DeansTalk - business management education

"European Venture Capital: Myths and Facts" - London School of Economics

Download European Venture Capital: Myths and Facts Report 21,Jan13 (PDF, 48 pages)
(Core Source: "Dow Jones VentureSource": Global Venture Capital Research Database)

British Venture Capital Association Chairman 2011/12:

so we welcome this research by Ulf Axelson and Milan Martinovic both of the London School of Economics because it challenges three key myths of venture capital performance in Europe – that the likelihood of a successful VC exit is lower in Europe than in the US; that some vaguely understood determinants of success are tilted in favour of the US and against Europe; and that there is a chronic stigma around failure which harms European entrepreneurs.

Abstract
We examine the determinants of successful exits in European venture capital transactions and compare them to US transactions. Using survival analysis, we show that for both regions the probability of exit via an initial public offering (IPO) has gone down significantly over the last decade, while the time to IPO has gone up – in contrast, the probability of exit via trade sales and the average time to trade sales do not change much over time. Contrary to perceived wisdom, there is no difference in the success rates of European and US deals from the same vintage year with respect to IPO exits, while Europe has about an eight percentage point lower probability of exit via trade sales than the US. Venture success has the same determinants in both Europe and US, with more experienced entrepreneurs and venture capitalists being associated with higher probabilities of exit. The fact that repeat or ‘serial’ entrepreneurs are less common in Europe and that European VCs lag US VCs in terms of experience explains the remaining difference in performance. Finally, and contrary to perceived wisdom, we find no evidence of a stigma of failure for entrepreneurs in Europe.

Professor Michael Porter, on 8 priorities for U.S. Competitiveness (ReutersTV)

@robertwolf32,  @MichaelEPorter,   "Impact Players" on ReutersTV, 23 Jan 2013

US Secretary Clinton To Deliver Remarks at 100,000 Strong Foundation Event

January 23, 2013   (May 30, 2012)  @100kstudents

On January 24, Secretary of State Hillary Rodham Clinton will host an event to celebrate the launch of the 100,000 Strong Foundation as an independent nongovernmental organization. Announced by President Barack Obama in 2009 as the 100,000 Strong Initiative and until now a part of the Department of State, the new 100,000 Strong Foundation will work to achieve the goal of having 100,000 American students study in China by 2014. Thursday’s event will underscore the importance of study abroad in China and the benefits to our strategic relationship with China as well as the personal benefits individuals receive through these exciting experiences.

America's Fiscal Cliff Can Be a Catalyst for Growth - Prof Vijay Govindarajan (Tuck)

HBR blog network, November 9, 2012

As America turns its attention to the "fiscal cliff," the proposals on the table look at solutions that will either shrink the economy (e.g. cutting expenses and raising taxes) or make it stagnant (e.g. reduce tax rates but recover the revenue from fixing deduction loopholes).

Are there ways to expand the pie, instead? Here's one idea: turn the trade deficit into a trade surplus.

The trade deficit is goods and services we have consumed but have been provided by other countries. Over the last 10 years, the trade deficit has been between $400 billion a year and $800 billion a year.

For the purposes of this thought experiment, let us assume an average trade deficit of $600 billion a year. If every company had to pay a tax for the "deficit" they caused, and got a tax credit for the "surplus" they contributed; the goals and aspirations of entrepreneurs, businessmen and industrialists will be aligned with those of the country...

Dean John Quelch CEIBS (China) on the future of China’s economy and relationship with the U.S.

Aug 7, 2012, Dean John Quelch on the future of China’s economy and relationship with the U.S.

Tuck Prof. Richard D'Aveni - How America Can Beat China's State Capitalism (Book: "Strategic Capitalism")

Richard A. D’Aveni is the Bakala Professor of Strategy at the Tuck School of Business at Dartmouth College and author of Strategic Capitalism: The New Economic Strategy for Winning the Capitalist Cold War (McGraw-Hill; 1 edition (July 31, 2012), 304 pages)

 

 

 

October 02, 2012 Businessweek

With the rise of China as an economy, a question hangs in the air: Can America beat state capitalism? The evidence is not encouraging. The U.S. has lost millions of jobs to the Chinese. It will lose millions more if China, as it proposes, turns itself into a high-tech giant in critical industries ranging from telecommunications to aviation.

The rise of state capitalism has put the U.S. at a competitive disadvantage. State capitalism operates with zero-sum rules, in which one country gains as another loses. This is hardball competition, dog eat dog. And the Chinese dog is eating the American one in products ranging from cell phones to steel.

Zero-sum capitalism is not the form of capitalism U.S. policymakers see as the challenge in global markets. U.S. policymakers are guided instead by the idea of a win-win world. When everyone trades freely, business expands across the board. Every country wins. This free-market, open-trade approach is enshrined in the World Trade Organization...

US Immigrant Entrepreneurship Has Stalled for the First Time in Decades, Kauffman Foundation Study Shows - Vivek Wadhwa

New book based on findings warns of potential dire consequences for U.S. economy and urges swift action to reverse the trend

(KANSAS CITY, Mo.), Oct. 2, 2012 — A new Kauffman Foundation study finds that high-tech, immigrant-founded startups — a critical source of fuel for the U.S. economy — has stagnated and is on the verge of decline.

"America's New Immigrant Entrepreneurs: Then and Now" shows that the proportion of immigrant-founded companies nationwide has slipped from 25.3 percent to 24.3 percent since 2005. The drop is even more pronounced in Silicon Valley, where the percentage of immigrant-founded startups declined from 52.4 percent to 43.9 percent...

The implications of the research findings, conducted by Vivek Wadhwa, director of research at the Center for Entrepreneurship and Research Commercialization at the Pratt School of Engineering, Duke University; AnnaLee Saxenian, dean and professor at the Berkeley School of Information; and F. Daniel Siciliano, professor of the Practice of Law and faculty director, Rock Center for Corporate Governance; are the subject of a bookbeing released today by Wadhwa.

The Immigrant Exodus: Why America Is Losing the Global Race to Capture Entrepreneurial Talent, (Amazon) draws on the research to show that the United States is in the midst of a historically unprecedented halt in high-growth, immigrant-founded startups.

"The U.S. risks losing a key growth engine just when the economy needs job creators more than ever," said Wadhwa. "The U.S. can reverse these trends with changes in policies and opportunities, if it acts swiftly. It is imperative that we create a startup visa for these entrepreneurs and expand the number of green cards for skilled foreigners to work in these startups. Many immigrants would gladly remain in the United States to start and grow companies that will lead to jobs."

With funding from the Kauffman Foundation, Wadhwa has launched a website — ImmigrantExodus.com — as a resource for journalists and a voice for immigrant entrepreneurs.

From the 107,819 engineering and technology companies founded in the last six years, the study examined a random sample of 1,882 companies in a nationwide survey. Of those companies, 458 had at least one foreign-born founder.

Restoring American Capitalism to Its Former Glory

Chicago Booth School of Business, August 8, 2012

From 1945 to 1948, the United States represented an unparalleled productivity machine. It had an educated workforce, advanced production techniques, well-organized institutions, and relative stability. A period of huge growth ensued—one that greatly benefited workers. "It was a virtuous circle that worked well for a long time," said Luigi Zingales, Robert C. McCormack Professor of Entrepreneurship and Finance.

But other countries soon learned from its efficiency, and in recent years, the unfettered influence of business lobbyists has further eroded confidence in the US system. The last quarter-century has brought the largest creation of wealth in history, Zingales noted, but it has occurred mostly in developing nations.

The once-robust underpinnings of American success are getting weaker, Zingales told a group of Booth students at Gleacher Center during a Myron Scholes Global Markets Forum event organized by the Initiative on Global Markets. But the trend is not irreversible. In a plea to bolster free markets and not big business, he shared insights from his new book, A Capitalism for the People: Recapturing the Lost Genius of American Prosperity.

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Luigi Zingales is the Robert C. McCormack Professor of Entrepreneurship and Finance at the University of Chicago's Booth School of Business.  He is a faculty research fellow for the National Bureau of Economic Research, a research fellow for the Center for Economic Policy Research and a fellow for the European Governance Institute. He is the Lead Independent Director of Telecom Italia and the Vice President of the American Finance Association. He is the co-author of Saving Capitalism from the Capitalists and a contributing editor of City Journal.  He lives in Chicago with his wife and children. (on Project Syndicate)

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J. Bradford DeLong, University of California, Berkeley

“More than 30 years ago, Milton and Rose Director Friedman raised high the banner of small-government free-market libertarianism with their Free to Choose. Now, a generation later, income inequality is substantially higher, the globe is even more interconnected, and our partial financial deregulation has backfired badly. Luigi Zingales thus has a harder task as he tries to update the small-government free-market libertarian position for the 21st century. But he has done a very good job at it.”

Robert J. Shiller (Yale SOM), author of Finance and the Good Society

“This remarkably creative book, driven by a strong moral conviction, offers a bold array of ideas for us to ponder, so we can really make the American capitalist model work better for everyone.”

Edmund S. Phelps, Director, Center on Capitalism and Society, Columbia University

“In A Capitalism for the People, Luigi Zingales joins the small but influential group of economists who see that America’s economy is now more and more corporatist, less and less capitalist. His impressive account of our downhill slide is enriched by his deep knowledge of the harm wrought by the worst excesses of Italian crony capitalism. A must-read.”

N. Gregory Mankiw, Robert M. Beren Professor of Economics, Harvard University, and author of Principles of Economics

“A Capitalism for the People is a wise, deep, and timely book.  With lively prose, Zingales diagnoses what is right and wrong with the U.S. economy.  Whether your political sympathies lie with the Tea Party, Occupy Wall Street, or someplace in between, you will learn much about how we can best promote an economic future that works for all of us.”

Dean Paul Danos (Tuck): "Why Businesses Hire MBA Grads, Despite a Weak Economic Forecast", US News

U.S. News, July 6, 2012.

Paul Danos is dean of the Tuck School of Business at Dartmouth.

For the past three years, employment statistics have hit an all-time high here at Tuck. At top business schools across the country, these statistics usually reflect business optimism—at least in the sectors that hire our graduates. The stock market, too, during a four-year period, has been quite positive. Again, this can normally be viewed as a reflection of forward-looking optimism. 

But most economic prognosticators see a continuing dull economy indeed, and the last 12 months of macro-economic data reinforce their gloom. I believe that businesses are hiring young leaders from top MBA programs because of an optimism based on real business prospects and capabilities. These include the desire to build and expand, along with the notion that there will be increased political and policy hostility and deadlock.  

This presidential campaign provides a stark contrast on the business-friendliness scale with perceived end points in terms of regulatory and tax burdens being far apart. Uncertainty in the prospects for the government's level of business-friendliness blunts planning for growth, and even though business leaders individually see great prospects, they are held back by the real possibility of more oppressive government policies.

"American Competitiveness" special - Harvard Business Review

hbr.org/special-collections/insight/american-competitiveness

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The Economist, "This time it’s serious", Feb, 18th 2012

...not a recipe for dynamism.

Dean John Quelch of CEIBS in Shanghai - FT - Bark with bite

Professor John Quelch (Wikipedia) is dean of Ceibs in Shanghai. His latest book is ‘All Business Is Local’. Previously, he was senior associate dean at Harvard Business School and dean of London Business School  (Ceibs press)

Article of Finanical Times, "Bark with bite", January 30, 2012

Academics succeed if their names are linked to one important idea that outlives them. Professor Theodore Levitt’s name is linked to many. The first was a blockbuster. “Marketing myopia” was published by Harvard Business Review (HBR) in 1960, one year after Harvard Business School plucked Prof Levitt, the son of a German immigrant cobbler, from the University of North Dakota...

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www.quelch.tv

Video: Can the U.S. Economy Still Compete With China?, Feb 8, 2012 “All Business is Local” author John Quelch on what is needed to boost U.S. economic growth and competitiveness globally

Stanford GSB Finance Expert: Federal Interpretation of Volcker Rule Would Lead to Constraints on U.S. Economic Growth and Recovery

January 17, 2012

Stanford Finance Expert: Federal Interpretation of Volcker Rule Would Lead to Constraints on U.S. Economic Growth and Recovery

Finance professor Darrell Duffie of the Stanford Graduate School of Business proposes alternative capital requirements for banks to eliminate potential unintended consequences of financial reform.

U.S. Competitiveness Project - Harvard Business School

www.hbs.edu/competitiveness  

Media news including www.compete.org

The Harvard Business School's U.S. Competitiveness Project, led by Professors Michael Porter and Jan Rivkin, will engage some of the world's greatest thinkers to assess U.S. competitiveness and develop actionable recommendations to change America's trajectory. 15 nov. 2011

In an interview with Justin Fox of Harvard Business Review, Professors Michael Porter and Jan Rivkin define U.S. competitiveness, explain why it's crucial to look at drivers of competitiveness holistically, and call upon all Americans, especially those in business, to meet the competitiveness challenge by turning strategy into action. "While government policy sets the stage, it is companies that ultimately win or lose in the marketplace," says Professor Porter.

Professor Matt Slaughter Assoc Dean Tuck - New Data Set Reveals Health of U.S. Economy

Via @TuckSchool, Nov 21, 2011  (Bio, Tuck)

New Data Set Reveals Health of U.S. Economy Professor Matt Slaughter talks about a newly released data set that won't get much media coverage, and yet paradoxically is one of the most important indicators of the health of the U.S. Economy.

Dean Glenn Hubbard of Columbia Business School - Tax Reform Is the Swiftest Path to Growth - WSJ

Wall Street Journal, August 12, 2011

'What is tax reform?"

That's the Jeopardy-like question matching the answer: "The best step the government could take now to promote growth and employment." The Obama administration has been responding with "What are higher marginal tax rates and more stimulus?" But fundamental tax reform offers three key benefits.

First, reducing marginal tax rates on saving and investment and on work and entrepreneurship will increase capital formation and productivity, raising wages and output. Broadening the tax base and sharply lowering marginal tax rates can raise gross-domestic-product growth by a half to a full percentage point per year over a decade, according ...

Professor Frank Warnock (Int. Finance) of Darden - U.S. Treasuries Lose 'Risk-Free' Luster

Council on Foreign Relations, August 6, 2011.

Francis E. Warnock, Adjunct Senior Fellow for International Finance

Paul M. Hammaker associate professor of business administration at the Darden Business School, University of Virginia. Former senior economist at the Board of Governors of the Federal Reserve System. Author of the Center for Geoeconomics reports How Dangerous Is U.S. Government Debt?, Two Myths About the U.S. Dollar, and Doubts About Capital Controls.

Professor Raghuram Rajan of Finance at Chicago Booth GSB - "Washington and the Art of the Possible"

2011-08-04 www.project-syndicate.org

...In the meantime, US politicians might have done just about enough to convince debt markets that America’s credit is still good. For that, Americans – and others around the world – should stop pillorying them and give them their due credit.

Raghuram Rajan, a former chief economist of the IMF, is Professor of Finance at the University of Chicago’s Booth School of Business and author of Fault Lines: How Hidden Fractures Still Threaten the World Economy, the Financial Times Business Book of the Year.

(previously mentioned on DeansTalk: 5/2/2011, 15/2/2009)

Professor Jack M. Guttentag of Wharton (finance emeritus) - "Debt Default’s Game of Chicken"

Article of Wharton Today, July 29, 2011.

In a blog posted this week, Jack M. Guttentag, professor of finance emeritus at Wharton, warned of the consequences — both immediate and long-term — of a debt default by the federal government. Asked by Knowledge@Wharton what continues to be the single biggest obstacle to agreement on a plan to increase the debt ceiling, he responded — “an ideological gridlock between different political forces that may be playing a game of chicken to see which one is going to blink first to prevent a catastrophe. To put the country through this horror in the expectation that someone will blink and everything will come out all right is just unbelievably irresponsible.”...

“If a default had the horrendous consequences you describe, and these induce Congress and the Administration to agree finally on an increase in the debt ceiling, how long would it take financial markets to return to normal?”

Markets would never return to a state where U.S. Government obligations are viewed as riskless. We will pay for this loss of grace forever...

Professor Matt Slaughter of Tuck - "America is tempting a financial crisis of unknowable proportions"

Up Against the Debt Ceiling, July 2011.

If the United States defaults on the federal government’s debt, the consequences would be catastrophic. That was the central message in Tuck professor Matt Slaughter’s testimony before the House Democratic Steering and Policy Committee on July 7.

 

Professor Gayle Allard (IE Business School) - Will the US Congress react in time?

Post of IE Economy Blog, 21 July, 2011.

As the deadline approaches for the US Congress to either raise the debt ceiling or enter into technical default on the huge US public debt, what appears to characterize the debate is a lack of concern for what will happen if the deadline is missed.

Republicans, determined not to raise taxes, refuse to approve any compromise that would violate that objective. Democrats, reluctant to make deep reforms to social programs, want most adjustments to happen on the revenues side. The deadlock has held firm even under the time pressure of looming nonpayment on the debt.

Kenan-Flager debate the US debt crisis - July 25, with Charlie Rose

www.kenaninstitute.unc.edu/DebtCrisis

Dean Glenn Hubbard (Columbia) - "Forget the debt ceiling and focus on debt"

Article of the Financial Times, May 26 2011

On May 15, the US hit its “debt ceiling” of $14,300bn, covering publicly owned debt held by the Federal Reserve and government trust funds, and Washington is in a furore. While budget debates are often more talk than action, this one needs more talk – but of a different kind...

Tuck Professors, Alumni, and Students Weigh In on the credit crisis

Professor Robert Hansen moderates a panel on the ongoing credit crisis. Hansen asks panelists to discuss such issues as: why this asset bubble is different from others, what the crisis says about market management, what direction public policy will take, whether we need more regulation or regulation of a different kind.

Panelists include: Professor Jonathan Lewellen, Professor Sydney Finkelstein, Matthew Vamvakis T'09, Tuck Overseer John Jacquemin T'73, and Tuck Overseer Harvey Bundy T'68.

Recorded October 11, 2008, during Tuck reunion weekend.

Dean, Darden School of Business, Robert Bruner, A Time to Hang in there.

Taken in its entirety as posted by Robert Bruner on his own blog  02/10/2009 12:09 AM

“I want to quit the MBA Program.  The job situation is miserable.  The economy is headed down the drain.  I enrolled here with expectations that I would get into brand management—I deserve it!   Now, it seems that you can’t deliver.  I can’t see doing the work and running up more debt just to go back to the job I had before B-school.  I’m outta here.”[1]

These are words that chill a teacher.  They reveal a gap between expectations and achievement.  They suggest a failure of courage and ambition.  They are a symptom of the jarring adjustment required by the current economic crisis.  And they imply confusion about the role of professional education in society and in the life of the individual.    

Sure enough, these are tough times for everyone.   The students now in B-school applied at a time when it looked like school was a sure thing: an entry to a better life.  Then came the crunch.  Money for student loans became scarce.  Job prospects declined.  Companies scaled back their recruiting—but they have not tempered the salaries they did offer.  The aspirations and outlook of MBA students have shifted.  Some openly wonder whether they should quit.    I attended a big meeting of B-school Deans last week; this topic was a subject of conversation.

Plainly, there is an alternative to B-school, the school of hard knocks.  An article published in the Wall Street Journal makes the pitch: “How to Succeed in Business: Drop Out of School?”  It glowingly details the examples of three drop-outs who succeeded: Bill Gates (founder of Microsoft), Mark Zuckerberg (founder of Facebook), and Larry Ellison (founder of Oracle).   The odds of hitting it that big are quite small.  You should read the comments that follow the article: they tilt on the side of “stay.”  Ironically, the article was published on December 21, 2007, about the time that the present recession began.  Taking the advice of the Journal, one would have tried to launch his or her small business boat into the face of a rising gale.

I don’t have a lot of experience with this problem.  The overwhelming majority of MBA students stick it out; they vote with their feet in favor of the MBA value proposition.  Voluntary departures from Darden in mid-program are extremely rare.  From my time at

Raghuram G. Rajan, Professor of Finance and Economy, (Chicago Booth Business School)(ex IMF-Chief Economist) - Bankers’ pay is deeply flawed

Chicago Booth Faculty page

Wikipedia entry 

(Bhopal, India, February 3, 1963)^[1] was the "Economic Counselor and Director of Research" (Chief Economist) at the International Monetary Fund from September 2003 until January 2007. He was the youngest individual to hold the position (beginning at the age of 40).

Raghuram G. Rajan served as Chief Economist at the International Monetary Fund between 2003 and 2006. His major research focus is on economic growth, and the role finance plays in it. Rajan believes there is no issue with greater urgency or moral imperative than economic development.

FT.com: "Bankers’ pay is deeply flawed" January 8 2008

Banks have recently been acknowledging enormous losses, yet those losses are barely reflected in employee compensation. For example, Morgan Stanley announced a $9.4bn charge-off in the fourth quarter and at the same time increased its bonus pool by 18 per cent. The justification was that many employees had a banner year and their compensation should not be held hostage to mistakes that were made in the subprime market. The chief executive, John Mack, however, assumed some responsibility and agreed to take no bonus for 2007 – although he got a $40m payout for 2006.

....

The typical manager of financial assets generates returns based on the systematic risk he takes – the so-called beta risk – and the value his abilities contribute to the investment process – his so-called alpha. Shareholders in asset management firms, such as commercial banks, investment banks and private equity or insurance companies are unlikely to pay the manager much for returns from beta risk. For example, if the shareholder wants exposure to large traded US stocks she can get the returns associated with that risk simply by investing in the Vanguard S&P 500 index fund, for which she pays a fraction of a per cent in fees. What the shareholder will really pay for is if the manager beats the S&P 500 index regularly, that is, generates excess returns while not taking more risks. Hence they will pay for alpha.

In reality, there are only a few sources of alpha for investment managers. One of them comes from having truly special abilities in identifying undervalued financial assets. Warren Buffett, the US billionaire investor, certainly has it, yet this special ability is, by definition, rare.

A second source of alpha is from what one might call activism...

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Raghuram G. Rajan,  draws the distinction between “liquidation values” and those of calmer times, or “going concern values.” In a troubled time for banks, Mr. Rajan said, analysts are constantly scrutinizing current and potential losses at the banks, but that is not the norm.

“If they had to sell these securities today, the losses would be far beyond their capital at this point,” he said. “But if the prices of these assets will recover over the next year or so, if they don’t have to sell at distress prices, the banks could have a new lease on life by giving them some time.”

Senior Associate Dean and Professor, Robert G. Hansen (Tuck School of Business) his blog on the crisis

Robert Hansen's Blog

Tuck Biography of Robert Hansen

Selection of posts:   

Welcome to the Treasury Amateur Hour, Tuesday, February 10, 2009

So our new Treasury Secretary comes out after having plenty of time to work out some details, and what do we get?

More uncertainty. Just what the markets and the economy need.

There is a beast in the room, and nobody wants to move because they don't know which way the beast will run. The beast of course is the Federal Government, doing their best to avoid the laws of unintended consequences.

A few quotes from the Wall Street Journal's story are very illuminating:

"But critical details of the plan remained unanswered, despite the weeks of planning leading up to Tuesday's announcement."

"Mr. Geithner said the plan to stem foreclosures would be announced in coming weeks."

"He also provided few details of the asset-purchase plan, which is designed to be done in partnership with the private sector."

"The absence of detail speaks to the thorny issues that lie at the heart of the financial crisis: how to value the toxic assets causing banks to report losses and how to shuffle aid to homeowners and stem the rise of foreclosures."

OK, these are not new issues.

The Government has two choices: One, come up with a credible and specific plan to buy toxic assets from financial institutions and support the ones that become insolvent as a result of having to take losses on the sales. Or two, step aside, and let natural market forces restore equilibrium.

Right now, the Government is effectively blocking mutually beneficial trades from taking place. Who wants to argue that financial institutions are the natural holders of these risky mortgage assets right now, instead of private investors? They never should have had such a concentration in the first place, so let's get on with the business of transferring that risk to those who are most willing and able to bear it...

The 2004 Banking Leverage Rule Change, Monday, February 09, 2009

We can expect a lot of revisionist history in the next several months, as policymakers and pundits attempt to spin the historical record to fit their interests.

We had a speaker at Tuck today who mentioned the SEC's 2004 rule change, which eliminated some leverage restrictions on investment banks in favor of capital requirements by type of asset as well as more reliance on self-regulation and reporting to the SEC. A good reference for a similar story is here in the NYT.

I have been meaning to look into this "smoking gun" for some time as it did sound intriguing. Of course, the headline is usually something like the NYT's: "Agency's '04 Rule Let Banks Pile Up New Debt." The subheading is, naturally, that we need more regulation not less and that the Bush administration was at fault.

Now there might be some issues about regulation of the banks, and I myself am very surprised at how poorly market forces seemed to enforce reasonable behavior on the part of the banks. Like Alan Greenspan, I have I guess a nostalgic view of how self-regulation should work (well).

But as to the story on the 2004 deregulation -- it simply does not hold water. I pulled out the Bear Stearns 2003 and 2006 annual reports -- before and after the regulatory change, but before falling asset prices caused an endogenous increase in liquidity.

In 2003, Bear had an overall leverage ratio of 26.4, and a net adjusted leverage ratio of 12.4. In 2006, the respective numbers were 26.5 and 13.6.

Do you think the NYT reporter could have looked that up and told us as well?

TARP: Take Two (Hopefully in Earnest This Time!), January 21, 2009

It appears that the core of the original TARP idea is being resurrected: buying bad assets and securities from banks and putting them into a government-controlled vehicle with the intent of reselling at a later point. From the WSJ over the weekend:

"The U.S. government, recognizing that the banking crisis is far larger than originally thought, is laying the groundwork for a second phase of its rescue attempt, with plans to purge bad assets that are paralyzing the financial system.

Nobel laureate economist Joseph Stiglitz (Columbia U.) talks with the FT on video about the crisis + video London Summit Feb09,"on resolving the global financial crisis"

Wikipedia entry

In an interview recorded in Paris on January 9, 2009 Columbia University's Nobel laureate economist Joseph Stiglitz tells Lionel Barber, editor of the Financial Times, why tax cuts are not the way to fix the global economy, why China´s contribution to the solution could be "small peanuts" and why banks are to blame for all the major economic shocks of the past 25 years.

Click here for the FT video

"Wizard of Wharton" - Professor of Finance, Jeremy Siegel on the crisis

Personal website

Wikipedia enty

Video highlights of lectures and television interviews

"Wharton professor analyzes the crisis" Philly.com, October 2008

Inside Look: The Future of Financials, two weeks ago.

The Economy & TARP - Interview with Jeremy Siegel

Knowledge@Wharton, 2009.02.04

Lesson One: What Really Lies Behind the Financial Crisis? 

What was the true cause of the worst financial crisis the world has seen since the Great Depression? Was it excessive greed on Wall Street? Was it mark-to-market accounting? The answer is none of the above, says Jeremy Siegel, a professor of finance at Wharton. While these factors contributed to the crisis, they do not represent its most significant cause.

Here is the real reason, according to Siegel: Financial firms bought, held and insured large quantities of risky, mortgage-related assets on borrowed money. The irony is that these financial giants had little need to hold these securities; they were already making enormous profits simply from creating, bundling and selling them. "During dot-com IPOs of the early 1990s, the firms that underwrote the stock offerings did not hold on to those stocks," Siegel says. "They flipped them. But in the case of mortgage-backed securities, the financial firms decided these were good assets to hold. That was their fatal flaw."

Speaking in Philadelphia on January 20, Siegel, author of Stocks for the Long Run and The Future for Investors, provided a detailed analysis of the factors that fueled the worldwide financial meltdown. His talk was the inaugural lecture of a 15-session course on the financial crisis that Wharton is offering MBA and undergraduate students. Siegel's mission was to detail the factors that sparked the crisis that has caused the U.S. stock market to lose more than a third of its value in a year, while sending unemployment to its highest level since the 1980s. Siegel's lecture was on the same day that millions of Americans expressed optimism over the inauguration of President Barack Obama, even as the Dow plunged another 300 points.

Explaining his theory further, Siegel pointed out that many troubled banks and insurers continued to prosper in almost every other aspect of their businesses right up to the 2008 meltdown. The exception was the billions of dollars in mortgage-backed securities that they bought and held on to or insured even after U.S. home prices went into a free-fall more than two years ago. American International Group (AIG), the insurer that received an $85 billion federal rescue package last September, is a prime example. Some 95% of its business units were profitable when the company collapsed. "AIG has 125,000 employees," Siegel noted. "Basically, 80 of them tanked the firm. It was the New Products Division, which had an office in London and a small branch office in Connecticut. They came up with the idea of insuring mortgage-backed assets, and nobody at the top decided it wasn't a good idea. So they bet the house -- and the company went under."...

Professor of economics at Harvard University - Greg Mankiw's Blog - Crisis

Greg Mankiw's Blog

My preferred fiscal stimulus. February 5th, 2009.

Regular readers of this blog have a pretty good sense of my policy preferences. But for those occasional readers who might be stopping by, let me reiterate what I would do right now if I were the fiscal king.

I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax. I would make the two tax changes equal in present value, so while the package results in a short-run budget deficit, there is no long-term budget impact. Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift.

I recognize that some state governments are now struggling in light of the macroeconomic crisis. For the next two years, I would let each state governor have the authority to divert a portion of the payroll tax cut in his or her state and take the funds instead as state aid. This provision would essentially be giving governors the temporary authority to impose a payroll tax on his or her citizens, collected via the federal tax system. Those governors who think they have valuable infrastructure projects ready to go would take the money. When designing a fiscal stimulus, there is no compelling reason for one size fits all. Let each governor make a choice and answer to his or her state voters. It is called federalism.

Any further federal spending projects should be evaluated on the basis of cost-benefit analysis. That analysis would take time, but it would ensure that the projects are not a waste of taxpayer dollars.

Some traditional Keynesians would object that government spending has a larger multiplier than tax cuts. Even though that is the prediction of standard Keynesian models, the evidence is not completely consistent with that conclusion, as I have discussed here in previous posts. In addition, given the lags inherent in large spending projects, and the risks inherent in hasty spending at the federal level, the case for taxes over spending as the fiscal instrument of choice is compelling. To me, at least.

None of this should be viewed as a substitute for fixing the banking system and trying to come up with a better process for homeowners and banks to work out mortgage loans in default. Housing and finance are the real sources of the macro problem. Any fiscal stimulus, such as the one I propose above, is only an attempt to mitigate the symptoms. Those symptoms are severe, so mitigation is fully appropriate. But fiscal policy is not a panacea for what now ails the economy.

---

The GOP Mortgage Plan: Con and Pro February 5, 2009.

Congressional Republicans are proposing that the government offer people 4 percent mortgages, which is below current market rates for mortgages but above the current government bond rate. Harvard economist Ed Glaeser is opposed...

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Feldstein on Fiscal Stimulus February 4, 2009.

Interview with Marty (Felstein)  December 13, 2008.

J. Bradford DeLong, Department of Economics (U.C. Berkeley), his blog, Grasping Reality with Both Hands

J. Bradford DeLong´s blog (his profile)

Grasping Reality with Both Hands

Publish at Scribd or explore others: literature null

Strategy Professor David B. Allen (IE Business School) - some of his crisis-related posts

David B Allen´s blog "Strat Op. Ed."

Bogus Bonuses

January 30, 2009

President Obama called the bonuses paid to banking sector executives, "shameful". He then said,“There will be time for them to make profits, and there will be time for them to get bonuses.”

He was right about "shameful", but he fudged it on bonuses, as if there were good old days we could go back to when a CEO received an "honest day's pay for an honest day's work". In a complex economy, this is close to impossible. It is inevitable earnings of investment bankers, hedge fund managers and CEOs of large companies will depend far more on social norms than long-term economic performance. Don't get me wrong. The elite of big business and finance are talented people; there is, however, scant economic justification for the pay they receive.

Fixing America: Obama's To Do list 

January 14, 2009

The TO DO list for Barack Obama put together by our best and brightest is clear. When he gets the Oval Office on Day 1 on desk all he will be asked to fix ... everything.

We all know why there is so much to be done. The foundations of society are off kilter. Education and work, the two things that take up most our lives, need to be retooled -- from pre-school imagination building to post-doc innovating. We need to rethink what is worth doing and worth learning how to do...

1. Get out of Iraq and Afghanistan now.

2. Provide all American children with the world's best health care and education.

3. End U.S. dependence of foreign oil.

Bailing out on the bailouts

December 27, 2008

Nice, nice, very nice;

Nice, Nice, very nice;

Nice, nice, very nice --

So many different people

In the same device.

 

-- Kurt Vonnegut

 

 

BACKGROUND

 

There are lots of smart people describing the mess we are in. I read The New York Times and The New Yorker mostly, where professional journalists have incomparable access to the world’s most important decision-makers and our best minds. These journalists, the media elite, work hard to do their job monitoring the elites of the other estates.

 

Thomas Friedman, of the flat world, is fixated on our collapsing infrastructure, fractured educational system, and inane business culture. His articles detail failure upon failure made palatable by a dash of optimism and a catchy title like "Time to Reboot America".

 

He and his colleagues, in an attempt to veil despair, regularly finish up their missives with a plea to the Office of the President-Elect to save our skins. Paul Krugman is a pro at it (see "Barack be good"). Though as a Nobel-prize winner he is smart enough to have figured out that Obama ain’t off to such a great start, vacationing in a luxury beach home, taking the Clintons and most of their team on board in this winter of discontent, and signing Rick Warren for a dose insipid truth for our inaugural prayer.

 

We, the people, would like, and deserve, something better from our elites.

Please do NOT Save: Why GM, Ford and Chrysler should not get our money

For years I believed that managerial incompetence in the U.S. automobile industry had no limits. I was right. But that was only part of the story. Now these giants of industry and their million lobbyistreplicant march on Washington is on the cusp of a monster bailout that promises to suck $15 - $25 billipn out of the American taxpayer in the first tranche. (This is peanuts, of course, compared to what was wasted on AIG, but I have already exhaled sufficient spleen on that topic.)

The three big automakers are singly and collectively underserving of a red cent, but the most undeserving of all is Cerberus, the savior of Chrysler. Cerberus is run by Stephen Feinberg, who by all accounts is smart and, by the standards of superrich hedge fund moguls, modest in his impudent arrogance.

Nice, nice, very nice;

Nice, Nice, very nice;

Nice, nice, very nice --

So many different people

In the same device.

 

-- Kurt Vonnegut

 

 

BACKGROUND

 

There are lots of smart people describing the mess we are in. I read The New York Times and The New Yorker mostly, where professional journalists have incomparable access to the world’s most important decision-makers and our best minds. These journalists, the media elite, work hard to do their job monitoring the elites of the other estates.

 

Thomas Friedman, of the flat world, is fixated on our collapsing infrastructure, fractured educational system, and inane business culture. His articles detail failure upon failure made palatable by a dash of optimism and a catchy title like "Time to Reboot America".

 

He and his colleagues, in an attempt to veil despair, regularly finish up their missives with a plea to the Office of the President-Elect to save our skins. Paul Krugman is a pro at it (see "Barack be good"). Though as a Nobel-prize winner he is smart enough to have figured out that Obama ain’t off to such a great start, vacationing in a luxury beach home, taking the Clintons and most of their team on board in this winter of discontent, and signing Rick Warren for a dose insipid truth for our inaugural prayer.

 

We, the people, would like, and deserve, something better from our elites.

For years I believed that managerial incompetence in the U.S. automobile industry had no limits. I was right. But that was only part of the story. Now these giants of industry and their million lobbyistreplicant march on Washington is on the cusp of a monster bailout that promises to suck $15 - $25 billipn out of the American taxpayer in the first tranche. (This is peanuts, of course, compared to what was wasted on AIG, but I have already exhaled sufficient spleen on that topic.)

The three big automakers are singly and collectively underserving of a red cent, but the most undeserving of all is Cerberus, the savior of Chrysler. Cerberus is run by Stephen Feinberg, who by all accounts is smart and, by the standards of superrich hedge fund moguls, modest in his impudent arrogance.

Economics Professor Nouriel Roubini (NYU)- "Is the U.S. a Japan 2? The Return of Japan’s “Free Fallin” Stag-Deflation and the Risks of a U.S. "

Is the U.S. a Japan 2? The Return of Japan’s “Free Fallin” Stag-Deflation and the Risks of a U.S.

Nouriel Roubini´s blog | Feb 3, 2009

William Pesek, the savvy Asia columnist for Bloomberg, reports - in his latest column (see below) - my views about the structural crisis faced by Japan that I outlined in a 1996 paper titled “Japan’s Economic Crisis”. Thirteen years later Japan is entering another severe slump that looks like even worse than that of other advanced economies: while in US, Europe and some other advanced economies and China the second derivative of growth and of other economic indicators is turning closer to becoming eventually positive rather than negative (i.e. growth is still negative but GDP may be falling at a decelerating – rather than accelerating - rate) in Japan is still highly negative (i.e. the fall is accelerating and looking like a free fall, a severe case of stag-deflation).

The sad case of Japan free fall is a cautionary tale of what happens when a high flying economy has a real estate and equity bubble that goes bust and avoids for too long doing the painful structural reforms and clean-up of the financial system that is necessary to avoid a long-term L-shaped near depression. Japan had over a decade of stagnation and deflation, then a mild sub-par growth recovery that lasted only three years and is now spinning into another severe stag-deflation. Keep alive zombie banks and zombie corporations whose balance sheets and debts are not restructured as in Japan (zombie banks and zombie insolvent households in the US today) and you end up in a L-shaped near depression.

Let me explain next in this note why the US and the global economy face the risk of an L-shaped near depression if appropriate policy actions are not undertaken…

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Doing one´s duty

“In practice it is seldom very hard to do one’s duty when one knows what it is, but it is sometimes exceedingly hard to find this out.” Samuel Butler (Note Books, 1912)