Confused by the Credit Crunch?

Having a hard time understanding collateralized debt obligations? Those financial instruments that got us into this financial mess are confusing many investors.
Marketplace Senior Editor Paddy Hirsch gives a superb lesson on how this credit crisis started and may give you a sense of when it may end.
Check it out:
http://www.youtube.com/watch?v=eb_R1-PqRrw

Someone to Watch Over You

I listened to a speech while lunching at Bay Street's secret handshake club last week where the guest speaker was Tom Hockin.
He told us not to tell anyone else, but since the finance industry was in such a crisis, now was the time to stop the madness of 13 separate regulatory bodies and merge into one.
Mr Hockin had travelled across Canada, putting together legislation that everyone - except Quebec - agreed to support.
Appears that The National Post got the story a few days later:

Canadian businesses would no longer have to file securities filings with 13
different provincial and territorial regulators, as they have for decades, and
brings to an end a much-criticized regulatory system described as "convoluted",
"unwieldy" and "Byzantine".
Instead, stock and bond-issuing institutions
would have to file prospectuses and other regulatory documents with only two
regulators -- a national body and its Quebec counterpart.

I'm Quiet and Thoughtful - Really!

Let’s talk about the real stars of Dragons’ Den – the brave entrepreneurs pitching their stories.
Did you know you can find past Dragons’ Den some of these people blogging on the CBC website, commenting on the deals and the Dragons?
It’s all very impressive.
In another reality show, The Bachelor, the girls who compete to win the heart of the single male return for one episode to confront the poor fellow.
Unlike The Bachelor, Dragons’ Den does not dedicate a show to the entrepreneurs returning to roast the Dragons - Arlene, Brett, Kevin, Jim and Robert.
To give the CBC credit, it lets fans know how the entrepreneurs and their businesses progressed and gives past winners, like Trent Kitsch of SAXX, their own blog too. But here’s the thing: participants can get in their two cents about their deal by blogging on the Forum just like TomChalker of dataSentinel who helpfully answered other bloggers’ questions. If you are expecting mildly depressed, dejected entrepreneurs who harbour ill will, forget that.
There are the budding armchair venture capitalists, like Dannolin and Pinebox, rating the merits of each business or venting about their own Den experience. Reading the past contestants and their often provocative takes on current pitches is fascinating because these guys know their stuff. It’s as if they’ve been through the miracle of entering the Dragons’ Den as innocents and emerging as venture capitalists (with tougher comments than Jim or Arlene would ever utter.)
The leader of the blogger pack is Ralfcis – he of the “sharpened keyboard” – was an engineer at Nortel. With his quirky wit and prolific writing, Rolfcis could make a career change from engineer drop-out to ad copy writer. Ralfcis describes his experience on a previous season of Dragons’ Den and as I read, it all came flooding back. Rolfcis was expecting a display table where he could spread out his samples. Instead, he had to stand up and pull out each item from the bag. Needless to say, things did not go well.
Rolfcis blogs about the good natured reaction to the pitch by Dragon Laurence Lewin, who sadly has just lost his battle with cancer.
Allison of Ariel Angels blogged all the way from Dubai to recommend a book called What Makes Things Stick. At first I was dubious and thought she just wanted to make Kevin O’Leary stick to the wall. In fact, the book’s inspired by Malcom Gladwell’s best seller book, Tipping Point and is a must read for anyone selling a product.
Maybe the bloggers could run a book list?
My happy browsing came to an abrupt halt when I read the name of a blogger called Darryl Koster. Hang on a mo. Isn’t he the pleasant CEO of Buster Rhino, that delicious sauce signed on with Brett Wilson and Robert Herjavec?
In the CBC Forum, Darryl Koster, the CEO, reveals to us that he turned down Brett and Robert’s deal. When I read that I went oooh nooo!
Where was the spoiler alert, Darryl?
I know there’s that six month delay from filming to the airing of the show but think about it, if you found out before season end of The Bachelor that the final girl has split and is living cheerfully with someone else, wouldn’t that be a huge let down? Darryl does make up for it by giving great website and technology advice to other presenters which may mean I have to vote him the season winner. Darryl, can you check out my website and give me some feedback?
There are many financiers who build their careers from the engineering profession and one of those people is the Big Kahuna blogger, Dragon W. Brett Wilson. How great is that to have a Dragon cruise around the Forum and drop in to blog?
Brett does not do much chit chat on the TV show except when he revves at warp drive to do a deal. Fasten your seat belts, ladies and gentlemen. The bloggers do appreciate how Brett shows up on the chat forums explaining why he made decisions and answering issues raised. He also says that he is not as the CBC portrays him – quiet and thoughtful.
Are you kidding, Brett?
That’s like describing Clint Eastwood as quiet and thoughtful. You are in the entertainment industry for a reason; it’s not because of your bookish ways. But don’t worry, your secret’s safe with us.
The bloggers do spend a great deal of time debating whether the show is better or worse with Kevin’s dramatics. One blogger calls Kevin a troll hiding under the bridge waiting to trap entrepreneurs which is a gross insult and unfair to trolls worldwide. Yet, I do believe Kevin really does the fairest exchange on Dragons’ Den as he teaches while he makes his decisions. After going through the hour meeting with Kevin, not one entrepreneur could possibly say, “I do not know why he did not invest with me, why my business needs to be changed, how my revenues might not reach the amount I expect or what I need to do.”
Not one Angel investor out in the real world would give anywhere near that much information for an entrepreneur to take away. In fact, investors say, “I like your plan but could you give us a call in a year?” That translates into au revoir. Most entrepreneurs would prefer to get more feedback than that.
I notice many bloggers have picked up Kevin’s key phrases too – the sign of a great teacher:
Let me use my time machine, slash, crystal ball and visit the future to imagine how the business revenues go.
Here comes Kevin and his bus.
How do we make moneeeeeeey.
Brett on the other hand chooses to share his investment strategies after the fact on the blogs. Either way, I think this sharing of knowledge is a fair swap between presenters and Dragons.
There is the trade theory that when people show each other their goods, it creates more perceived value, even though money may not have exchanged hands. The Dragons’ Den has entrepreneurs show their businesses and Dragons give their analysis and, sometimes, cash. Maybe this does create good will.
Several bloggers, like sslondon, liked the Dragons giving away cash in cheap loans because they had sympathy for someone’s situation. Brett Wilson and Robert Herjovec have done this so far and the Forums fans eat it up. I hate to rain on the parade, but if venture capitalists and Angels practiced this style of investing, they would be bankrupt within the year. Most businesses have their investing rules and deal structures. Doing venture capital and then veering abruptly to the left to give a loan or two means way too much complication for your average VC to manage.
Firms tend to do their philanthropy separately and for good reason. Maybe a philanthropy option should be built into the Dragons’ Den rules as a life line to be given once during the season, but Kevin O’Leary is right: feeling for a business owner is generally not the way the prickly world of investing works.
Kevin is teaching entrepreneurs how to fish; actually, he’s teaching how to spear gun and he doesn’t just hand over the darn fish.
For all you past contestant bloggers – here’s an idea for you:
What about a road show? You could call it, Lessons Learnt in Dragons’ Den. (Ralfcis, I’m sure you could come up with a catchier title). Maybe the sponsors like Profit magazine or EDC would be interested in supporting an event? Perhaps the School Boards may like you speaking to their high school students taking business classes. There are many entrepreneurs out in Canuckland who would benefit from hearing more from your side. I know I did.
Just a thought.

Theatre of the Absurd

Recently I spoke to a young, upwardly mobile, American private equity associate out of Chicago at the latest ACG Conference in Toronto.  I asked, as I did many, how low EBITDA multiples had dropped in the U.S., and this particular investment professional said something absurd...  "Actually, we recently lost out on a deal because we valued the company too low at a 16x multiple, the final valuation was 20x apparently".  

Where had this guy come from, El Dorado?  The more common language trudging through the marble halls of private equity firms is far more vehement at its core as the tide of credit slips through their hands. Many in the portfolio management industry are using words like "capitulation" to describe the current market apoplexy.  Private equity fund managers are not exactly having that much fun, but they are now being forced to reinforce their dykes against the fallout flood of melting consumer confidence, recessionary hyperbole, and teetering financial institutional giants.

The G20 meeting held by the world's undisputed champion of empty pledges, George W. Bush, was held in Washington on November 14, and looked like a charming get-together for the President and 20 of his closest friends, its effectiveness is yet to be seen, but certainly the opportunity to establish a sense of global solidarity was lost amidst the vagueness of the summit's conclusions. And today, before a podium and in front of a dilapidated-looking Henry Paulson, George Bush announced yet another emergency and absolutely necessary bailout package for another of the United States' beleaguered financial institutions, though Congress dismissed the auto industry the week prior.  

It seems things have reached a point of absurdity, the now mighty Democrats (though so did a few Republicans) triumphantly lambasted the auto industry executives about the dysfunctional nature of their business models last week, but petitioned the very same industry not a month earlier by calling for protectionist measures (also laying the ground work for higher operating costs and material costs) when they were fighting for their own jobs.

In 1961, Martin Esslen coined the term Theatre of the Absurd to describe a type of tragicomedy, in which rationality is usually corrupted to disenchant the audience and cultivate a sense of unreality...nowadays it seems life does imitate art.  Though a 20x multiple is absurd to most in the private equity industry, these days, absurdity may actually lend itself to credibility.  

We are all richer with Free Trade

"Do you know how to make a sandwich?" asked Mr. Lajeaneusse, an economics teacher at UCC high school.
Sure, I thought - two slices of bread, ham, cheese and maybe a piece of tomato.
"What would be the price of that sandwich?"
Well, depending on where you are buying all the parts making up that sandwich, but probably several dollars.
Mr Lajeaneusse then asked, "Now, what about a pencil. Can you make a pencil?"
Errr...nope.
"So why is the cost of a pencil so much lower than that of a sandwich?"
Adam Smith explained this concept of specialization back a few centuries when he used the example of the cost to an individual to make a pin. There are economic clubs trying to do just that but Mr Lajeanesse makes the point just as well.
The tasty sandwich example illustrates why specialization of skills pays off in bringing down the time and price for making something. He also showed how trade is of benefit to us all. Instead of our neighbours, today we trade around the world and there is talk about trade barriers going up again.
Here's a video clip of Milton Friedman Mr.Lajeanesse shared, explaining why free trade is a great thing for the world. I particularly like it when Milton Freidman talks about world peace. Now if only we could get beauty queens to discuss how world peace and free trade work together!
http://www.youtube.com/watch?v=d6vjrzUplWU&feature=email