Takethe5th Picks and Pans

The Republican party is engaged in a massive campaign of Revanchism. They hope to rescue their wrecked brand by rewriting recent Presidential history and motivation. Forget for a moment that Still President Bush in his 2000 campaign promised a)to a be “a uniter and not a divider” and b) not “to engage in foreign expeditions and then proceeded to turn both of these Presidential oaths into their diametric opposites.

Still President Bush, following Rovian dictates, has  sought to rule with a  51% majority using the mostbitterly partisan and pork barrel politics of the past half-century. Then when he lost his majority in Congress in 2006, the Still President suddenly found his 6 years of lost fiscal responsibility and started to veto bills and obstruct Congressional work with brazen partisanship to at least create the largely successful illusion that Congress was do nothing  … and would succumbe to popular ratings lower than his own.

And as for “foreign expeditions”, there are too many best sellers that describe the neo-conservative draft dogers rampant run to a useless war. And we have left out the complete gutting of the civil service and key departments of Justice, Environment, Agriculture, etc. So now the President is trying to have his administartion’s history rewritten - so that John McCain does not look like a total fool inadopting big chunks of the Still President policies.

Macleans, Canada’s National News Magazine has a story about “the shockingly liberal legacy of the Sill President”. It keeps the blinders on about when and how small and late the efforts were and of course does not take into account the missed opprtunities on Enery and Conservation, Health and Welfare.

However, Newsweek tops this with its  story by head correspondent Fareed Zakaria on What Bush Got Right.
Again the storyline is remarkably the same as that done b y MacLeans magazine. The same “liberal” successes - Africa, No Child Left Behind, etc. Eevn those these are flawed and even-shortsighted; they are trumpeted as major efforts rather than smal gestures used to mollify the otherwiase harsh image of the Still President. My question is how coulld these remarkably similar stories arise at this time ? What is the nature of the timing and intent ? Its a glimpse into the real power levers in the US.

There have been some interesting business news items recently.  In the Thursday, August 14th Financial Post, there is a story by Barbra Shecter on the state of securities disclosure by Canadian businesses. Even in the polite etiquette and language of regulation, the Canadian Securities Administration declared that “significant deficiencies were found in the disclosures made by one quarter of 854 companies “. Many of the difficulties are associated with ABCP-Asset Backed Commercial Paper - the derivative based instruments similar to the  sub-prime loan fiancial paper originating in the US and still wreaking great financial harm. Now this disclosure deficit  is occurring  in a Canadian market which is already reeling from the accunting embarrassment is   Nortel Networks.  The Canadian Accounting community is tainted with three years of mis-stated financial returns starting in 2002. The associated  legal proceedings continue to this date.

Next there was The Financial Time reports on  the same day which describe the dispute between Royal Dutch Shell and the WWF-World Wildlife Federation.  This is the same Royal Dutch Shell that is currently paying out $200 million for overstating its oil reeserves. Now the ASA-Advertising Standards Authority in Britain ruled in favor of the WWF and said Shell was guilty of misleading the public in its full page ads touting Shell’s environmentally responsible efforts. The ASA cited the misleading claims of environmental efforts at the Canadian Tar Sands and in the expansion of its Port Arthur Texas refinery. This rebuke does contain possible further legal entanglements; but also shines the light on the Tobacco-company inspired propaganda tactics now being used by the oil and gas industry. Another example is the huge $20++ annual funding of anti-Global Warming dis-information campaigns by Exxon Mobil.

Why is this important ? One can find dozens of stories like this every week  in the business press. White collar “venial sins” matter because in the new globalized and faster decision making business environ, it is vital that information flows are credible and not subject to “revisionism” if not bald faced falsehoods.  An Open Information environ fostered by the Internet and drawn upon by dozens of financial info companies (think Reuters, Bloomberg, Moodys, Morningstar, Standard and Poors, etc, etc)whose financial data and business interpretations should provide fair and widespread distribution of information. This info is the crucial oil that makes markets so efficient as business champions such as the Economist, Forbes and Fortune are so wont to point out. But if that information is tainted, markets start to build in hedges, delays for confirmation, and greater distrust which can quickly poison and stall markets. This is exactly what has happened in the derivatives/complex financial instruments based ABCP and other financial markets. Hence the intervention of the US Fed several times with unprecedented rate cuts and investment bank bailouts due the US sub-prime loan seize-up which, a year and a half later, is still jinxing world financial markets.

So when one hears business and especially the financial community complaining about regulations and government red-tape(there is a chorus against Sarbanes-Oxley, Basel II Risk Management, FASB Rulings and others), consider that businesses and particularly the Financial community has nobody to blame but themselves. Businesses have proved to be: a)increasingly making deeper incursions across the legal line/limits of business and financial integrity and even more flagrant violations of fiduciary and stakeholder trust; b)almost totally incapable of self-regulation and group discipline (witness the sub-prime fiasco and consequent self-protective but market paralyzing actions), and c)increasingly going to the public bailout trough as self inflicted and ever more frequent financial bubbles explode in their faces “requiring huge public money bailouts”. So the financial markets in particular which say to regulators “stay out of our business” are being calculatedly deceptive. This stay-out notice only applies until they are at self-induced risk of losing money bigtime and stand to bring key segments of the markets and the economy in general to a halt - then you have to rescue us at public expense.

The real policy problem is that the frequency of financial firms coming to the bailout trough is increasing; the size of the bail outs are increasing; yet the financial firms are not establishing any self-discipline with internal regulations nor with self-financed group insurance commitments. Yet in good times these firms find it possible to reward themselves extravagantly with monster pay packets and bonuses. Yet they complain and lobby against the very regulations and controls their own waywardness has caused. But worst of all businesses and financial firms are siphoning capital from admittedly risky necessary industrial capital investments in new energy, water+agriculture, and other innovative ventures for the future.

In short, it is no wonder that developing countries like China, India, Brazil, and even parts of Eastern Europe are besting the US and Western Europe in not just GDP growth but also key emerging industrial markets. Just another wicked problem awaiting the successor to the Still President Bush.

I have promised to feature some venture capitalists who are taking real risks and creating new jobs and businesses. This is in stark contrast to private equity and hedge funders who are playing Ponzi games or, given cheap capital, making sure thing leveraged buyouts of marginal beneficial impact to the economy. My first choice is the often controversial but also undoubtedly successful Vinod Khosla originally a founder  with Daisy System sand  Sun Microsystems. Hee later became a partner at Kleiner, Perkins, Caufield & Byers. There he helped bring to market such companies  as Juniper, Bay Networks and Cerant among others . In 2005 he started his own venture capital firm, Khosla Ventures.

What distinguishes Khosla from the formul-following private equity firms are two clear characteristics. First,  his willingness to bring new ideas and firms from start-up to full marketcontributing both capital and managerial skills to the new venture. In contrast, the private equity firms are out to loot the realtively strong balance sheets of their takeover targets.   Second is Vinod’s  willingness to venture his own money with the inherent high risks in markets  that can change rapidly with new feature and process innovations.  Again, in contrast none of the private equity firms exposed to financial capital markets seizing up - were willing to risk any moneys - not even  simple top-ups when the Treasury Secretary and Fed came calling . In short Vinod style Venture Capital is a world away from the sure-money approach taken by financial private equity and hedge fund firms.

It is interesting to note that the current Khosla  ventures are heavily outside of the Internet and computing technology fields of his previous successes and are now aimed at alternative energy and medical breakthru fields. It is also interesting to see the distinctive point of view that the man brings to the market - and some of the major  players. Now this is the type of capitalism that America is famous for - brought to you courtesy of an India-born American venturer.

It is this type of venture capital that is going to be needed over  the next two decades as the Energy Crisis is replaced by the Freshwater Shortage and then the Food Provision Dilemma  and the almost certainty of the need to rein-in  rising health costs. Perhaps this type of venture capital should be rewarded with lower capital gains tax rates for first sales of stocks  depending on the number of net  new jobs created by the venture. The government benefits because for every 1% of one time capital gains lost it has  two hundred new taxpayers creating a revenue stream hopefully for decades. Maybe one could raise the capital gains tax rate  for LOB takeovers to make up any other shortfalls.

Whatever the case, the US and the World is going to need more Khosla type venture capital, not the “for-our-own-gain” financial machinations of private equity and hedge funders.

I rarely agree with Paul Krugman’s economic policy; but his placement of the center of ideas from the current Republican party is right on Denmark. Krugmaan says the Republican’s who once prided themselves as being the party of ideas - is now clinging to the notion that appeals to the simple, brute force approach to everything woeful courtesy of the Still President  and sclerotic financial elite will win the day in every political realm.

 Now given the Machiavellian acumen of the Republican political  hitmen - there is a distinct possibility that this will work .. for a time. The question is how long duration will this be - the attention span of the US populace looking for better than what they got for the past eight years may be more than slick Will Rovian political maneuverings.  It won’t be dull.

It bears repeating that American capitalism is at a crossroads. There is a coterie of financier and investors primarily of the private equity and hedge fund kind that are taking advantage of historically low interest rates and banks willingness to allow for and finance hugely leveraged (the private equity stake is typically less than 15% of total invested capital) buyouts of weakened but still viable companies (low debt to equity, still profitable but waning, often caught in the technology-change headlights). These are the new low risk, high personal return financiers who have found a very low risk money making machine for themselves and “friends”. Think KKR, Clayton Dubilier Rice, or the BlackStone Group (see here for a partial list of large scale private equity shops).

Now some of these private equity operations - lets call them venture capitalists, have been thriving for 30 plus years and are distinctly different from the financial private equity firms. These venture capital firms invest in technology start-ups first in computing, then software and Internet, and now more broadly in biotechnology and alternative energy ventures. Think of Kleiner, Perkins, Caufield & Byers or Sequoia Capital. The essential difference is that venture capitalists are investing in new firms and new technologies. These investments come very early in the startup process and typically have 2-3 rounds of increased capital investment. The whole idea is to help shepherd new technologies onto the market with financial, start-up and managerial skills that the nascent firm may be missing. Another key difference is that venture capitalists are creating jobs and often whole new industries. Unlike financial private equity shops, venture capitalist are not saddling firms with high debt burdens,  slashed  staffing,  short-term cutbacks and/or new capital starving-diets. Finally, the risk exposure of venture capitalists is much higher - there ventures can belly-flop or just take a long time to mature. Inherently, because venture capitalists are indeed creating new capital ventures they bear much greater risk than financial private equity firms whose takeover formula guarantees that their risk is minimized right from the outset of a highly leveraged buyout - and then huge increases in the new corporates debt load as initial financing is paid off under the privacy umbrella.Divisional sell-offs and manpower cuts are made to further reduce risk exposure. The whole goal is to make huge amounts of money quickly for the financing private equity firms.

The net result is that the US, long cited as the most venturesome of business capital economies is now ceding that pre-eminent position to the Brazil’s, China’s, and India’s of the World as the country’s financial powers and wealth is devoted to more “sure-thing”, low risk financial private equity ventures. And the evidence is clearly on the table. Look at 3 huge emerging markets - and the lack of major partcipation by US firms and Capital.
1)Non or lower oil-based transportation particularly cars, trucks and planes. Only Boeing has made a major investment in reduced energy usage - and despite the technology hiccups is still doing well against Airbus and other competitors. As for the US car and truck industry - the best that can be said is that it is scrambling to catch up;
2)Alternative, less-carbon, less dangerous-waste energy sources. US companies have succumbed to the lure of sure-thing 40% ROI typified by oil investments or low risk coal/gas fired energy sources rather than embarking on grid changing investments in wind, solar and other clean sources.
3)Rampant increases in health care costs. US companies have declined from 85% coverage of health costs to less than 60% in less than 20 years  while the cost of care has grown at 2-3 times  inflation rates during the same period. Health care is now closing on 20% of GDP. This is a huge opportunity waiting for smart investments in basic health infrastructure.  The problems are often wicked and the role of government is inevitably large.But so far investments have been very mixed with good intentions being overwhelmed by quarterly earnings requirements.

So the US capital markets have shifted to short term and me-first formulaic, low risk financial investment. The country that brought the world the most vibrant venture capital markets at the close of the 20th Century has seemingly ducked into the sure-things world of financial private equity and hedge funding investments. Could it be that the billion dollar++ salaries at the top of private equity and hedge funds firms  and their  other huge personal payouts have tipped the scales definitively towards low-risk, “sure thing” US capital markets ?  

The Economist has in its July 26th issue, the first of two articles on Discontent in America. The polls are in alignment. Gallup shows a strong rise in discontent in America. When asked “How do you feel about the way things are going in America ? “, close to 85% of American register Dissatisfied versus only 30% in 2001-2002 at the height of the US Economic Internet bust and after the 9-11 attacks. Likewise  President Bush has reached the nadir of approval ratings, less than President  Nixon at his historically lowest point of popularity. And of course, the President and his party seem to be working overtime to earn that disapproval rating with their concerted obstructionist policies in Congress where partisan politics has determined that Republicans must lower Democrats ratings by vetoes and filibuster.  The net result of obstruction - approval for Congress has fallen to 14%, half that of President Bush.
But the both the short term and long term economic indicators are bearish in America. While the Iraq and Afghanistan wars are draining the US of $350-500 billion per year(depending on whose accounting you have faith in) just when:
1)oil prices are hitting new highs 10-15%  above those seen in the past;
2)food prices rise by 10-25% precipitated by a combo of bad weather, fuel costs, and displacement of corn into energy supply  as subsidized biofuel - another rushed “solution” courtesy of the Bush administration and a compliant Congress;
3)continuing health care cost rises  outpacing  inflation;
4)inflation itself continues to grow at higher rates reaching 5.7% and growing;
5)the greedy guts financing debacle continues to undercut the housing markets with a double whammy of tighter credit and declining home values (16% down  but between 12-35% in various US cities).
So Americans, already holding record debt levels

As an alternative RPEM-Rigged Perpetual Earnings Machinations being foisted on North American financial markets by Hedge Funders and Private Equity firms, I am going to highlight some real venture capitalists. These are  financiers that are NOT doing the latest financial no risk sure thing to existing large corporates that have fallen into stock market disfavour (currently RPEM Stratgems are the  Private Buyout with Employee Slash+WorkOverload plus Asset Selloff and Debt Equity Ramp Up but the machinations vary with time and conditions for the quickest possible “turnaround”). These are true Venture Capitalists who are doing major start-up work, adding to employment, and risking their capital in that some of these ventures (even with guidance from the Vneture Capitalists) simply do not pan out and large losses are taken. Contrast this with Hedge Fund and Prvate Equity venture that leave a corporate with all of the original corporate stakeholders(most of the employees, local governments, customers, suppliers,bondholders) with exeption ofshorterm

Silicon Valley of course has been the source of much true Venture Capital. Much of the money has been spent in computing  and electronics but of late Venture capitalists even from the IT oriented Silican Valley are making bigs bets in genetic-based drug and health processes, energy alternatives, and  nww materials and methods. Venture Capitalists use iterative methods  - going through rounds of financing as the emerging firm proves out each stage by bringing an expanding set of product+services to market. Some VCs confine themselves to finacing and milestones setting while others also take on some mangerial functions depending on the needs of the emerging firm. But the  key VC  idea is to develop new markets and profit from the often large intial margins and growth rates that make a profitable coming to market for a broad set of players: employees as well as top management, key suppliers, and access deals (to setting goals and standards or maybe key commitments to product at set prices)for key customers as well.

Contrast these methods with the Grind and Finacial Manipulation that is hedge funding and private equity buyouts. In effect, US capital markets are having a war over how mone is to be best made - and right now the low risk bearing Hedgeand Private Equity have set up systems that reward low managed risks with outsize rewards. In effect, US Capital Markets have turned the Risk/Reward (the more the Risk the greater the Reward) on its head and are doing an Exxon Mobil - only invetsing in 40% ROI sure things - which for the time being is in oil. But of course if ExxonMobil continues that for much longer - they will decline. Not the same apparently  for Private Equity which sees their monopoly control over capital returns (just new methods) as for ever perppetuated.

This is the Cover story at Business Week this July end - one year after Bear Sterns shot itself and the US Economy in the foot, being the first of many Hedge Funds and Investment banks, to gag on its own Derivative Mortgage Greed. Now I don’t want to say that I told you so in Greedy Guts US terms - but Business Week describes in even more detail how greed, leverage, greed, Complex Ponzy derivatives, greed, compliant financial instrument ratings firms (don’t think, rather indict, Moodys, S&P, Fitch, etc.), greed, Fed Moral Hazard money, and even more greed have left Business Week saying:
“One thing is for sure: The new normal won’t be a fun as the recent past. Banks will be smaller and fewer. Capital will be harder to get for some consumers and companies. And more of that capital will be parcelled out by lightly regulated hedge funds and private equity firms, for better or worse, as the balance of power on Wall Street shifts”

Yikes! - out of the fire and into the dark, shadow world of hedge funds and private quity financing. This is like giving US investment power to the Dark Lords of Mordor. Even the Economist has had second thoughts on the Shadow world of Hedge Funds and Private Equity. But in the waning days of a Federal Administration that is working triple overtime to permanently secure “trickle down” tax braks for the wealthiest Americans most of which are not investing in the US or the new Energy Smart economy but are working triple overtime to procure more “sure thing pounds of financing flesh” (see recent buy out of Trans Alberta Utilitiesfor the latest example) - don’t expect any enlightened control or regulation from Washington.

No its Free Rein at least for 7-8 months as the Still-President lets the most discrete highest bidders settle their Wall Street Wrangle for Power. And so the Sharks of Wall Street Hedge Funders and Private Equity firms are working triple overtime to secure their positions as scott free on the Mortgage Meltdown and the new primetime Lenders of Last Resorts - “the Banks are down a $Trillion or so, so see what We can do for you out of the ‘prying eyes’ of financial regulator”. Give me Venture Capital out on the West Coast over these band of thieves any day.
So until the Still-President is replaced, there is scant hope that the US Capital machinery will right itself out of the “business” of gutting low debt equity ratio firms repackaged as “financial vehicles” and into the truly risky business of transitioning the US economy into a smaller ecological footprint(The US cannot continue to consume 1/4 of the world’s resources given it has only 1/20th of the population) and energy savvy(the World cannot continue on its environmental disaster course). But even with a McCain or Obama presidency - there is no guarantee that the US will not punt its Financial Rainmaking Power into more capable hands. All the results of replacing “Fiduciary Trust” with “Unbridled Greed is the new Might makes Right”.

This article in the NYTimes shows that Greed is still running rampant on Wall Street and the Financial markets:
“Since the almost overnight collapse of Bear Stearns earlier this year, top-level Wall Street executives have been pleading with regulators to investigate what they see as efforts by short sellers to plant false information and profit from it.

Lehman Brothers, for example, faced rumors last week that two major clients had stopped doing business with the firm. Lehman’s stock dived almost 20 percent before recovering somewhat as both clients denied the rumors.

The issue is a notoriously challenging one for the SEC. Rumors have long been a part of Wall Street’s fabric, and to prove rumor-mongering is a difficult task, especially with 24-hour news and communications technology like instant messaging and text messaging. But Wall Street executives insist that false information is permeating the marketplace as never before. Since Wall Street firms are highly leveraged businesses that need outside financing, confidence is crucial, and rumors can overshadow the strength of their businesses, executives say.”

First, the need for this type of warning indicates how shark-invested the US financial markets have become. Literally, with huge lay-offs in the finance sector, large stock devaluations and huge fortunes at stake, privateering and pirating rules the Financial High Seas. The enormous financial upheavals help to disguise malvolent actions. In this financial storm getting my share protected overrides all other considerations: fiduciary trust, national economic well being, skirting the law among other things.

Second, the SEC, Treasury, FED and other financial regulators are hopelessly at sea trying to control the new Greed Invested Risk-takers. It is the complexity of derivative financial instruments, the relentless pace of 7/24 trading, the precariousness of huge leverage, the fragility of access to astonishing salary payouts , and market positions changing overnight that has this vortex increasing as every sector sagging with debt-driven obligations - says “I won’t be the next Bear Sterns”. And as the country lurches from one financial disaster to the next, “the controllers and regulators” look more like reels of Keystone Kops.

Third, this continuing and already year old financial debacle indicates how much the fabric of the economy is subject to the whims of unbridled Greed. Kenneth Arrow won a Nobel Prize for his work on the social and legal boundaries in economic systems. He proved in his General Possible Theorem that rational players could collectively make individual and even Pareto optimal decisions and still leave behind the best decision for the overall group. In this way he showed that bad decisions for the overall economy could be readily or “rationally” taken when many players were satisficing but not necessarily producing the optimal outcome for economy and the greatest number=the whole economy. In effect Arrow was calling into question the unquestioned efficiency of Adam’s Smith Invisible Economic hand. This has been the argument from thinkers on the right who suggest “their Darwinian decisions” always produce the greatest good (and very handsome returns for themselves). Thus informed, Arrow has gone on to comment on the need for morals and trust to keep economic systems working effectively. Clearly, that effective working level of trust has evaporated from US Financial markets - and all the Still-President’s men cannot even seem to restore it.

Its rare that you get to see a real contest of wills, the sheer ebb and flow of best blows taken for minute advantage only to be repulsed, and the sheer extravagance of seeing pounding shot after shot taken that you know to be, from your own dallying in the game, of a sublime nature. But even that shot returned with an even greater skill. And then again. Then throw in the elements of alternate Sun, wind, rain delays and approaching darkness. That was the delight of the five set Wimbledon Men’s Finals between Spain’s Rafael Nadal and Switzerland’s Roger Federer. After that match I can say I have seen gladiators.