences between Entrepreneurs and VC's:
Entrepreneurs are very focused. Narrow and with deep expertise.
VC's don't really execute. They find opportunities and match them with people. A mile wide and an inch deep.
VC industry has changed dramatically since 1999 when there was about $40B of capital available. Today that number is closer to $250-300B.
This means there are more funds, with greater capital bases, making funding small deals uneconomical.
IDG Ventures (now Flybridge) saw this as an opportunity and was launched with a smaller fund to address the needs of smaller start-ups.
The dispersion in VC is massive - even higher than in private equity or mutual funds, which makes picking a great fund even more important for institutional investors. By staying focused, Flybridge can stay in the top tier.
Flybridge is focused on being a true service provider and having a high level of customer service to entrepreneurs. From my perspective this makes a ton of sense.
The reputation market for Venture Capital is highly efficient. Reputation is everything.
In general, the Venture Capital business has had an outsized impact on the world and the economy. Approximately 1,000 partners of venture capital firms have invested in companies that employ 10 million employees and represent 18% of the GDP.
Venture Capital and Entrepreneurship are about as American as it gets. Ben Franklin was one of the first great entrepreneurs and we have not stopped since.
Thursday, April 17, 2008
Struggling to Stay Optimistic
I went to a talk tonight on a talk entitled "The Subprime Crisis, Gold, Commodities and Where the Stock Market Goes From Here" given by a few investors with a collective 70 years of investing experience, and lets just say that it makes this blog sound like a cheery story.
The punch line: we narrowly avoided financial markets Armageddon last month when the Fed arranged the bail out of Bear Stearns and the risk is far from over.
The short-seller and 50 year veteran suggested a variety of things, the most tangible of which is to be long gold as a hedge against hyper inflation and further deterioration of the dollar (just his opinion, not advice). (He is also long GOOG and RIMM. Smart old dude).
That said, spending a good deal of my time on Twitter over the last few weeks has kept me in the flow of optimistic and creative ideas...allowing me to keep my head out of the murkiness caused by headlines like:
S&P may cut $57 bln subprime debt, reviewing loss:
and
US Foreclosure Filings Jump in March: Foreclosure Filings Against US Homeowners Soar 57 Percent in March; Bank Repossessions Surge
Instead, I am starting to focus on signs of an emerging bottom like this:
Wilbur Ross Seeks $4 Billion to Purchase U.S. Banks
And remembering, that God Blessed Texas:
Dallas housing market: nation's most stable
The objective side of me realizes that there is much more pain to be felt before this is over. But we are still a nation of innovators and entrepreneurs. So I will keep dreaming and keeping hope alive.
The punch line: we narrowly avoided financial markets Armageddon last month when the Fed arranged the bail out of Bear Stearns and the risk is far from over.
The short-seller and 50 year veteran suggested a variety of things, the most tangible of which is to be long gold as a hedge against hyper inflation and further deterioration of the dollar (just his opinion, not advice). (He is also long GOOG and RIMM. Smart old dude).
That said, spending a good deal of my time on Twitter over the last few weeks has kept me in the flow of optimistic and creative ideas...allowing me to keep my head out of the murkiness caused by headlines like:
S&P may cut $57 bln subprime debt, reviewing loss:
S&P said it is reviewing loss expectation for more than 17 percent of U.S. subprime debt deals issued in the first half of 2007
and
US Foreclosure Filings Jump in March: Foreclosure Filings Against US Homeowners Soar 57 Percent in March; Bank Repossessions Surge
Instead, I am starting to focus on signs of an emerging bottom like this:
Wilbur Ross Seeks $4 Billion to Purchase U.S. Banks
Billionaire financier Wilbur Ross Jr., who made his fortune turning around distressed steel and textile companies, plans to seek about $4 billion from investors including Arab sovereign funds to buy U.S. depositary banks.
And remembering, that God Blessed Texas:
Dallas housing market: nation's most stable
A recent PMI Group study reported that the risk of U.S. housing price declines remained low in many areas of the South, Midwest and Northwest. Among the 50 largest metropolitan statistical areas, Texas cities were the lowest and most stable in risk outlook during 2007.
The objective side of me realizes that there is much more pain to be felt before this is over. But we are still a nation of innovators and entrepreneurs. So I will keep dreaming and keeping hope alive.
Hyperbole Or Not
I was having a discussion with a friend today about a paper I am writing on the credit crisis, and he suggested that I remove some of the "hyperbole" from my analysis. He was referring to recent statements by Soros and Krugman, who have both stated that the current crisis is the "worst since the Great Depression".
That got me to thinking that in communicating extreme events or ideas in general it is difficult to avoid sounding "hyberbolic" or far fetched when describing the conclusion or the idea because it is so far removed from the status quo of the audience.
A similar phenomena occurred in a discussion with some friends last night where I was explaining the power of Twitter in the context of idea generation, dissemination and socialization. Those who are barely using Facebook thought what I was saying was extreme, while a fellow "tech-minded" person thought what I was saying was highly reasonable.
Although this problem may be limited to people like me, who tend to think at the edges of our knowledge and technology, I actually think it is more likely a general concern for communicating new ideas generally: if you are far removed from the audiences' understanding, you should build a bridge to walk them to the island of your idea, or run the risk of sounding like a fanatic or dreamer.
I guess this presupposes a desire to be heard by a wide audience. Maybe it is just better to speak and let those who can hear your voice understand and let the rest think it is all hyperbole. Perhaps one day, when the story has unfolded, they might remember some glimmer of the idea and realize it wasn't so extreme after all.
That got me to thinking that in communicating extreme events or ideas in general it is difficult to avoid sounding "hyberbolic" or far fetched when describing the conclusion or the idea because it is so far removed from the status quo of the audience.
A similar phenomena occurred in a discussion with some friends last night where I was explaining the power of Twitter in the context of idea generation, dissemination and socialization. Those who are barely using Facebook thought what I was saying was extreme, while a fellow "tech-minded" person thought what I was saying was highly reasonable.
Although this problem may be limited to people like me, who tend to think at the edges of our knowledge and technology, I actually think it is more likely a general concern for communicating new ideas generally: if you are far removed from the audiences' understanding, you should build a bridge to walk them to the island of your idea, or run the risk of sounding like a fanatic or dreamer.
I guess this presupposes a desire to be heard by a wide audience. Maybe it is just better to speak and let those who can hear your voice understand and let the rest think it is all hyperbole. Perhaps one day, when the story has unfolded, they might remember some glimmer of the idea and realize it wasn't so extreme after all.
Saturday, April 12, 2008
John Doerr of KPCB Visits HBS
In contrast to much of the negative news in the financial markets, there still remains a vibrant and exciting world of innovation in this country, primarily driven by the most extensive network of Venture Capitalists in the world.
One of those VC's, Mr. John Doerr of Kleiner Perkins Caufield & Byers (KPCB) visited us at HBS yesterday.
His talk focused primarily on KPCB's interest in "Green Tech" ventures, but he also offered general advice for entrepreneurs and future venture capitalists. Here are my notes from the talk:
The best way to predict the future is to invent it.
If you can't invent it, fund it. But to fund the future, you first have to find it.
At KPCB, they believe "Green" technology and energy efficiency are an important part of the future.
55 percent of energy in the global economy is wasted, primarily through heat emissions.
3 primary areas of focus for KPCB: Cars, coal, and efficiency.
Cars:
Fisker Automotive: producing a hybrid electric plug in. Gets about 100 mpg. 1 of 3 car companies in the portfolio.
6 renewable fuel ventures. Amyris produces a key compound in anti-malaria drugs. This allows them to construct better fuels - molecule by molecule. Transportation fuels industry is a $1 Trillion market.
Coal:
Biggest area of opportunity with few companies succeeding to date - carbon capture and sequestration for coal power plants is a massive market. Solve this problem!
Big fan of solar. Investment in Miasole a producer of thin film solar-technology. Able to achieve 11% efficiency.
Conservation and efficiency:
RecycleBank: Uses existing technologies such as Rfid. Has been able to increase recycle rates by 50 percent. They incentivize people to participate by giving people points which they can redeem at local businesses. Huge success and growing.
Policy Matters:
Get states to change rules regulating utilities.
Interest in Green-tech is growing with $3B of VC investments in 2006 and $4B in 2007. This number is growing and will continue to grow.
However, Federal investment in green technology is less than 1 day of XOM's revenues.
To solve this problem, we need all the people to make the right outcome the profitable outcome and therefore the probable outcome.
If we are successful, "going green" will be the largest change on planet earth in the history of humanity.
Advice to HBS students:
Hang out in engineering club at MIT. Join a KPCB, Greylock, or Sequoia portfolio company.
Think about ways to do: Green accounting, green marketing, green strategy.
Advice on becoming a great Venture Capitalist:
Most have entrepreneurial experience. V.C. is a service business, so you need to understand your partners.
You have to learn by failing...Like crashing an F16, it will cost $30 mm the first time. Get operating experience. Spend time at MIT.
Definition of entrepreneur:
Do more than anyone thinks is possible with less than anyone thinks is possible.
Restless. Never satisfied.
Difference between Mercenaries (Bad) vs Missionaries (good):
Drive vs Passion.
Pitch vs Big Idea.
Opportunistic vs Strategic.
Focused on competition vs Focused on customers.
Aristocracy vs Meritocracy.
Deferred life plan vs Whole life plan.
Money vs Meaning and Money.
Success vs Success and Significance.
Consumer change:
How will we change consumers minds to get them on board with "Green"?
Consumer change is hard. For example, we still import bottled water from Fiji.
Theory of change:
We will not have a global solution until the U.S. leads. Leadership is up for grabs. All current platforms are unacceptable. Mainstream America does not have a sense of emergency or urgency here.
Politics are non linear.
Alliance for scientific communication. WeCanSolveIt.Org.
Hewlett foundation. Design to win. The looked at 5 regions of the world that matter. Within each region and each sector and figure out what needs to happen. Figure out how to make change happen (i.e. within power industry, utility commissions have power and 20 dudes really matter). Move public opinion and change the laws.
"Brown" companies will retaliate against "Green". Already have with things like: Coal is clean.
Coal and oil companies will do what they need to do to preserve the status quo.
We need to develop a Carbon accounting system. Carbon capture and sequestration will become standard in coal.
Future hope:
His daughter's generation (she is 16) needs to get out of Facebook and into the face of politicians. We have numbed them into a set of career expectations.
The Energy movement is the first grassroots movement that has embraced 10 million people since Martin Luther King. He is glad Al Gore is out there and providing the leadership he is.
Future of Technology (if all his companies are successful):
Browser will be transformed by sites like: Cool Iris. We will have fully-immersive 3D technology.
We will be mobile.
A few hundred dollars will let you spit in a tube and have your DNA analyzed in hours.
We will reverse metastization of cancer.
Green fuels will be made from CO2.
General advice on balancing competing interests:
Measure how much time you spend with each priority.
For him: Family comes first.
Home by 6 p.m. 20 days a month.
Measures how much time he spends with Partners, current CEO's, potential entrepreneurs, and community service (targets 15% of his time).
General Career Advice:
Ideas are easy. What matters in life is execution. It takes a team to win. Think and speak on your feet.
Network constantly. Network each day for 10 minutes.
Find a mentor, ask them to be a mentor. Sustain that relationship.
Take risks. To ask permission is to seek denial.
Integrity is a binary state.
Life is long - its a marathon, not a sprint.
Call your mom once a week.
One of those VC's, Mr. John Doerr of Kleiner Perkins Caufield & Byers (KPCB) visited us at HBS yesterday.
His talk focused primarily on KPCB's interest in "Green Tech" ventures, but he also offered general advice for entrepreneurs and future venture capitalists. Here are my notes from the talk:
The best way to predict the future is to invent it.
If you can't invent it, fund it. But to fund the future, you first have to find it.
At KPCB, they believe "Green" technology and energy efficiency are an important part of the future.
55 percent of energy in the global economy is wasted, primarily through heat emissions.
3 primary areas of focus for KPCB: Cars, coal, and efficiency.
Cars:
Fisker Automotive: producing a hybrid electric plug in. Gets about 100 mpg. 1 of 3 car companies in the portfolio.
6 renewable fuel ventures. Amyris produces a key compound in anti-malaria drugs. This allows them to construct better fuels - molecule by molecule. Transportation fuels industry is a $1 Trillion market.
Coal:
Biggest area of opportunity with few companies succeeding to date - carbon capture and sequestration for coal power plants is a massive market. Solve this problem!
Big fan of solar. Investment in Miasole a producer of thin film solar-technology. Able to achieve 11% efficiency.
Conservation and efficiency:
RecycleBank: Uses existing technologies such as Rfid. Has been able to increase recycle rates by 50 percent. They incentivize people to participate by giving people points which they can redeem at local businesses. Huge success and growing.
Policy Matters:
Get states to change rules regulating utilities.
Interest in Green-tech is growing with $3B of VC investments in 2006 and $4B in 2007. This number is growing and will continue to grow.
However, Federal investment in green technology is less than 1 day of XOM's revenues.
To solve this problem, we need all the people to make the right outcome the profitable outcome and therefore the probable outcome.
If we are successful, "going green" will be the largest change on planet earth in the history of humanity.
Advice to HBS students:
Hang out in engineering club at MIT. Join a KPCB, Greylock, or Sequoia portfolio company.
Think about ways to do: Green accounting, green marketing, green strategy.
Advice on becoming a great Venture Capitalist:
Most have entrepreneurial experience. V.C. is a service business, so you need to understand your partners.
You have to learn by failing...Like crashing an F16, it will cost $30 mm the first time. Get operating experience. Spend time at MIT.
Definition of entrepreneur:
Do more than anyone thinks is possible with less than anyone thinks is possible.
Restless. Never satisfied.
Difference between Mercenaries (Bad) vs Missionaries (good):
Drive vs Passion.
Pitch vs Big Idea.
Opportunistic vs Strategic.
Focused on competition vs Focused on customers.
Aristocracy vs Meritocracy.
Deferred life plan vs Whole life plan.
Money vs Meaning and Money.
Success vs Success and Significance.
Consumer change:
How will we change consumers minds to get them on board with "Green"?
Consumer change is hard. For example, we still import bottled water from Fiji.
Theory of change:
We will not have a global solution until the U.S. leads. Leadership is up for grabs. All current platforms are unacceptable. Mainstream America does not have a sense of emergency or urgency here.
Politics are non linear.
Alliance for scientific communication. WeCanSolveIt.Org.
Hewlett foundation. Design to win. The looked at 5 regions of the world that matter. Within each region and each sector and figure out what needs to happen. Figure out how to make change happen (i.e. within power industry, utility commissions have power and 20 dudes really matter). Move public opinion and change the laws.
"Brown" companies will retaliate against "Green". Already have with things like: Coal is clean.
Coal and oil companies will do what they need to do to preserve the status quo.
We need to develop a Carbon accounting system. Carbon capture and sequestration will become standard in coal.
Future hope:
His daughter's generation (she is 16) needs to get out of Facebook and into the face of politicians. We have numbed them into a set of career expectations.
The Energy movement is the first grassroots movement that has embraced 10 million people since Martin Luther King. He is glad Al Gore is out there and providing the leadership he is.
Future of Technology (if all his companies are successful):
Browser will be transformed by sites like: Cool Iris. We will have fully-immersive 3D technology.
We will be mobile.
A few hundred dollars will let you spit in a tube and have your DNA analyzed in hours.
We will reverse metastization of cancer.
Green fuels will be made from CO2.
General advice on balancing competing interests:
Measure how much time you spend with each priority.
For him: Family comes first.
Home by 6 p.m. 20 days a month.
Measures how much time he spends with Partners, current CEO's, potential entrepreneurs, and community service (targets 15% of his time).
General Career Advice:
Ideas are easy. What matters in life is execution. It takes a team to win. Think and speak on your feet.
Network constantly. Network each day for 10 minutes.
Find a mentor, ask them to be a mentor. Sustain that relationship.
Take risks. To ask permission is to seek denial.
Integrity is a binary state.
Life is long - its a marathon, not a sprint.
Call your mom once a week.
Thursday, April 10, 2008
Spring Is Finally Here
It is hard not to be optimistic on a day like today. 60 degrees and sunny just sets a nice tone. May help to explain the creativity and entrepreneurship of Californians.
Well, it looks like the optimism (or muted optimism) is spreading to
Wall Street with Goldman's head honcho today staying we are in the "third quarter" of the crisis. (here is the Bloomberg Article: Goldman's Blankfein Says Credit Crisis Close to End).
Such confidence is not only helpful to hear in terms of market sentiment, it is also a nice contrast to the more pessimistic tones reflected in the below post as well as that echoed by the IMF yesterday, which suggested that losses will rise from the current $230 billion to close to $1 trillion by the time we are all said and done.
The most pessimistic number I have heard came in my Investment Management class at HBS, where John Paulson, manager of Paulson & Co, suggested that losses will likely reach ~$1.2 Trillion before the end of the crisis. Mr. Paulson (no relation to the Treasury Secretary) made $15 Billion in profits last year for his investors (with returns approaching 700% for one of his funds) primarily by betting against Subprime ABS securities.
Here is an article discussing his success: Trader Made Billions on Subprime. His bearishness not only turned out to be correct, but it was also very profitable.
What the ultimate losses will be in this crisis will come down to a variety of factors, but I don't think one should underestimate the importance of confidence and optimism.
So bring on the sun...or move to California.
Well, it looks like the optimism (or muted optimism) is spreading to
Wall Street with Goldman's head honcho today staying we are in the "third quarter" of the crisis. (here is the Bloomberg Article: Goldman's Blankfein Says Credit Crisis Close to End).
Such confidence is not only helpful to hear in terms of market sentiment, it is also a nice contrast to the more pessimistic tones reflected in the below post as well as that echoed by the IMF yesterday, which suggested that losses will rise from the current $230 billion to close to $1 trillion by the time we are all said and done.
The most pessimistic number I have heard came in my Investment Management class at HBS, where John Paulson, manager of Paulson & Co, suggested that losses will likely reach ~$1.2 Trillion before the end of the crisis. Mr. Paulson (no relation to the Treasury Secretary) made $15 Billion in profits last year for his investors (with returns approaching 700% for one of his funds) primarily by betting against Subprime ABS securities.
Here is an article discussing his success: Trader Made Billions on Subprime. His bearishness not only turned out to be correct, but it was also very profitable.
What the ultimate losses will be in this crisis will come down to a variety of factors, but I don't think one should underestimate the importance of confidence and optimism.
So bring on the sun...or move to California.
Wednesday, April 2, 2008
Ratings Schmatings
This headline from Bloomberg says enough to explain the content of the article.
Moody's Is Least Accurate Subprime-Bond Rating Firm
The crazy piece of this to me is how this can to continue to persist given all of the recent public acknowledgment of the obvious fact that the rating agencies were a central character in the credit debacle we have been experiencing for the past 9 months.
The recent report by the President's Working Group on Financial Markets is worth a read if you have not yet. (The press release and link to the report can be found here: President’s Working Group Issues Policy Statement To Improve Future State of Financial Markets)
The report walks through a number of causes for the crisis, with the rating agencies playing a central piece in the puzzle.
As their credibility continues to be undermined it remains to be seen what implications will arise. Hopefully this will create more discipline in the initial underwriting of investments, which to be fair, should not fall on the shoulders of agencies but rather should be conducted by the individuals being compensated to make investment decisions.
In the mean time, the story continues to play out with estimates of total expected losses now ranging from:
the ~$150 Billion written down to date by S&P (Subprime Writedowns: Is the Worst Over?)
...to $600 Billion by UBS Financial Firms Face $600 Billion of Losses, UBS Says)
...to $1Trillion by commentators (Brace for $1 Trillion Writedown of `Yertle the Turtle' Debt)
Judging from the Rating Agencies' performance to date, one would likely have to side with the more conservative scenarios of other estimators if taking sides...or maybe they have learned their lesson?
Moody's Is Least Accurate Subprime-Bond Rating Firm
Moody's assigns Caa2 or lower ratings to just 12 percent of the 292 bonds underlying benchmark Markit ABX indexes that UBS analysts expect to default. Both Fitch and Standard & Poor's tag 57 percent of the bonds with equivalent rankings, according to a report from the New York-based analysts yesterday. A rating of Caa2 or CCC is eight levels below investment grade.
``Moody's trails badly,'' UBS analysts including Laurie Goodman and Thomas Zimmerman wrote.
The crazy piece of this to me is how this can to continue to persist given all of the recent public acknowledgment of the obvious fact that the rating agencies were a central character in the credit debacle we have been experiencing for the past 9 months.
The recent report by the President's Working Group on Financial Markets is worth a read if you have not yet. (The press release and link to the report can be found here: President’s Working Group Issues Policy Statement To Improve Future State of Financial Markets)
The report walks through a number of causes for the crisis, with the rating agencies playing a central piece in the puzzle.
As their credibility continues to be undermined it remains to be seen what implications will arise. Hopefully this will create more discipline in the initial underwriting of investments, which to be fair, should not fall on the shoulders of agencies but rather should be conducted by the individuals being compensated to make investment decisions.
In the mean time, the story continues to play out with estimates of total expected losses now ranging from:
the ~$150 Billion written down to date by S&P (Subprime Writedowns: Is the Worst Over?)
...to $600 Billion by UBS Financial Firms Face $600 Billion of Losses, UBS Says)
...to $1Trillion by commentators (Brace for $1 Trillion Writedown of `Yertle the Turtle' Debt)
Judging from the Rating Agencies' performance to date, one would likely have to side with the more conservative scenarios of other estimators if taking sides...or maybe they have learned their lesson?
Avoiding Moral Hazard
Let's hope this article from the Brits is more than speculation:
Fed eyes Nordic-style nationalisation of US banks
Apparently Fed officials have been consulting with their Scandanavian central banking counterparts to learn how the Nordics were able to save their own economies through seizing some of their domestic banks in the early 1990s.
Unlike Bear's bailout, which looks like it is giving equity holders $10/share and Bear management a seat at the table, the Scandanavian efforts "purged" management and ensured equity golfers received nothing.
While perhaps further failures can be avoided recent speculation of losses approaching 1 trillion makes such an optimistic scenario unlikely. It seems the fed is pragmatically asking what to do "when" rather than "if" another shoe drops.
Fed eyes Nordic-style nationalisation of US banks
Apparently Fed officials have been consulting with their Scandanavian central banking counterparts to learn how the Nordics were able to save their own economies through seizing some of their domestic banks in the early 1990s.
Unlike Bear's bailout, which looks like it is giving equity holders $10/share and Bear management a seat at the table, the Scandanavian efforts "purged" management and ensured equity golfers received nothing.
While perhaps further failures can be avoided recent speculation of losses approaching 1 trillion makes such an optimistic scenario unlikely. It seems the fed is pragmatically asking what to do "when" rather than "if" another shoe drops.
Friday, March 28, 2008
More Paulson Common Sense
In another move indicating that Mr. Paulson has experience outside of Washington he appears to be poised to suggest a new set of regulators and consolidated roles among Washington beaurocrats. The moves are discussed here: Paulson to Propose New Regulators, SEC-CFTC Merger and here: Treasury’s Plan Would Give Fed Wide New Power
Acknowledging that part of the cause of the current crisis was a failure in oversight is an honest step in the right direction and suggests hope for the future. The fact that a conservative-minded former business executive with as much credibility as Mr. Paulson is doing this suggests that perhaps even those with a "leave things they way they are" form of conservatism might be willing to listen.
There is no question in my mind that our government needs to innovate if it wants to have a chance to keep pace with the breakneck speed of financial wizardry. By creating a leaner, more well organized, and more focused regulatory body perhaps we can accomplish such a lofty goal in the future and prevent future calamities like the one we have been watching unfold over the last year.
Now if only they would extend their reach to the rating agencies...one can only hope for so much I guess.
Acknowledging that part of the cause of the current crisis was a failure in oversight is an honest step in the right direction and suggests hope for the future. The fact that a conservative-minded former business executive with as much credibility as Mr. Paulson is doing this suggests that perhaps even those with a "leave things they way they are" form of conservatism might be willing to listen.
There is no question in my mind that our government needs to innovate if it wants to have a chance to keep pace with the breakneck speed of financial wizardry. By creating a leaner, more well organized, and more focused regulatory body perhaps we can accomplish such a lofty goal in the future and prevent future calamities like the one we have been watching unfold over the last year.
Now if only they would extend their reach to the rating agencies...one can only hope for so much I guess.
Monday, March 24, 2008
Finding A Bottom
A number of you have asked me when I think housing prices will bottom. The short answer is: I have no idea, but most smart people I have asked think it will be 2010 before housing prices stop falling.
Here is a realistic view from Irvine Housing Blog that suggests that in least in the Los Angeles market, it will likely be 2011 before we reach a bottom based on historical S&P/Case-Shiller forecasts.
In any event, there appears to be a lot more pain for individual homeowners left to come. Hopefully some of the liquidity pumped into the system over the last few weeks will help to dampen the blow in the form of more reasonable renegotiations and restructuring with individual homeowners who are facing the prospect of foreclosure.
It seems like it is in the banks' collective self-interest to reduce the excess supply of housing as the wave of adjustments in a wide variety of exotic mortgages continues to play out.
Here is a realistic view from Irvine Housing Blog that suggests that in least in the Los Angeles market, it will likely be 2011 before we reach a bottom based on historical S&P/Case-Shiller forecasts.
In any event, there appears to be a lot more pain for individual homeowners left to come. Hopefully some of the liquidity pumped into the system over the last few weeks will help to dampen the blow in the form of more reasonable renegotiations and restructuring with individual homeowners who are facing the prospect of foreclosure.
It seems like it is in the banks' collective self-interest to reduce the excess supply of housing as the wave of adjustments in a wide variety of exotic mortgages continues to play out.
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