Private Equity Markets: Not Today, Perhaps Tomorrow

Claire Cain Miller penned a story in last Wednesday's New York Times concerning the development of private markets for venture-backed equity investments. The article raised several important issues, but I'd like to provide further color beyond my quotes in the story. Private markets, their opportunities and risks are very complex: my belief is that while it would be great for a "third exit" to emerge, its realization remains far, far away, except for the most popular, "branded" private companies. Think Facebook, Twitter and the like. Legal and regulatory issues are a problem. Scaling is a problem. And the demand side is a problem. For these and other reasons, I believe it will take years for a true alternative means of liquidity to emerge.

Not a Technology Problem

First off, let's be clear: this is not a problem that subjects itself well to a technology solution, at least not now. The hardest issues with these types of transactions are operational: compliance with transaction documents, e.g., Right of First Refusal provisions, etc.; transfer and custody of physical stock certificates; receipt of stock powers; alterations to books and records; collection of sufficient information about the company to make an educated investment decision, etc. Due to investor demand and regulatory limitations, technology as a vehicle for price discovery hasn't really been necessary. So those that consider this a technology problem to be solved are far off the mark. Think of one of the single most successful financial start-up of the past decade: Gerson Lehrman Group. The company is worth over a billion dollars. The vast majority of this market value is not attributable to technology, but to making a match between information seeker and information provider. The technology that has been built in recent years is nice but certainly not a key driver of firm value. The largest and arguably most successful company in the private/illiquid asset space, SecondMarket, has painstakingly built an back-office environment to rival that of a small broker/dealer. Companies that are at all successful in this space will have significant infrastructures to handle the operational requirements of trade execution and settlement. Everyone else is simply pretending.

Not a New Idea

Making a match between a large seller of restricted/private stock and a buyer. Hmm, that sounds familiar. Who else does this? Right, Mergers & Acquisition bankers and block desks. Depending upon whether the sale is to a strategic buyer or a financial buyer, Wall Street has long dealt with exactly the problems these private exchanges are purporting to solve. If it's employees with small holdings ok, not the same, but if it is a venture firm like Union Square Ventures, Kleiner Perkins, or DFJ looking to find an alternative path to liquidity, they can always call up their friendly investment banker and place the stock through them. Bankers can do the job of price discovery just like a listed market, and the prices will be much more reflective of the kind of size the sellers want to move than a shallow indicative level that doesn't do the venture firms much good. It will take years to cultivate a truly new investor base, e.g., high net worth retail, to take up the stock. Moving large size in private companies tends to be an institutional phenomenon, those same institutions that are currently no bid in the largely dead IPO market.

Depth in Demand Does Not Exist

The investors that generally drive the IPO market - not high net worth individuals but mutual funds, hedge funds and other institutional investors - are largely on the sidelines. There is a massive emphasis towards liquidity in today's environment, and private company stock is not high on most institutional investors' shopping lists. So in the absence of these key players, are accredited investors (in Securities Act of 1933 terms) really sufficient to pick up the slack? It's not as if angel investors have been deploying large amounts of capital, and those "super angels" that have been bridging the gap between founders and institutional rounds are primarily "first-money-in" investors; they are not looking for Facebook stock at $4 billion or Twitter stock at $350 million. So the fact that there isn't a vibrant IPO market says to me that there isn't a deep private company stock market, either. In the absence of real demand, all the recent buzz in this space appears to be a solution looking for a problem.

The Regulatory Environment is Hostile, and the Trend is Not Your Friend

All of these private markets are predicated upon either the Accredited Investor or Qualified Institutional Buyer (QIB) rules; these provide safe harbors from a host of SEC reporting and disclosure requirements, on the assumption that investors in these buckets are sufficiently sophisticated to make investments in risky, unregistered securities. These restrictions, coupled with the 500 investor limitation pursuant to the Securities Exchange Act of 1934, sharply limit the potential parties that can underpin the demand for these private markets. In effect, for the volume of these markets to scale, the same institutional investors mentioned above need to participate. And if they won't buy shares of more profitable, less risky IPO companies that will provide detailed SEC-compliant disclosures, then why would they be motivated to invest in less profitable, riskier private markets companies with limited disclosure requirements? Answer: they wouldn't. Further, in order for these markets to truly flourish, rules such as the 500 investor limitation would need to be relaxed. But with today's environment awash in scandals, trillions of losses due to illiquid and non-transparent asset portfolios and the taxpayer and Congressional backlash arising from the bailout, is anyone really in a position to ask for relaxation of rules that are designed to protect investors? Good luck. The timing could not be worse.

Private Markets Could Work - Someday

The key needed for these markets - any private market - to succeed is real and durable demand. When that will emerge I do not know, but I am pretty confident it won't be for another 18-24 months, at best. Another factor are the public company listing, filing and compliance requirements. Sarbanes-Oxley (Sarbox) has certainly raised the bar for companies going public, and represented one of the key motivations for markets such as GSTrUE and Opus-5 to emerge. But if Sarbox were rolled back or recast in such a way that compliance was less complex and cheaper to implement, then the need for private markets might go away. I don't buy the argument that a "long tail" of demand exists for non-brand name private companies, except insofar as these companies are raising capital, not for investors who are looking to sell out. Just as with GSTrUE, the companies that were able to be placed were top-shelf names with big brands and significant pent-up demand. This kind of dynamic does not exist in the long tail. It seems to me that Internet investors are seeking to apply web logic to a Wall Street phenomenon. Sometimes characteristics of the online world don't necessarily apply to the offline world. I could be wrong here, but I doubt it.

The Bottom Line

I appreciate the desire for a third path to liquidity, and acknowledge its importance, but you can't manufacture demand where none exists. Demand will pick up at some point and these markets will be viable, but their growth will be sharply capped due to both the "brand name" and "head of the tail" phenomena and the regulatory environment. So this is one to keep an eye on, but my sense is that this third path simply won't become viable for a long, long time.

The Peter Lynch of Consumer Internet is.....

Fred Wilson. Why this just hit me today I do not know, but after thinking about it I know it to be true.

I was having a conversation with a very good guy from MTV Digital today, Michael Bloom, and we got to talking about the NYC investment scene. Invariably the conversation winds around to Fred and his partners at Union Square Ventures, and as I always do I mention how I could never invest the way Fred does. This generally centers around the way Fred is able to invest in platforms that often generate massive audience and upside but which is not at all visible from the outset (del.icio.us, Twitter, etc.). Lacking such vision, I generally focus on businesses that have clear paths to revenue, require far less capital than platforms, are generally more B2B and less B2C (with some notable exceptions) and which generate valuable data and/or metadata that can be repurposed and reused to generate additional revenue streams. This has always been my rap.

Michael, astutely, says "Well, it seems that Fred invests in stuff he likes to use himself." Now, it isn't that I haven't thought of this before but I've generally thought about it in more clinical terms, e.g., Fred sees something cool, tries it out, posts it on his blog, gets a ton of feedback, does additional homework and makes a decision. But after thinking about the lion's share of his investments, I think Michael is right. I think he really does eat his own cooking and invests very close to home, e.g., in companies that do stuff and make things that he himself likes. This is a much more elegant way to contextualize the differences in mine and Fred's investing styles. He is a consumer geek and a gadget freak and his investments display this passion. I am a data geek with a quant background and most of my investments display this passion.

In short, Fred is the Peter Lynch of consumer internet investing. Invest close to home. Invest in things you understand. Invest in things you have passion for. And invest in things you use in your everyday life. It certainly worked for Peter. And now it is working for Fred.

The US Government: Over-engineering for Under-performance

Beginning with Bush and Paulson and continuing with Obama, Geithner and the newly-emboldened Ben Bernanke, the US Government has adopted the posture of over-engineering our emergence from the financial crisis, with an eye on stock market performance. Plans have been highly complex, rescues have been largely one-off and Congress has gotten into the business of executive compensation, company-specific tax policy and other minutia. The alternative: broad, sweeping, clearly communicated and transparent policies, those to which investors and taxpayers alike can rapidly assimilate and react. It is a matter of trust, and trust has been in short supply ever since the crisis hit. Unfortunately, the US Government's involvement has done little to rebuild trust on Wall Street or on Main Street. The result of the Administration's plans is depression followed by mania followed by depression, as incomplete or misleading information is slowly disseminated into investor consciousness while the equity markets see-saw depending upon which side of the wave we find ourselves. And recent bank earnings are only one shining example of why we are now locked into a painful, protracted process of false hope, failure and rebirth, when we could have chosen quick, deep pain, and transitioned to real hope and rebirth in a much shorter time-frame. But the US Government does not believe the US citizen can withstand such pain; they'd rather take the path of least resistance, delay the inevitable, buy time and pray that we - the collective "we" - get bailed out. Unfortunately life seldom works this way. If you've got it coming to you it generally comes: the only question is how quickly you can get it to go away.

When I hear friends both inside the major banks say "But we just reported earnings of $x billion and beat Street estimates; why is our stock getting hammered?" or "Our stock is trading at x% of book value when our earnings power is improving, why do investors continue to lack faith in our institution?," it only highlights the disconnect between the Wall Street (and Administration) world(s) and the real world. Clearly few investors look at Citigroup and Bank of America's headline earnings and think them to be of high quality: out-sized trading revenues, debt revaluation and one-time gains dominate the story. Customer revenues generally are poor. Credit charges are skyrocketing. Every kind of loan portfolio is under pressure. And with the mind-bending error of weakening the mark-to-market guidelines, transparency and financial statement clarity is worse than ever. The American Bankers Association and their lobbyists thought they were really smart; let's press the Financial Accounting Standards Board (FASB) to weaken FAS 157 (mark-to-market guidelines) in order that our member firms can show better earnings and capital ratios. And they were successful. But surprise! Investors are not all as stupid as they sometimes appear. They looked right through the reclassifications and accounting changes and determined that earnings quality stunk. Hooray! Citi beat Street estimates. Yippee! Bank of America hit the cover off the ball. But not if what you are looking for are real earnings and true indications of sustainable revenues and financial health. Once again, we have taken a big step backward in the transparency and trust departments. These are areas where the Administration and Congress should be showing strong, decisive leadership. Sadly, they are not.

You now have CEOs of TARP recipients rattling their sabers saying that they want to return the funds, shortly after printing historic trading gains off the backs of US Government debt guarantees and TARP funds. This is clearly not the outcome the US Government had in mind: a direct transfer of value from the US taxpayer to common stockholders of TARP recipients. But if you develop a program as complicated as TARP which impacts multiple constituencies in vastly different ways, it is not surprising that chaos and adverse PR would result. And, suffice it to say, we are still mired in the toxic asset issue. As predicted, the PPIP is dead on arrival. With a weakened FAS 157, regardless of the demand fomented by enormous liquidity on the sidelines together with cheap Government-sponsored leverage, the supply side will simply not show up. Without a clear requirement to clean up their balance sheets, banks will simply milk the option delivered to them on a silver platter by the FASB. They will wait it out, not lend significant sums, engage in financial engineering to make their capital ratios look good, all with the tacit if not outright support of the US Government. This was not the way it was supposed to work. But if you take the path of least resistance, you generally deserve the least attractive results. Not surprisingly, this is where we've ended up.

The US Governments, past and present, had a clear idea of how they wanted the financial reconstruction to go: stabilize the largest, most troubled institutions; let one go to show that they are still free marketeers at heart; loosen accounting standards to make supporting the largest institutions less costly, at least in the short run; use moral suasion and cajoling to encourage supported firms to lend; and then let time work its magic by enabling broken portfolios to recover in value and for earnings to be rebuilt through "riding the yield curve" and lending with Government-subsidized borrowings. But all did not go according to plan. Policies became highly fragmented as each institition was treated as its own separate case, creating uncertainty in the markets and on Main Street. Public relations became a problem as bailed-out firms started paying bonuses, ostensibly with taxpayer dollars. Compensation caps were enacted. Tax policy was used to attack contractual bonus payments. The forest was long ago lost for the trees. The dream of engineering a soft landing is now long gone. The best that can be hoped for is getting through without a financial crisis of staggering proportions. And it didn't need to be this way. Fewer, clearer, more aggressive policies with an emphasis of transparency and communication. Then let the markets do what they will do. Obama & Co. should really be called the Bloomberg Administration: because with such a focus on Wall Street and the stock market there must be a Bloomberg terminal on every desk. Our leaders need to switch them off - now. They do not hold the answer.

A Few Thoughts for a Breadless Holiday

Yes, I am referring to Passover. A truly wonderful holiday, one which chronicles the Jewish people's exodus from tyranny in Egypt. As part of our remembrance, we don't eat "leavened bread" (stuff that rises). In short, no bread. Given the depths of the financial crisis, bread is in short supply among those of any religious persuasion these days. We're all in the midst of our own personal exodus, trying to find our way from poverty back to a healthier, more sustainable prosperity.

The irony of Passover story and its linkage to today's circumstances isn't lost on me, so I thought I'd share a few thoughts about what I'd like to see "Pass over" in the ensuing weeks and months:

1. Pithy sound-bites from the US Government about how the worst of the economic crisis is over;
2. Erratic and conflicted thinking as it relates to the banking sector and every other sector in need of assistance;
3. The thought that propping up sick banks will actually make bad assets turn into good ones, like magic;
4. Immigration policies that keep those outside our borders who can best help our country remain at the forefront of research and innovation;
5. Senior politicians in positions of power with real or perceived conflicts with those whom they influence;
6. Adjustments to accounting rules that make bank earnings look rosy when underlying portfolio problems are still acute;
7. A loss of focus on the importance of alternative energy even though oil prices are 65% off their highs;
8. The sentiment that Americans who choose to save and/or de-lever are somehow un-American, because Americans are supposed to borrow and consume, right?;
9. The White House trying to please everyone all of the time, instead of taking bold stances and pushing through difficult, but correct, legislation; and
10. The power of lobbyists and special interests in times of crisis, when their influence should be marginalized for the greater good.

This is merely a start. But as I sit here breadless and thinking about our future, I hope, and have confidence, that the best is yet to come.

May We Live in Interesting Times...

Consider these events of the past week:

• Life Insurers may gain access to TARP funds (though "only" $130 billion remains under the current authorization) to deal with a severe liquidity crunch. Several of the largest life insurers - Hartford, Genworth, Lincoln National - scrambled to buy thrifts shortly after TARP came into being to gain a place in the queue. Few have really focused on the implications of a sick life insurance industry. Trillions of assets. Hundreds of trillions of insurance in force. The largest buyers of corporate bonds. If life insurers really feel a liquidity crunch, they will spit out their liquid assets, e.g., corporate bonds, by the billions, sharply raising the cost of capital for businesses across the country. This is not a happy thought when businesses are under so much pressure to begin with. Also, like banks, life insurers are enormous. Consider what a TARP II might look like with life insurers as part of the bail-out; it will make the $700 billion TARP I look positively cheap. But does the stock market care? Nah. But corporate bond spreads certainly haven't moved in lock-step with the equity rally; credit traders appear to know something their equity counterparts don't. Like, how to quantify and price risk?

• The Administration is pushing money managers to create "Bailout Bonds," or the ability for retail investors to play the PPIP game. I have heard some bad ideas in my day, but this one is up there. The rationale is ostensibly "Don't moan and groan about those money managers making all the money off the Government bailout programs; you can do it, too." Linking together the Government, Wall Street and Main Street in one big, happy bailout embrace. This is being directed at a retail public, many of whom haven't the faintest idea of how to properly plan for their financial future. How about providing a tax refund for taking a life-cycle investing class? How about investing people's Social Security balances intelligently? Providing the cash-strapped US consumer with an opportunity to buy bailout paper is patently irresponsible. It is nothing more than a PR stunt to put a damper on complaints that the Blackrocks and PIMCOs of the world are getting sweetheart deals at the taxpayer's expense. Given how the Administration has chosen to address te financial sector's problems these complaints have real merit, but creating yet another money-making vehicle for the large retail asset managers is not the solution. Fixing the plan the right way, by creating a centralized troubled asset vehicle that takes on assets at market value which get worked out over time for the taxpayer's benefit, solves the problem without marketing spin and PR stunts.

• Goldman Sachs is issuing stock to repay its TARP funds. Goldman has enjoyed a 162% run-up since its November low, trading just shy of $125. I understand it wants to repay the Government, but when smart market-timers like Goldman are selling, take heed. Generally it means the market has run up and is due for a breather. Whether it is a breather or a collapse, who knows, but is certainly doesn't portent good things for the equity market - or at least the GS stock price - in the near term.

Next week's market action should be fascinating. On a tiny bit of good news and a bunch of bad news the market roared higher. With bank stress test results on the horizon and more bad earnings reports coming up, the recent rally will be sorely tested.

The US Government: Manufacturing Outcomes

It appears that the Financial Accounting Standards Board (FASB) - the "independent" rule-making body of the accounting profession - and the US Government are in almost perfect sync. One week the FASB relaxes FAS 157 - the mark-to-market standards applying to financial asset portfolios - while the next brings the Treasury Department's release of bank stress test results. The Treasury, without question, has tremendous latitude in how it reports the results of the stress tests, and if it chooses it might well incorporate the expected benefits of the "new" FAS 157 on bank capital balances. This would have the beneficial public relations impact of showing banks as being much healthier than the former accounting regime would indicate, the regime that forces banks to deal with the reality of where their assets would clear the market. And while naysayers would have you believe that marking-to-market assets which are intended to be held until maturity is harsh, I'd counter with this simple question: does the bank have the term capital, and, therefore, the ability, to fund these assets until maturity? If the answer is no, which is invariably the case given the massive size of bank illiquid asset portfolios relative to term capital, then marking-to-market is the prudent way to reflect its true financial position. The US Government is conveniently staying silent on this part of the debate. But what else should we expect? The business at hand is that of manufacturing outcomes, regardless of their basis in reality. 

Merely the latest formula to describe the US Government's approach to spinning the financial crisis:

Relaxing FAS 157 + Release of Treasury stress test results = A Positive Manufactured Outcome

The stock market will initially cheer the positive results, following the US Government's lead. But once reality sets in, the reality that deals with market values, financing terms and solvency, the pretty picture that has been painted won't look so good. But hey, things are OK for now, right? For now.

Bailing out the Bailout

It has been both frustrating and painful watching the US Government's response to the financial crisis unfold over the past year. That said, the events of the past two weeks have dropped our Government's response to new depths. Mistakes compounding mistakes, while the PR machine is spinning to ensure that neither the US public nor its allies perceive things this way. First, the Treasury and the Federal Reserve applied inconsistent policies to distressed financial institutions, allowing some to live (AIG, Bear Stearns) while others were left to die (Lehman Brothers). Next, they stuffed certain terribly sick institutions with $200 billion of taxpayer dollars in the form of direct capital injections and capital guarantees (Bank of America, Citigroup, Merrill Lynch), little of which has flowed through to either new lending or the resolution and winding down of massive illiquid asset portfolios. And this doesn't include AIG, which itself consumed $170 billion of taxpayer dollars, much of which went directly to AIG's counterparties, a separate bailout unto itself. And certain of these institutions (Goldman Sachs, for one) were already recipients of TARP funds. Now, the Treasury proposes a plan, the PPIP, to engage the private sector in helping to liquify these illiquid asset portfolios, which only serves to highlight the divergent motives between the buyers (who wish to acquire cheap assets with Government-sponsored leverage) and the sellers (who are seeking to garner above-market prices for assets in order to clear their books without mark-downs). In short, PPIP lacks a catalyst to encourage the sellers to participate in the program. Finally, Thursday brought a relaxing of the FAS 157 mark-to-market standards promulgated by the Financial Accounting Standards Board (FASB), further reducing the likelihood banks will proactively address their toxic asset woes. Because if they can mark their books and they say they intend to hold these illiquid assets for the long haul then there really isn't a problem, is there? All the public wants to hear about is executive pay, because this is what our leaders want us to think about. All form, no substance. Due to poor policy-making, a lack of leadership and fear, we are no closer to solving the financial system's deep-seated problems today than we were back in September.

One would have thought that squandering and losing track of a few hundred billion dollars would have spurred the US Government, the Treasury and the Federal Reserve into action - constructive action - but this has hardly been the case. We've only seen more of the same. But our officials are certainly pleased with themselves in light of the recent stock market rally. This surely has to be validation that they are on the right track.They've placated the big banks, offered up fodder for already wealthy structured asset investors (BlackRock, PIMCO and the like), preserved their lobbyist cash flows by allowing the accounting rules to be changed for the banks' benefit (needless to say, the American Bankers Association was pleased with the FASB's change of heart) and staved off a market meltdown, right? Time will tell, but I am not optimistic. The embedded problems are the same: multi-trillion dollar asset problems; balance sheets laden with illiquid "hold to maturity" assets funded with much shorter duration liabilities; inadequate transparency into bank portfolios; poor tracking of US taxpayer dollars deployed in the bailout; special interests driving critical parts of economic policy; and the sense that the game isn't being played fairly and for the benefit of the American people. It is a lack of trust that is central to our country's problems, a breach that new runs deep within most of its citizens. If our Government can allow the rules of the game to be changed in mid-stream (as they were with Lehman Brothers, TARP, FAS 157 and company compensation), then how can the markets and its citizens judge when things are truly better? An absence of both trust and transparency are enormous barriers to emerging from this economic crisis.

When President Obama was elected, many felt change was afoot and that real diplomacy, tough decisions and transparent and rational decision-making was at hand. In the early days of his Administration, his style has arguably been more effective on issues of foreign diplomacy than on domestic policy. The financial crisis requires a strong hand, a strong stomach and avoidance of interference from entrenched and conflicted parties in both Government and the private sector. Unfortunately, too many of these people have garnered influence within the Administration, leaving us with an approach that is engineered to placate, pacify and perpetuate existing institutions. This is the wrong way forward.

Last year I had proposed the creation of an independent Stabilization Oversight Council (SOC), a group with the expertise and perspective to suggest the tough prescriptives while obtaining the support of the President and Congress. I believe now as I did then that the current policy team is not sufficient to make the difficult yet necessary decisions. When items as arcane yet as important as accounting rules become politicized, something needs to change. And it is incumbent upon our elected leaders to make these changes not for the good of their popularity, but for the good of their citizenry. And this doesn't mean the lobbyists. It means their voting constituents.

The right approach has not changed that much over the months since the crisis moved into full swing. And as the issues have been addressed in bits and pieces over this time period, I will seek to offer a step-by-step prescriptive of how we can get our financial system on the path to recovery rather than merely deferring the day of reckoning:

• Impose strict mark-to-market standards on financial institutions' balance sheets. If assets are classified as "held to maturity," confirm that the financing is in place to carry these assets to term. Intention to hold to maturity is very different than the ability to do so, and the rules need to change to link these two principles. This exercise will quickly flush out the solvent from the insolvent, and create a regulatory capital surplus (deficit) for each and every bank, broker/dealer and insurance company.

• If firms are in a deficit position, and within a pre-defined distance from solvency, they can have a 60-day window within which to raise private capital to fill the deficit. If the required capital cannot be raised, then the firm is eligible for seizure by the Government. This also applies to firms in deficit positions that are not granted a 60-day capital-raising window. These firms are then taken over and reorganized in a pre-packaged bankruptcy, with obligors paid off with available capital. The courts will be closely involved in this process. Many will be out of luck. Common stockholders. Many if not all unsecured debtholders. Incumbent managements.

• After the window has expired, each firm's bad/illiquid assets, now marked down to market values, are segregated from the healthy operations. These "bad" assets are held in a central repository administered by agents of the US Government on behalf of the US taxpayers. They will be warehoused and liquidated in a rational, non-fire sale manner over time. The healthy operations, including bank branches, core deposits, performing loans and liquid assets will be available for investment by private institutions, with the US Government potentially retaining a stake (with the intention of being sold as quickly as practicable). The "Good Banks" will be offered publicly almost immediately, with new managements, clean balance sheets, strong capital positions and a willingness and ability to lend. No longer will these banks have to hoard capital to cushion persistent losses from their troubled asset portfolios. Taxpayer capital will finally be put to good use; creating good banks that can make good loans to help good businesses emerge from the crisis.

• Rules governing financial disclosures will be modified to ensure full transparency, and financial accounting practices will be reviewed to ensure their consistency with new disclosure requirements. Further, off-balance sheet financial transactions will be sharply curtailed, simplifying both balance sheet presentation and footnote disclosure. Investors will no longer have to engage in time-consuming and costly forensic accounting reviews to get a true picture of a financial institutions' health. It will all be there in the financial statements.

• Over-the-counter (OTC) derivatives transactions will be pushed to exchanges. This will enhance transparency, liquidity and collateral management in this opaque, multi-trillion dollar market. Transactions will no longer evidenced by customized firm-to-firm agreements whose terms are invisible to the marketplace, but by notional amounts of standardized contracts with collateral balances that are "trued up" at the end of every trading day. This will sharply reduce the risks of a replay of AIG, where a firm with a high public credit rating was allowed to accrue hundreds of billions of dollars in potential liabilities without having to post collateral until it was too late. The movement towards exchanges will both demystify and de-risk a huge part of the derivatives industry, one which has been maligned for complexity and the inappropriate behavior of certain of its participants. But the value of derivatives as a risk-management tool is unquestioned and its ability to serve as a vehicle for speculation is also important for enhancing market liquidity and price discovery. But only if the risks can be dynamically managed via collateral posting and disclosures are straight-forward easy to understand.

• Boards' fiduciary obligations will be clarified and strengthened and anti-shareholder friendly provisions such as staggered Boards will be eliminated. The Government has started to get involved in discussions around corporate governance and executive pay. This is not the Government's job; it is the job of company Boards as elected by its investors. Everyone has failed on this score. Boards allowed executive pay to spiral upward without reason, and shareholders neither objected strenuously enough nor had the easy ability to impact directors' behaviors. Boards, plus their investor fiduciaries - the pension funds and endowments - all are resopnsible for the massive disconnect between executive performance and compensation. If Boards act as if they are in the pocket of the CEO, they should be replaced by vote. Right now Delaware state law is the big stumbling block to reform. Make it a Federal issue. This is where the Government should be spending its efforts; not on how executives should be compensated.

The Government's approach to addressing the root cause issues of the financial crisis has thus far been inadequate. Market realities have slowly been forcing it towards the prescriptives I have described, yet at a glacial pace. We have no more time - or money - to waste. Issues of politics, perception and partisanship have to give way to pragmatism before it is too late. If only our legislators could shed the shackles of short-termism we as a country, and as a people, would be far better off.