Comp Change Means Mgmt Change on Wall Street

500k and restricted stock that vests only when the government has been repaid.  Wow.

My predictions:

1.  Goodbye to  Wall Street Executive who can afford to retire.  It will not be fun or rewarding and they will reinvent or play golf.

2.  Young Guns with lots of energy and significantly less experience will rise to prominence.

3.  Clever lawyers will design workarounds to increase compensation for executives.

4.  Congress will look the other way if economy recovers

5.  Wall Street Executives will  rally around the next Republican presidential candidate.  This will blunt some of Obama’s fundraising prowess in the next cycle.

6.  Obama will need 8+ years to break the cycle of avarice and entitlement that has dominated Wall Street since the Reagan Era.  Any economic recovery will foster aggressive political attacks on the severity of this presidential change.  This could lead to a new era in class warfare.


Republican Senators Have Courage

Fred Wilson beat me to a GM post that I wanted to write over the weekend.  If only I had watched less football.  Fred nails it so read his post, but here are my thoughts.   General Motors is a disaster and we send the wrong message to everybody in this country and around the world if we give the company money without demanding changes.  The republican senators stood up to the Bush, Obama, and Pelosi and said the legislation that was originally intended to “green” the auto industry should be used as a stop-gap to save GM for a few more months.  It’s discouraging that Bush has the ability to use TARP money to bailout GM, but not surprising that a President who has never paid attention to what anybody else thinks would just circumvent the system using poorly written legislation.  TARP was done to prevent a collapse of teh financial system not bailout any company that needs help during these savagely difficult times.

I recognize that GM employs lots of people, but we will face this problem every quarter in 2009 if we don’t make some changes.  Here is what the United States government must get if we are going to bailout GM.

1.  Goodbye  shareholders.  This is a pay to play situation.  If you don’t want to pay you can’t play and the United States and GM employees should be the only shareholders at GM.

2.  American Government picks up the the GM healthcare obligations for retired workers until healthcare legislation is passed that can replace it.  This would give GM a competitive chance at going forward and relieve huge expense burdens that have no impact on the company’s ability to make good cars.  This is expensive. Hopefully the rise in GM’s equity will help offset that.   We cannot abandon these workers’ healthcare needs.

3.  New Management.  We are all shareholders now and I don’t believe Rick Wagoner.   Find somebody else.

4.  UAW contract must be revised.  The union leadership postures because Pelosi, Obama, and even Bush look for ways to circumvent the Republican Senate.  Everybody needs to be on same page.   We can’t pay workers double what Toyota does and expect GM to compete.  Only the threat of Chapter 11 will bring the UAW in line.  Use the threat.

5.  GM board should meet monthly to review monthly objectives and see if the company is making progress.  Management should be under tremendous pressure to perform and be rewarded properly.  But make no mistake.  Working at GM should be the hardest job in America and every effort should be made to apply massive pressure on this mgmt team to deliver change in 2009

6.  Extract the appropriate commitment to greentech as a way of getting GM’s marketing muscle and scale behind environmental changes.

7.   Move GM out of Detroit.  This is radical, but I think would help.  Detroit is bad for the automobile industry.  It’s insular and suffering from years of failure  GM needs a rennaisance and the American car industry does not all need to be in the same city.  If people don’t want to move, don’t move and find new people.  That would help GM.   Michigan has good things going for it and they need to reinvent the economy.  I think GM moving to say Dallas or Atlanta or Los Angeles or even Chicago would help them find new people, new ideas, and most importantly the pyschological will to start again.

Pray for Newspapers

The WSJ reports that Tribune has retained Lazard to help restructure its debt and that Tribune may seek Chapter 11 Protection.  A month ago I met Bruce Toll (Toll Brothers) at a cocktail party.  Toll is the Chairman of Philadelphia Media Holdings and had helped lead the deal to buy the Philadelphia newspapers from McClatchy.  He was very pessimistic about McClatchy’s ability to avoid bankruptcy proceedings and disclosed that Philadelphia Media itself was really in no position to continue meeting its debt obligations.

Meanwhile Henry Blodget continues to track the travails of the NYT and I encourage you to make sure you read his posts today and in the future

Whither These Friends

Whither These Friends

While the automobile industry commands most media attention these days, the rapid demise and potential reinvention of the newspaper business will likely be a huge story in 2009.  Major cities in America may find that the newspaper of record no longer exists or emerges from a restructuring with a far leaner news gathering organization.  At best, diversified newspaper companies such as the NYT, Hearst, Cox, Gannett, Tribune and others will have to sell off valauble assets to restructure the balance sheets.  Goodbye television stations and baseball teams.

The good news is that the Chapter 11 process or other debt restructurings could pave the way for new ownership and reduced debt service.   Plenty of debtholders will settle for 30 cents on the dollar to get something in what they perceive to be a  dying newspaper industry.  So new equity participants could get in inexpensively with significantly less debt on the balance sheet.

Here’s what’s interesting about this dynamic.  In some communities — Philadelphia, Minneapolis, and New Orleans to name a few — newspapers play a central role in people’s lives that takes years to establish.  Even young people in these communities appreciate the newspaper brands of these towns and that awareness could be utilized to grow a local business that is central to people’s lives.  These companies also have one of the few sales organizations capable of selling at the local level.  Citysearch wants that capability.  Yahoo has partnered with newspapers around the country because they couldn’t grow that same competency.  Local advertising remains remarkably untapped and newspaper companies still may be able to retain and nurture that business.

Interestingly, this bad economy might be the saving grace for the newspaper industry.  Debt holders want something and the need for restructuring may bring more innovation to the beleaguered category.   Recent history has been brutal.   Tribune has struggled in LA and Chicago.  The Philadelphia Inquirer,like so many others big dailies,  has been unable to stanch the bleeding subscriber base, and many of the big newspaper companies carry debt levels that required healthy classified and national advertising franchises to service.

The few times I’ve visited Detroit it’s felt  like dead city walking.  Old buildings, bored employees, little diversity, marginal passion. I’m sure I have not seen all that Detroit has to offer, but the car industry feels tired.  When I visit newspapers they may have much of the same physical architecture, but they crackle with energy.  They have experimented, they still want to win.  The car industry may not be able to find its way back in this brutally global marketplace.   But the newspaper industry can find their way.  Pray they do.  Bloggers need newspapers to help set the agenda so they can frame it.  People need newspapers to ensure that institutions private or public do not run completely amok.

Think the financial crisis is bad?  Imagine what it would be like if nobody was reporting on it.

The Decline of the Goldman Sachs Brand

This weekend Wall Street Journal ran an interview with Robert Rubin yesterday in which he was surprisingly defensive about his role at Citigroup over the past decade. Here are some highlights:

  • He passes the buck to the executives throughout the interview claiming “they did not execute properly.”
  • His $115mm in compensation (before options!) over the past 9 years was totally justified and that he could have made more money elsewhere.  Passed on his bonus last year.
  • At the outset of his engagement with the firm, he wanted no opearting authority so he could have more time to flyfish and pursue other passions in his life.
  • Nobody saw the perfect storm coming that has created the financial crisis of ’08

Meanwhile in only two short months, Hank Paulson has done serious damage to his professional reputation as he failed to stay consistent for even one of the past 10 weeks or so.  First, TARP fails to pass congress.  Then when it does it doesn’t buy bad assets, preferring direct infusions of capital and nobody knows what’s happened to that money.    Now TARP  could be used for auto companies or home mortgages or maybe to finish off the new Jets/Giants Stadium.

Rubin, Paulson, and  Jon Corzine ran GS for approximately 15+ years from the late 80’s until Paulson took over at Treasury in 2004.  Paulson was instrumental in taking GS public a move that was controversial within the firm because some partners feared that they would struggle to maintain Goldman’s high standards as a public company and would succumb to the the pressures of quarterly earnings.

It is worth noting that Goldman’s current management has performed quite well (much better than other banks) during this process.  Goldman unwound many of their toxic positions (as far as we know) a year ago.

But Rubin’s “it wasn’t me” interview and Paulson’s “deer in the headlights” leadership have weakened their reputations and, whether GS’s current leadership likes it or not, the three politicians are deeply intertwined with Goldman’s brand.

I can’t help but think that Rubin saw his role at Citigroup as a well paid consulting role — a gift for a job well done as Secretrary of Treasury from 92-98.  I have no issue with  former public officials  collecting their paydays after time well served as our public officials.  Clinton charges  tons of money for speeches and that’s his right.  But I find it  disconcerting and possibly even disingenuous that Rubin doesn’t realize that $10mm a year (cash not  including equity) is an aggressive pay package for a non-opearting executive who has presided over a 70% decline in shareholder value during his tenure.  Shouldn’t he be more apologetic?  The defensiveness in the WSJ article reads like a creative teenager who knows he bears more guilt than he cares to admit.

During the early days of the TARP crisis, I worried that Secretary Paulson was too emotionally invested in Wall Street generally and Goldman specifically to think clearly.  I’m sure his assets are managed by a blind trust, but given the decline in GS’s stock price he must have been taking huge losses of wealth.  Is it possible that Paulson’s reverence for Wall Street and concern for his wealth clouded his judgement?

Perhaps Hank Paulson will become the Bush Adminstration’s Robert McNamara — the once hawkish Defense Secretary in the Kennedy And Johnson administrations who came to grips with his own failures in the Errol Morris documentary The Fog of War.   Paulson once preached deregulation at every opportunity, but presided over  the greatest systemic collapse in modern financial history.  Will Paulson own up to his failures or will he hide behind the always-available and impossible-to-combat excuse of “Nobody knew.  Who could have known?”

Both Rubin and Paulson are towering figures in the financial industry who have accomplished much in their storied careers.  However, their resumes have been at best setback and at worst undone by the past two months in the markets.  What we need from them is the honesty and integrity that made Goldman Sachs the great brand that it was for decades.  We need them to be transparent, reflective, forthcoming and most importantly, self-aware.  This history will help us to ensure our markets recover and run in a more orderly fashion in the years to come and that we place each of them where they deserve to be in the history of American Finance.

Credit Crisis for Dummies

Thanks to Fred Wilson, I was turned on to these great slides at Slideshare.


These slides will help many people understand our current financial predicament.

Moreover, it’s very exciting to see people are bringing great innovations and creativity to presentations.  If you are an entrepreneur who presents material with dozens of slides, hundreds of bullet points, and thousands of charts and footnotes — You’re dead.  You must fight the forces of darkness (investment bankers, lawyers, consultants) who tell you that venture capitalists need a “comprehensive deck” that they can distribute to their partners.

What investors need is entrepreneurs with great ideas who present well and get them excited.  Comprehensive information is for diligence.

Speak up on Sarbanes-Oxley

As part of our new progressive, inclusive new politics we can turn to former enemy turned relevant free-market intellectual  Newt Gingrich, who has a well-reasoned op-ed piece in today’s San Francisco Chronicle.  In it, he calls for repealing Sarbanes-Oxley.  This will help the broad economy and is essential for Internet innovation to continue.

One unfortunate result of the enormous wealth created by the Internet era was that it made the Initial Public Offering synonymous with “getting rich”  as opposed to “raising growth capital.”  It was less than 8 years ago that we referred to IPOs as branding events.  In retrospect, this notion revealed how unsophisticated and foolish we were as an industry — investor and entrepreneur alike.  Read Facebook director and and Accel partner Jim Breyer’s interview to take a stroll down memory lane.

During the past 8 years or so, startups have had really one path to exit — the acquisition.   Very few companies — especially in the Internet industry — have been able or elected to go public.  This is the result of two economic tragedies.  First, was the demise of the IPO as method to raising less expensive growth capital.  The willing participants of our industry — venture investors, bankers, lawyers, and enterpreneurs looked the other way and handed out friends and family shares with impunity.  Second, the Enron collapse and the subsequent distruction of Arthur Andersen  tarnished the entire private sector.  Enron’s destruction was so swift and severe that their executives, Ken Lay, Jeff Skilling, and Andy Fastow became the latest in a long line of  nefarious, avaricious American corporate executives.

The reaction by congress which had the duel agenda of a placating constituents and damaging the Bush administration (Enron had close ties) was Sarbanes-Oxley.  As Gingrich points out, even with SarbOx,  Bear Stearns, AIG,  Lehman hit the wall.  Repealing this legislation costs the government nothing (in terms of “stimulus”) and can potentially create thousands of new jobs even in the next year.

As an industry, we need the IPO market to return.  Young companies need multiple paths to liquidity.  But we — especially managers — must resist the temptation (often pitched by bankers seeking fees and investors looking for exits) to go public too early.  Public companies need proven, growing, and reliable financial metrics in order to withstand the scrutiny of the public markets.

I believe the new administration can repeal or amend Sarbanes-Oxley in 2009 and companies should prepare for the changes.

When Obama Wins

Roger, I’ve been thinking about your doomsday post that you published yesterday.

This is the worst seven weeks in America since Sept 11 to October 31st 2001.   Seven years ago that period was marked by an emotional state of fear that was totally unfamiliar to us. Remember riding the subway or airplanes in the aftermath?  We were scared.   Our personal safety and sense of peace was inexorably shaken by one coordinated act of staggering terror.

These six weeks are a 9-11 of economic dislocation.  Many major media outlets and several political figures have used the world Depression, a period of 25-33% unemployment in America.  Confidence in Bernanke and Paulson eroded as both men failed to author a coherent strategy and suffered the embarrassment of misjudging congress. By the time they figured it out, trillions of dollars in wealth was destroyed (much of it outside of America) as we came to learn that our entire country is overextended. It really sucks.

Yet  this economic catastrophe destroyed McCain’s meager chances of pulling out a narrow victory.  Perhaps we will view this timing with gratitude in a decade.  2008 was already a Democratic year, but the economic meltdown has ensured that we are about to elect a very, very different person as our next President –a true progressive.

Let’s define progressive for the purposes of this post.  Here’s a paragraph from the New Democratic Network site.  It’s instructive:

… (for) progressives to succeed in the 21st century as they did in the 20th, they will have to do three things: offer a new governing agenda that speaks to the challenges of our day; master the new media and technology tools that are changing the way we all communicate and advocate; and understand and speak to the radically new demographic make-up of today’s America.

Progressives are not synonymous with liberals.  We systematically thinking about government problems in the context of new technologies, new demographics, and, I would add, the forces of globalization.

Barack Obama has extremely progressive politics and he is going to have a much larger mandate than Bill Clinton had when he took office.  Remember Ross Perot won nearly 20% of the vote in 1992.  This will be the biggest opportunity for progressive political change since the Johnson administration.   LBJ was among the most gifted politicians of the last 50 years.  If Obama can match his skills (no way he could match his experience) we are in for some big changes in America.

And these changes will be felt throughout the world.  For all the talk about how interconnected the global economic system has become, nobody that I have read is talking about what the impact of Barack Obama’s election will be on the world’s politics and policy.  We are about to elect the child of African man to be the President of the richest nation on Earth.  Americans will finally demonstrate to the world the true measure of our messy democracy and convincingly demonstrate that the  flavor of our multi-cultural republic is not some abrigded version of democracy in countries where minorities have no real hope of grabbing the leadership.    Do you really believe a peasant can become Premier in today’s China?   An “Untouchable” in today’s India?  Where are the minority political leaders of France, Germany, and the United Kingdom?  This isn’t simply symbolic.  When pundits discuss Obama’s opportunity to  “restore American stature”, there has to be a positive economic outcome from this reconstruction.

Look, I would be lying if I told you, I wasn’t anxious about the American, global and Internet economies.  I have had more headaches this month than in the past 3 years.  It’s stressful.  But at the same time, it’s amazing to me that we are one week away from the most important political moment in the history of the country for anybody under 50 and yet few in our industry media landscape are discussing  the impact the new administration can have on the startup economy.  Here’s a quick example: Obama himself probably understands the issues with Sarbanes-Oxley and how closed the IPO market has been for 6 years.   My guess is that these laws will be rewritten within 18 months.  This will be a vital change for an industry that has become blinded by the illusion that every little company can be acquired by Google.

The United States has faced significantly worse crises than what we face now.  The difference is that we are no longer a nation of shared sacrifice.  We are a nation and a world of wealth creators.  It is how we have been trained and how we train aspiring Americas.

We have spent three weeks all aflutter about the Sequoia slides and the Calacannis doomsday scenarios.  Meanwhile, the country is about to be given its most progressive politician since Franklin Roosevelt.

The Obama presidency will not be a panacea for this financial crisis.  But if the global economy has become this interconnected then surely the prospect of a progressive American presidency can catalyze meaningful world change.

Roger, the only thing we know is that we cannot know.  The difference between entrepreneurs and everybody else is a higher appetite for risk and an abiding faith that the glass of progress is half-full.  Like everybody who gets older, I’m getting more pragmatic with age.

But it sure feels good to think young again.