We'll Always Have 2007

I'm checking out until the second week in January. Blackberry yes. Computer no. And a forced break from blogging. So I just wanted to take this opportunity to thank each and every one of you for participating in the online conversation, and sharing a little bit of yourselves with me. I have certainly tried to share some of myself with you. I'd guess you'd have a pretty good feel for me after 18 months of being out there. Hard to believe that 2007 is only my first full year of  blogging from wire to wire. It feels like it has been years. It is now such a part of me.

To those who read IA and maybe commented whom I either pissed off, inadequately stated or defended my positions or just plain disappointed, thanks for taking the time to read my stuff. I try my best and am true to myself, but I can certainly understand why not everyone might agree with me. To those who generally get me and where I am coming from, and are pretty happy with my output in 2007, I appreciate you as well. The private notes of support I've gotten throughout the year have been amazing, and I've tried to answer each and every one. I apologize if I've missed a few or haven't been as timely as I might have liked, but I was somewhat overextended in my for-profit and not-for-profit activities. I'll hopefully get that more under control during 2008, but I doubt it.

2007 has been a great year for me and for this blog. I did lots of fun stuff at work, met dozens of amazing people, continued to learn every day, saw my kids grow a year older and continue to wow me with their passion, intensity and beauty, and further deepen my relationship with my closest and best friend, my wife. More of you read me this year than in 2006, when I was really just a newbie. And apparently some people in mainstream media read me as well, as their kind notes and requests for comments and perspectives were welcome diversions throughout the year. But most importantly the sense of community I've gotten from blogging continued to grow, and I've developed real relationships with several readers of this blog who are bloggers and businesspeople themselves. I never could have imagined how blogging would serve to build my community and web of relationships in such a powerful way. And every day I continue to be surprised and impressed by the power of this medium.

Anyway, thanks again and I'll see you next year. Feel free to send me a note, as always. And all the best to you and your families for a fantastic 2008.

From the Mailbag: When Was I The Happiest in My Life?

Just as I was pondering an end-of-year post, I received the following email from one of my readers:

For quite a long time, I have followed your blog. It has become a habit for me to read your articles for Wallstreet and tech issues. I can almost feel your enthusiasm radiating from my screen. There is a question that I want to ask you.

When were you happiest in your life?

Suffice it to say, this question sparks a wide range of thoughts and spawns even more questions. Like is "happiest" in this context work happiness, personal happiness or overall happiness? And is it possible to separate them? Also, for me happiness is very phase-dependent, as the things that made me most happy when I was 22 are different than those things that get me going at 42. The introduction of a partner, a best friend and a wife over 20 years ago changed the prism through which I view happiness, as well as the birth of my children 10 years and 7 years ago. This makes the assessment of happiness even more complicated. For starters, I will answer the question in three ways: personal happiness derived from self, personal happiness derived from others, and professional happiness. After doing this, I will seek to pinpoint the time in my life when I was happiest.

Personal happiness derived from self

That one is easy: age 27, right after graduating from business school. Ages 24-27 was a time of intense self-reflection, grappling with the transition from college to the work world and then on to being a true professional. Further, I had never been a dedicated student in my earlier years, pretty much freeloading on my ability and organizational skills to achieve at a high level in the absence of real effort. So the time I left my full-time banking job to consult and attend Columbia full-time was filled with excitement, opportunity and angst. What did I want to do? Who did I want to be? How did I envision my life 3, 5, 10 years forward? What about work/life balance? All of these thoughts permeated my thinking, leading me to make decisions that ultimately set the course of my post-grad school life. Decisions that, in retrospect, were pretty good and about which I am very proud. I actually put forth real effort in grad school, thoroughly getting into my classes and enjoying my professors, my peers and the curriculum. And this showed in my performance and what I was able to take away from coursework that influences me to this day. I cannot say the same for undergrad. It was not the school's fault. It was my own laziness and immaturity. I chose to go into Sales & Trading and not banking as I was drawn to the math of the markets, the meritocratic culture and the fact that objective results were the driver of the domain, a culture not driven by how many hours you spend at the office but how well you perform.

So upon graduation from Columbia and with my derivatives job in hand, I had a sense of achievement and confidence that I had never felt before. I had taken a chance (by getting off the Wall Street bandwagon and going to school at my own behest), worked hard (both by working part-time and attending school full-time, and achieving at a high level) and was now ready to move my life forward in a confident, directed, proactive way. I was never more proud of myself than I was at that moment in time.

Personal happiness derived from others

That one is also pretty easy: age 31, right before the birth of my first child. I might have said when I first met my wife at a bar in Ann Arbor at age 21, or sometime during our courtship, or even the day we got married. But there was something so special, so deep and so other-worldly about the time just before our son Andrew was born that stands out. My wife and I had been together 10 years by then (married for four of them). We were very, very comfortable with each other. We knew each other's rhythms, we could finish each other's sentences, there was an already well-established "shared brain" that existed between us reflecting the maturity and intimacy of our relationship. All that early-relationship uncertainty, craziness and volatility had long since left, leaving in its place confident love, passion and deep friendship. Good stuff. And now there was the imminent addition of a third member to our unit, and our lives would never be the same again. A person that was part of her, part of me, and both of us. As her body changed during pregnancy and as she got more beautiful by the day, the feelings of love, warmth, and permanence in our relationship wrapped me up like warm velvet.

In many ways this was the happiest time of my life, a time that can never be reclaimed by any event because of its uniqueness in time and space. It was what it was. And what it was will never leave my brain or my heart as long as I live.

Personal happiness derived from work

Now this is really hard. There are two distinct times that stand out. The first is when I was 30 and a derivatives pro at Citibank. I had recently gotten a few industries to cover: health care and Media & Telecom. I had been given health care about six months earlier and had just gotten M&T, and was really coming into my own as a senior transactor. I had worked for the ultimate mentor for the first three years of my derivatives career, learning by his side, and then had the chance to do some stuff on my own. And false modesty aside, I did pretty damn well. I turned health care into a true partnership between banking and Sales & Trading, advising clients on comprehensive liability management strategies in tandem with the banking team. It was a potent combination and quite simply, we rocked it. I also began to chip away at some big, legacy M&T clients that were in need of help but simply hadn't looked at us as trusted advisers. And now some of them did. And we did some excellent monetization transactions as well as buyback-related hedging strategies. I really began to see how I could cover the client base and make money in a way that hadn't been done previously. I was making it happen. And at the end of the year I got paid well for the work I had done. It was a dizzying year with a payoff to match. It was so unreal to me. And I was very proud.

The second time is when I was 34. It was my first full year at Deutsche building the Strategic Equity Transactions Group. I had made some key hires over my first year and now, in 2000, it was time to make some serious wood. We had gone from almost nothing in 1998 (I wasn't there yet; and DB basically razed the BT derivatives team in the wake of that acquisition) to a nice business during my first eight months on the job and the table was set for me and my team to deliver. We had planted lots of seeds in 1999, both transaction-specific as well as relationship-building that would lead to IOUs when deals needed to get done. The stars and planets aligned in 2000, and between a handful of mega-monetization transactions as well as several billion-dollar buyback hedging transactions we just killed it. The degree of our success was not expected, and the tight bond we developed with the trading desk helped create a culture that was both highly efficient and fun. I had built the team, mentored the team and gotten great people who delivered big, and as the catalyst for this effort I was also very, very proud.

The economic disparity between the two situations is stark: in the Citibank situation I took home less than 1/10th of what I got paid at Deutsche. The value of the deals done were simply much, much smaller. But if I had to pick when I was truly happiest, it is when I got my bonus after my breakout year at Citibank. It really wasn't about the money. The money was the symbol of what really mattered: I had arrived.

Conclusion

So when was I the happiest? It depends. But if I absolutely, positively had to choose when I was the happiest in my life, I'd probably have to say right now. I've seen a lot, done a lot and accomplished a lot over the years. I've got a family whom I adore. I've got the greatest friends a person could have. I've got my health (knock on wood). I've made a little money. I've been both extremely fortunate and helped make some of that good fortune through hard work, persistence and sheer stubbornness. And notwithstanding my not-so-cheery view of the world at the moment, I do have confidence in our ability to come together as people and to make the world better for our children. So with that in mind, best to all of you for a happy and healthy 2008. And may the upcoming year be the happiest in your life and those of your loved ones.

2007 in Review: The United States

The US is in trouble, and the trends are not good. The question is, with the mega-trends that are firmly in place – rapid economic expansion across Asia, a rapidly depleting supply of fossil fuels, a global threat to sustainable growth, and an aging population – is the US on an inexorable path downward that can only be checked and not stopped? A home-grown mortgage crisis and its worldwide ripple effects, together with a slowing economy, inflationary pressures, a war and a plummeting greenback now severely challenge American policy-makers.

The US is caught in a vicious cycle that impacts the economics, politics and foreign policies of its allies and its enemies, and poses a crisis for not just itself but for the world. With its house in fiscal disarray, the US has precious few options for stabilizing a weak and much-derided dollar. Raise rates, and it threatens the domestic economy, a gravely-damaged banking sector and further hastens the downward trend of housing prices. Drop rates, and it threatens foreign investment in dollar-denominated assets, may not jump-start domestic consumption and, in fact, further weaken the dollar in the process. There are no easy answers for a country with a deficit measured in the trillions, spending hundreds of billions annually on unproductive military activities, suffering its worst banking crisis in a generation and nearing the end of a 25 year bull run.

It wasn’t that long ago that observations of a “flattening world” dominated the US discussion, offering both risks and opportunities for a productive, (seemingly) healthy US economy bent on capitalizing on its culture of innovation. China, India, Russia and others offered deep pools of intellectual capital that could be tapped by US innovators to move their ideas forward in a highly flexible, cost-effective manner. Two years hence and the US dialog with the world has changed markedly, reminiscent of the 1970s when rocketing energy prices, rampant inflation, crushing interest rates and its conflict with Iran cast a pall upon market sentiment and the mood of the entire nation. Question such as “Are the Arabs going to buy the US?” and “Is the dollar ever going to recover?” were the issues of the day. Just like today.

As bad as things seem, the US is a tough, resilient country of innovators. It will take hard work to get the US back on track. Restoring confidence in its financial institutions. Taking the bitter pill of a real estate correction that will provide a healthy base off which to resume growth. Committing to addressing the politically-sensitive overhang of Social Security and health care costs, which if left unchecked will cost its children and grandchildren a chance at economic prosperity. Fixing its own house is the only way for the US to restore its position as a credible, thoughtful, and respected leader in an increasingly balanced global stage. The time for painful change is now, for the betterment of the US and the rest of the world.

Alphabet Soup and the Subprime Crisis

M-LEC. Super SIV. SWF. Kind of reminds me of banking "reform" in the late 1980's - SAIF, BIF and other ridiculous acronyms representing entities that ultimately did little to help the underpinnings of the S&L crisis. The story of the day is the abandonment of the M-LEC structure, supported in spirit by the US Treasury but ultimately driven by the realities of the private sector. Some are saying "what a dumb idea - of course it was going to die." From my perspective those voices don't really understand what is going on here. And of course I do.

As I said from the beginning, the M-LEC proposal was never conceived of or structured as a "bailout" in the conventional sense, implying that Government funds were going to be used to prop up an ailing market. The Treasury Department certainly served as a catalyst to get the discussion going, but it was only going to work if the private sector bought in - both metaphorically and with hard dollars. And this type of buy-in was required of both the SIV issuers and the potential M-LEC investors, two constituencies with their own agendas and stresses. The metaphor I used to conceptualize the M-LEC structure was akin to the "good bank/bad bank" model of yesteryear, where the best assets could be pooled and liquidity raised against them, bridging the gap between either the sale or recovery of the worst assets that remained on-balance sheet. Bottom line, the Treasury's catalytic actions got issuers and investors the world over to focus on the magnitude of the problems facing the SIV vehicles and their sponsors, and it is this that represents the true value of Mr. Paulson's initiative. Was this his endgame? Who knows.  But in any event, it worked.

But as the M-LEC moved closer to reality another path towards resolution presented itself - the injection of capital by SWFs directly into the ailing institutions, enabling SIV assets to written down and something approaching economic reality to be reflected on financial institutions' balance sheets. Citigroup. Morgan Stanley. Merrill Lynch. UBS. And this list will get longer, believe me. The confluence of massive sovereign liquidity in Asia, the marquee names of the institutions willing to receive investment, the ability of the SWFs to actually help the financial institutions' with the exploding business opportunities in the region, Saudi Prince Bin Talal's high-profile success with his Citi investment back in the early 1990s - all of these contributed to the development of the on-balance sheet SWF alternative to the off-balance sheet M-LEC alternative. The private market has spoken, and this is the solution that was deemed best. Congratulations to Mr. Paulson, the financial institutions' receiving investment, the SWFs and investors in these institutions' and their SIV vehicles. This was a pretty good answer to a really difficult problem.

But before anybody claims victory, let's keep a few key things in mind. The problem is far from solved. Liquidity has not yet returned to the market. There is still not a clear bottom to where these mortgage and associated derivatives portfolios will ultimately realize value. And it is this uncertainty that makes the SWFs investments so brave and so bold. Will Merrill need an additional $5 billion? Will Citigroup need another $10-$15 billion? UBS? $5-$10 billion more? Who knows. Maybe so. And where is that money coming from? Will political realities enable Asian SWFs to buy 20-25% of these damaged firms without causing a huge backlash?  I'm not so sure about that, and it's not a question I'd really like to be compelled to answer. I think we are maybe in the second inning of a game going into extra innings, with a lot of excitement, angst, fear, conflict and greed lying ahead.

If there is one thing we can take away from this SWF for M-LEC trade is that the Government really has limited tools at its disposal to deal with crisis once it has happened in such a massive, interconnected world. The real answer lies in prevention. And is it here that the US Government, the Federal Reserve and the SEC have failed so miserably. They should take a good, hard look in the mirror when doing a post-mortem of the sub-prime crisis. If they have any self-awareness at all they certainly won't like what they see.

A Kindle for a Kanoodle?

Nah, just a Kindle for the lovely Lindsay to use on Wallstrip tomorrow. The taping will be in NYC and she needs the device for show-and-tell. If you got the goods, you might even get a cameo on the show. So for all you aspiring vlog actors, take note. Send your availability to the furry Mr. Howard Lindzon at his blog. And make Lindsay a happy vlog queen this holiday season.

My Gloomy Thesis is Playing Out: Three from the Saturday NYT

I've been one of those on the stagflation bandwagon, deeply concerned about the weakness of the dollar, the likelihood of the Fed continuing to reduce rates in the face of locked-up credit markets, rising food and energy prices and persistent and rising deficits. This is a toxic macroeconomic cocktail I've written about and which has been the source of much worry. And to add insult to injury, a rash of economic statistics were released last week that generated articles this weekend that only served to reinforce my Droopy Dog attitude towards the US economic landscape. So I'm here to share the pain.

First, CPI shot up 0.8% in November, the largest jump since Hurricane Katrina in 2005. From Saturday's New York Times:

Higher prices, however, have begun to bubble up at the consumer and producer levels, government reports showed this week, complicating the policy calculus of the Federal Reserve as it tries to bolster the struggling economy.

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“This is the first time we really have seen these energy costs and food costs starting to get passed through into finished- goods pricing,” an investment strategist, Edward Yardeni, said. “It’s the first glimpse that it’s starting to spread more broadly.”

A rise in inflation leaves the Federal Reserve policy makers “walking a tightrope,” Mr. Yardeni said. Analysts said they expected the Fed to be more reluctant to cut rates as it tries to balance problems in the credit and housing market with the need to maintain price stability.

Bottom line, the Fed has precious little room for error given the confluence of rising prices and troubled credit markets. Continue to pump liquidity into the system by reducing rates, and run the risk of unleashing inflation after a two-decade hiatus. Hold the line on rates to stave off incipient upward price pressures, and face the threat of recession due to a heavily indebted consumer and a scared and unfriendly credit market. Choose your poison.

Next, even in the face of rising prices we have signs of an economic slowdown within export/import data. Also from Saturday's NYT:

The rate of increase in imports has begun to decline, and is now at its lowest level since 2002, when the economy was only slowly emerging from a recession. At the same time, export growth has remained strong, thanks to a buoyant world economy and a weaker dollar that has made American goods seem cheaper to overseas buyers.

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...the last time import volumes declined was in 2001 and 2002, which was also the most recent recession. The time before that, in 1990 and 1991, was another recession. In each of those cases, the figures fell into negative territory only after the recessions began.

After the 2001 recession ended, imports rose even faster than exports, leading to a rapid rise in the American trade deficit. But import growth peaked in August 2004 and has come down significantly since then.

Whether by coincidence or not, that was one month after the Standard & Poor’s/Case-Shiller home price index peaked. Americans who used their homes as piggy banks to finance consumption were less able to do so once home prices began to slip.

It seems pretty logical. A weak dollar makes domestic goods look cheap to foreigners, foreign goods expensive to those in the US, and even more expensive when a major source of US consumer purchasing power - home equity - is taking a big hit. This is a pattern that has been played out in the past and is being played out now. The question is when things will begin to turn. But between the weak fundamentals for the dollar and only being at the beginning of a great housing unwind, I can't see the current outlook changing markedly in the near term.

Finally, just to rub it in, overseas shoppers are engaging in a feeding frenzy over comparatively cheap US goods. From the Saturday NYT once again:

With the dollar near its lowest rate against the pound in 26 years, and its lowest rate against the euro ever, many Europeans are looking at the United States the way some Americans have long viewed Latin America and the Caribbean and, once upon a time, Europe — a cheap place to flex their strong currency.

The situation is more than a potential blow to Americans’ self-image, it could be a blow to the world economy as some central bankers worry about “currency tension,” and many countries move trillions of dollars out of their reserves and buy euros instead.

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But monetary authorities are not laughing. The dollar has been so low for so long, Europeans are worrying about how expensive their exports are becoming for American consumers when priced in dollars, and how much that hurts European growth.

Last month, Mervyn King, the governor of the Bank of England, warned that an appreciating pound and euro, combined with most oil-producing countries and China linking their currencies to the dollar, creates “great currency tension.”

Such tension could hurt the dollar further as countries like China, which holds the largest reserves of American currency outside the United States, see their dollar reserves sink in value and hurry to move them to other currencies. A Chinese official threatened to do that last month, though other leaders contradicted him.

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“The current currency system is quite fragile and will break down as it leads to imbalances and capital losses” among countries with dollar reserves, said Nouriel Roubini, a professor at the Stern School of Business at New York University.

It is still less clear whether one or several currencies will replace the dollar as the main reserve currency. “With the euro, the world has gained an alternative reserve currency but other currencies have also won in strength,” said Chris Munns, a lecturer at the London School of Economics.

Can you believe this? This totally sucks. The article did a pretty good job highlighting some of the big issues of the day and some of the very real concerns I have over the prospects for the US given its current spending patterns and economic policies. And it doesn't even begin to describe how the vibe in the US is beginning to feel a bit circa 1975-79, with sky-high rates, rising prices, a massive rise in Middle Eastern petro-wealth, tensions with the Muslim world and a US asset base essentially for sale. Sound familiar? We're not there yet, but do we want to be? I'd say not. Whether it was real estate, companies or art, it felt like the Middle East was taking over the US. The only difference today is that it is not only the Middle East who is buying but China and Russia as well. We've got to get it together, and quick. We incurred a lot of pain in the early 1980s to get us back on track, but get us back on track it did. We need to take some pretty bad-tasting medicine. But let's get it over with. Some fiscal responsibility, international diplomacy and common-sense immigration policies would be good places to start.

EXPERT NETWORKS: Where is the industry going?

Gerson Lehrman is the big dog, but vertical communities, vertical search engines and alternative information platforms like Monitor110 are moving reputation-based information discovery online. And now the ad-based Google Knol. Just where is this industry going? Who are the up-and-rising players, which models will prevail, and is it possible for anyone to knock Gerson Lehrman off of their formidable perch? I'd really like to know what you think.

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This is part of the experiment I mentioned in a post a few days ago. I have asked this question on LinkedIn, Facebook and now here, on my blog. I think this is a really important topic that warrants spirited, vibrant discussion, but I'm not sure which venue will serve to generate the most and best content. I guess we'll see. I'll report back.

Google Knol: NOT Setting the World on Fire

Google has become the new EF Hutton: when it speaks, people listen. So when I first heard about Google Knol I was curious and intrigued: a true competitor to Wikipedia? A new spin on expert networks? An easier way to discover high value content? These are all areas about which I have a high degree of interest and some degree of knowledge. But after reading the description on the Official Google Blog and thinking about it here is what I've concluded: NO BIG DEAL. Unless I am missing some big conceptual point here (which is always possible, of course), I don't see any benefits to creators of high-value content that don't already exist - and are perhaps manifest in better ways - through personal blogs and message forms, vertical search engines and Wikipedia. I know, going against the Google juggernaut risks intellectual humiliation and disdain, but is this merely an effort to devise and gain control of new sources of ad dollars? I mean, at its core, even in light of its stated mission, isn't this how Google makes money? And is this truly a vehicle for achieving the grand mission, (better) organizing all the world's information? Personally, I don't think so.

So using the illustration provided on the Google Blog - insomnia - consider these alternatives:

1. Wikipedia entry: Collaborative, multi-participant, human-edited definition
2. OrganizedWisdom WisdomCard: Domain-specific, expert-constructed vertical search result
3. ehealth Forum topic: Issue-focused, community discussion forum with expert participation
4. dr.greene.com article: Issue-focused, community questions with expert response

So let's consider the characteristics of each of these media and how they compare to Google Knol:

• Wikipedia: as close as we've gotten to aggregate knowledge. Social mission. Human-edited "wisdom of crowds" results. No advertising. No specific credit for entries. In my opinion, a fairly high-quality starting point for information discovery.
• OrganizedWisdom: vertical search for health and wellness. Social mission with commercial overlay. Human-constructed domain expert results. Targeted advertising and affiliate relationships. Specific credit for entries and payment for creating entries. High-quality  results. (Disclosure: I am an investor in OrganizedWisdom).
• ehealth Forum: issue-specific discussion board with expert participation. Social mission with commercial overlay. Targeted participation from community members of varying reputation. Targeted advertising. Community identities are known. Mixed results.
• dr.greene.com: issue-specific Q&A with expert response. Social mission with commercial overlay. Expert-moderated community discussion. Targeted advertising. Question submitters identified per instructions. High-quality results.

Now let's consider some of the key features of Google Knol:

1. Page owner ("author" in Google parlance) is known and gets full credit
2. Readers can suggest edits subject to owner acceptance
3. Ease of publishing/editing pages
4. Platform may give rise to multiple Knols on a single subject
5. Community ratings and reviews of specific pages
6. Ability to take advertising

Now let's consider my options first as a content creator, then as a content consumer:

• Content creator: First question: do I want recognition and do I want to make money? If no, then Wikipedia is a good place to start. I can contribute my knowledge in an easy lightweight manner, with an eye towards enhancing the world's knowledge. If yes, then Wikipedia isn't the place for me. So what are my options? I can start my own blog, sell my services to a vertical content aggregator or expert network willing to pay for my expertise or establish a Google Knol. If I start my own blog, I can build my own brand, my own site, use it is a robust platform not only for sharing expert insights but also for collaboration, sharing materials, commerce, etc. It is mine. And I can do with it what I please. It can be indexed. It can be linked to. I can generate ad revenue. My reputation will be reflective of who links to me, how many people subscribe to me and my overall traffic. Now if I sell my services to an expert network, I can get paid for my knowledge and the intensity of my involvement. I can also build brand and monetize this however I see fit over time. I don't control my own real estate as I do with a blog but I also don't need to maintain it, either. This is a very targeted, very parameterized way of monetizing my expertise. Or I can start a Google Knol. Starting a knol is easy, seemingly not unlike starting a blog. But why would others contribute to my knol as a source of knowledge (as opposed to discussion)? If I don't care about money or credit, am I really going to choose someone's knol over Wikipedia? And if I do care about money or credit, I'm not getting any of that from submitting an edit or addition to someone's knol so why do it? I really don't know. There will likely be competing knols on major topics of interest which may be good for the content consumer but not so great for the content creator. So from the content creation standpoint, I'm not sure I get it. Unless community involvement is not really what you're after and what you are really after is being indexed by Google, becoming known on a particular topic and having Google help you to generate ad revenue. Then I get it.

• Content consumer: If I am interested in better understanding insomnia on a general level, where am I going to go first? Depends on my level of knowledge. If I know of a good vertical search engine, I'll go there first because the information is going to be highly targeted, highly relevant and from reputable sources. If I don't, my backup would be Wikipedia. It may not be comprehensive, it may not be perfect, but it is going to give me a lot of information and links that are valuable and my lead me in the right direction. Would I choose a knol over a vertical search engine or Wikipedia? I'm not sure why. With many knols on a given topic I may be barraged with alternative views that could be more annoying than anything else, similar to doing a fairly unstructured search in Google that yields 85,000 results where the one best suited for me might be on page 86. Sure, there are community ratings of each knol, so I might simply decide to read the most highly rated knol in my area of interest. But depending upon the nature of the topic and the complexity of the issue, the community rating may or may not be reflective of the value of the information. If I go to a vertical search engine that is expert-powered, I know I am getting results from a highly reputable source. This is very valuable. With a knol, it is pure wisdom of crowds at work, which might not be the most comforting vehicle with which to gauge reputation depending upon the complexity of the topic.

So based on what I know, which is admittedly little, this is where I am coming out. I don't see Google Knol as either a threat to Wikipedia or almost any other information discovery medium, for that matter. But maybe I'm just missing it.

The Right Venue for Online Discussion?

This blog? My Facebook groups? A couple of very pointed but sensible comments to my recent post made one thing clear: that this blog is where I should look to spur active conversations, not my Facebook groups. I am frankly confused, and would like to share two comments from yesterday's post.

From Ian Wilson:

Why not just keep discussion centered on this blog? I am sure most of the people signed up to the facebook groups also read your blog.

Right now there does not seem to be any easy way to manage discussions around various web sites...so having them all in 1 place, your place, seems like the easiest way to keep the conversation flowing, imho.

Facebook is becoming more and more cluttered with spam daily, so much so that its cost of use is getting too steep for me, I cant find the signal for the noise. Does anyone else find that?

From Michael Sharon:

I completely agree with Ian. Encouraging conversation around your primary and most visited community - although it's in some respects a limited channel - is far more useful than trying to stimulate discussion within multiple sub-communities based around related topics on sites which have higher barriers to entry.

It may not be your fault that there hasn't been enough discussion in those groups, perhaps it's simply that the conversation and the platform that you have here is enough for most people, most of the time.

You mention fomenting an active dialogue which reminded me of this article about the User Generated Content myth over at Publishing 2.0 (link neutered! google it). I think the reality of the situation is that encouraging an active dialogue within any one of your groups would require a non-trivial investment in attention - which you've chosen (unsurprisingly) to spend at your main site here. For me, Facebook is less useful for high value, public dialogues simply because content within the group is not searchable (through Google or FB). If the intention is for the conversation to be private or limited to group members only, then I think FB is the tool for you, otherwise, keep it in the blogosphere.

I've got to say, Ian and Michael make a lot of sense. But as a test, I am going to run questions in both venues and see what happens. But after reflecting on it a bit, I do think they are right as my blog has far greater reach than my Facebook groups, and the goal of posing questions and stimulating discussion among my readers is to cast a wide net. So in order to raise a new question I had posed on my IA Capital Partners group to a broader audience, I am reproducing it for my blog readers here:

 

I am currently looking at deals related to online investing tools and resources, as well as gaming and gaming services. There are some others but these are the mega themes. I recently exited one of my companies in the online financial space, am helping work on strategic partnerships for another and just invested in a young integrated gaming entertainment company, Green Screen Interactive Software. I'd be interested in what others are seeing out there. Deal flow is very strong.

I've got lot of other questions rattling around that I will post soon but this is my question du jour. I'd love to know your thoughts. Thanks in advance for participating in what is hopefully a rich, interesting, interactive discussion.

My Use of Facebook Groups: IA Capital Partners and Information Arbitrage

I have done a woeful job using these groups to stimulate discussion. I tossed out a few questions early on, generated some interesting dialog, and then stopped. Stupid. Sorry about that. So here is my pledge. I will use best efforts going forward to do the following:

• IA Capital Partners Facebook group: Pose questions and offer commentary around what I am actually seeing in early-stage deal land, a land where I am very active and seeing a lot of stuff. I'll share ideas, trends, themes and memes, and would love group members to share their perspectives as well.

• Information Arbitrage Facebook group: Raise thematic questions and issues of interest to me around Wall Street and technology, and generate a hopefully vibrant discussion around these issues.

I'd also love it if group members started question and theme threads of their own around the concepts and meanings of these groups. I think Facebook groups can be a very powerful medium for an active, multi-threaded conversation. I just feel like I haven't done my part to foment an active dialog. My bad. I'll try to do better.

A Different Approach to Early-Stage Investment

I admit it - I am green in the world of early-stage investing. Three years experience, 18 deals, $1.5 million invested, three exits (one has happened but is not yet disclosed). That said, I feel like I am in and around the early-stage investment scene enough and have done enough to have an opinion. And it is somewhat different than the classic VC definition of early-stage investing that I'm familiar with. I've always been told that a VC perspective can be summed up as follows: "A successful fund is characterized by a few home runs and a bunch of failures. This is the nature of the venture business." That always seemed to me like a scary model. Swing for the fences every time, strike out a ton and hope to connect on a few in the World Series. Fred Wilson's post on the Union Square Ventures weblog did a better job describing what I expect is the more conventional VC return pattern, where roughly 1/3 of the deals fail, 1/3 underperform and 1/3 meet expectations. But does this mean that VCs are still swinging for the fences every time, but that there are some duds mixed in with the complete goose eggs and the home runs? I don't know, but I expect that most are striving for at least a 10x on each and every deal.

I have taken a somewhat different view of early-stage investing. I have sought to build a portfolio diversified not only by sector and business model but also by another key dimension of risk: exit path and timing. What this specifically means is that I actually invest in deals where I expect to generate a return of, say, 3-5x in a fairly short period of time yielding a high IRR and risk-adjusted return. What does this mean? It means that I invest in both intelligent, needed features and applications as well as potentially disruptive technologies and business models. Mytrade? Great application. TheLadders.com? Disruptive business model. Mashery? Great application (but with great upside). Buddy Media? Disruptive business model (combining real high-value, monetizable commerce with social networking? Huh?). My portfolio is littered with great applications and features that will likely never be billion-dollar companies but where the entrepreneurs are laser-focused on commerce, making money from their IP and business approach. These are the deals that get taken out quickly, for that 3-5x type multiple, and get bolted on to a larger company's core offering. Is this a failure because it wasn't a "home run" and failed to get a 10x? Hardly. I'll take those all day long. But I do want the disruptive bets in my portfolio, but I don't want them to dominate. And I don't want a 1/3 failure or 1/3 underperformance rate. I want a much, much higher batting average with lower volatility of outcomes.

One might say that my approach is foolhardy, that all I'm doing is giving up a large portion of the call option for a bit of a put option. And I can understand that concern. But my experience tells me that my perception of value is pretty good, and that by backing entrepreneurs who are focused on making money and not on some technological breakthrough, and where my relationships and experience can add value yields a very attractive, risk-adjusted result. Clearly time will tell but my three years in the business indicate to me that I'm on to something. I'm not sure anyone would give me money to run such a seemingly unconventional strategy but it is certainly working for me.

VikWin Pandoff: A Few Cards Short of a Full Deck

Much has been written so I'll keep it short: this won't be pretty unless we're looking at a bust-up of Citi. IMHO, the esteemed Mr. Pandit and Sir Bischoff lack the experience, perspective and people-skills to run the financial supermarket that is Citigroup circa 2007. To be precise, here is what I said when interviewed for a story that ran in today's Washington Post:

A criticism of Pandit is that he lacks experience in consumer banking, a critical part of Citigroup's business.

"They clearly got a professional who can address the current crisis," said Roger Ehrenberg, an entrepreneur who worked 18 years at Citigroup and Deutsche Bank in investment banking and derivatives departments. "But is he the right person to address the broader growth issues that they have? That's a different question."

Ehrenberg said the separation of chief executive and chairman made sense, given Pandit's shortcomings.

"Were they to have given him both titles, they would basically be making the statement that they feel he is the balanced professional, which I think the markets would have widely rejected," he said.

There was a lot I said that they didn't print. Like that a more logical combination might have been Vik and Bob Willumstad, given Bob's extensive consumer experience and institutional memory, but presumably that avenue was pursued and rejected by a sane and sober Mr. Willumstad. Or that while Vik is a very, very smart markets guy, he doesn't really have the personality or the dynamism to lead a super-complex, 300,000+ person (though likely a lot less in the near future) organization with businesses far afield from his areas of expertise. He really should be the head of banking, its risk management and its strategy. But the CEO of Citigroup?

Clearly the Board was under immense pressure to do something. They also had clearly cast a pretty wide net to find a broader-based candidate and came up with a big goose egg. Somehow they just couldn't tap into the right combination of masochist and egotist for the job. Maybe a Presidential candidate? And then you had the natty Mr. Rubin just dying to get out of the hot seat, forcing the Chairman issue. So the Citi Board was really sitting there under the spotlight, sweating bullets, with 8-2 pocket cards yet being compelled to play the hand. So what did they do? Take the path of least resistance: justify the stultifying $800 million search fee they had already paid (read: buying Old Lane), put Vik in the CEO seat and play the hand they were dealt.

Problem is, with VikWin running the show it appears that they are a few cards short. And that there is likely little help on the turn or the river. Unless the original Citi gets back to its roots and the consumer piece is jettisoned. Then you've got a team that can run the corporate and investment banking show. But is this the right way to go about making that assessment and a decision of that import? You tell me.

In Defense of "Free"

The recent comScore numbers are in and the answer is pretty clear: The NYTimes.com won and won big, showing a 64% rise in readers and a 52% rise in page views over the last quarter. Why? The mid-September tear-down of the subscription edifice Times Select. TechCrunch carried the story yesterday and Marketing Pilgrim added onto it today. Here is Marketing Pilgrim's interpretation of the NYT's decision to go free:

The main reason behind they changed models is that search engines were bringing a new demographic to the site. In the past more people went directly to the site, and they were often regular readers who are loyal to the paper. People coming to the site via search engines were turned off by having to subscribe. Most likely they are looking at a specific article and want to pick and choose rather than read the entire paper. Sort of like how we want to buy our songs one at a time rather than buying the whole CD.

Right now subscribers generate about $10 million a year in revenue. After running the numbers the Times saw more growth potential in online advertising revenue than in collection for subscriptions.

I like the iTunes analogy. I think they are right on. I believe most online consumers of media, be they consuming text, audio or video, want it a la carte. They don't want to be forced to buy the entire paper, the entire CD, the entire movie. A snippet here, a song there, a micro-chunked video now and again, and I get what I want, when I want it and how I want it. This is also consistent with Digg, StumbleUpon and other community-based recommendation engines, where people read and listen to what is popular and/or what their friends are into. And this is cool. And as ad targeting gets increasingly better, the value of these recommendations only gets more valuable to advertisers seeking to reach a particular demographic with empirical, measurable results.

And there is no doubt the Mr. Murdoch has already internalized this phenomenon by announcing the freeing of the Wall Street Journal Online. He knows that edifice Rex - the realm of Old Media - is rapidly dying. And he is going to get out in front of it. MySpace was only the beginning...

Is Old Lane Old News?

Now that it appears that Vik has nosed into the lead in the great Citigroup CEO race, what of Old Lane? When it came out that Citigroup was buying the new Old firm back in April, I had hypothesized that they were essentially paying an $800 million executive recruitment fee. Sure, there was spin that Citigroup's alternatives business was going to broadly distribute the Old Lane product across its broker network, and use it as lever for growing its alternatives franchise. But I wasn't buying. Who would pay such a sum, call it 15-20% of assets, for a new hedge fund firm with just ok returns? No rational financial institution, IMHO. I know, I know, we are talking about Citigroup here. I felt that promises of an Old Lane product push was a bunch of smoke to get at Vik and John Havens, two quality managers with bulge bracket Wall Street cred.

Fast forward to today. Was I right? Are quants grumpy? Has anybody heard of a sub-prime mortgage? Of course I was right. Citigroup looks to be getting their new CEO (Pandit), a top guy who may run investment banking or some other super senior job (Havens), Old Lane's performance is weak and the product isn't being pushed by anybody. Assets are reportedly around $4 billion, less than the $4.5 billion when the deal was announced. Ho hum. Old Lane is truly old news. So what does the rich Old Lane price tag look like now? Just like I said nine months ago - the biggest headhunter fee on record. Vik did an amazing deal for which he should get the props - getting paid to find himself. Now if only I could do that deal...

The Trading Game: Where Losers Can Win and Lose Again

Swing big. Lose big. Get another chance to swing big again. This concept has always astounded me, dating back to Howard Rubin's legendary $377 million swan dive back in May 1987, the year I began my Wall Street career. Mr. Rubin was a successful young mortgage trader at Salomon, jumped ship to make real money (around $1 million per year) at Merrill, and within two years dropped almost $400 large through unauthorized trading at a time when this was real money. I remember that when this happened, Wall Street and the entire financial community was shocked. Stunned. The magnitude of the loss was simply incomprehensible. The combination of hiding such massive trades on Mr. Rubin's part and abysmal risk management on Merrill management's part created a toxic brew that caused the largest loss of its kind that anyone could remember. Yet somehow, some way, the fact that Mr. Rubin took a massive gamble on complex securities (PO mortgage strips, as I recall), was less than honest about his positions and lost huge, earned him a job at Bear Stearns less than six months later. Huh? Where could this possibly happen? Answer: Wall Street.

This phenomenon has been repeated again and again in the financial markets, much to my amazement. Now I fully admit that great traders can get carried out from time to time, but there is carried out and there is having a near-death experience. I'd say that if Mr. Rubin's experience isn't as close to death as you can get in the markets, I don't know what is, yet he was able to get another top firm to take him on even in light of his alleged ethical and risk management lapses. And how do you explain the nine lives of Victor Niederhoffer, the man who has gone from boom to bust and back again more times than the US economy since the Articles of Confederation? From trading wunderkind on his own to being one of George Soros's top guys to having his own firm once again, Mr. Niederhoffer's strategy has been incredibly volatile and often very profitable, just before it blows up and forces him to close down. Yet the money comes back. Now that he closed down again after dropping 75%, even he may have to throw in the towel for good. Don't get me wrong: it's not that Mr. Niederhoffer isn't an incredibly brilliant man and a legendary trader, but there is something fundamentally wrong with generating 40-50% returns for four years and then blowing up. There is always an excuse, there is always a reason. But bottom line: there are plenty of traders that make great money and don't blow up. Yet so many that do just keep on coming back.

And what about all the Amaranth veterans (those in some way associated with the $6.6 billion melt-down) who litter the Street after the firm's demise last year? Some of them have gotten huge books and are running massive risk, like the gents at Moore Capital who just dropped 15% in November in their Canadian book. Now these guys aren't Brian Hunter, but there were clearly systemic risk management problems at Amaranth and the trader leading the Canadian effort was a senior guy at the firm. He had been at Moore for around a year. My question is what were his risk limits and how was his exposure being monitored? Because dropping $150 million isn't awful when looked at in a vacuum; it depends how much capital this loss is related to and the strategy that sustained the loss. $3 billion portfolio, 5% loss, concentrated long/short equity book that runs net long, ok. I can see that. But $150 million on $1 billion in capital in a convertible bond/equity book? Something just isn't right in this picture. Wouldn't you think that the new guys coming from a firm with a highly questionable past, even if they are great, would have somewhat tighter risk limits than those evident in this situation? I'd think so. But hey, maybe I'm just a little too cynical.

I am not a trader. I have managed traders. And I understand that finding great traders is incredibly hard. And I also know that being able to sustain a loss, a big loss, and bounce back is a necessary ingredient for a great trader. Problem is, the mere ability to lose hundreds of millions and wake up in the morning does not a great trader make. Good risk management along with great investing have to go hand in hand. Now some volatile strategies like CTAs and super-concentrated long-only portfolios will suffer big drawdowns by their nature. But that is part and parcel of those strategies. But some of the legendary losses that have resulted in second and third chances have, to me, been reflective of fundamental problems with risk management and bet sizing. And this means that the traders may not be as great as they seem when things are good; it is only that they are taking out-sized risks to generate these returns. But it appears that Wall Street and professional investors time and time again make the same mistakes. I just don't get it. Maybe I never will.

Rating Agencies on Trial

Something is wrong when an entire industry teeters on the brink of destruction because of - what? - a change in credit rating. Consider the anxiety in and around the monoline insurers. The recent MBIA situation simply brought the point home: investors have given rating agencies too much power. Way, way too much power. Somehow, someway, large swaths of the investor landscape has effectively abrogated responsibility for conducting proper due diligence because an entity which, by the way, is paid for by the issuer, has said "this instrument is ok for investment if your risk tolerance is (choose your letter)." What is happening today isn't unique - we've seen big, discontinuous changes in ratings when a rating agency just got it wrong, was late in incorporating new information, or simply followed the implicit guidance of bond market prices to reassess a ratings stance. And yes, I understand that bond prices and credit risks are not perfectly correlated, and that rating agencies are all about credit risk. But rating agencies remind me a lot of classic sell-side research: take a stance based on the historical information, and only adjust that stance when new information has already caused prices to move. This is not the way it should be. And the markets and investors well-being are in jeopardy because of an excessive reliance on third-party credit ratings.

The very premise of monoline insurers like MBIA and AMBAC has been in question for more than a decade. Minimal capital, massive theoretical exposure, little data on historical losses. It is the classic business of selling out-of-the-money put options, collecting premium, showing great ROE and margins until, POW! You're dead. One of my better posts as a blogger that maybe 3 people read is titled Volatility Management in a Complacent World. The date: April 15th, 2007. World looks pretty different now, huh? It addresses this exact issue, as do about 50 of my other posts about the properties of hedge fund returns, employee incentive programs, and many other financial strategies. So as risks were mounting across many of the instruments backstopped by the monolines, did they alter their strategies, buy insurance, seek to offset a measure of this long-tail exposure? Not really. Here is my conclusion back in April when considering the inertia and idiocy of the marginal risk-taker:

So where we are today is at a time when the costs of insurance are both relatively and absolutely low yet the urge is for investors to sell it, not buy it. Because short-term performance considerations (which directly drive most fund managers' compensation, as well as the ability to gather additional assets to manage) can often drive sub-optimal portfolio decisions. And this is certainly not good for fund investors. And it is at times like these when the smart, savvy, long-term oriented managers with an appreciation for history take a contrarian position. And I might wager that this is precisely what is happening. We'll see the wheat separated from the chaff in short order. Just wait and see.

On occasion, even I can call it. But forget about poor management for a moment. What about the rating agencies? Where were they when it came to forward-thinking in light of new risks on the horizon? I know, I know, they worry about credit and not prices, but don't market prices (after adjusting for interest rate movements) have something to say about investors' perception of credit risk? I'd say so. So if they aren't looking ahead, thinking about future exposures, advising investors of bonds they've rated about their risks in light of new information, then what exactly are they doing? And what exactly are issuers paying for?

Oh, I take that back. I know exactly what issuers are paying for - getting a blessing on their bonds so they can be sold to investors. But what are investors getting out of the deal? Is the imprimatur of a rating agency really worth much? Have they gotten the easy cases largely right and the more complex cases more frequently wrong? And do they only really adjust ratings when it is blindingly obvious that they have to be changed because of information that is already in the market? And who are they ultimately working for? Shouldn't they really be working for the investor and not the issuer? Doesn't this create perverse motives, the exact same short-optionality perverse motives enjoyed by senior managers and others who are incentivized to show "superior" performance, keep things nice and steady, get paid a bundle until BOOM! Game over but they've already gotten paid and gone home? The whole thing is just wrong.

It all really comes back to the same issue: caveat emptor and for gosh sakes, do your job. Especially if you are a fiduciary. You simply can't outsource responsibility for making decisions that are core to your mission. If you are going to invest in complex instruments, do the homework or don't invest. And by all means, do not rely on the opinion of others whose motivations might not be aligned with your own. Because as we've seen, this can result in some very ugly outcomes.

"Hey Hank"

Now I know I've really lost it. My 10-year old son is practicing for his piano recital, and his chosen piece is "Hey Jude." Which means, by definition, that I've heard it something like 300 times in the past month. Somehow, this repetitive playing provided the inspiration for me to adapt the Beatles tune into a commentary on Hank Paulson's plight. I can safely say that none of the Beatles had the following in mind when they composed and played their legendary ballad. Sorry John, Paul, George and Ringo. I mean no disrespect.

********************

Hey Hank,
Don't let us tank,
Things really suck,
Use that Goldman luck,
Remember, we need tough choices right now,
Otherwise how,
Will we get better?

Hey Hank,
Don't be afraid,
Though we're scared sh*tless,
You must be brave,
Remember, those SIVs really need help,
Deal with it or else,
We won't get better.

But hard choices you must make,
Hey Hank, just take
A path that deals with the real problems,
It will be painful but hey,
Hey Hank, refrain,
From copping out and delaying pain,
Don't do it Hank, don't do it, Hank....

Hey Hank,
The dollar's in the tank,
Keep lowering rates,
You'll seal our fates,
Remember, we're debtor to the world,
Cut off SWFs,
We won't get better.

Hey Hank,
Don't be afraid,
You've got Lloyd and John, and shortly Vik,
They'll help you, to get our system back,
By working together,
We might get better.

But no matter what you do,
Hey Hank, it's you,
Some say you are part of a cabal,
Of Goldman staffers and alums,
Who rule the world,
And take Bueller's teacher at his word,
What is this world coming to?

Hey Hank,
Just screw them all,
Do the right thing, you're against the wall,
Our banks need purging right now,
Provide a strong base,
So we'll get better, better, better, better, better, better, OH!

Na na na na na na na na na na na, Hey Hank, Hey Hankie Hankie Hankie Hankie Hankie YOW, YOW!

********************

Like I said, off the deep end. Well, this was a fun use of 40 minutes, huh? And I'm purportedly a serious blogger? Yeah, right.

Congratulations, Spotlight Data

I am happy to offer congratulations to my friends at Spotlight Data Solution, who were just acquired by Metastorm, a leader in BPM applications. Spotlight Data was one of my earliest angel investments, and I learned a tremendous amount both from the company and from my fellow outside Board member, Mike Zisman. Mike is a seasoned entrepreneur, senior corporate executive and early-stage investor, and his guidance and counsel were key components of the Company's successful sale to Metastorm. As I sit on several Boards and am constantly trying to figure out how to be a better and more effective Board member, Mike's experience and leadership were terrific examples of what I should strive for. Ira and Jay, your persistence and staying power through hard times was fantastic. All the best in your new home. I'm sure the two of you will rock it.

Oh, The Pain - Falling Below Howard in the SA 100. NOT!

Just when I thought I had suffered the gravest of injustices, tying the not-so-dainty and not-too-dextrous Howard in the original Blackberry Thumb-off, I was alterted to this: that I am #90 on the Silicon Alley 100, and Mr. Lindzon is #61. I know, I know, when I heard that Howard was 61 I thought they were talking about his age but no, this is where he falls on the list.

Now Howard is very proud of his position, and has been gloating about it both online and offline (I had the pleasure of sitting in a Board meeting with the slimmed-down Lindzon, who is looking like an advertisement for Nutri-Fast). In fact, he can't seem to shut up about it. Recognition on a list of any kind is almost too much for him to handle. Real-world validation! On the same list as major-domo Michael Bloomberg, VC dude and pal Fred Wilson and the babealicious Lindsay Campbell! This is the culmination of a dizzying 2007 for my Phoenix-based friend.

I think his inclusion into the SA 100 glitterati might be just the catalyst to get Mr. Lindzon to trade the sun and sand for the friendly confines of Silicon Alley. All the pieces are now in place. He is an online media playa. Friends and pals among top NY VCs. Dropping the pear-shaped leisure body for a lean, mean and sleek NY look. Is the writing on the wall? Maybe Silicon Alley Insider can investigate... The question isn't if Lindzon can handle NY, but if NY can handle Lindzon.

Congrats to Mr. #61. You really did have a rocking year and you deserve it, pal. But someone had to kick you in the nuts for being so freaking excited about a stupid list. And that someone just had to be me. xoxoxo

Me on CNBC Talking Stein (When Not Being Interrupted)

I was just on CNBC's Closing Bell show debating Charlie Gasparino on the merits of Ben Stein's position regarding Goldman Sachs and Jan Hatzius' recent paper. Based on yesterday's post, I think you all know where I stand on the topic. Mr. Gasparino, however, felt compelled to talk, talk, talk, and not debate, though I did take away from his monologue that he disagreed with me. He said that "all shops talk their book," and that "all his friends on Wall Street" know that Ben Stein is right. Huh?

Well, I can't speak to Charlie's friends, their existence or their intelligence, but I can tell you that NOT ONE PERSON that I know from the Street thinks that Mr. Stein's piece should be used for anything other than lining the family guinea pig's cage. But hey, maybe our worlds just don't intersect, I don't know. But I do know that there is some serious mis-information and bilge water being sprayed around on this topic, and I hope smart readers/watchers and consumers of media can separate the good from the crap. Because the crap on this issue is plainly abundant.

PS. next time I know I'm going on CNBC I'll do what Paul Kedrosky does and tell my readers in advance so they can watch and chuckle.

At the Intersection of Chinese Walls and Wall Street

In his missive in today's New York Times, Ben Stein does what many would like to do: call out Goldman Sachs and introduce some tarnish to its shiny reputation. The thrust of Mr. Stein's argument is that one of Goldman Sachs' leading economic analysts, Jan Hatzius, basically put out a puffy "fear piece" that would ultimately benefit the firm's proprietary short positions in the housing sector. And he suspects even greater bad behaviors but you get the gist. Now I don't have a problem with Ben or anyone else trying to expose misdeeds or shady dealing, but I do have a problem with an analysis that is economical with the truth and detached from the realities of a business model that is both heavily regulated and under constant scrutiny. Either Mr. Stein doesn't understand how Wall Street and the securities market work (unlikely) or he has a clear agenda and was in desperate need of a column for today's paper (somewhat more likely). Whichever it is, I believe he is way, way off, and trying to concoct conspiracy theories directed at Goldman is somewhat similar to those he is creating with his own puffy fear piece. Those who throw stones... right?

As I interpret it, Dr. Hatzius was saying that the financial system would possibly not be able to adjust to a level of financial losses that are large on an absolute scale but small compared with aggregate credit or the gross domestic product. He is also postulating that lenders would have to retrench so deeply that lending would stall and growth would falter — an event that, again, has not happened on any scale in the postwar world, except when planned by the central bank.

In other words, with the greatest possible respect to Dr. Hatzius, his paper is not really what I would call a serious overview of the situation. It is more a call to be afraid and cautious based on general principles that he embraces and not on the lessons of history. (In this respect, he is much like many economic journalists and commentators who sell newsprint by selling fear. The common cause of journalists and Wall Streeters in this regard is a subject I will address in the future.)

Ok, so Dr. Hatzius has a view, and given his credentials and his perch I'd say his view is probably worth considering. Just because his paper doesn't comport with Mr. Stein's view of the world doesn't make it wrong or its methodology flawed - it's just that Mr. Stein doesn't like it. That's fine. But one need not intuit evil intent because of it. Anyway, Ben goes on to ask the following question:

Why, then, is his document circulating? Perhaps as a token of Dr. Hatzius’s genuine intelligence, which is fine. But to me, his paper seemed like a selling document in the real Wall Street sense of selling — namely, selling short. (Dr. Hatzius notes that he has long been bearish on housing, since faraway 2006, but I respectfully note that that is a lot different from predicting a credit catastrophe. The spokesman for Goldman also noted the company’s bearishness on housing since 2006. He also noted that in the recent past, Goldman Sachs has moved to a considerably larger short posture and that the firm is net short.)

More thoughts came to me as I read a recent piece in Fortune by my colleague Allan Sloan, a veteran financial writer. Mr. Sloan traces the life and death throes of a Goldman Sachs-arranged collateralized mortgage obligation. He shows how truly toxic waste was sold to overly eager investors who now have major charge-offs, and he also points out that some parts of the C.M.O. were indeed safe and were either current or had been paid off.

But what leaps out at me from this story is that Goldman Sachs was injecting dangerous financial products into the world’s commercial bloodstream for years.

Ben, come on, you've got to be kidding me. He's setting the table for his conspiracy theory, the foundation of which is that not only that Dr. Hatzius is biased in his view because of his firm's trading book but that the firm itself has been engaging in destructive behaviors. Mr. Stein, CMOs, CBOs and all forms of ABSs have their place in the capital markets, increasing liquidity, re-allocating risk to those best able to accept it and supporting economic growth. The sub-prime mess does not, in and of itself, mean that pooled assets where participations are sold off to investors are bad. And his use of language and populist rhetoric severely dulls the strength of any argument he is likely to make from this point forward. Further, there are walls between groups that underwrite securities and those that issue research, for the reasons we all now know so well (read: Blodget-gate). So the likelihood that a senior economist is putting out reports that would knowingly benefit the firm's positions and get paid for it is somewhat far-fetched, especially when the firm in question is Goldman Sachs. What firm would have more to lose from such a thinly-veiled ploy? I think they're a little smarter than that.

And then, 2/3 of the way into his discussion, Mr. Stein drops the bomb:

Here is my humble hypothesis, even after talking to Goldman: Is it possible that Dr. Hatzius’s paper was a device to help along the goal of success at bearish trades in this sector and in the market generally? His firm says his paper, like all of its economists’ work, was not written to support any larger short-trading strategy. But economists, like accountants, are artists. They have a tendency to paint what their patrons, who pay them, want to see.

If I were Dr. Hatzius, I'd be making a little Ben Stein voodoo doll and sticking it like a pincushion. And just when you thought Ben had only gone off the reservation, be took an express trip to another galaxy far, far away. Check out this line of argument:

Doesn’t this bear some slight resemblance to  Merrill selling tech stocks during the bubble while its analyst Henry Blodget was reportedly telling his friends what garbage they were? How different would it be from selling short the junky stock that your firm is underwriting? And if a top economist at Goldman Sachs was saying housing was in trouble, why did Goldman continue to underwrite junk mortgage issues into the market?

HERE is a query, as we used to say in law school: Should Henry M. Paulson Jr., who formerly ran a firm that engaged in this kind of conduct, be serving as Treasury secretary? Should there not be some inquiry into what the invisible government of Goldman (and the rest of Wall Street) did to create this disaster, which has caught up with some Wall Street firms but not the nimble Goldman?

Ok, now here is where my disbelief comes in. Wall Street firms are made up of separate groups. Walls are established among these groups where appropriate, particularly keeping those areas that touch clients separate from those that trade proprietary capital. So at any one time a firm may well have someone in research put out a "buy" rating (grounded in the logic and belief of the research team) on a security, while a prop trading desk elsewhere in