Tom Glocer's Blog

Newt vs. Mitt -- Voodoo Economics meets Vulture Capitalism

2012-01-16T20:27:00Z

I find it amusing that the increasingly desperate Romney-chasers among the remaining US Republican presidential candidates are working overtime to attack the front-runner for his leadership of Bain Capital in the 1980s and 1990s. While not a blind supporter of the private equity industry, I actually find Mitt's business experience one of his more attractive attributes.

There is a serious debate to be had about the social utility of the private equity business, and the tax incentives which encourage riskier PE capital structures, in particular. However, the attacks unleashed by Newt Gingrich, Rick Perry and others have eschewed such policy-based criticism in favor of a more populist, anti-free market attack. This is ironic given the Hayek-style belief in free market capitalism that has dominated Republican politics since the Reagan revolution of the 1980s. The core of the Gingrich/Perry attack is that private equity is all about firing American workers to line the pockets of "vulture capitalist" financiers like Mitt. While the job destruction, or at least job export, criticism merits critical analysis (not likely in this election cycle), the data I have seen suggest that for every job eliminated, PE-backed companies create at least as many new jobs — and not menial ones. This is "creative destruction" as envisioned by Joseph Schumpeter in its most concentrated form.

What private equity firms (and for that matter, all good investors) do pursue is the competitiveness and efficiency of their portfolio companies. This often includes reducing labor costs as a percentage of total revenues, but as growth is achieved new jobs are also created. Indeed the central fallacy of the politicization of the PE debate is the insinuation that respectable firms like Bain somehow seek to ruin and bankrupt companies for the sheer pleasure and greed of the sport. This has not been my experience. What these firms are organized to deliver for their pension fund and other institutional investors as well as for their operating partners is the maximum return on investment achievable at an acceptable level of risk (more on this below). This core free market goal results in an efficient allocation of capital and labor – often more efficient than the internal allocation mechanisms that operate within large corporations. Thus a private equity buyout or significant equity participation often acts as a catalyst or concentrating force, enhancing the economic performance of the enterprise.

Now, all is not perfect in the PE universe. There are potential negative externalities – in particular the allocation of risks and rewards (abetted by US tax policy) that tends to favor greater risk taking and provide less margin for error in down markets. In brief, private equity professionals typically have more to gain than lose financially from increasing the variability of returns from a given investment. Let's see why. First, as with most corporations, PE-backed companies benefit from the deductibility of interest payments on indebtedness — this encourages more leveraged structures by lowering the cost of debt versus equity financing. Second, income earned by PE sponsors in the form of a "carried interest" on the overall gains of their funds (typically 20% of total gains) is currently taxed at favorable capital gains not at ordinary income rates. While there has been a raging debate as to why US tax policy should favor this form of employment income over wages, my goal here is limited to noting that this favorable tax treatment tends to amplify the incentive already created by the asymmetrical carried interest reward mechanism to seek the highest return on equity – typically, but not exclusively, by taking on the maximum debt lenders are prepared to commit. When a portfolio company goes bust, the PE sponsors lose their often substantial personal invested capital in the deal alongside their limited partner investors, and they earn no carry on that investment; however, they do not pay a 20% "negative" carry to their investors. At most they risk having to give back the positive carry earned on prior winning investments and they potentially incur a repetitional hit which can hinder future fundraising. However, when portfolio companies succeed and the overall fund achieves positive returns, the sponsors earn their substantial carried interest (even taxed at a favorable rate as we have seen above). This asymmetrical reward structure resembles a call option on the upside of the investment portfolio, and classical options pricing model tells us that the holder of an option benefits from increasing the variability of the returns on the underlying investment (I.e., the value of an equity call option increases as the beta of the underlying common stock rises).

I delve into this somewhat esoteric detail only to point out that there is a reasoned economic criticism that can be leveled against private equity. Namely, that it tends to increase the riskiness of the economy by encouraging the substitution of debt for equity as a result of the asymmetric reward structure and tax advantages afforded this form of ownership. However, the analysis must not stop there, as private equity also enhances the efficiency of its portfolio companies and often provides badly needed growth capital when other more risk averse investors are unwilling to fund.

In withdrawing today from the race for the Republican nomination Jon Huntsman declared that the party must return to being the "party of ideas." All I can add is that this would be a welcome change.

An Existential Holiday

2012-01-03T03:54:00Z

I write at the end of a wonderful two week holiday with the family. I would be interested to hear from the readers of this blog as to whether any of you have ever had the following thought. When a long vacation begins I often feel like time has slowed down and that I have a seemingly limitless number of pleasure-filled days ahead of me. However, lurking behind, the fore-knowledge is already there that this holiday, like the others before it, will come to an end. As I pass the mid-point of the trip, time seems to accelerate, and I soon find myself on another airplane home. Is this not a metaphor for life itself?

I recognize how fortunate I am to be able to take a vacation with my family, and any sadness I feel at trip's end is tempered by a true sense of gratitude and privilege that we can afford such luxuries at a time when all too many parents struggle to keep a job and a home and to provide for their children. However, because up to now I have had limited vacation time away from a demanding job, the parallel between the length of a vacation and the span of a lifetime is an interesting one to me.

I see through my children's eyes and recall my own feeling that time seemed to move very slowly through life's first phases. However, little by little as responsibilities multiplied and those small aches of middle-age set in, the passage of time seemed to accelerate. The French Existentialists understood this and wrote in fiction and essay form of the way in which man's knowledge of his mortality (and the arbitrariness and absurdity of this condition) changed the nature of the arc of life toward that end.

The goal I have always pursued in my life is not to pretend that I have an infinite time on earth (or on a far lesser scale, that a nice holiday will last forever), but to not let the certainty of an ending compromise the quality of the experience in the meantime. Viewed in this way, endings are not to be feared, but rather add to the intensity of, and appreciation for, the time we have.

Debt vs. Equity -- The Ossification of Economics and Politics

2011-12-10T16:09:00Z

Debt and equity are common terms from the financial world, but I argue below we should begin thinking of our politics in this way as well. Debt is commonly defined as an obligation (usually to repay money) owed by one party to another. As such its terms are usually fixed, establishing a moral and legal obligation to repay a sum certain. Conceptually, debt permits the borrower to anticipate future purchasing power in the present before it has actually been earned. Equity by contrast, is a more free-form ownership claim on the residual value of an enterprise or asset. If the debts of a company are too great, the company may go into default and breach its debt covenants; however, the terms of its equity are not violated per se; the equity is just not worth anything.

As I have been arguing for several years in this blog and elsewhere, the developed world has taken on way too much debt — too much current spending that has not yet been truly earned and will need to be funded somehow by our children. Our politics have been similarly ossified. The so-called Super Committee in the Unites States was given the mandate by Congress to find at least $1.2 trillion in savings by the Thanksgiving recess, or mandatory budget cuts would automatically go into effect the following year. While painful but viable budget plans are available — most notably the $4.2 trillion plan that Erskine Bowles and Alan Simpson led — neither the Not-so Super Committee nor the greater Congress appears able to achieve any form of sensible compromise. In other words, all the positions taken are debt-like in their rigidity.

The clearest example of this is the "No New Taxes" pledge made by many House Republicans and the similarly inviolate commitment made by many Democrats not to limit entitlement programs like Social Security or Medicare in any way. This is despite the fact that federal taxes are at their lowest levels in a generation, on the one hand, and that we are living longer (and therefore consuming more healthcare and pension benefits), on the other. These intransgent political positions take on the nature of debt obligations -- even the campaign language speaks of "No Tax Pledges."

The public policy debate on non-economic issues is similarly ossified. The erudite lawyer and campaigner for the common good, Phil Howard, has argued that we have created so many legal rights (think debt obligations) that public officials are no longer able to act in the interest of the greatest common good (think pubic equity). Like a borrower hemmed in by its debts, the current public servant, school principal or judge has limited discretion to pursue the greater public good.

Europe is, of course, not immune to this phenomenon. I write this piece airborne (as usual) en route back from Brussels where the leaders of the Eurozone have once again failed to tackle the fundamental economic problems facing their 27 member states. A crisis has been brewing for years in Europe because the core members of the common currency have locked themselves into a one size fits none currency; taken on way too much sovereign debt (especially at the Southern periphery); and refused to countenance any form of debt relief or debt-for-equity swap. This is just the "balance sheet" problem. In addition, rigid labor, trade and other rules have sapped economic growth in the least flexible markets and not provided the ability to afford the level of ongoing social benefits (think debt-like present consumption entitlements) that politicians have promised for years.

Asia ex-Japan is the obvious exception to the debt straight jacket of the West, and indeed much of the sovereign debt that does not sit recursively on the books of Western banks, is owed to China and other new powers amassing huge foreign reserves. While certainly better off on a relative basis, these emerging powers are not "decoupled" from the indebted economies, and with rising wealth they are also feeling the pressure to begin social spending programs on health, education and pensions.

To me there is only one long-term solution as opposed to the serial kicking of the can down the road so beloved of politicians (i.e., keep spending and let the person elected next term solve the problem). We need to return some equity-like flexibility to the system; to make more of what is now fixed, variable; and to create the conditions for true economic growth (and concomitant job creation) that ultimately lifts standards of living. So, when you hear the word "debt," think rigidity, fixed entitlement and mortgaging our children's future. And, when you hear "equity," think freedom, growth and allowing our children to enjoy the fruits of their own labor. I think Mariana and Walter deserve no less.

The Government We Deserve

2011-10-15T23:01:00Z

I’ve been thinking a lot lately about the following issue: Why does it seem so difficult to turn sound economic policy into political action (i.e., results) in the United States and other established democracies? There are many versions of this complaint. So, for example, why do American Congressmen insist on playing an adult variant of the game “Chicken” when addressing the national debt ceiling? Why has the EU been unable to get ahead of the markets in dealing with the Greek crisis? Why has such a rich and productive nation as Japan been unable to rekindle growth across two decades?

I have come to an uncomfortable conclusion. Democracy works a bit too well these days and we are receiving the government we deserve. For me, this is linked to the parallel yet related phenomenon of why quality journalism, at least in the form of broadsheet newspapers and broadcast news, has been drowned in a murky sea of tabloid celebrity worship and “reality” television. Amid Dancing with the Stars, Celebrity Apprentice and The Bachelor is it any wonder that democracies are being starved of the intellectual oxygen needed to create an informed electorate. It is not that serious journalism, including I would argue that produced at Reuters News (but also at other organizations and by individual bloggers) does not exist, but that these are being narrowcast to a small elite. We get the government we deserve in part because we get the media we deserve.

In The Politics Aristotle wrote that he did not fear for the State, because the great and the good would always come forward to govern since they could not abide to be led by lesser men, In our more selfish contemporary civilization, I don’t believe we can count on this noble elitism, nor should we. However, we are then faced with the responsibility as citizens to inform ourselves sufficiently on the serious and complex matters of public policy so that we can exercise the vote effectively. Thus, we have a choice: Revel in our couch potato ignorance and allow an educated elite, directly or indirectly, to govern. Or educate ourselves sufficiently to make wise political choices — principally by electing the right candidates for the right reasons.

Why does it appear that things have gotten suddenly worse? Why has the political paralysis gotten so bad of late in established democracies that serious liberal commentators sound downright wistful about the ability of the Chinese State to turn policy into action? I think there are two main reasons. First, the longer we have allowed problems to build up, the longer-term the solutions must be. This is always a challenge in a democracy as we must rely on our elected representatives to adopt policies which are likely to only yield returns beyond the next election. This is even more the case when, as today, current term sacrifices are required only to restore reasonable fiscal balance in the future. Second, the amazing advances in technology over the past two decades (principally, the internet) have further shortened the feedback loop and encouraged politicians to respond to shorter and shorter term influences. Finally, while populism is hardly a new phenomenon among politicians, the political elite (think UK civil service “mandarins”; US Senators and Cabinet officials: etc) is losing its ability to influence policy out of the glare of the “always on,” You Tube digital media.

Returning to the role of the media, it is fashionable to blame the mogul-owners for pandering to the lowest common denominator, and thereby intentionally leading a downward spiral in public discourse. There may well be some truth to this, and scandals such as phone-hacking in the UK add support to this argument. However, I believe this unduly absolves us all of a collective and individual responsibilty we should have as citizens of the modern democracy. By and large, media companies are pursuing a profit motive (especially when publicly owned), and thus are publishing and broadcasting the material they believe will sell to the broadest audience. This is particularly true in an advertising supported model. As such, these companies are really holding a giant mirror up to the public at large. If we don’t like what we see in the mirror, we should each do something about it; arguing that the person holding the mirror is aiming it downwards is an abdication of personal responsibility.

There is only one solution for better government: Demand the information needed to evaluate complex policy decisions and vote the pandering demagogues who only play sound bite politics out of office. We deserve no less.

Let's Blame the Instant Messenger

2011-10-01T01:05:00Z

Over the summer two seemingly unrelated developments caught my eye. First, a collection of Continental European officials urged their governments to ban the short selling of securities. Second, a member of Parliament called for the ban of Twitter and other social media to combat violent street protests. Am I the only one who detects a Luddite link?

I am no fan of falling securities prices (especially the stock of my company); however, banning short selling will not stop market forces from reaching a new equilibrium valuation. If the goal is to protect against run-away algorithms or short-term order imbalances, then a sensible policy response is to introduce market circuit breakers which halt trading in a class of securities or single instrument in the event pre-established boundary limits are reached.

As for Twitter, the case is even stronger. Attempting to ban communications facilities just because they are new and potentially "scary" to neophytes is a similarly blunderbuss approach. Should we ban wireline telephony because it can be used to order an assassination? In the 19th Century a group of English textile workers who came to be know as the Luddites sought to ban the introduction of new wide frame textile looms because they threatened the old artisanal ways of weaving. Perhaps the world would be a more bucolic and leisure-filed place had they prevailed, but we would also not have benefitted from 200 years of scientific advances in areas such as vaccines and transportation.

I do not mean to suggest that no regulatory limits on either technology or financial markets are ever appropriate. Sensible capital requirements, disclosure rules and circuit breakers are well-established ways in which to channel capital markets, and rules which ban texting while driving and wireless telephony over military frequencies are also in the public interest. However, had Louis XIV outlawed the guillotine I doubt the French Revolution would have been any less bloody [Frederic points out below I should have cited Louis XVI instead].

There are enough real policy challenges to be tackled, let's not invent fanciful new ones.

The Good Old Days

2011-09-10T02:34:00Z

Apologies for not having posted in a while -- it's been a busy summer. I did manage to spend time with the family, play some decent tennis, read a couple of good books (Feast of the Goat by Vargas Llosa and Cutting for Stone by Verghese) and watch the occasional film.

One of these films, Woody Allen's Midnight in Paris, got me thinking beyond the pretty images of Paris. In the movie, the principal characters look beyond the considerable charms of contemporary Paris to idealize an earlier "Golden Age" -- either Paris in the 1920s Jazz Era or the 1890s Belle Epoque. They lament that they did not live in their chosen era.

It is, of course, not unusual for us to romanticize an earlier, seemingly superior period. Just ask your parents. In this perfect past, kids were better dressed and better behaved, contemporary music did not sound like screaming Banshees and adults could make it through a meal without tweeting, texting or updating their online status.

These ruminations on time and place reminded me of my first day in law school, almost 30 years ago to the day. The then Dean, Harry Wellington, welcomed my new classmates and I to Yale Law School with a talk which ranged from the usual orientation logistics (where do we eat our meals; where do we buy our West textbooks) to an Allen-like meditation on the passing of a Golden Age.

Dean Wellington told us that very soon after we came to realize that we had not, in fact, been admitted to this prestigious law school by mistake, we would quickly move on to bemoan our fate at having missed the Golden Age at Yale. Where had the former Lions of the Law all gone? Where were the Grant Gilmores, Alex Bickels and Boris Bittkers? The truth he said, was that each generation of students failed to appreciate that the young professors teaching their classes would one day be similarly revered. The class of 2014 starting classes this week will no doubt lament that they did not have the chance to study with Guido Calabresi, Harold Koh or Geoff Hazard.

In our crisis-laden times, we would all do well to remember the blessings of our present Golden Age. I have been writing for some time about the dangers of the over-indebted, no growth western economies, but I believe we are in only the early years of an Information Revolution which will outpace the Industrial Revolution. The threat of terrorism and regional violence remains real; however, we have lived more than half a century without nuclear or world war. Finally, we have global warming, depleting natural resources and super bugs, but infant mortality and life expectancy have improved in most parts of the world, and we are poised for scientific breakthroughs in green energy and the fight against cancer.

These truly are the good old days.

R.I.P Notorious B.I.G

2011-06-30T00:41:00Z

As regular readers of this blog are only too well aware, I am a passionate promoter of technology and internet-based businesses. However, there is at least one dimension in which the elephantine memory of the internet can be a nuisance -- incorrect information, once loaded into databasQes or just freely available to search engines, is difficult to revise. Protecting privacy is another and related dimension, but I will save that for another day.

Many years ago, a particularly humorous friend in the music business decided to tell a journalist that I had a secret talent for rap, and that I enjoyed nothing more than to have a microphone thrust upon me in any large group setting so that I could show-off my talent.

America Has Talent --- NOT.

I confess that I do like rap music, but only when performed by professionals. While speeding around Central Park on my Specialized Roubaix S-Works (that's a bicycle if you must ask), shamelessly wearing Team Thomson Reuters Lycra in orange and grey, I often listen to a mix of Ludacris, Eminem and Jay-Z. My 13 year-old daughter tells me this is the semi-modern equivalent of listening to Frank Sinatra and Lawrence Welk (generations in music having sped-up on internet time as much as hard disk drives and news aggregators), but I find the rhythms still get me up the 110th Street hill on lap 3 or 4. I do harbor some residual concern about the relentlessly misogynist and gun-obsessed lyrics, but I don't think my mom was crazy about Purple Haze, Brown Sugar or Casey Jones either.

The point I was trying to make is that information, right or wrong, once resident in the cloud is very difficult to correct. I was reminded of this recently when a prominent New York civic leader came to see me and asked me whether I was "keeping-up" with my rapping. I knew immediately where her office had done its research Some years ago, I had another embarrassing moment when, at the end of a town hall meeting at our Bangkok software development center, a couple of over-eager young engineers handed me a microphone and encouraged me to end the meeting with one of my "hallmark" raps. Never one to disappoint or offend local custom, I managed to mutter my way through some rhyming couplets, but The Notorious B.I.G. did not roll over in his grave in appreciation.

So, when like every other uncool parent, I advise my 11 and 13 year-olds not to post items on the internet that would embarrass them one day during their Senate confirmation hearings, I know of what I speak. Leave that job to your friends.

English Football, President Sarkozy and the Arab Spring

2011-06-04T21:47:00Z

I gave a talk at a lunch last week in London at which I was asked to speak about "Social Media and Revolution." While this is a very worthy and interesting topic to me, I chose to broaden (but I hope not trivialize) the topic by making a connection between the role of social media in the Arab Spring and the status of super injunctions against publication in the UK.

The role of internet and related technologies in the civil uprisings that continue to roil the Middle East have been well documented, including in this blog (see Internet Freedom Finds a Fertile Crescent). Where once a coup could be achieved or blocked by securing the palace and the radio station, today much of the world carries an even more powerful broadcast device in the form of an internet-enabled smart phone. What is perhaps less clear is the relationship between the Green Revolution and Englsih football.

First, a bit of background is needed. Under Englsih law it has been possible for some time for individuals to bring a court action to obtain an inunction (a form of legal order) barring the publication in any form of information which the petitioner has legal grounds to keep private. The resulting legal order is so powerful, barring even the mention that a court order has been obtained, that it is commonly referred to as a "super-injunction." In fact, there is nothing common about this legal process as the significant expense required (£60,000+) puts it out of the reach of most everyone other than the celebrities, including footballers, who typically apply for one.

Now, to return to the connection to social media-assisted revolution, while the events of the Arab Spring were unfolding, the blogosphere and the Twitterverse began to fill with posts and tweets naming a certain player for Manchester United and exposing a marital affair, the existence of which does not appear in doubt. The tricky bit is that all the while, the so-called mainstream press and broadcasters have been barred by super injunction from reporting these facts. Under US law, such "prior restraint" would be unimaginable save in cases of absolute national security, but current English law provides a broader right of privacy and libel protection.

While legal scholars on both sides of the Atlantic debate the finer jurisprudential points of these laws, I write to make a different point: Technology has moved on and regardless of legal doctrine there is no longer any practical means of enforcement. Much as the music business learned the hard way that it is very difficult to prosecute millions of illegal file sharers (as opposed to the services they used), so English judges are discovering that while they can stop on-shore publications like the FT and BBC from publishing, it is an order of magnitude more difficult to block 75,000 tweets from the far corners of the world.

The connection to the Arab Spring is, I hope, now clear. The internet, while it certainly can have a dark side and be applied to evil purposes, is a giant distributed transparency machine, which over time, tends to promote democracy. What President Mubarak could not shut down in Egypt, so English judges will fail in bending to their gag orders.

What is needed is not a better super-injunction for the wealthy, but a better global framework for all citizens which balances a legitimate desire for privacy and protection from online evils such as child pornography and malware with a healthy bias in favor of maximum political freedom and freedom of expression. President Sarkozy made a similar point at last week's e-G8 conference in Paris, but most commentators preferred to stick to the safe shibboleths of government leaders who wish to regulate everything and internet leaders who wish nothing to be regulated.

As a father and, I hope, a responsible leader of a digital business, I reject both extremes, but note the great practical difficulty in achieving the right balance - especially as the internet has blurred and superseded the application of national laws. So, for example, when a reader based in France reads a piece about an English footballer written by a blogger from Brazil who posted the article using a service hosted in the Amazon cloud somewhere in the US, whose law applies? This is not some theoretical law school exam question, but the everyday reality of the modern media business.

Governments everywhere should tread very lightly in this new global domain and resist the temptation to believe that their own national norms and beliefs apply universally. Their guiding principle, like Hippocrates, should be to "do no harm." They should also recognize that not all societal evils nor medical conditions are susceptible to a quick cure. Rather a few embarrassed English footballers than a nation deprived of the freedom of speech.

Trump's White House Hotel and Casino

2011-05-08T02:31:00Z

I made the annual Amtrak trek to attend the White House Correspondents Dinner – an intimate affair in which the President and the First Lady, along with thousands of other guests fête the journalists who cover the White House. There are some worthy scholarships and awards bestowed, but everyone goes (i) to see and be seen, (ii) to attend the pre- and post-dinner parties and (iii) to hear the President, and sometimes even the invited comedian, crack jokes.

Each year in the days leading up to the dinner, I question why I want to spend another Saturday night away from the kids, yet come Sunday morning I am up for another year (not to mention a Bloody Mary chaser). This year was particularly good; not only because it is an honor and a treat to be included, but because this President happens to be very funny. This is not a political view (although I am conscious of blurring what I find funny with what I agree with politically), but a comedic one, based on how well the President delivers his lines and even, quite endearingly, laughs at this own jokes.

This year, the “official” comedian was Seth Myers of Saturday Night fame, and he was also very funny. The one theme that linked both the President’s and Myers’ routines was an absolute Navy Seal attack on Donald Trump. Now normally, my respect for minority groups like the follicly-challenged would cause me to rush to the defense of the Donald, but, in truth, his behavior has been absolutely indefensible — especially his recent embrace of the “birther” attack on President Obama. This surely surpasses all his prior comb-over antics, including the “Tour de Trump” bike race and his thrice-bankrupted Trump casino properties in Atlantic City.

Here is what the President had to say Saturday night:

“Donald Trump is here tonight. Now, I know that he’s taken some flak lately, but no one is happier, no one is prouder to put this birth certificate matter to rest than the Donald. And that’s because he can finally get back to focusing on the issues that matter — like, did we fake the moon landing? What really happened in Roswell? And where are Biggie and Tupac? “

Seth Myers was no less on target:

“And then of course there's Donald Trump. Donald Trump has been saying he will run for President as a Republican, which is surprising since I just assumed he was running as a joke. Donald Trump often appears on Fox, which is ironic because a Fox often appears on Donald Trump's head. If you're at the Washington Post table with Trump and you can't finish your entree, don't worry - the Fox will eat it... Donald Trump said recently he has a great relationship with the blacks, but unless the blacks are a family of white people I bet he is mistaken. I like that Trump is filthy rich, but nobody told his accent. His whole life is models and gold leaf and marble columns, but he still sounds like a know-it-all down at the OTB.”

Now the one thing most Democrats and Republicans can agree upon is that the Donald is unelectable, but I have to admit, the comedian in me relishes the thought of four years of Trump Presidential press conferences – provided I can watch them from whatever other country admits me as a citizen.

A Trip Down the Amazon

2011-04-16T22:30:00Z

I was reminded recently that I travel a bit excessively for a non-pilot when my chosen home remedy for a blocked ear and sinus infection was to plunge 30,000 feet in a couple of minutes.

Let me explain. On the back of what had already been a pretty intense travel start to the year (see some of my previous posts on Japan and the Middle East), I had committed to help launch our new killer legal research service, Revista Online, in my beloved Brazil. This was always going to be a short two-day trip to Sao Paulo, then made shorter by the need to attend the funeral of a wonderful man in Toronto on what was to be the second day of the trip.

The absurd turned into the ridiculous when the plane I was taking to Sao Paulo lost its cabin pressure, necessitating the rapid decent. Now, it must be said, I never enjoy awaking at 4:40AM to the sight of those little orange oxygen masks deploying over my head while traveling somewhere over the Amazon. However, on this occasion, the unpleasant feeling was exacerbated by the pilot's need to rapidly descend 30,000 feet to avoid all of us blacking out when the oxygen ran out - not a recognized homeopathic cure for blocked ears.

What followed, fortunately, was the usual boring story of someone else's travel delas (hours waiting around an airport, too many bags of salty snacks masquerading as meals, the search for roaming dial tone, etc.), but the story itself ended well. I made it to the launch event in Sao Paulo just in time for a quick speech, a caipirinha. and a mad dash back to the airport to -- you guessed it -- get on another plane.

As I write this, on board another plane from London to New York, all I can say is that I am glad I have no fear of flying.

A Haiku for Japan

2011-03-30T23:12:00Z

I am en route home from what was always going to be a long trip (Abu Dhabi, Dubai, Qatar, France, UK), made longer by an unscheduled visit to ravaged Japan.

Japan has long been a very special place for me. Maarit and I lived in Tokyo during much of 1989 and took the opportunity to travel the country widely and get to know its wonderful people. I have been fortunate through my work to have occasion to visit Japan at least once every year and have, thus, maintained my relationships with and affinity for its people. There are, of course, wonderful people all over the world, but I have always admired the very particular grace, determination and collective spirit of the Japanese. These have never been in as high demand as during the past two weeks. A record earthquake, devastating tsunami and ensuing nuclear crisis have tested these fine qualities.

Much as after 9/11 I felt I should return to New York as soon as possible, so too was I drawn to visit Japan as soon as my presence would not constitute more of a burden than benefit to the the already over-worked staff of Thomson Reuters Japan. In my visits to our various offices and talks with individuals and small groups, I heard many heroic stories: Missing relatives reunited; nights spent sleeping under work desks or walking marathon distances home and back to work; and herculean efforts to serve our customers.

Much has been written about the devastation of the earthquake and tsunami, the science of nuclear melt-down, and the response of Tokyo Electric and the Japanese Government — much of the best of it in Reuters News. Instead for me, inspired by the jewel-like concentration of much of what I admire most in Japan, I offer this Haiku to my friends in Japan.

In our deep sadness
We must nonetheless rebuild
For all the children

Internet Freedom Finds a Fertile Crescent

2011-03-23T20:41:00Z

I participated in a fireside chat last week at the Abu Dhabi Media Summit in which I was interviewed by the talented Lebanese journalist, Raghida Dergham. Raghida writes a well-read weekly column in Al Hayat and is a close follower of political developments across the Arab world. Thus, I should have been on notice that our scheduled discussion on the future of media could not ignore the remarkable changes taking place across the region.

During a wide-ranging discussion of the future of media (not an unfamiliar theme to the readers of this blog) and the role of social media in the popular uprisings sweeping the region, I stated that I believed that access to the internet was now a basic human right. By this, I did not mean to imply that governments should not regulate noxious material such as child pornography or hate speech on the internet, nor that all societies regardless of their current state of development needed to provide free universal internet access immediately, but simply that citizens would not stand to be deprived of the basic information and connectivity they needed to function as participating members of modern societies. Thus, President Mubarak's clumsy attempt to shutdown the internet in Egypt only fanned the flames of the popular rebellion.

I am not so naiive or optimistic to think that the online tools provided by Twitter and Facebook, can, in the short-run, protect individuals from the guns and tear gas of a totalitarian state. However, over time, suppression of the internet will undermine the legitimacy of any government and sow the seeds of its downfall. I also have the 160-year history of Reuters News as a guide. There have been brief periods when governments have sought to punish the company for adhering to our Trust Principles and reporting the truth. However, over the longer-term, by sticking to our convictions we have earned the trust of the societies in which we operate. So too the internet will triumph. Not thanks to a single publisher, no matter how respected, but via the loud and competing voices of a multitude of self-publishers.

Fighting the tide of history is always a losing bet.

Davos 2011

2011-02-06T02:22:00Z

For me two major themes ran through the recent World Economic Forum — unequal economic recovery and the advent of social media. While neither item is novel, that misses the essential Davos point. Themes at the WEF are seldom new or innovative; rather the snowy valley acts a large reverb box to bounce around, amplify and finally rebroadcast whatever memes are then trending in the wider world. As the author William Gibson once observed, “the future is already here -- it is just unevenly distributed.” So goes the global economic recovery.

Last year, the focus was all on the BRIC nations, and the emergence of a two-speed world. The West, Europe and the US included, were mired in recession and their various government stimulus plans compared very unfavorably with the Chinese ability to rapidly turn policy into rising GDP and employment. This year the Forum organizers proclaimed that we were living in a “multispeed” world. This is not only more complex to model than a simple growth/no growth duality, it changes the psychological geography as well. Through 2009 the health of Western economies was generally poor. If you were a European politician you could simultaneously blame the US for causing the crisis and feel reasonably comfortable that the large US economy was not performing any better than the local one. Schadenfreude indeed.

Come January 2011, two things had changed. First, and foremost, the US economy began showing signs of life in the second half of 2010. Second, while US bankers are not completely off the hook (nor should they be), the causes of the financial crisis and the ensuing global recession have been found to be more complex and multi-sourced. So, for example, while the US mortgage and securitization market witnessed some morally awful (and by the way, long-term economically stupid) conduct, the external debt to GDP ratio in the US did not exceed 1 to 1, while various European countries allowed their ratios to expand to 2 (France), 4 (UK), or even 10 (Ireland) to 1. A similar pattern emerges if one compares bank balance sheet to GDP ratios. While some WEF attendees, European officials in particular, preferred to stick to the simpler (and more comfortable) truths of the 2010 Winter Meeting, the multispeed recovery is slowly refocusing attention on fundamental issues such as innovation, labor mobility and productivity, and entrepreneurship, and their impact on relative economic growth rates. A series of bankers (the always blunt, amusing and smart Jamie Dimon first among them) also began to speak more publicly about the need to distinguish between banks that acted responsibly through the crisis and those that were found to be still dancing when the music stopped. To me the lesson is clear: Stop talking in generalities and hurling retrospective blame, start looking at the underlying data, and move on to implementing polices intended to encourage long-term growth, prosperity and an adequate social safety net.

The other overriding theme of the “great global debate” this year was social media. Those of us who have been playing with Web 2.0 technologies for some time can be excused for not seeing the novelty in this, but that would again miss the larger point. For the last 45 years, the Winter Meeting of the World Economic Forum in Davos has itself been a grand social network — think of it as a bricks and mortar precursor to the newer virtual models. Before there were tweets and pokes and friending and unfriending, there were years of quick hallway meetings, kept to 140 platitudinous characters: “Hi, how are you? Great to see you here. All well with your business? See you at the Mckinsey party.” There were large “plenary” sessions, akin to writing for all to see on a friend’s wall, and quick bilateral meetings in semi-private rooms not unlike direct messaging. Above all there was plenty of re-tweeting going on as delegates repeated the witty aphorism they had just heard at their last session.

All this reminded me of how we were taught to "hand simulate" code when I was learning to program. Back in what now seems like the days of ENIAC, we learned to simulate the computer and attempt to interpret or complie each instruction by hand to determine if our program worked as intended or would hang in some endless loop. So the thought occurred to me that Davos was really one huge hand simulation of Facebook, starting of course with that coveted small white and blue WEF facebook. The parallels abound. Will that potential client or partner accept my invitation to a bilateral meeting? No different than awaiting a response to a pending Facebook friend request. Will my comments on the panel be judged approvingly? No different than not knowing how my friends will react to my latest wall post. Moreover, that same sense of belonging to some inner circle, of being in the know, replete with that speed dating rush of quantity of interactions over quality.

No wonder Sheryl Sandberg seemed to appear in more sessions than even Klaus Schwab.

Don't Buy Grandma a Mac

2011-01-11T03:27:00Z

Devoted readers of this blog will recall that I sometimes credit my 89 year-old mother with teaching me (by negative example) the need to stay current with technology. So I only have myself to blame for deciding it was a good idea to buy her a new Mac Book Pro for her last birthday.

Ursula had been making noises that she was interested in this “new email thing” and that it might be practical to be able to order groceries for home delivery. Given my addiction to electronics, I needed little encouragement to hit the Apple store for laptop, printer and router, provision cable broadband and set up a home network for mom. What I should have recalled was (i) I have never been long on patience, as a teacher or otherwise, and (ii) the last piece of technology my mother had mastered was the IBM Selectric II typewriter. Never having made the transition to fax, word processor or mobile phone, let alone first generation PC, my mother had missed successive waves of tech learning. We tend not to think about it much, in large part because it has become second nature, but manufacturers of everything from cars to microwave ovens expect that every half-literate adult can operate a touch screen, choose options from a set of radial buttons, scroll down a screen and manipulate a mouse. Not Grandma.

Thanks to the good nature of my wife, and my occasional emergency intervention, my mother has almost mastered the power button, and has managed to send a couple of Gmails. There are, of course, some humorous misadventures and questions. I particularly appreciated Ursula’s query when she was having trouble sending an email to a relative in Israel with a “.il” rather than a “.com” address. In the age of the world wide web (ps., that’s a clue, Mom), my mother asked whether perhaps the reason she was getting message failures was that we had not paid for “long distance” service.

Equally charming was the time Ursula failed to send us a welcome home message and her Mac said there was a problem with the “Airport.” I later assured her that we had breezed through customs at JFK, but that her wireless Apple Airport was the culrprit. There was also the time I got nervous call from my mother worrying that she would be convicted of trademark infringement because I had set her password to include a very common proper name. I only wish that I had been so good a lawyer as to have worried about such an attenuated claim.

What my mother kept asking for was a set of written instructions which could demystify the computer for her, or at least guide her down a narrow path to accomplish the handful of things she wanted to do. While I did hide icons to simplify her screen and set up programs to remember her user ID and password, I could not give her a simple set of instructions to cover all issues that might appear, or fail to appear, on her screen. While she insisted that the kids and I must have learned how to use this “wretched machine” in school, I came to realize that we had learned through simple trial and error. Unfortunately, my advice that she should “hang loose, stay agile and experiment” in the face of confusing warning messages did not have its intended pedagogic effect.

While my mother may not be thrilled that I am sharing her technology travails quite so publicly, I think it is a good challenge. I will tell her there are some amusing stories about her on my blog and see if she can find her way here. If she does, and then commits a very late term abortion of her only son as a result, I know I will have succeeded in my mission.

The Death of Domesticity -- Remarks to BABI London

2010-12-07T16:07:00Z

I gave the following remarks this morning in London to a meeting of British American Business, an organization dedicated to supporting business and fostering cooperation between the US and the UK. As my remarks picked up some of the themes I've written about in other posts to this blog, I include them in their entirety below.

BABI Breakfast Briefing

December 7, 2010

I’d like to thank British American Business for hosting this breakfast and I’d like to thank all of you for coming out early to join us this morning.

I’ve been fortunate to be both a member of, and to have worked with, BABI over many years, spanning the seven years I lived here in London and time in NY before and after. I do have to say that I’ve learned a lot about doing business in both great capitals, both the similarities and some differences.

I’m actually sorry to see that the American business breakfast seems to be catching on here in London. I’m sorry to have infected the culture here. Business breakfasts always remind me of a true story from the time I worked as a lawyer in Paris when one of my clients told the story of a particularly overeager client from Texas who sought to organize a business breakfast with my friend.

When the good-natured and eager Texan suggested a 7:30am breakfast meeting to Jean-Claude, he responded in mock seriousness “But why don’t you just join me in the shower at 6:30am. We could discuss business while you soaped my back?”

There are, of course, other more serious areas in which business practices are converging in the US and Europe. I wanted to talk about one such subject today. This is a topic I sometimes call “the death of domesticity” in the financial markets.

Now let me explain what I mean. In 2005 the average allocation of UK pension funds to domestic stocks was about two-thirds of their portfolio, according to Mercer. Today that allocation stands at about 50%. Again, according to the Mercer 2010 Asset Allocation Survey, some 35% of European pension funds plan to reduce their exposure to domestic equities, partly in favor of international stocks over the coming year.

While the serious recession in Europe explains some of this reallocation, I think a deeper trend is at work. Again, let me explain. There was a simpler time in the markets if you were an institutional investor in the 1970s and 1980s, when your investments were made closer to home. Let’s say you were a pension plan, you sought to match the inflation and interest rate exposure of your pension fund participants with investments in companies that were exposed to similar factors. Thus, in a less global market at the time it made sense to invest the savings of UK pensioners in UK domestic companies traded on the London Stock Exchange. This original reasoning was quite economically sound.

However, little by little over the years the connection between the forces acting upon the assets and liabilities sides of the balance sheet began to diverge, so that companies that were formerly UK domestic businesses actually became very global enterprises that just happened to be headquartered and listed in the UK. I ran one such firm which was Reuters. But the truth even at Reuters pre-acquisition was that only 15% of our revenues came from customers in the UK. Notwithstanding this fact, we were deemed a domestic investment, and pension funds and other institutional investors whose mandates were limited to domestic investments could easily hold our shares if they so chose.

The UK has always been a very open and forward-looking financial market. One of the great attractions of being headquartered and listed in London is the regime of principles-based regulation practiced in the City of London and companies from all over the world seek to be listed here for that reason. At times, especially during turbulent periods like these, that openness is questioned. So, for example, when the Borealis Infrastructure Management Company from Canada recently bought up a large piece of UK infrastructure, the Channel Tunnel Rail Link, eyebrows were raised. This of course is nothing new as major parts of the UK banking infrastructure were bought over the last couple of decades by international banks. It was argued at the time that this so-called “Wimbledon effect” worked well enough in rising markets but as soon as markets went in the other direction continental and international banks would pull back to their home bases and fire their London staffs, thereby decimating the UK economy.

Well in fact it’s hard to imagine a worse shock than the financial crisis of 2008, and I suppose you could say that the bankruptcy of Lehman Brothers did cause them to pull back from their London headquarters across the plaza from Thomson Reuters in Canary Wharf, but I don’t think that’s exactly what people had in mind by the “Wimbledon effect”. The way it has worked out is that London has remained a vibrant center of international finance. However, London investors, just as investors all over the world are seeking better returns by investing in the most international of companies. Whether you’re a hedge fund manager in London, or a mutual fund manager in New York, it’s difficult to explain why you’re not invested in Asian equities if this is an asset class that is expected to outperform over the next 10 years.

Unfortunately, many political leaders are resorting to protectionist policies in the light of the shrinking pie represented by their domestic economies. While this has a certain jingoistic appeal, in the long run this is the surest way in which we will lower living standards for all. Finance and the internet show us the direction toward a more interconnected, borderless world. Yet, nation-states do still matter and many are engaged in a dangerous game of international brinkmanship.

Take, for example, the recent controversy over the US Federal Reserve’s announcement of its second round of quantitative easing nicknamed, amusingly, QE2. Chairman Bernanke, as well as President Obama, have said QE2 is not a deliberate effort to weaken the dollar and strengthen US exports. However, numerous finance officials around the world have taken an opposite view. In fact, Brazil’s finance minister, Guido Montegna, was quoted to have said that “we are in the midst of an international currency war unleashed by these actions”.

Unhelpfully, the US and South Korea recently failed to come to an agreement on new a free trade pact, and last month’s G20 summit in South Korea also failed to produce any consensus among the world’s leading economies on how to encourage global economic growth.

This is no time for parochialism. What we need instead is a system of international cooperation that makes the pie larger for everyone. So for example the China versus the rest of world tug of war on currency values is instructive. A lot of jawboning emanates from US officials seeking to pressure China to allow the Renminbi to float more freely and presumably appreciate to its full trade-weighted value against the dollar and other currencies. Much of this talk goes on for purely domestic political consumption since it is unlikely that the Chinese will actually bow to such pressures. In fact, I’ve heard it said in China that the Chinese government will allow the Renminbi to float exactly one year after the US stops demanding that the Renminbi appreciate.

Regardless of your political analysis, from an economic perspective it is far from clear that solely allowing the Renminbi to appreciate will solve the US export-import imbalance. This is because goods and services from other nations will likely take the place of the currently lower cost Chinese items. What is more important is that China actually develop a larger domestic consumption market and this will not occur until the social safety net in China is more developed. In the end, it is not unreasonable for a people to be great savers if they have relative uncertainty concerning who will pay for their retirements in a one-child per family environment and who will pay for healthcare in a system in which there is not widespread health insurance. Once these large social issues are settled there is no reason to believe that Chinese consumption will not pick up and China will not add to global demand in much the same way they are now adding to global supply.

So, the moral of my story is that the solution lies in more openness, more free trade and more interconnectedness and not in the zero-sum game of cloistered domestic markets.

And this, I should note with a nod to our hosts, is a position that British American Business has consistently advocated between the US and the UK.

Thank you.