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"Bailing Out Wall Street" Commonwealth Club Panel Broadcast on KALW 91.7 November 11 at 7PM PST

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.

 

Dave Callaway, Maggie Mui, Jonathan Berk, Pascal Levensohn, and Kathleen Pender

Some of the thorny questions we addressed: 

• Will the bailout work and is it really a bailout?
• Did the Treasury's decision to throw Lehman Brothers under the proverbial bus on September 13 light the match for the panic that subsequently routed financial markets?
• What are the current prospects for entrepreneurs and for continuing innovation in Silicon Valley during these recessionary times?
• Are we going to drown in new securities regulations with unintended negative consequences?

Why I am Voting for Barack Obama for President of the United States

I have been a registered Independent voter since 1994.  Like many Americans, I've given more thought to this election than to any previous political contest. Many of us share a deep sense of unease as we witness a degree of instability and see a snowballing lack of confidence in  our country's economic and political institutions that was considered impossible in America. I feel strongly that my vote in 2008 may well be the most important exercise of this civic duty in my life. 

In supporting Barack Obama, like General Colin Powell, I also believe that Senator Obama is a "transformational figure".  I trust Barack Obama's judgment and believe in his ability to successfully lead this country through the dark period that engulfs our national psyche.  I also believe he is sincere in his desire to "do the right thing" for America.  His specific position on eliminating capital gains taxes for start-ups supports long-term investing through innovation and venture capital.  This approach recognizes that there are no quick fixes to our economic problems and that America needs to resume a path toward sustainable long-term economic growth through new job creation.  

In my view, the Washington Post's endorsement of Barack Obama for President on October 17 most closely reflects my own personal opinions.  Below, I have quoted some excerpts from the Post's editorial which capture the essence of my strong support for Barack Obama:

"Mr. Obama is a man of supple intelligence, with a nuanced grasp of complex issues and evident skill at conciliation and consensus-building. At home, we believe, he would respond to the economic crisis with a healthy respect for markets tempered by justified dismay over rising inequality and an understanding of the need for focused regulation. Abroad, the best evidence suggests that he would seek to maintain U.S. leadership and engagement, continue the fight against terrorists, and wage vigorous diplomacy on behalf of U.S. values and interests. Mr. Obama has the potential to become a great president. . . .

A McCain presidency would not equal four more years [of the Bush administration], but outside of his inner circle, Mr. McCain would draw on many of the same policymakers who have brought us to our current state. We believe they have richly earned, and might even benefit from, some years in the political wilderness. . . .

There are two sets of issues that matter most in judging these candidacies. The first has to do with restoring and promoting prosperity and sharing its fruits more evenly in a globalizing era that has suppressed wages and heightened inequality. Here the choice is not a close call. Mr. McCain has little interest in economics and no apparent feel for the topic. His principal proposal, doubling down on the Bush tax cuts, would exacerbate the fiscal wreckage and the inequality simultaneously. Mr. Obama's economic plan contains its share of unaffordable promises, but it pushes more in the direction of fairness and fiscal health. Both men have pledged to tackle climate change. . . .

Mr. Obama also understands that the most important single counter to inequality, and the best way to maintain American competitiveness, is improved education, another subject of only modest interest to Mr. McCain. . . .

A better health-care system also is crucial to bolstering U.S. competitiveness and relieving worker insecurity. Mr. McCain is right to advocate an end to the tax favoritism showed to employer plans. This system works against lower-income people, and Mr. Obama has disparaged the McCain proposal in deceptive ways. But Mr. McCain's health plan doesn't do enough to protect those who cannot afford health insurance. Mr. Obama hopes to steer the country toward universal coverage by charting a course between government mandates and individual choice, though we question whether his plan is affordable or does enough to contain costs. . . .

It is almost impossible to predict what policies will be called for by January, but certainly the country will want in its president a combination of nimbleness and steadfastness -- precisely the qualities Mr. Obama has displayed during the past few weeks. When he might have been scoring political points against the incumbent, he instead responsibly urged fellow Democrats in Congress to back Mr. Bush's financial rescue plan. He has surrounded himself with top-notch, experienced, centrist economic advisers -- perhaps the best warranty that, unlike some past presidents of modest experience, Mr. Obama will not ride into town determined to reinvent every policy wheel. Some have disparaged Mr. Obama as too cool, but his unflappability over the past few weeks -- indeed, over two years of campaigning -- strikes us as exactly what Americans might want in their president at a time of great uncertainty. . . .

...Mr. Obama, as anyone who reads his books can tell, also has a sophisticated understanding of the world and America's place in it. . . .We hope he would navigate between the amoral realism of some in his party and the counterproductive cocksureness of the current administration, especially in its first term. On most policies, such as the need to go after al-Qaeda, check Iran's nuclear ambitions and fight HIV/AIDS abroad, he differs little from Mr. Bush or Mr. McCain. But he promises defter diplomacy and greater commitment to allies. His team overstates the likelihood that either of those can produce dramatically better results, but both are certainly worth trying. . . .

Thanks to the surge that Mr. Obama opposed, it may be feasible to withdraw many troops during his first two years in office. But if it isn't -- and U.S. generals have warned that the hard-won gains of the past 18 months could be lost by a precipitous withdrawal -- we can only hope and assume that Mr. Obama would recognize the strategic importance of success in Iraq and adjust his plans. . . .

We also can only hope that the alarming anti-trade rhetoric we have heard from Mr. Obama during the campaign would give way to the understanding of the benefits of trade reflected in his writings. A silver lining of the financial crisis may be the flexibility it gives Mr. Obama to override some of the interest groups and members of Congress in his own party who oppose open trade, as well as to pursue the entitlement reform that he surely understands is needed. . . .

… the stress of a campaign can reveal some essential truths, and the picture of Mr. McCain that emerged this year is far from reassuring. To pass his party's tax-cut litmus test, he jettisoned his commitment to balanced budgets. He hasn't come up with a coherent agenda, and at times he has seemed rash and impulsive. And we find no way to square his professed passion for America's national security with his choice of a running mate who, no matter what her other strengths, is not prepared to be commander in chief. . . .

… Mr. Obama's temperament is unlike anything we've seen on the national stage in many years. He is deliberate but not indecisive; eloquent but a master of substance and detail; preternaturally confident but eager to hear opposing points of view. He has inspired millions of voters of diverse ages and races, no small thing in our often divided and cynical country. We think he is the right man for a perilous moment."

It's Time for America to Get Back Into the Storage Business

I used to be in the moving business. Eighteen years ago, after working for seven years in the risk arbitrage business, one of the many 'moving' businesses of Wall Street, I left New York to come to San Francisco in order to get into the 'storage' business. America's strong economic foundations are rooted in multi-year business building and long-term risk taking. We are now bearing witness to the sour fruits of moving securities around like meaningless scraps of paper for short-term profit and the securitization of risk into a daisy chain of the unknown and the unmanageable.

Over the past 20 years, the average holding period for stocks has declined from 2+years to just 3 months as of earlier this year. A root cause of the relentless volatility in the equity, commodity, and debt indexes is the steady erosion of long term thinking in investing, not only in this country, but all over the world. How many public company CEOs have lamented the wholly inconsistent demands of managing quarterly earnings expectations for fickle institutional investors while maintaining a consistent long term operating strategy to maximize shareholder value?

It's time for a global re-boot of the investor mindset so that people can start investing responsibly-- there are many reasons why Warren Buffett is such a successful investor, and long-term thinking is one of them.

I can thank Brett Haire, my boss at First Boston during the 1980's, for inspiring me to leave Wall Street and risk arbitrage behind. I remember once asking Brett for permission to accumulate a long-term, unhedged position in the spin-out of a company that we were researching for investment. Brett looked at me, incredulous, and said, "Pascal, we're in the moving business here, not in the storage business." At that moment I realized that I did not want to be in the moving business and initiated the career path that led me to become a venture capitalist.

America needs to get back in the storage business at many levels and actively promote the entrepreneurial spirit that built this country one brick at a time at the same time that we re-build our securities markets. Let's learn from our mistakes.

The SEC's Colossal Failure of Oversight-- Isn't This a Violation of the Business Judgment Rule?

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.

Building Alliances Between Venture Capitalists and Corporations- A Consistent Imperative

Building alliances between venture capitalists and corporations has never been more important than in today's extraordinarily volatile capital markets. We may be looking at a Brave New World in finance when markets re-equilibrate (and eventually they will), but knowing how to partner with large corporations-- who are both strategic business development partners as well as potential strategic acquirers of emerging companies-- will remain a constant for venture capitalists.

The National Venture Capital Association (NVCA) kicks off a new corporate webcast series on Friday, October 17, 2008 with a special complimentary webcast featuring Claudia Fan Munce, Managing Director, IBM Venture Capital Group, and Dan'l Lewin, Corporate Vice President, Microsoft Corporation, who have generously sponsored Partnerships for Prosperity: Building Alliances Between Venture Capitalists and Corporations.

I will be moderating the webcast, and we will discuss some of the challenges and best practices that venture capitalists should follow in order to optimize their relationships with IBM and Microsoft. The models that IBM and Microsoft follow are by no means identical, as they are influenced by different corporate cultures and business priorities. Claudia and Dan'l will share helpful tips on how to best work with their organizations as well as more general insights on successful corporate partnering strategies for VCs.

The new webcast series will follow this special launch event with other relevant content featuring global corporate leaders whose organizations seek to partner with venture-backed companies.

This webcast is complimentary to all NVCA members-- to register CLICK HERE TO LINK TO THE NVCA WEBSITE

Best Practices for VC Directors Involved in M&A Transactions in Today’s Challenging Environment

Dave Barry, Managing Editor of Dow Jones Financial Information Services, has invited me to join a panel of M&A experts on September 26 to discuss best practices and some of the key challenges currently facing VC-backed company boards involved in mergers and acquisitions. Joining me on the panel are Jeff Laborde, Vice President in Goldman Sachs’ Technology Investment Banking Group, who represented our portfolio company Rapt earlier this year in Rapt’s acquisition by Microsoft. John Peters, former CEO of our portfolio company Reconnex, which McAfee acquired recently, will also be a panelist. Ron Star of Howard Rice joins us to bring the legal perspective to this webinar.

Any venture capitalist involved in or considering an M&A transaction knows that the dynamics of acquisitions in today’s market have shifted such that there is an asymmetric negotiating advantage favoring large corporations (greater resources, always able to ‘wait until next quarter’). Levensohn Venture Partners completed three acquisitions of our portfolio companies so far this year, so I have a very current perspective on the challenges and opportunities of the technology M&A market.

This webinar should be both lively and enlightening as my fellow panelists bring deep experience and best practices knowledge to the discussion. Today, and until we see a robust IPO market re-emerge for growth companies with market capitalizations below $1 billion, M&A is the only way to generate liquidity for most venture portfolios. We will discuss the challenges associated with getting deals done and recommend best practices to optimize outcomes for emerging companies.

To register online for Best Practices for Board Members Priming VC-Backed Companies For M&A
on September 26, 2008 go to http://events.dowjones.com/webinars/20080926.html

Aspen Ideas Festival: Peter Hirshberg Interviews Jim Steyer About How Children Must Learn Responsible Digital Citizenship on the Web

Technorati's Chairman,Peter Hirshberg, is on the move at the Aspen Ideas Festival-- his video blog provides an excellent forum for impromptu commentary from influential thought leaders in various fields who are attending the conference (link below). Globally, children are developing differently as a result of the pervasive influence of the Internet in their social relations. Jim Steyer, CEO of Common Sense Media, explains why it is imperative to define 'rules of the road' for every kid on the Internet and the role that his organization plays as a thought leader in this area. According to Steyer, "this is a huge issue of ethics and responsibility . ... kids get this, parents are clueless but know they should." Despite many challenges when it comes to media content regulation, Steyer is optimistic about the future. This important discussion that ties directly into the that we discussed at our Socrates Society seminar last week on issues of the Media and our Conflicting Values. to watch the video: click on the following link:

http://fora.tv/myfora/PeterHirshberg/clip/127/Aspen_Ideas_Festival_Interview_Jim_Steyer

Aspen Ideas: Justice Sandra Day O'Connor Challenges Game Developers to Bring Civics in Government to the Web

How do we get young people in America, particularly children in the 7th, 8th, and 9th grades, to learn about Civics in Government? Justice Sandra Day O'Connor has been working with the MacArthur Foundation, Georgetown University, and Arizona State University to develop engaging game content that will teach young people the importance of Civics and get them to understand how issues are actually decided in the US court system.

This video clip from the Aspen Ideas Festival really resonates with me, as it highlights the ignorance of our civic process among young Americans, a topic which I have written about in my blog series Democracy in America Revisited in the context of America's political identity. Justice O'Connor poses her questions to Eric Brown of Impact Games and Douglas Thomas, also a game developer. Brown is the co-creator of the game PeaceMaker-- coincidentally I just had breakfast in New York last week with his partner, Asi Burak and have a copy of the game that I am planning to play this weekend.

Justice O'Connor asks, 'do we learn better by doing than by reading about something in a book'? Watch the video for the answers and for some of the challenges facing game developers who want to create entertaining content that also teaches about civic duty and citizenship.

Irshad Manji from the Aspen Ideas Festival on Ijtihad and Interfaith Marriage in Islam

Irshad Manji comments on the positive power of Ijtihad, the ancient tradition of critical thinking in Islam, and the importance of contemporary Muslim imams in justifying Muslim interfaith marriage.

Re-Defining the Public Interest in the Media Torrent of the Internet

Media and Our Conflicting Values: Day 3

On our last day of this Socrates Seminar, we jumped squarely into the discussion of the Internet that we all wanted to have since Day 1.

First, we acknowledged the disruptive transformation of the media away from its historical one-to-many controlled distribution model, which was largely restricted to professionally produced print, radio, and linear video broadcasting content. We discussed how the Internet’s broadband infrastructure has supported the development of a global multi-media content stream now defined by many content creators, both professionals and amateurs. Today we are inundated by countless streams of data broadcast in a free flow of information that is truly a torrent of bits.

Research has shown convincingly that the attention span of Americans has shortened substantially over the past several decades and that the rate of change in this direction continues to accelerate.
Are we doomed to being Information Snackers, a nation of dilettantes distinguished only in being a mile wide and an inch deep in our thinking? Does this trend raise troubling questions and pose risks to the integrity of our democratic society?

I think so. Why?

First, because we are drowning in choice. While America’s obsession with Freedom is empowering, too much choice is debilitating. We have too many choices in the Internet Age of mass customization in digital media. While people like to speak of their love of choices, in fact, people hate choices. Notice the incredible power of global brands today after the initial view that the dawn of the Internet rendered traditional brands worthless.

What are some of the nasty implications for democracies overwhelmed by media choices? In my view, the hyper abundance of choice makes individuals increasingly susceptible to manipulation by groups that have an agenda—especially an agenda associated with power and manipulation of masses of people (does anyone doubt that Al Qaeda has developed a sophisticated web presence, for example?)

The web has massively reduced the costs of coordination among large groups and truly revolutionized social collaboration on a large scale—for a positive example, consider the fundraising powerhouse of the Obama campaign and the massive empowerment and inclusion in the democratic political process of otherwise alienated and disenfranchised groups of American society.

There are many good things associated with these paradigmatic changes in the American political process enabled by the Internet borne media revolution.

But we should also consider the corner cases, the potential for abuse, for manipulation, for the propagation of lies through the digital media. We need to remember the potential for Tyranny of the Majority in a digital media search construct that determines what rises to the top by its popularity.

As Newton Minow, Chairman of the FCC said in his historic address to the National Association of Broadcasters in 1961, “some say the public interest is merely what interests the public. I disagree. … broadcasting, to serve the public interest, must have a soul and a conscience, a burning desire to excel, as well as to sell; the urge to build the character, citizenship and intellectual stature of people, as well as to expand the gross national product.” Promoting citizenship! A novel concept, and one that I have written about extensively in this blog in the context of the Democracy in America Revisited Series and Professor Michael Sandel.

In my view, being right and doing the right thing should have nothing to do with what is popular and everything to do with the responsible exercise of leadership (something that is in very short supply in America today). Having technology drive people to the most popular result only accelerates the mediocrity that Alexis de Toqueville foresaw for American democracy.

We should not let our passion to uphold the First Amendment’s guarantee of freedom of speech trump the obligation that we have as a democratic society to keep our citizens informed of objective facts so that they can responsibly exercise their civic responsibilities. To be clear, I do not see this statement as being unsupportive of the First Amendment in any way.

Unfortunately, our discussion on Day 3 did not address a redefinition of the Public Interest.

Domain expertise, an objective mastery of the facts and the nuances associated with a specific body of knowledge, requires more than a passing acquaintance with that domain (would you go to a doctor for surgery who is not truly an expert in his/her field?). In my view, the knowledge crisis facing our next generation will be rooted in the misconception that surface knowledge is sufficient to impart expertise.
We are certainly still in our infancy in this new realm of digital media, but it is abundantly clear that technology has left our regulatory institutions in the dust. While I am a strong believer in the positive power of the market, I fear for those members of our society who will be left behind, for the voices that will not be heard.

The Government is a steward of the Public Interest, and that Public Interest will, of necessity, be redefined when we face a crisis. There needs to be a cool hand, a slow, deliberative process, that gets us to the right answer. Unfortunately, the history of regulation in America shows us that it is most often reactive and likely to generate severe, negative unintended consequences (Sarbanes Oxley, for example).

While I greatly enjoyed our Socratic discussion, I left the seminar continuing to ask myself, what will force this question, and how great a cost will our society bear along the way?