If you know you will be eating the food that you cook, do you think it would make you more careful how much salt you add? When there is self interest, we human beings are absolutely going to pay more attention.
In the same vein, people investing their own cash into a business are more likely to pick winners.
It is uplifting to see that the Ontario government is recognizing this human trait and is partnering with private equity to invest in up and coming companies.
Karen Mazurkewich, Financial Post, writes about useful government initiatives that support venture capitalists and what entrepreneurs really think of them. Marzio Pozzuoli started his company RuggedCom and recognizes that the VC funds are the most competent at funding early stage companies.
"The best guys to fund the emerging technologies and start-ups are the VCs because they are doing diligence to do the investments," says Mr. Pozzuoli. Earlier this week, the Ontario government announced a new $250-million co-investment fund intended to help companies working in clean technology, life sciences, digital media and information and communication technology. If a venture capital firm invests money in a company, the government will match it dollar for dollar. Another bone to the sector was a new $205-million Ontario Venture Capital Fund created last June, comprised of Ontario government cash and funds from institutional players.
Mr. Pozzuoli says the best program the government has for companies like his is the Scientific Research and Experimental Development Tax credit, which has a federal and provincial component. "We still use it today as a public company."
March 23, 2009
March 22, 2009
Private equity would be better for AIG
I talk a great deal about the difference in the psychology of investing, in my book Money Magnet. But if you want to see some real life examples of people's behaviour when they invest other people's money, not their own, then take a seat to learn from the drama of AIG. Watch the US government and their tax payers' treatment of one of their "investments" - AIG. Now the American government and many of their nation's tax payers believe they have "given" money to AIG. This delusion is understandable but in fact, the US government has bought shares in AIG making tax payers one of the biggest investors. They hold shares in what was a very successful company. Now they are destroying wealth by braying for blood. Who will want to work at AIG in the next few years - only dolts. There goes AIG to the garbage heap and tax payers will not earn back a cent of profit. Joe Nocero at The New York Times explains why tax payers and government need to understand their position as an investment partner in the business.
In other words, it is in the taxpayers’ best interest to position A.I.G. as a company with many profitable units, worth potentially billions, and one bad unit that needs to be unwound. Which, by the way, is the truth. But as Mr. Ely puts it, “the indiscriminate pounding that A.I.G. is taking is destroying the value of the company.” Potential buyers are wary. Customers are going elsewhere. Employees are looking to leave. Treating all of A.I.G. like Public Enemy No. 1 is a pretty dumb way for a majority shareholder to act when he hopes to sell the company for top dollar.
March 20, 2009
Too much leverage is a bad thing
there is just too much leverage in the financial system. Banks, dealers, hedge funds and private equity firms. Too much leverage. The big U.S. investment banks were, by far, the worst offenders followed closely by European banks.
In April 2004 the SEC granted the five big U.S. investment banks virtually unlimited leverage.
Following this decision, the assets and leverage ratios of the five firms exploded.
In just the four years to the end of 2007, the aggregate assets of these five firms doubled from $2.1 trillion to $4.2 trillion and the average leverage ratio, as measured by total assets to common equity, increased from 23 times to 33 times.
These ratios were “off the charts” – especially when you consider these weren’t investment banking firms at all.
Over a decade these firms had morphed into being gigantic hedge funds, dealing in risky assets and they were financed largely by wholesale money.
They were an accident waiting to happen.
Financial firms love leverage because it can do wonders for your profits and your return on equity in the good times.
Unfortunately, leverage can kill you when business turns down.
Most people do not appreciate the destructive power of leverage. At 33 times leverage, as these five big investment banks were, if your assets drop by just 3.3%, you are out of business. And at 40 times leverage, where some European banks were, if your assets drop by just 2.5%, you are gone. With these leverage ratios, there was zero room for error – no cushion.
Leverage is especially destructive in a deflationary environment.
Asset prices decline, debt remains the same and the equity gets crushed.
In April 2004 the SEC granted the five big U.S. investment banks virtually unlimited leverage.
Following this decision, the assets and leverage ratios of the five firms exploded.
In just the four years to the end of 2007, the aggregate assets of these five firms doubled from $2.1 trillion to $4.2 trillion and the average leverage ratio, as measured by total assets to common equity, increased from 23 times to 33 times.
These ratios were “off the charts” – especially when you consider these weren’t investment banking firms at all.
Over a decade these firms had morphed into being gigantic hedge funds, dealing in risky assets and they were financed largely by wholesale money.
They were an accident waiting to happen.
Financial firms love leverage because it can do wonders for your profits and your return on equity in the good times.
Unfortunately, leverage can kill you when business turns down.
Most people do not appreciate the destructive power of leverage. At 33 times leverage, as these five big investment banks were, if your assets drop by just 3.3%, you are out of business. And at 40 times leverage, where some European banks were, if your assets drop by just 2.5%, you are gone. With these leverage ratios, there was zero room for error – no cushion.
Leverage is especially destructive in a deflationary environment.
Asset prices decline, debt remains the same and the equity gets crushed.
March 19, 2009
Great news from Canadian Youth Business Forum in an email from Flavian, the PR magnet!
Prime Minister Stephen Harper visited Toronto today to officially announce a $10M grant to my company CYBF. He visited some friends of mine in their Tortilla restaurant on St. Claire & Dufferin and then headed off to a press conference to make the announcement. La Tortilleria is only 10 months old with 3 locations....best authentic Mexican in Toronto. The entrepreneurs, Axel and Juan are 26 yrs old...and immigrants from Mexico.
Some stories so far...http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20090318/harper_presser_090318/20090318?hub=Canadahttp://www.thestar.com/News/Canada/article/604397
Prime Minister Stephen Harper visited Toronto today to officially announce a $10M grant to my company CYBF. He visited some friends of mine in their Tortilla restaurant on St. Claire & Dufferin and then headed off to a press conference to make the announcement. La Tortilleria is only 10 months old with 3 locations....best authentic Mexican in Toronto. The entrepreneurs, Axel and Juan are 26 yrs old...and immigrants from Mexico.
Some stories so far...http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20090318/harper_presser_090318/20090318?hub=Canadahttp://www.thestar.com/News/Canada/article/604397
The ability to say no
One of the most difficult things in banking or investment banking is not to follow your competitors over a cliff.
This is incredibly difficult because if one, or a few, increase their risk profile and start taking your clients, there is strong pressure within your own company – and from the market place to, increase your own risk profile to maintain your competitive position.
In boom years this process rachets up the risk profile across the entire industry on a continuing basis. As Jacoline Loewen discusses in Money Magnet, "The business goes to the private equity fund prepared to take the most risk."
It’s the same thing in investment banking. If one firm increases their risk profile on new equity issues, usually the others fall in behind.
I don’t know how many times I’ve heard we’ve got to go into this business, or we’ve got to make that loan or we’ve got to go into that deal because everyone else is in it.
My conclusion is that the most important word in the financial business, apart from please and thank you, is the ability to say no.
- No, we are not going to do that deal.
- No, we are not going into that new business.
- No, we are not going to make that stupid acquisition.
- No, we are not going to make that loan.
Many times the best deals you do are the ones you don’t do.
In the course of my career I wish I had said “no” more often.
This is incredibly difficult because if one, or a few, increase their risk profile and start taking your clients, there is strong pressure within your own company – and from the market place to, increase your own risk profile to maintain your competitive position.
In boom years this process rachets up the risk profile across the entire industry on a continuing basis. As Jacoline Loewen discusses in Money Magnet, "The business goes to the private equity fund prepared to take the most risk."
It’s the same thing in investment banking. If one firm increases their risk profile on new equity issues, usually the others fall in behind.
I don’t know how many times I’ve heard we’ve got to go into this business, or we’ve got to make that loan or we’ve got to go into that deal because everyone else is in it.
My conclusion is that the most important word in the financial business, apart from please and thank you, is the ability to say no.
- No, we are not going to do that deal.
- No, we are not going into that new business.
- No, we are not going to make that stupid acquisition.
- No, we are not going to make that loan.
Many times the best deals you do are the ones you don’t do.
In the course of my career I wish I had said “no” more often.
Bank of Canada a winner
For over 100 years increased government regulation of financial institutions has followed financial crises as night follows day.
This time will be no exception.
The fact is the market has lost confidence in the Federal Reserve, the SEC, the Bank of England and the Basel One or Basel Two regulatory regimes.
This crisis built for years under their watch.
I believe OSFI and the Bank of Canada have provided better oversight. In particular, the SEC has acted like a head waiter to the securities industry in the U.S.
In any event, there is a ray of light and that is Paul Volcker age 81, who was Chairman of the Federal Reserve from 1979 to 1987 and is arguably the greatest central banker alive today.
Last July the group of 30 nations launched a project on regulatory reform under the leadership of Paul Volcker. This report was tabled just ten days ago and contains four core recommendations and eighteen sub-recommendations, focused directly on problem areas which have emerged over the past two years including;
- structured products
- proprietary trading by banks
- regulation of hedge funds and private equity firms
- leverage
- and several more
At the press conference tabling the report last week Mr. Volcker called the current financial system by a four letter word – he called it a “mess”. He said “we are going to have to rebuild this system from the ground up”.
We are fortunate, indeed, that the highly capable, blunt talking, Volcker has been appointed Chairman of President Obama’s Recovery Board.
The long and the short of it is;
The grand experiment of deregulation of financial markets and financial institutions which started with President Ronald Reagan’s appointment of Alan Greenspan in 1987, is over.
This time will be no exception.
The fact is the market has lost confidence in the Federal Reserve, the SEC, the Bank of England and the Basel One or Basel Two regulatory regimes.
This crisis built for years under their watch.
I believe OSFI and the Bank of Canada have provided better oversight. In particular, the SEC has acted like a head waiter to the securities industry in the U.S.
In any event, there is a ray of light and that is Paul Volcker age 81, who was Chairman of the Federal Reserve from 1979 to 1987 and is arguably the greatest central banker alive today.
Last July the group of 30 nations launched a project on regulatory reform under the leadership of Paul Volcker. This report was tabled just ten days ago and contains four core recommendations and eighteen sub-recommendations, focused directly on problem areas which have emerged over the past two years including;
- structured products
- proprietary trading by banks
- regulation of hedge funds and private equity firms
- leverage
- and several more
At the press conference tabling the report last week Mr. Volcker called the current financial system by a four letter word – he called it a “mess”. He said “we are going to have to rebuild this system from the ground up”.
We are fortunate, indeed, that the highly capable, blunt talking, Volcker has been appointed Chairman of President Obama’s Recovery Board.
The long and the short of it is;
The grand experiment of deregulation of financial markets and financial institutions which started with President Ronald Reagan’s appointment of Alan Greenspan in 1987, is over.
Forget being globally competitive
In Canada over the past fifteen years there has been a constant drumbeat, from every point of the compass, for our banks to make large foreign acquisitions to become, so called, globally competitive.
What is globally competitive anyways?
Does that mean like Citigroup, Deutsche Bank or UBS?
If so, forget it. If there’s a pothole, these big global banks will find it. There are probably more than 12,000 banks in the world.
Why do you have to be in the top five or ten? It’s all egos run amok.
What’s wrong with being the twenty-fifth, or the fiftieth, largest bank in the world and growing your business organically by offering good service. Shares of the biggest banks in the world have been the worst performers as long as anyone can remember.
I have learned that the financial business is a marathon and not a hundred yard dash –
- slow, steady and dull often wins the race –
in many cases because your fast moving hot shot competition blows up. Bear in mind every time a competitor blows up and goes out of business, the survivors win.
In my view Canadian banks are plenty big enough to compete where they want to compete.
What is globally competitive anyways?
Does that mean like Citigroup, Deutsche Bank or UBS?
If so, forget it. If there’s a pothole, these big global banks will find it. There are probably more than 12,000 banks in the world.
Why do you have to be in the top five or ten? It’s all egos run amok.
What’s wrong with being the twenty-fifth, or the fiftieth, largest bank in the world and growing your business organically by offering good service. Shares of the biggest banks in the world have been the worst performers as long as anyone can remember.
I have learned that the financial business is a marathon and not a hundred yard dash –
- slow, steady and dull often wins the race –
in many cases because your fast moving hot shot competition blows up. Bear in mind every time a competitor blows up and goes out of business, the survivors win.
In my view Canadian banks are plenty big enough to compete where they want to compete.
Take away the punch bowl
In just the last ten years we have had two explosive bubbles which have been extraordinarily destructive. The telecom and internet bubble which burst in 2000 and the U.S. housing bubble which burst in 2007. In my view, the record clearly shows that the Federal Reserve should have moved to choke off these euphoric, speculative manias.
They could have done this by aggressively raising interest rates at an earlier date, increasing stock margin requirements and perhaps by also increasing bank capital requirements.
It didn’t happen.
Once again it was the age of deregulation. Let the market take care of itself. It’s been said that one of the primary jobs of a central bank is “to take the punchbowl away just when the party is getting started” which, in retrospect, looks like sound policy.
In short, should central banks target, and rein in, overheated and speculative industry and market bubbles even if it causes a slowdown or a recession – the answer is yes.
They could have done this by aggressively raising interest rates at an earlier date, increasing stock margin requirements and perhaps by also increasing bank capital requirements.
It didn’t happen.
Once again it was the age of deregulation. Let the market take care of itself. It’s been said that one of the primary jobs of a central bank is “to take the punchbowl away just when the party is getting started” which, in retrospect, looks like sound policy.
In short, should central banks target, and rein in, overheated and speculative industry and market bubbles even if it causes a slowdown or a recession – the answer is yes.
March 18, 2009
Innovation and financial engineering
FINANCIAL ENGINEERING AND INNOVATION - the headlines would scream. If your bank was not working at these, you were no where.
This has been a big problem area – actually disastrous.
Toxic complex structured products developed and aggressively marketed around the world by U.S. dealers and banks were the multi-trillion dollar time bomb that finally blew up the system.
In the five years or so up to 2006, big U.S. banks and dealers were bringing new and complex highly leveraged structures to market a mile a minute.
There were CDOs, CLOs and CMOs and a dozen other acronyms.
Many of these structures were leveraged more than ten times with exotic derivatives. For hundreds of billions of these structured products there is now only a market at distress prices – if there is a market at all.
The financial industry should get out of complex structured products.
If a security has more than two bells and one whistle, just say no. Think $32 billion of frozen Canadian non-bank asset backed commercial paper. It took a small army of top lawyers and top accountants a year to figure it out and, even now, no one knows what it’s worth.
It’s an amazing story that this could happen.
This has been a big problem area – actually disastrous.
Toxic complex structured products developed and aggressively marketed around the world by U.S. dealers and banks were the multi-trillion dollar time bomb that finally blew up the system.
In the five years or so up to 2006, big U.S. banks and dealers were bringing new and complex highly leveraged structures to market a mile a minute.
There were CDOs, CLOs and CMOs and a dozen other acronyms.
Many of these structures were leveraged more than ten times with exotic derivatives. For hundreds of billions of these structured products there is now only a market at distress prices – if there is a market at all.
The financial industry should get out of complex structured products.
If a security has more than two bells and one whistle, just say no. Think $32 billion of frozen Canadian non-bank asset backed commercial paper. It took a small army of top lawyers and top accountants a year to figure it out and, even now, no one knows what it’s worth.
It’s an amazing story that this could happen.
March 17, 2009
What's happening to our money?
If you haven’t had a chance to see the Stewart versus Cramer Video yet, here’s the link: Link
http://www.thedailyshow.com/video/index.jhtml?videoId=221516&title=jim-cramer-unedited-interview
This video raises many questions and whether you like Jim Cramer or not, at least he had the guts to come on the show and get publicly humiliated for his “mistakes”. My personal problem with the investment community though is still the fact that there are pervasive conflicts on interest throughout the industry. And despite or perhaps because of regulatory oversight any recommendation must always be taken with a grain of salt. Nobody can predict the future and yet many institutions are paid to do so. Personally I feel the bigger blunders are with the ratings agencies who are after all still getting paid by the companies and institutions they are supposed to rate, including those sub-prime CDO’s and CMO’s. Compare that with the simple conflict of interest rule for brokers. No broker can accept gifts of over $100.
It is also clear that the news media and reporters are not free of conflicts of interest. To that extent we must question why reporters (disguised as comedians) could not or did not expose these conflicts of interest, the false predictions, the questionable role of CNBC and other organizations earlier. When things are good, everyone including John Stewart’s 401K enjoyed the (false) benefits of a booming economy. Yet, a rational person should have questioned how on earth someone’s home could double in value every 5 years … and continue to do so indefinitely?
http://www.thedailyshow.com/video/index.jhtml?videoId=221516&title=jim-cramer-unedited-interview
This video raises many questions and whether you like Jim Cramer or not, at least he had the guts to come on the show and get publicly humiliated for his “mistakes”. My personal problem with the investment community though is still the fact that there are pervasive conflicts on interest throughout the industry. And despite or perhaps because of regulatory oversight any recommendation must always be taken with a grain of salt. Nobody can predict the future and yet many institutions are paid to do so. Personally I feel the bigger blunders are with the ratings agencies who are after all still getting paid by the companies and institutions they are supposed to rate, including those sub-prime CDO’s and CMO’s. Compare that with the simple conflict of interest rule for brokers. No broker can accept gifts of over $100.
It is also clear that the news media and reporters are not free of conflicts of interest. To that extent we must question why reporters (disguised as comedians) could not or did not expose these conflicts of interest, the false predictions, the questionable role of CNBC and other organizations earlier. When things are good, everyone including John Stewart’s 401K enjoyed the (false) benefits of a booming economy. Yet, a rational person should have questioned how on earth someone’s home could double in value every 5 years … and continue to do so indefinitely?
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