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Category: money

The Edifice of the Bank: Connecting Streams of Capital

Published May 17, 2009 by cgerrish

vintage_bank_antiques

On a recent road trip through the wine country of Northern California, I passed through Petaluma, Calistoga and Healdsburg. In the small downtown areas of these cities you’ll find large bank buildings. Sometimes more than one, but often just a single building anchoring the business district. The architecture of the bank is meant to convey stability, tradition, security and trustworthiness. The neo-classical design of these buildings is a strong gesture in favor of the rational and measured over the emotional and spontaneous. Their monumental scale signals that they were constructed with great effort and forethought– and that they will perdure through the vagaries of time.

The bank building in Petaluma is now occupied by an Antiques collective. By the looks of it, it’s been that way for a long time. Even the bank’s vault itself is just another room in which collectibles are displayed. The bank building in Calistoga is now a shoe store. Healdsburg’s bank building houses an art gallery. The symbolic nature of the architecture remains, but it is unconnected to the commercial enterprise now in residence.

There was a time when we brought our paper currency to a bank for safekeeping. The thick metal walls of the safe provided a fortress to protect the excess capital we’d created with our labors. The architecture of banks has changed, they seem to have morphed into a combination of a fast food restaurant and a self-service gas station. Banks no longer function as protectors of capital, their value now is as fast connectors, or routers, of capital through the Network. Capital streams are routed in from various sources; capital streams are routed out to selected payment endpoints. Banks also have a DVR function, time shifting capital streams through loans or investments.

As capital continues its migration to the Network, the need for a physical edifice containing customer facing bank operations begins to disappear. The bank only needs to be securely available in its full capacity wherever the Network is available. Just as you can now withdraw paper money from any commercial endpoint, you will be able to deposit money as well. The Network always tends to move toward a two-way interaction. The first screen of your iPhone is the new prime real estate, the new town square.

Lifestreaming data pours off of the routing transactions we make throughout the day– generally this has been a private gesture stream reserved for our eyes only. The shape and presence of that stream, its user interface if you will, will emerge as a new ecosystem. Rather than a flat record of alpha-numeric transaction routing codes, it will be an dynamic network of active commercial nodes– a stream of information/interaction points.

The thickness of the bank vault is replaced by the connectivity of the Network as a primary metaphor. Banks, telecom companies, internet providers, and credit card companies are all in the same business now. In this new landscape, in what must you trust to select a provider?

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Voter Suppression By Proxy

Published January 15, 2009 by cgerrish

Voter Suppression

Dominic Jones of the Investor Relations Blog sent me a link to ProxyDemocracy.org this morning. We’ve recently seen the power the of the vote in our Presidential elections. We marvel at the power of the community as we vote with our attention and gestures to surface the wisdom of crowds in social media applications. There’s another form of suffrage that is within our reach, but largely ignored. Shareholders have a say in how public corporations are run. One share of stock in a public company gives you a vote.

ProxyDemocracy.org explains it this way:

A company’s stockholders have the legal right to decide important decisions at the companies they own: they elect directors, review aspects of executive compensation, and weigh in on shareholder proposals addressing a variety environmental, social, and governance issues. History has shown that shareholders can use their voting power to create value — both economic and social — at the companies they own.

Whether you invest in mutual funds or individual stocks, you have a say in how things are run. While the recent market crash may have caused you to curse Wall Street and wish a pox on all their houses– if you’d like a say in how our financial institutions are run, a single share of stock gives you the right to vote.

If you’re already a shareholder, are you accepting disenfranchisement? The voting process as it’s currently implemented is a form a voter suppression. Once again, ProxyDemocracy.org:

In practice, it can be hard for investors to exercise their rights and have their voices heard. One important obstacle is information. Shareholders often have a hard time keeping track of when the companies in their portfolio are meeting and what the ballot items mean. Mutual fund owners, whose funds vote on their behalf at the companies in the fund portfolio, rarely know how their funds are voting and thus have no way to be sure that their interests are being represented.

Imagine, for instance, that you’d like a say in the future of the auto manufacturers in Detroit. Perhaps you’d like to have a say in how health insurance and HMOs are run. Now you can certainly vote by choosing to spend or not spend your hard-earned dollars on the products of these corporations. You can stand on a soap box on a street corner and shout at the passing crowd. Or you can buy a single share of stock and express your opinion as a shareholder. Now imagine the power of the swarm, of Twitter, FriendFeed and Facebook.

ProxyDemocracy provides tools to help investors overcome these informational hurdles and use their voting power to produce positive changes in the companies they own. We help shareholders vote their shares by publicizing the intended votes of institutional investors with a track record of shareholder engagement. We help mutual fund investors understand the voting records of leading funds, making it possible for them to purchase funds that represent their interests and pressure those that don’t.

We’ve seen the power of bottom-up democracy, but it’s not only in our government that this approach can be effective. Big corporations and institutional investors will a happily vote for you, and they will vote their own interests.

Clay Shirky talks about the power of organizing without organizations, about the cognitive surplus that we have in abundance today. The tools at our disposal and our expectations have radically changed. Shiky tells this story:

I was having dinner with a group of friends about a month ago, and one of them was talking about sitting with his four-year-old daughter watching a DVD. And in the middle of the movie, apropos nothing, she jumps up off the couch and runs around behind the screen. That seems like a cute moment. Maybe she’s going back there to see if Dora is really back there or whatever. But that wasn’t what she was doing. She started rooting around in the cables. And her dad said, “What you doing?” And she stuck her head out from behind the screen and said, “Looking for the mouse.”

Here’s something four-year-olds know: A screen that ships without a mouse ships broken. Here’s something four-year-olds know: Media that’s targeted at you but doesn’t include you may not be worth sitting still for. Those are things that make me believe that this is a one-way change. Because four year olds, the people who are soaking most deeply in the current environment, who won’t have to go through the trauma that I have to go through of trying to unlearn a childhood spent watching Gilligan’s Island, they just assume that media includes consuming, producing and sharing.

Being a shareholder in a public corporation has been a one-way transaction. The tools to make it a highly visible two-way transaction are now ready to hand. They’re here now. And as you think about the investments you’ve made for your retirement, you should be asking yourself, “where’s the mouse?”

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The Doomsday Machine and The Golden Rule

Published November 26, 2008 by cgerrish

Before the turn of the millenium, back when I was first joining an investment bank, I wanted to do some background reading. One of the must-reads was Michael Lewis’s Liar’s Poker. Of course, we were looking at disrupting the business. But in the over-heated world of the Internet IPO, no one wanted to disrupt anything– there was too much money at stake. Like all bubbles, that one eventually popped.

Our firm had a small part in popping that bubble with a piece of research we produced called “burn rate.” The first crop of Internet companies went public very early in their lifecycles. That meant they had to report their financials quarterly. At a certain point it was a simple matter of looking at cash versus run rate to determine how many months these firms had left. In Internet Bubble 2.0, initial public offerings were not possible, but the principle of burn rate remains the same. If a firm is not at, or close to being cash flow positive, they’re burning cash. This time the fires are behind closed doors, but their burning just as brightly.

Whack-a-mole

But the Internet Bubble is nothing compared to the Real Estate / Sub-Prime Bubble. While trying to get my hands around this Bubble and Collapse, I turned to Michael Lewis again. Lewis’s article, “The End,” in the December issue of Portfolio nails it. The Sub-Prime meltdown is difficult to understand. And when people talk about the “bailout,” it’s hard to understand what exactly needs to be bailed out. Treasury Secretary, Hank Paulson, has come under criticism because he’s perceived to be playing whack-a-mole with the crisis.

Bubblicious

Lewis takes a simple approach to explain the situation. He looks at the other side of the trade. Every trade requires a buyer and a seller. While the vast majority of the nation and Wall Street were buying in to the idea of ever rising real estate values, Steve Eisman, of FrontPoint Partners, was shorting the bubble. The article exposes the transubstantiation of BBB rated debt into AAA rated debt. As Eisman struggles to understand the trades he’s making, we start to understand the Doomsday Machine that Wall Street was constructing. For the bubble to keep expanding, it was important that the emperor was percieved as being fully clothed and regal. People like Peter Schiff were laughed at for trying to seriously address the problem. Risk is at the heart of investing, but in the real estate bubble, risk was grossly misrepresented. The label on the box said it contained wholesome ingredients, higher return with less risk. It was too good to be true, and it was. Bubblicious.

Lewis closes the loop by having lunch with John Gutfreund. Gutfreund was the CEO of Salomon Brothers while Lewis worked there. Liar’s Poker chronicles that time. They were the first i-Bank to go public, created the mortgage-backed security and their BSD’s from the bond arbitrage group went on to found Long Term Capital Management. Investment Banks follow the Golden Rule, he with the most gold makes the rules. Lewis posits that this is the end of investment banking as we know it.

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Hambrecht Previews the Next 18 Months

Published September 17, 2008 by cgerrish

Om Malik interviewed my old boss Bill Hambrecht about the state of the economy and the future of the IPO in Silicon Valley. Watch the whole thing. Hambrecht has worked on transparency in the pricing of securities for many years. His ideas about using a modified dutch auction to price initial public offerings are still revolutionary.

Hambrecht’s explanation of the subprime mortgage crisis is one of the clearest I’ve heard. Mortgage backed securities are traded in a dealer-to-dealer market without transparent and continuous pricing. Stocks are priced through a continuous auction on the stock exchanges. When a company has to voluntarily mark down the value of these mortgage-backed securities, they hesitate. When they’re finally forced to mark an asset down, there’s a big jump down in value. That change in value wrecks the balance sheet. Interestingly, it’s not a business or revenue issue– it’s a price/value of assets problem. Hambrecht’s solution has always been to allow the market to discover the appropriate price and make the process transparent.

Hambrecht thinks the consolidation of the bulge bracket investment banks means that big iBanks will only be doing big deals. Their cost structures will dictate a move toward the mega deal. The ground is being prepared for a new crop of boutique investment banks to bring the new crop of small companies public. My favorite quote in the interview? “It’s like 1968 all over again.”

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