What Mr. Augustine refers to as the competitiveness ecosystem includes the innovation ecosystem.  It is clear today that the global financial crisis which began in early 2008 has only accelerated the negatives, both by catalyzing further spending cuts in critical areas of long-term research and by worsening the odds that our government will recognize the immediacy of the need for the allocation of critical financial resources to get America's innovation train back on track.

A couple of my favorite quotes from the essay follow:

Perhaps the most incisive summary to be found, as far as the nation's competitiveness ecosystem is concerned, comes from the 2,500 year-old writings of Aeschylus:

So in the Libyan fable it is told
That once an eagle, stricken with a dart,
Said, when he saw the fasion of the shaft,
"With our own feathers, not by others' hands,
Are we now smitten".

In America, we are to a considerable degree living off past investments, the comparatively strong position the nation held at the end of World War II, and the prevalence of English as the predominant language of business, government, and technical education.  But the impact of those discriminators appears to be diminishing.  Simply stated, we have been eating our seed corn. . . . We are witnessing a gradual, albeit accelerating, erosion rather than a single cataclysmic wakeup call. . . . Charles Darwin observed that "it is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change."

While there's been a lot of "Change" in Washington in the last few months, we are still at the bottom of the mountain.   The challenge ahead of us requires our policymakers to understand that the Change we must be investing in now is open-ended, risk-tolerant, and all-consuming. It is the long-term change that will protect our nation's posterity, and, by its very nature, is not politically expedient.  Sadly, the posterity baby has been thrown out with the bathwater many times in the course of the development of America's national obsession with immediate gratification, and we are paying a heavy price for this short sightedness today.     

Believe it or not, according to a report from the Washington Post, “the National Archives lost a computer hard drive containing a large amount of sensitive data from the Clinton administration, including Social Security numbers, addresses, and Secret Service and White House operating procedures, congressional officials said yesterday...”

Apparently, the drive was lost between October and March, and it contained one terabyte of data — enough material to fill millions of books… According to California Republican Rep. Darrell Issa,  the hard drive was moved from a "secure" storage area to a workspace while it was in use. The inspector general explained that at least 100 badge-holders had access to the area where the drive was left unsecured… Besides those with official access to sensitive material, the inspector general said janitors, visitors, interns and others passed through the area… Further, the workspace is in an area that Archives workers pass through on their way to the bathroom…

Many things trouble me about this report—but the biggest one is that inexpensive, commercially available solutions that would have made the hard drive useless to unauthorized parties have been around for years.  These solutions cost less than $100 and there are numerous quality systems available.  For example, John Muir and Bill Bosen of Trusted Strategies first built one in 1987, and this solution eventually became Pointsec. There are Federal security standards that should have enforced encryption. What were these people not thinking?

People in the National Archives are charged with organizing, preserving and protecting data, there are Federal requirements to do so, there have been numerous previous incidents from which to learn, and the means to provide adequate security are readily at hand. How can there be any excuse for this?

There is a lot to worry about when we talk about our nation’s cybersecurity vulnerabilites.  But we are talking about a fundamental breakdown in process here, and this worries me more than anything.  This incident is striking evidence of the truth that security is only partially a technology problem, and is largely an issue of personal and social responsibility.  Until people grasp that reality,  security will be elusive…

How can we expect to protect our country, even if we do manage to enact reforms that will allow innovative solutions to find their way into the hands of those who need them, when the barn door is being left wide open?

Gelb accurately diagnoses the "weakening fundamentals of the United States.  First among them is that the country's economy, infrastructure, public schools, and political system have been allowed to deteriorate.  The result has been diminished economic strength, a less vital democracy, and a mediocrity of spirit."

Several paragraphs in this powerful essay deserve highlighting:

"The bases of the United States' international power are the country's economic competitiveness and its political cohesion, and there should be little doubt at this point that both are in decline.  Many acknowledge and lament faltering parts here and there, but they avoid a frontal stare at the deteriorating whole.  It is too depressing to do so, too much for most people to bear. … The United States is now the biggest debtor nation in history, and no nation with a massive debt has ever remained a great power.  Its heavy industry has largely disappeared, having moved to foreign competitors, which has cut deeply into its ability to be independent in times of peril.  Its public-school students trail their peers in other industrialized countries in math and science. They cannot compete in the global economy.  Generations of adult Americans, shockingly, read at a grade-school level and know almost no history, not to mention no geography.  They are simply not being educated to become the guardians of a democracy.

These signals of decline have not inspired politicians to put the national good above partisan interests or problem solving above scoring points.  Republicans act like rabid attack dogs in and out of power and treat facts like trash.  Democrats seem to lack the decisiveness, clarity of vision, and toughness necessary to govern.  This tableau of domestic political stalemate begs for new leadership.  The nation that not so long ago outproduced the rest of the world in arms and consumer goods, the nation lionized and envied for its innovation, can-do spirit, and capacity to accomplish economic miracles, has become overwhelmed by the tasks it once performed competently and with relative ease."

This is the most succinct and gut-wrenching summary of our national predicament that I have read.  Gelb puts his finger directly on the jugular vein of America's innovation ecosystem and diagnoses the multiple layers of dysfunction that have launched our country into such a deep crisis.  I share his fear of a new global reality developing along the following lines:

"The real danger in this universe of primitivism and plenty is not new wars or explosions among major states, or a world war, or even a nuclear war.  It is the specter of nations drowning in a flood of terrorism, tribal and religious hatred, lawlessness, poverty, disease, environmental calamities, and governmental incompetence.  Many nations are going under because they are simply unable to cope, and they will drag others down with them."

Gelb closes this essay with an impassioned plea for action, and most important, he retains a strong sense of hope and pride in our country:

"Every great nation or empire ultimately rots from within.  One can already see the United States, that precious guarantor of liberty and security, beginning to decline in its leadership, institutions, and physical and human infrastructure, heading on the path to becoming just another great power, a nation barely worth fearing or following.  It is time to send up flares signaling that the United States is losing its way and its power, that it is in trouble. But it is even more important to reaffirm the belief that the United States is worth fighting for both across the oceans and at home.  There should be no doubt that the United States, alone among nations, can provide the leadership to solve the problems that will otherwise engulf the world.  And for all the country's faults, there should be no doubt that it remains the last best chance to create equal opportunity, hope, and freedom.  But to restore all that is good and special about the United States, to rescue its power to solve problems, will require something that has not happened in a long time: that pragmatists, realists, and moderates unite and fight for their country."

I've been sending out flares to other realistic moderate pragmatists on this and other topics that demand a "common sense" approach for years.  Through groups such as the Council on Foreign Relations, the Aspen Institute's Socrates Society, the Working Group on Director Accountability and Board Effectiveness, and, most recently, the Security Innovation Network, I have joined and helped forge communities of interest bound together by empowered individuals who are thoughtful and constructive agents of change.  As Gelb points out, we have a lot of wood to cut, but I remain energized and, most importantly, hopeful that we can make a difference because we have to.  Given where America stands today, fomenting pragmatic and realistic change is not an option, it is a requirement.

In my view, financial historians will commonly cite the death
of Lehman Brothers on September 15, 2008 at the hands of Treasury Secretary Henry
Paulson  (with the consent and support of other US financial policy makers), as America’s
Financial Sarajevo.  The death of Lehman will become generally recognized as the “proximate trigger” which led to the financial Panic
of 2008. 

Why? In short, the Lehman Brothers bankruptcy brought home
the reality that counterparty risk actually mattered in the murky world of
financial derivatives and the now infamous trade known as a Credit Default Swap
(CDS).  The demise of Lehman, in
one fell swoop, changed everything in the opaque world of the CDS, fueling a
cascading contagion of fear between buyers and sellers of all types of
derivative securities. 

Most damaging, the reality of Lehman’s failure brought
global financial markets to a virtual halt by causing banks to fear trading
with each other, essentially draining the oil that lubricates global bank
liquidity.  The second order impact
of Lehman’s failure was to ravage the razor thin balance sheets of CDS
underwriters from AIG on down, requiring massive infusions of government
capital to prevent a post-Lehman domino effect of insolvent financial
institutions around the globe.

KALW 91.7 FM, the local San Francisco National Public Radio station, will be broadcasting "Bailing Out Wall Street", the lively election-eveCommonwealth Club INFORUM panel on which I participated, tomorrow at 7 PM PDT.   In front of a live audience of over 200 people, we shared differing views on the wisdom of the Federal Government's emergency relief and assistance program to the banking and finance industries– commonly tarred as the "Wall Street Bailout".  Our vigorous discussion was fueled by the nature of the panelists, as I joined Dave Callaway, Editor-in-Chief, MarketWatch, Jonathan Berk, Professor, Graduate School of Business, Stanford University, and Maggie Mui, San Francisco Market Regional President, Wells Fargo.  The panel was expertly moderated by Kathleen Pender, Net Worth Columnist, San Francisco Chronicle.

 

The damning New York Times headline, “SEC CONCEDES OVERSIGHT FLAWS FUELED COLLAPSE,” from a September 26th article by Stephen Labaton, will hopefully end up as more than a footnote in the long list of misdeeds by the ’stewards’ of the American economy that have brought American capitalism to the precipice of systemic financial collapse. According to the article, a report by the inspector general of the SEC asserts that “voluntary regulation does not work” and that the SEC’s oversight program for the investment banks “was fundamentally flawed from the beginning.”

The article goes on to state:

The report found that the S.E.C. division that oversees trading and markets had failed to update the rules of the program and was “not fulfilling its obligations.” It said that nearly one-third of the firms under supervision had failed to file the required documents. And it found that the division had not adequately reviewed many of the filings made by other firms. The division’s “failure to carry out the purpose and goals of the broker-dealer risk assessment program hinders the commission’s ability to foresee or respond to weaknesses in the financial markets,” the report said.

We should not gloss over the importance and the far reaching nature of this indictment of the SEC by the SEC’s inspector general. The most fundamental fiduciary duty in business is the Duty of Oversight. Oversight is a theme which binds together the more commonly referred to fiduciary Duties of Care, Loyalty, Confidentiality, and Disclosure. Violators of the fiduciary duties listed above often seek refuge in the Business Judgment Rule and try to to hide behind ’squishy’ judgment call concepts like “good faith” and “honest belief”. But the Business Judgment Rule stands on oversight, and the SEC clearly failed in its duty of oversight of the investment banks. In my view, in addition to the bankers, the regulators themselves should also be held responsible for this crime against America.

Below is a definition of the rule, taken from the white paper, “A Simple Guide to the Basic Responsibilities of VC-Backed Company Directors”, written by the Working Group on Director Accountability and Board Effectiveness:

Business Judgment Rule
Creates a presumption that in making a business decision, the directors of a company acted on an informed
basis, in good faith and in the honest belief that the action taken was in the best interests of the company.
The business judgment rule helps protect a director from personal liability for allegedly bad business
decisions by essentially shifting the burden of proof to a plaintiff alleging that the director did not satisfy
its fiduciary duties. This presumption and the protections afforded by the business judgment rule are lost if the directors involved in the decision are not disinterested, do not make appropriate inquiry prior to
making their decisions, or fail to establish adequate oversight mechanisims.

All corporate directors and persons in positions of accountable oversight responsibility need to commit these rules to memory– and, more importantly, to act on them in the daily course of business.

The word ’scumbag’ should not be in the lexicon of any current or former U.S. President, living or dead.

I was disappointed, but not surprised, to learn that former President Bill Clinton went directly into the gutter to berate Todd Purdum, the Vanity Fair reporter who wrote a thoroughly scathing article about President Clinton’s penchant for excess in the current issue of the magazine. Recognizing that President Clinton threw out the ‘Dignity’ baby with the Lewinsky bath water some years ago, it is still hard for me to believe that a man with Clinton’s vision doesn’t consider himself to remain a steward of America’s image as he defines an unprecedented public role for himself in the election of 2008. Clinton’s instantly infamous ’scumbag interview’ will not soon be forgotten (click here for links).

As much as they are reprehensible and undignified for a former President, Clinton’s cutting remarks are also symptomatic of the American disease and reveal more about the sorry state of this country than they do about Clinton.

As we ask ourselves what it means to be an American and search for something to bind us together as citizens this pivotal election year, we need to recognize that we can only cure the American Malaise of the early 21st century if we pull our country’s image out of the “I want it all, and I want it now” hole that has swallowed former President Clinton and many others in positions of trust and leadership.

President Clinton is speaking at Radio City Music Hall on June 17 in New York as part of The Minds that Move the World Speaker Series.

I was in a cab driving up Avenue of the Americas last Monday morning and saw the famous marquee wrapping around the Radio City Music Hall, announcing ‘Cindy Lauper’, the ‘Indigo Girls’, ‘President Bill Clinton’, and the ‘Steve Miller Band’. My big question is whether, by the time Bill Clinton is scheduled to open for Spinal Tap, will he precede or follow the Puppet Show?