Way to start the season!  Nothing quite like taking a #1 pick and watching their legs go right away, a la Danny Manning.

Los Angeles Clippers’ Blake Griffin has broken kneecap, out weeks – ESPN.

Is it a curse or are the Clips actually doing something to keep their injury rate high?

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Break up the banks says former Treasury Sec. Paul Volcker.  We heard outrage against bankers and their excesses during the financial crisis, as we heard that business as usual would crash the country.  Following that time, we’ve seen a return to paper profitability by the big banks…but with a focus on trading operations over the loans and credit lines that lubricate the real economy down on Main St.

Which raises the question…what was the point of savings the banks if they weren’t going to provide this critical role for the economy?  And by allowing the institutions that had grown through excess live, we’ve choked out the opportunities for those who were prudent and waiting for tougher times.

The banks are there to serve the public,” Mr. Volcker said, “and that is what they should concentrate on. These other activities create conflicts of interest. They create risks, and if you try to control the risks with supervision, that just creates friction and difficulties” and ultimately fails.

The only viable solution, in the Volcker view, is to break up the giants. JPMorgan Chasewould have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. Goldman Sachs could no longer be a bank holding company. It’s a tall order, and to achieve it Congress would have to enact a modern-day version of the 1933 Glass-Steagall Act, which mandated separation.

Glass-Steagall was watered down over the years and finally revoked in 1999. In the Volcker resurrection, commercial banks would take deposits, manage the nation’s payments system, make standard loans and even trade securities for their customers — just not for themselves. The government, in return, would rescue banks that fail.

On the other side of the wall, investment houses would be free to buy and sell securities for their own accounts, borrowing to leverage these trades and thus multiplying the profits, and the risks.

Being separated from banks, the investment houses would no longer have access to federally insured deposits to finance this trading. If one failed, the government would supervise an orderly liquidation. None would be too big to fail — a designation that could arise for a handful of institutions under the administration’s proposal.

I think this idea brings us back to a more sustainable future.  If something’s too big to fail, its too big to exist…evolution’s pre-requisite is the failure of the biggest institutions to better adapted institutions.  This also addresses the fundamental problem of the finance industry…taking risks with OPM (Other People’s Money).  When investment banks were partnerships, they took risks with the invested capital of the partnership.  When investment banks are public corporations, bankers are taking risks where they gain the upside and the stockholder eats the downside…in my mind this leads to one inevitable outcome, which we’re suffering through today.

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There is tremendous pent-up demand for new opportunities and advancement among high-potential leaders. According to a recent study just 10% of high-potential leaders lost their jobs during the recession (with many quickly securing new opportunities). But fewer than usual received promotions or moved to new companies. So at the first sign that the job market is heating up, many will be dusting off their resumes and seeking greener pastures.

Companies that did a clumsy job of managing cost-cutting and restructuring during the downturn are particularly at risk of losing their best talent as conditions improve. Given plummeting revenues and the need to get costs under control, many firms rightly went into crisis mode. But the way they went about making the reductions varied greatly. For some, it was a process akin to taking a meat cleaver to the organization, with rapid, often indiscriminate cuts, and the attitude that virtually anything could be demanded of the survivors (longer hours, reduced salaries) because things were so dire.

These same survivors, especially the most talented of them, understandably feel absolutely no loyalty to their current employers

As the article highlights, the key isn’t looking at the macro picture (where there are plenty of unemployed), but the best talents…who are always in tight demand.  Companies that mistakenly forgot to develop and promote the individuals that will most impact their success…will suddenly find themselves without their bench.  Loyalty comes from moments of truth.  Too many companies forgot that their most valuable assets walk out the door each day…and that those assets have a memory that extends beyond the pressures of the last quarter.

Culture matters and the best talent wants to work for companies that value them and reward their achievements with recognition and opportunity.  It looks like it might soon be a good time to be an executive recruiter…

Attracting Key Talent in a “Noisy” Labor Market – BusinessWeek.

Several of these myths, as identified in The Corporate Executive Board’s recent study “The New Recruiting Realities,” revolve around the belief that good talent should be easier to hire. For instance, two of the most common myths hold that:

• More applications means organizations can find more high quality candidates faster.
• Prospective candidates are desperate, willing to take any job, and easier to win over.

In reality, the surge of activity in the labor market has made recruiting efforts more challenging—as it has caused more “noise” in the system from unqualified candidates, thus flooding recruiters’ sourcing channels. In fact, CEB’s study shows that among candidates actively looking for a new job, weekly job-seeking activity has increased 30% in 2009 as compared to 2006. By contrast, the quality of the candidates being hired has not changed since the first quarter of 2008.

Conversely, “passive” candidates—those currently employed and not actively looking for a new job—are more passive than they’ve ever been. The current economic uncertainty has made passive (yet potentially qualified) talent more risk-averse and entrenched out of fear of being “last in, first out” at a new organization. In addition, CEB study found that compared to those in 2006, passive candidates today are 40% less likely to switch jobs for higher compensation, and 66% less likely to switch for better management.

I certainly have experienced a surge in noise…which makes qualifying candidates a bit more challenging.  In sectors where seniority is a determinant of job security, I can see people becoming more sticky…but those same industries don’t seem to have as much of a profit motive from getting the distinctive hire and therefore wouldn’t seem as likely to target the passive candidate.

Nonetheless an interesting observation?  Any experiences that seem to prove or refute this?

It’s terrific to see top thinking in the private sector around performance and accountability brought to our government in a time when we are thinking about the need for tremendous investment that can’t just be frittered away.

Killefer will oversee the “line-by-line” scrutiny of the vast federal budget Obama mentioned frequently during his campaign.

What will Killefer’s priorities be? If McKinsey white papers are any indication, she’ll focus on improving transparency and reviving government productivity metrics. As Killefer and her colleague Lenny Mendonca wrote in a 2006 BusinessWeek column, the Bureau of Labor Statistics stopped measuring productivity in 1996. “We think a radical new approach to transparency of how government programs are performing is required,” the pair wrote in “Unproductive Uncle Sam.” “Only this will push Congress to exert performance pressure on government agencies.” They go on to suggest a Morningstar-like body called “Gov-Star” that would provide “completely independent measurement of government program performance.”

A government that encourages improved productivity through transparently and openly being accountable to its people is a lofty goal and I wish Nancy the best in her transition back out of the Firm and into the public service.

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Michael Lewis has a great expose on Wall St (both culture and incentives) this month, titled The End of Wall St’s Boom.

While the whole piece highlights the train wreck that is current Wall St culture, there’s great insight at the end as to why this happened so badly now.  And, as with all things, it comes down to what you do when you play with other people’s money.

When as a public firm, that means raking in profits when risk is taken, while not personally accountable for any (the public shareholders become a backstop, where partners’ own wealth was once at stake), then the long-term equity values begin to recede in importance to the quarterly/ annual bonuses.

What this highlights is the lie of Wall St finance, that bankers created vast amounts of wealth and needed to be paid to do it well.  Instead, it highlights that in banks, it makes sense to take the winnings out and distribute them to the shareholders in good times.  As a partnership, that used to happen.  As public entities, the shareholders were fleeced and left holding the bag.  I sense we’ll need to see public entities with less-well paid bankers and private entities whose shareholders will again create and share in the gains (and losses).

What we’ve also seen is that diversification is a farce in a world where derivatives tie all publically available assets together…the strategies to control risk should return to underwriting of individual investments.  As with all things, assumptions break he most complicated models, so its common sense, vision, and leadership–not spreadsheets–that will show us the way forward and make the world a place better than today.  As Thanksgiving nears, let us give thanks that we can gather our loved ones around and as the night gets darkest, it always gives rise to a brighter tomorrow.

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As many of you know, I’ve been busy at work creating Health Shoppr, a company focused on bringing transparency, choice, and personalization to health care.

As step one of that journey, I’m pleased to announce the public release of HealthProvidr.com, starting with a community and career resource for massage therapists.  Our goal is to help massage therapists succeed in their chosen profession by providing more choices and options relevant to each practice.  Our next step will be the creation of public web profiles for each massage therapist, helping them to promote their practice using the power of the internet.

Please stay tuned, as we release the consumer version of our technology, HealthShoppr.com.  There, we will start by helping consumers compare their options in massage therapy, and find the therapist that best fits their needs, by comparing practices in the same way they’re currently able to compare plane flights, hotels, books, and collectibles on sites.

We’ll be starting beta testing soon in California.  Please let me know if you’d be interested in testing our technology (and the massage it entails).

We look forward to sharing with you our vision for healthcare: a system based on choice, service, personalization, transparency, and wellness.  We look forward to blazing that road and hope you will join us.

Terrific piece, Roger.

What should the goals of any solution to the economic downturn and credit crunch include? I’ve attached a few of the things I think are important:

1) Transparency: No closed doors and real discussion of the objectives, risks, and alternatives

2) Re-establishment of risk: Allowing risk premiums to be re-established and restoring the risk/ reward trade-offs of investing

3) Reduction in leverage: Juicing rewards with leverage is a game that benefits traders, not customers (they can lever up themselves prior to allocating assets to a portfolio). Through regulation, disclosure, and/or raising the cost of capital–make sure this leverage-induced brinksmanship goes away

4) Put all transactions on the books. A lot of effort goes into accounting gimmicry. Make all corporate assets disclosed on the balance sheet. Disclose liquidity (regulating all agents would be bad…PE and VC both legitimately invest in illiquid assets).

5) Buy assets at market value. If market value can’t be determined, use different assets that can be valued. If market value makes firms insolvent, make sure they die quickly. Finding a bottom will get us back on the path to growth.

Originally posted as a comment by Vijay Goel, M.D. on Information Arbitrage using Disqus.

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The best traders are similar to cornerbacks in the NFL…they operate on an island and have poor memories.  Instead, they play each play to gain the greatest possible advantage, no matter what the last play held.

As the financial sector crumbles and institutions tumble, the American taxpayer has been set up to take the bag, supposedly for the national good.  And what impact does that have on those who’ve created this falling house of cards?  These sharks see blood in the water and are each seeking to extract a new chunk of taxpayer flesh.

The NYTimes has an excellent article on the entitlement mentality of Wall st

Even as policy makers worked on details of a $700 billion bailout of the financial industry, Wall Street began looking for ways to profit from it.

Financial firms were lobbying to have all manner of troubled investments covered, not just those related to mortgages.

At the same time, investment firms were jockeying to oversee all the assets that Treasury plans to take off the books of financial institutions, a role that could earn them hundreds of millions of dollars a year in fees.

Nobody wants to be left out of Treasury’s proposal to buy up bad assets of financial institutions.

“The definition of Financial Institution should be as broad as possible,” the Financial Services Roundtable, which represents big financial services companies, wrote in an e-mail message to members on Sunday.

The group said a wide variety of institutions as varied as mortgage lenders and insurance companies should be able to take advantage of the bailout, and that these companies should be able to sell off any investments linked to mortgages.

The scope of the bailout grew over the weekend. As recently as Saturday morning, the Bush administration’s proposal called for Treasury to buy residential or commercial mortgages and related securities. By that evening, the proposal was broadened to give Treasury discretion to buy “any other financial instrument.”

The lobbying became particularly intense because Congress plans to approve a package within just two weeks, without the traditional hearings and committee process.

Clearly there’s profit in the air and financial firms are looking to extract as much value as possible.  Which is why, we the taxpayers, should not let that happen as they try to extort us in the cleanup of their own mess.

There are several principles that we should stick to, including avoiding free riders and receiving transparent valuations even if we inject some liquidity into the markets.

From Roger Ehrenberg’s Information Arbitrage:

investors are expecting a bailout of institutions deemed “too big to fail,” with benefits flowing directly to those firms’ equity holders instead of the U.S. taxpayer who is providing the funds. This is clearly at odds with free market principles, as the common stockholders become “free riders.” Does this need to be in order to stave off financial catastrophe? I’d say not. And whoever says this is the case has something to gain, like being bailed out from poor investment decisions. Those at Treasury, the Fed and Congress: JUST SAY NO.

Buying assets at anything other than fair market value is against every principle we should be enforcing. Transparency. Accuracy. Full disclosure. This is a non-starter. Who cares where the assets are carried on a firm’s books? If Morgan Stanley has them at $.30, Merrill at $.32 and Goldman at $.50, this is not the point and should play no part in the analysis. There should be a reverse auction to determine price, with the Treasury buying the cheapest and moving up the line. Depending on where firms are carrying these assets, it might require a write-down that would threaten its solvency. If not, great. The firm has liquified the assets and the U.S. taxpayer gets the upside over time (monetizing the liquidity option, in my parlance). However, if there is a capital gap I’d suggest that the Treasury gets issued convertible preferred stock on attractive terms, supporting the firm in its operations while substantially diluting common equity holders. In this case jobs are saved, the institution continues to operate as a smaller, leaner, hopefully more prudent firm while the U.S. taxpayer, once again, owns the liquidity option.

Remember, at the heart of the problem is that there was too much cheap capital in the market.  While we don’t want all capital tied up, investors will adjust to a level of risk in the marketplace and seek places to grow their money.  Our problem is that too much capital was too readily available and people lost an appreciation of risk.  Bringing cheap capital back and rewarding stockholders by giving them a mulligan on the risks they chose is the wrong answer.  Ultimately, all money managers would lose their jobs if markets remained locked indefinitely.  They’ll make sure that doesn’t happen.

In the end, it will be painful as market trading and valuations return to levels that appropriately reflect the fundamentals.  The system built on outsized valuations and unreasonable leverage multiples needs to die…and I’ll be aghast at any taxpayer money wasted in the attempt to save the mansions of those who want to continue to feed off the carcass of a failed system of bubble finance.

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At the end of the day, the game of mortgage hot potato is coming to an end, bluffs are being called, and winners and losers are now being tallied.  Bad risk assessment is bad risk assessment and somebody needs to hold the bag.

It all comes down to cash, and we’re seeing the same lessons played out in LTCM and Enron– run out of cash, no matter what BS you put on the balance sheets, and you’re dead.  Simple lesson small business folks live by every day.  In the big corporate game however, you get to play with other people’s money and with year over year rewards, you care less about sustainable investing and more about playing chicken while being the last one standing.  Overreach and you just lost a lot of someone else’s money.  Underreach, and you have a pretty poor bonus compared to your friends and you may lose your job.  Given the incentives, why play it safe?

The culling of the losers creates new opportunities in the financial sector.  B of A will be busy digesting Merrill and the integration of those two cultures will create some interesting head-scratching moves in the near future (they won’t lose as many people as you may otherwise expect– where would they go?)  The firesale on poorly performing mortgage assets will a windfall for the vultures/distressed fund folks that have been starving for some time.  Hopefully, this will provide a floor for the housing market, which has been propped up on poor fundamentals for a while now…buyers asking prices well above what sellers are willing to pay.  New opportunies to skim the cream of what’s out there will arise…and I’d imagine some emerging risk-assessment firms will get their day in the sun (the FICO score as the risk assessors panacea is hopefully exiting for a few years at least).  Quants will pull back, as they realize that their assumptions need to be fixed before they hit the gas pedal again.

What’s really been confusing to me is the willingness of “smart” money to let investment firms lever up their bets and profit off the leverage.  Any investor can borrow money and increase their risk on their own…yet its the lack of liquidity that comes with the leverage that’s bringing down the firms, not the actual losses on the invested products (if you can cover the margin calls, you can weather the storm…none of these assets have come to term).

Will we see no-leverage funds compete head to head on real returns?  Will capital reserves and risk profile become real metrics people examine when purchasing funds going forward?  I think these safeguards, understanding of a risk portfolio, and potential shift to a value-creation from a sales culture, are going to be the most interesting elements of the next generation of securities and products as we move past this risk-insensitive debacle.

Thoughts?

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