Yesterday morning I attended the annual meeting of the NYC Partnership. The NYC Partnership is the "chamber of commerce" for NYC. Because NYC is one of the biggest commerce centers in the world, the NYC Partnership is a pretty interesting group and has lots of big name companies and execs involved in it.
My favorite talk was Larry Summers' in which he addressed the administration's economic plans, priorities, and strategies.
At one point, Larry said that the US needs to "save, invest, and export more and the developing world needs to spend, borrow, and import more" (or something like that). It's certainly true that we can't continue with the model where the US borrows and goes deeply in debt to purchase goods and services provided by the developing world which then saves the money they earn and lends it to the US. That's how we've gotten into the mess we are in.
But I'd like to focus on "saving and investing". It has not been fashionable in this country to be a saver and an investor. It's been more fashionable to be a borrower and spender. Everyone wants to lease a fancy car or take out a big mortgage to buy a big home.
I'd like to see Obama make a big deal about the value of saving and investing. He's got great oratorical skills but he often talks in grand sweeping generalisms, like the "need to change." Well I think its time to get more specific about what needs to change. And if Obama were to start talking about the value of saving and investing every time he makes a speech, I think he could make saving and investing fashionable.
Saving is hard, particularly when you can barely make ends meet. But a "forced savings" plan can work for most people. Many companies do an automatic deduction for a 401k plan. It would be great if you could also do an automatic deduction and send the money to a mutual fund or money market fund. If everyone tried to save 5 to 10 percent of their take home pay, it would make a huge difference.
Investing is also important. Not gambling, not speculating. That is best left to the pros. Investing means taking some risk but not a lot of risk. It means putting money to work in the economy, and not just our economy, but the global economy. Mutual funds are a good way to do this. So are index funds. There are a lot of good places to get sound advice on how to invest wisely and patiently. We need to do more of that in this country.
Saving and investing has been part of the american culture in the past. It is still very much part of the culture among some parts of our citizenship. But too many of us have gone on a borrow and spending binge and it's time to get back to basics. And I'd like to see our President get out in front on this issue and lead the country back to a better way.
John Heilemann has a cover story in the current issue of NY Magazine titled Obama Lost, Obama Found in which he details the challenges and opportunities facing the President. I took the time to read it last night, on the eve of the President's trip up to my birthplace and childhood home at West Point.
The President is going to irritate most everyone with his Afghanistan policy. The liberals want us out asap and a big troop increase is going be yet another sign that he's not one of their own. The conservatives will hate his emphasis on an exit strategy. And even if they approve of this decision, they'd never support him on anything and never will.
Heilemann points out that Obama's approval rating is now sub 50 percent and even more worrisome for him and his team is that his "job disapproval" rating is in the mid 40s, higher than any president at this stage other than Bill Clinton.
His support of Bush's economic policies on the meltdown (ie the splurge) were pro-business and placed him as a friend of the banks and wall street and an enemy of the man on the street. His push to get healthcare reform done early in his presidency has also eroded much of his political capital. And now with his decision to re-invest in the war in Afghanistan, he is facing another political hit.
I've got many liberal friends who are at their wits end with Obama and think he's completely blown it, that he is spending too much time negotiating/pandering to the right with nothing to show for it. And I've got plenty of conservative friends who are saying "I told you so". I can't think of too many friends who are happy with the choices Obama has made.
But I'm having a hard time arguing with any of the decisions he's made to date. He is a pragmatist and anti-partisan who seems to me to be doing a pretty good job of playing a pretty bad hand.
His decision to support and expand the splurge are distasteful on many levels, but we have restored the markets confidence and the financial system is functioning. It could have been so much worse.
His decision to focus on getting a healthcare plan passed that covers almost everyone early in his Presidency is borderline political suicide as Clinton showed. But if not now, when? The US is the wealthiest country in the world and it is just not right that we can't find a way to offer basic healthcare to our citizens.
His decision to support and expand the war in Afghanistan is the hardest of his decisions to date for me to support. The US-installed government in Kabul is corrupt and hated by its own citizens. Propping up a government like that has never worked long term and I can't imagine it will work now. But Afghanistan is a strange place where loyalties shift daily and troops fight for the Taliban one day and the Northern Alliance the next. I want to hear the President out on this one before I come to any conclusions. We'll get that chance tonight.
I believe Obama is suffering from governing from the "far center" and pleasing nobody in the process. My favorite quote in the Heilemann piece is from Alex Castellanos, a republican media consultant:
He’s stuck, and it’s kind of ironic. Obama has
tried so hard not to be George Bush and Bill Clinton, and yet he is
becoming exactly that. The guy who ran against ideological division has
brought it back with such a vengeance that he’s lost the middle, but
not sufficiently to make his base happy. He’s got no friends.
Well he's got at least one friend left. I'm stuck in the middle with him.
I went down to city hall yesterday to participate in a hearing on net neutrality. I realize the NYC city council has no oversight on this issue but the lobbyists were coming out in force so I figured I might as well show up too.
But this post is not about net neutrality. It's about an issue that came up during the questioning. A councilmember mentioned the idea that we should help infrastructure providers protect their businesses.
I am all in favor of the survival instinct in the marketplace. All companies should be executing strategies that will result in their survival.
But the idea that government should "protect businesses" seems very dangerous to me. Businesses come and go. Jobs come and go. Products and services come and go. That's the way of capitalism.
Our government stepped in and protected a bunch of businesses during the financial crisis. Examples are Citibank, AIG, and General Motors. In a time of financial panic, government does have a role of restoring confidence and we can argue whether those actions were necessary or not to do that.
But the financial panic is long gone. We still have big economic issues in this country and it would be a mistake for our government to continue to protect businesses and jobs now that markets are functioning again.
If the telcos and cable companies can't run profitable businesses without government protections, then I think we should let them go under and allow entrepreneurs to pick up their assets and make them work instead.
I also believe that government should be fostering a lot of competition in the access business. That was the idea of the telcom reform act. But it hasn't played out that way. We have an ever increasing consolidation of power in the access business. Just like we had in the banking and brokerage business. This is not good.
I could go on and on about this issue but I'll stop here and let the discussion start in the comments. I'll be in there with you.
I drove out to the middle of New Jersey yesterday morning to attend a board meeting. Everywhere I went, I saw "dump corzine" messages. It was clear the governor was in trouble.
And this morning, we wake up to the news that Corzine has indeed been dumped and Mayor Bloomberg barely got 50% of the voters in NYC to pull the lever for him
Both of these men are wealthy. Both of these men grew up on wall street in the 1970s. Both of these men moved from wall street to public service about a decade ago. Both of these men spent heavily to get re-elected. Bloomberg made it, Corzine did not.
It's worth spending a minute thinking about the message the voters sent here in one of the most liberal parts of the country. The voters aren't happy. The voters aren't comfortable with rich guys who can spend their personal fortunes getting elected. And most of all, the voters want change.
This may well be a referendum on Obama, but I see it more as a referendum on the status quo. It's a throw the bums out moment in this country. It's too bad that Nancy Pelosi, Harry Reid, Barney Frank, Chris Dodd, Mitch McConnell, and John Boehner didn't run for re-election yesterday. Maybe they would have been sent home as well.
It is not a positive to be an incumbent right now. And that's a good thing because the track record of our government sucks. I hope the anti incumbent mood continues to be honest. We could use a good house cleaning throughout our government.
I'm in London for Seedcamp 2009 and I've been spending the day with entrepreneurs and technologists from all over europe. It's a reminder that the world is full of great entrepreneurs and technologists.
I started my day in a board meeting with one of our companies that was started in Europe. It turns out one of the founders of that company, one that is growing and hiring in the US, cannot get back into the states right now because of a Visa issue.
That is infuriating to me and to the founder in question. His risk taking and the innovations of him and his partners and team members are creating a business in the US and creating jobs and wealth that will largely stay in the US. And he cannot even get into our country right now.
This is nuts. I've got an issue with our immigration policies generally, but specifically we should modify our rules around Visas for founders and key team members of startups that are at least partially based in the US, particularly if they have been well financed by angels and VCs.
Fortunately, there is a growing political movement called The Startup Visa movement and there is real momentum behind it. If you are close to your legislators, particularly representatives and senators, please bend their ear on this issue. Though I am not close to the politics around this issue, I suspect this is not a hard issue to get behind politically. Nobody is losing jobs because entrepreneurs around the world are starting companies that are based, at least partially, in the US.
We should make it easy for these people to get back and forth into our country. And with your help, I suspect we will.
Every time I post or tweet about politics, I get people saying things like this:
rkofflerWilson should stick to investing in 2.0 marvels. RT @jeffcohn: RT @fredwilson Obama really nailed it that last five minutes.
In my post about consumer centric healthcare last week, I got this comment:
I
think it's really unfortunate that the health care issue makes everyone
with a modicum of success mistake themselves for an expert in health
care, risk management and public policy.
I've said this before here on the AVC blog, but it's important to me and I want to say it again.
I am not an expert in everything I write about. But that is not going to stop me from speaking my mind about things other than venture capital and web startups. It might annoy or piss some people off. It could even hurt our business because those people are less likely to do business with me or our firm.
But I've made the decision to put myself out there, speak my mind publicly, and say what I think. And I am going to continue to do it.
There are plenty of regular readers of this blog who don't agree with me on most of my political views. People like Andy Swan, JLM, Dave in Hackensack, Steve Kane and many others. But they've never suggested that I shouldn't speak my mind. They leave comments arguing that I'm wrong. And you know what? They've opened my mind to other viewpoints and I have to say that I am more open minded about their views than had they not taken the time to articulate them sensibly and articulately.
If you really think I am full of s**t, let me know in the comments, but please don't suggest that I don't have the right to speak my mind. We live in an open society where everyone has this right. And thank god we do.
I am for universal health care. To me that means that everyone in this country can obtain medical care when they need it.
That said, I dislike our current form of healthcare delivery in this country and always have. I'd like to see either single payer if we must have it or even better, a consumer centric health care system.
The new Atlantic's cover story on health care is a must-read. Proposes a radical, paradigm-shifting Third Way http://tinyurl.com/lquswk
I clicked thru, saw a long six page article and then figured out (with the help of twitter) how to send it to my Kindle. I read the whole thing last night and this morning.
You really should read the entire piece, but this paragraph near the end sums it up for me.
The most important single step we can take toward truly reforming our
system is to move away from comprehensive health insurance as the
single model for financing care. And a guiding principle of any reform
should be to put the consumer, not the insurer or the government, at
the center of the system. I believe if the government took on the goal
of better supporting consumers—by bringing greater transparency and
competition to the health-care industry, and by directly subsidizing
those who can’t afford care—we’d find that consumers could buy much
more of their care directly than we might initially think, and that
over time we’d see better care and better service, at lower cost, as a
result.
Health insurance has never made any sense to me as a way to pay for regular health care expenditures. We pay for our own every day dental bills (because our firm does not provide dental insurance) and my wife and I can handle that as part of our annual expenses. Why shouldn't we pay for our every day medical bills the same way?
David Goldhill makes the point that we are using insurance for the wrong things in this country. We are using it as a way to finance healthcare broadly when it should only be used to fund catastrophic situations that cannot be paid for any other way (which is what insurance is designed for).
The benefit of a consumer centric health care system is we all would start paying attention to what all of this costs and negotiating ourselves for better prices and/or shopping around. That never happens except in the cases where the procedures aren't covered. And Goldhill makes a compelling argument that uncovered procedures have shown the benefit of a competitive market at work:
By contrast, consider LASIK surgery. ... The surgery is seldom covered by insurance, and exists in
the competitive economy typical of most other industries. So people who
get LASIK surgery—or
for that matter most cosmetic surgeries, dental procedures, or other
mostly uninsured treatments—act like consumers. If you do an Internet
search today, you can find LASIK
procedures quoted as low as $499 per eye—a decline of roughly 80
percent since the procedure was introduced. You’ll also find sites
where doctors advertise their own higher-priced surgeries (which more
typically cost about $2,000 per eye) and warn against the dangers of
discount LASIK. Many
ads specify the quality of equipment being used and the performance
record of the doctor, in addition to price. In other words, there’s
been an active, competitive market for LASIK surgery of the same sort we’re used to seeing for most goods and services.
Goldhill's proposal is radical and to my untrained eye, it sounds right:
A more consumer-centered health-care system would not rely on a single
form of financing for health-care purchases; it would make use of
different sorts of financing for different elements of care—with
routine care funded largely out of our incomes; major, predictable
expenses (including much end-of-life care) funded by savings and
credit; and massive, unpredictable expenses funded by insurance.
The details of how to do all of this, including the important questions of what to do with the people who truly cannot afford to pay for their healthcare, are on the last page of the article, in the section called "A Way Forward".
As I said, I have an untrained eye on this subject and am no expert. Maybe this approach is flawed. And of course, as a wealthy person who can afford to pay for his family's healthcare even without insurance, I am somewhat immune to all of this.
But I believe in markets and competition. And I believe that our current approach of using big fat bureaucratic insurance companies to finance and manage healthcare is badly flawed. I'd prefer the government run the healthcare system to the way we are doing it now. But an even better approach would be to let us run it ourselves.
The WSJ has a story in its Washington Wire column that says Senator Kerry Promises An Agressive Tech Agenda. The basis of the story is a talk Senator Kerry was giving to the cable execs assembled in DC for their annual industry gathering. The story goes on to talk about the $7.2bn that the gov't is going to spend as part of the stimulus bill to "deliver broadband to rural consumers who can't get it and urban americans who can't afford it."
I don't think spending $7.2bn to build out wired broadband to rural and urban communities is an "agressive tech agenda". I think its nuts. There's a better way that was alluded to in the end of the WSJ piece:
Kerry and Republican Sen. Olympia Snowe of Maine have
co-sponsored legislation that would require the government to inventory
the nation’s airwaves and see if the spectrum is being used
efficiently. The report would be the first step toward future
government action to remove “spectrum squatters,” freeing airwaves for
high-speed Internet or other wireless services.
The fact is that wireless spectrum is not being used efficiently except in the unregulated bands (like the band that wifi runs in). We need open spectrum in this country and we need it now. If we unleased entrepreneurs and engineers on the spectrum by opening it right now, we would solve the rural and urban access issues easily. It would take some time, maybe five years, maybe a bit more, but not much longer. We'd save the $7.2bn (it's too late to save that, it will be spent digging trenches and doing things the old way) and we'd get better, faster, and more reliable WIRELESS broadband.
Ten years from now the idea of licensing swatches of the radio spectrum for private use will seem quaintly obsolete.Most
spectrum will be available for any entity – including individuals - to
use so long as the rules for the use of that spectrum are observed.Today almost all usable frequencies are licensed to private license holders or reserved for specified public uses.
I am glad that Senator Kerry recognizes that all this "reserved spectrum" is a huge impediment to innovation and better connectivity. If he really wants to pursue an "agressive tech agenda" then the first step would be to push hard and fast for open spectrum.
I can't exactly explain why I am so fascinated by the Treasury's PPIP plan, but I am. I was also fascinated by the RTC back in the day but had no involvement with it. I love the idea that one man's toxic asset can be another man's (or woman's) gold.
Yesterday, I asked everyone for their opinions on this plan and I got a bunch in the comments. We also heard from JLM, who called it "Dr Tim's Excellent Elixir". I promised that I would publish links to posts everyone liked and I got a ton of them.
So here are some highly recommended posts from the AVC community. Just in time for your Sunday morning reading pleasure.
I've spent some time in the past few days looking at Geithner's plan to stimulate the purchase of toxic assets from banks. I've also spent some time reading what my favorite finance bloggers think of it. My friend Roger Ehrenberg is mildly impressed but concerned that there is no forcing function to make the banks sell. I have not spent much time reading the opinion pages other than to note that Krugman hates it (surprise surprise - he wants us to take over the banks).
But I am most interested in what you all think of it. We've got plenty of sharp investors and smart people who can read, think, and analyze here at AVC and I'd really like to know what you all think. You can leave a comment with your thoughts and if you leave a link to a post of your own, I'll link to it here.
To get the conversation going, I've turned to no other than my "treasury secretary" Jeff Minch (who I disagree with on all things politcal, but agree with on most everything else). You all know him as JLM and he was our first guest blogger a month or so ago. Here's his thoughts on the Geithner plan. Please let us know yours. ----------------
Dr Tim’s Excellent Elixir
The circus is back in town and Dr Tim is peddling a new potion promised to cure the problem of “legacy loans and securities” or toxic assets. These bad boys have been creating gas and obstructing digestion at the banks and thereby have prevented the flow of loans as current values have caused painful deleveraging of balance sheets absorbing available capital and have exacerbated the natural unwillingness of these banks to extend credit to jump start the economy. Whew!
The call to action of this plan is to finally and bravely (well, a four martini kind of bravery) attempt to PRICE the toxic assets. There is a real timid, coy element at work here, not a bit unlike winking at the pretty girl across the bar.
To dispel the suspense, the plan --- The Five Guys Toxic Assets Auction Plan --- intends to do this by conducting a beauty contest to select five (5) Fund Managers to form, fund and manage Public-Private Investment Funds to competitively bid on packages of loans and securities offered for auction by banks which currently hold the toxic assets. That’s it. That’s all there is!
The rest of the plan is simply about how the government intends to co-invest on the equity side (match the equity raised), loan money to finance the transactions (up to 85%) and participate in the upside on the sale side (pari passu w/ the private equity).
As a plan, it is the recognizable journeyman-like work product of a competent investment banker complete with an executive summary, white paper, term sheet, FAQ and application to participate. It is not a prospectus, it is a deal sheet. You have to give them good marks for the general thoroughness of the communication. Take a look at the Treasury’s website and you will see all of this. The only thing missing is the Power Point presentation. Hell, they even have an e-mail address to ask questions.
There are things to like, a few to dislike and a few to question. In no particular order:
1. We are finally doing something about the 800 lbs gorilla sitting in the corner and frankly the plan is well laid out from a communication perspective. Any reasonably perceptive financier could understand and model the plan. I leave it to you, the markets, the economy and the banks to decide whether it is a good plan. It is an understandable plan.
2. The toxic assets initially are only assets which were once upon a time rated AAA. Huh? This is not a huge portion of the universe of toxic assets and this is likely the low hanging fruit. So I wonder how effective the process is really going to be.
3. The big job of the “private” participants is to price the toxic assets. This has always been the object floating in the punchbowl. I don’t like the idea that only five (5) bidders will attend the auction. My sense is that at a certain level of pricing there could be many more folks who would make a bid. My market sense is that more bidders means higher auction prices.
4. Here is a subtle point --- as bidders exhaust their funds available, isn’t there the possibility that realized auction prices will go down dramatically? Simple liquidity trap. This argues for a wider set of bidders and a more expansive embrace of bidders who might bring their own financing. Should a deal be viewed differently if NO public money is involved?
5. In addition to the auction not being very broad, the sellers can withdraw the toxic assets from the auction if they do not like the prices. Hmmmm, this kind of feels like a cheap way for a bank to get an appraisal on their toxic assets. Maybe I am overly suspicious.
6. The government financial leverage is huge. The government will match the equity raised and will fund up to 85% of the deal. The private Fund Managers therefore only have to contribute about 7% of all the money in order to get half of the upside and some negotiable fees.
7. There even seems to be an argument that the private money could use NO public money on the equity side and thereby achieve a 6:1 leverage by providing up to 15% of the funding. A 15% equity investment earns 100% of the upside. That would be my personal favorite. In for 7% to get 50% or in for 15% to get 100%?
8. The expansiveness of the government’s funding also argues for a broader field of auction bidders because the government is “non-recourse” and secured solely by the assets.
9. The Fund Managers --- picked by the swimsuit and talent portions of a Treasury run beauty contest --- are sure to be large firms and I worry that they are not nimble enough to deal with the vagaries of litigation, foreclosure, renegotiation or obtaining payment on a huge, huge, huge number of individual mortgages. There is a skill set required to liquidate the underlying assets which is not the normal ken of big asset management firms. Isn’t that how we got into this problem in part?
10. OK, the line forms to the right for all folks who WANT to be partners with the government given the recent AIG/Wall Street demonization. What happens if you make too much money? Sure, the government gets their chunk but who wants to be successful and get demonized? Perhaps there is a derivative security that can be developed to hedge this risk? LOL
11. It is not clear how this plan will coordinate with HASP and other mortgage plans.
12. The Fund Managers can charge fees to run the deal with almost no restrictions on what they can charge the private money but the government --- in a welcome display of savvy deal making --- will only pay fixed fees from its share of the distributions or winnings. Bravo!
13. The banks find themselves in a very odd situation as it relates to their regulatory capital. Without boring you with the details most of these assets are going to be Class II or III assets for regulatory purposes and if the selling prices are very low could cause real regulatory capital problems. On one hand, the government flushes out the toxins and on the other hand the government must subsequently further shore up the bank’s capital. Proving that no good deed goes unpunished.
14. There is a 10-year mind set at work here while the real engagement phase of the RTC/S&L crisis was more like 5 years. Note that almost everything this Administration tackles has a 10-year time frame involved.
15. This needs to happen quickly to be effective and it clearly will not happen quickly. There is a chemotherapy element to the timeline which troubles me greatly. Right now, unfortunately, I would be long cancer. A ghoulish analogy for which I apologize.
Let me conclude by saying --- this COULD work. This is the RTC but with a public-private wrinkle and with the financing pre-arranged. The paltry list of bidders seems a real flaw to me. It is difficult to imagine a rallying cry being: “Rally around the asset managers, boys! And give them hell!” But, hey, it COULD just work.
Let’s give credit where credit is due. While it has been easy to take cheap shots at the Secretary of the Treasury and he added a bit of fuel to the fire with his timing, this plan is the best piece of work that has been presented thus far indicating that he is teachable.
Who would have expected less from a guy who grew up in Zimbabwe, India and Thailand and has an Ivy League degree in Asian studies and government with a graduate degree in international economics and East Asian studies? BTW, did you know that his father while in the employ of the Ford Foundation worked with Ann Dunham-Soetoro on Indonesian microfinance programs? Who is AD-S, you ask? Barack Obama’s momma! Karma, kismet! We are saved!
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