The goal of this post is not to make a travel advertisement for Colombia; or a geopolitical warning about Ecuador.  Rather, it is to muse on how easy it is for external views on a place to ossify, and how, to an outsider, particular geopolitical perceptions all too quickly conflate: Ecuador – part of the “good South America;” Colombia – part of the bad.

I found Colombia to be a great place: the people were friendly (a local surgeon we ran into on the street offered to give us a ride to dinner when he realized we didn’t know exactly where our restaurant was), the weather was lovely – hot, sunny, with spotty but high Carribean-esque cloud-cover, and getting around was straight-forward.  Go.  To Cartagena (great food scene), to the Islas Rosarios (we were on Isla Pirata, which is adjacent to Pablo Escobar’s former private island lair) – I found Colombia to be a terrific place for a vacation.

Ecuador was another matter: hosted by a friend from college, we were forewarned to be very careful about which cabs to get into (lest we get kidnapped or worse) and to not enter bars, for risk of local roughnecks responding to our obvious US-anianness.  Ecuador’s government recently aligned with Hugo Chavez of Venezuela (yes, I say this is a definitively bad thing).  Talk of widespread property seizure (individual and corporate) has led to capital flight, and a collapse in the local real estate market (as anyone who can liquidates their hard assets so as to expatriate capital).  And unrest is visible: in one particularly intense 20-minute interval, our host was pick-pocketed by a thief ring (we pieced this together after the fact), we were hit with pepper spray as police beat back protestors outside a social event for the rich, and we witnessed some unpleasant police violence toward a group of teenagers who had some role in the protest and following conflagration.

On its current path, I can’t imagine Ecuador remaining a tourist-friendly place.  Perhaps this will be all the better for the Galapagos, suffered as they have from over-visiting.  And so perhaps perceptions will change.  Fortunately, Colombia is right next door.

I intellectually believe in what I just wrote; still, the guttural aspects of the sport – its intensity, its colors and noises, compelled my attention in a way that few other things have.  What is it about bloodsports that allow them to so easily grasp our attention?  Would it be different if it were man v. man? – indeed, I think not.  In writing this I realize I am admitting to a certain primal hold that something, somewhere deep down has over my worldview – or at least that perceptory filter that modulates what I enjoy.  Does this admission compel me to curtail that which is internal to me, or, rather, does this point to the need for institutions to help us save us from ourselves?  I strongly believe the latter to be true, even though the Hemmingway-wannabe in me hopes to see these fights again.

Liked: the flow and tone of the narrative; the range of stories included; the authors’ effectiveness in bringing the central characters to life.

Maybe Not For Everyone: while I’d recommend this book to history buffs, for those looking for a more direct tie to today, there are other, better reads (see posts below).  This is a fun book, and one with great detail, but if you’re looking for a first primer on how central asia got the way it is not a good starting point.

Ok, I buy that’s one reasonable path.  But for me to believe the argument, I’d want to see a pretty detailed assessment of the impact on imputed growth expectations in these companies’ share prices.  Their strong balance sheets show they can grow opportunistically — through acquisition or internal investment.  Moreover, even if some acquisitions fail, or the price paid ends up being unjustifiably high, there are others that are quite successful (MySpace still looks pretty brilliant for NewsCorp.).  So, isn’t the real point that companies should seek to grow, profitably, and acquire wisely?  Or do we really think their stocks will move like GE’s?

April 7, 2009, 1:11 pm <!– — Updated: 4:17 pm –>

Google and the Temptations of Being Cash-Rich

• The Expat Model of Fund Management and Financial Services is Dying: I was last in Hong Kong exactly five years ago (for the Hong Kong 7s); when I was here last, energy and capital were flowing East, exuded by western (American, W. European) funds and fund managers. Then, my flight over from NY (as my flight over from Boston a few years earlier had been) was packed.  Fund managers snapped up talent bellering that:  “HK as the gateway to China” — a bridge for capital formation and indirect investment into “Greater China”.  Now, purportedly, Och-Ziff, Soros, etc., who so eagerly opened presences here in the 2004-2007 boom window have wound down their operations.  ExPat Club and School enrollment is apparently plumetting (someone really ought to create a private school enrollment indicator to measure the health of global financial centers — from what I’ve seen it would work brilliantly in NY, London, HK, and Singapore) and I had half a dozen local friends ask whether we’d be willing to hire here – sending me the CVs of their formerly top-ranked banker, HF and PEq friends (all expat).  Perhaps most tellingly, the business class section on my early-week, Cathay Pacfic flight from JFK to HK was 2/3rds empty.  And I’m writing this from the Cathay Pacific business lounge in HK, preparing to get on my flight back to NYC, and I’m one of a handful of whitefaces in a packed lounge, preparing ethnically Chinese business to board their flights to Tokyo, Sydney, Kuala Lampur and Dubai.  If I had to make a bet, the former expat model in financial services/fund management here (HK) and potentially also in Singapore may be in a potentially terminal tail-spin.  Why employ expensive non-Chinese speaking foreign talent to allocate capital or advise companies when locals are better-suited and oftentimes cheaper?  A correlary of this argument might be that western Fund-of-Funds and Advisors will be of increasing importance, as they guide western capital through local intermediaries to find primary opportunities on the continent.  Anyone — who speaks Chinese — want to start a Asia FoF with me? 
• The Asian Upper-Middle Business Class is Here to Stay — and They’re Better Positioned Than the “Global Western Businessman”: Across Asia the Tycoon class have longed been watched with envy.  Likewise, western consumer-focused businesses have eagerly tracked the rise of the Asian middle-class.  But what about the Asian upper-middle? — the equivalent of the 10-branch store owner who drives an M3, golfs avidly, and whose kids drink themselves senseless before going to USC business school and taking over the family business?  The Asian version is probably better-positioned, because they speak Chinese, were oftentimes educated (at least partially) in the west so they are globally comfortable, and also because there are SO many more business opportunities.  As an expample, a Chinese-speaking contact in Singapore is producing films in China and India, investing in restaurant management in Dubai, and banking across the SoPac — and he’s part of a two-man show!  The very immaturity of many local markets provides a HUGE opportunity for a local, saavy, hard-working business people…whereas the US only needs so many new “bar-club” owners, franchisees, or multi-branch commercial insurance agency-owners.
• The Business Community That Matters is Still Small: The only good news I found out of my trip (thinking in terms of a westerner who might want to do business here) is that the folks here who matter as a western business-person are countable, known, and, if you find the right “bridge-head” (usually a US-based, western-trained Asian biz person who’s operated here) not that hard to access/sway to work with you.  True, these locals may be richer, better-educated, and more mutlilingual than you, but provided you are rep’ing a reasonable product or idea, they’ll listen to you — they are, after all, good entrepreneurs.

A few concluding tirades: we in the US need to develop more products that are reasonably-priced and sticky for Asian consumers.  Music and luxury brands alone doesn’t cut it.  We need to develop strong distribution relationships with local partners on the ground here — because in-person matters, and the chance we’re going to learn Chinese and come out here is slim-to-none, and we need to ever-more focus on Education — language, technical, cultural — not only so we can have some chance of keeping up, but also so we can continue re-exporting western-educated (secondary, tertiary) Asian-based business people who are friendly to us.  Otherwise their markets are going to let them beat us.  It’s just a numbers game, after all.

“In the weeks after the Lehman Brothers investment bank collapsed last fall, Robert C. Lieber, the deputy mayor for economic development, was predicting that Wall Street would confound doomsayers by bouncing back faster than expected and reaffirm New York as the financial capital of the world.

Last week, Mr. Lieber and his colleagues at City Hall sounded a very different tune: most of the financial jobs lost in this crisis, they predicted, would not be regained in the next several years — if ever.

“We’re not looking to recreate what was here before,” Mr. Lieber said. “We’re acknowledging the changes and looking to diversify within financial services and outside financial services.”

That admission, as much as any other, highlights just how significantly the thinking about Wall Street has changed in a matter of months.

Early last year, city officials were still fretting about the rise of London’s financial industry and the competitive threat it posed to New York. Now they are worried about filling a huge hole in the city’s economy while trying to retain thousands of laid-off financiers before they scatter across the globe.

They now forecast that the financial services sector that powered the city’s prosperity will shed 65,000 jobs as a result of the financial crisis. Almost half of them will come from the highest-paying pursuits like investment banking and the sales and trading of stocks and bonds, according to an analysis the city commissioned from the Boston Consulting Group.

The study concluded that what remained of the sector would be far less profitable than it was. In 2007, its $70 billion profit amounted to about 22 percent of its revenue, the study found. But it concluded that that profit margin could decline by half or even three-quarters before it started to grow again. The speed and depth of the reversal of Wall Street’s fortunes have shaken the faith of city officials in the staying power of the biggest corporate employers and driven a rapid overhaul of their economic development policies. No longer can they count on the financial sector to supply one-third or more of all the compensation paid out in the city, as it did in 2007, or to fill the coffers of the city and state governments with tax revenue.

Mayor Michael R. Bloomberg’s news conference last week in a converted warehouse near the Holland Tunnel revealed a stark turnabout in his administration’s approach.

It had been only four years since Mr. Bloomberg piled up more than $100 million in incentives to persuade Goldman Sachs, one of the world’s most profitable companies, to build a 43-story headquarters near the site of the destroyed World Trade Center. That building, still under construction, was designed to have hangar-size spaces where hundreds of traders could buy and sell all sorts of high-risk securities. Trading floors like those were supposed to help set New York apart from its rivals.

But last week, Mr. Bloomberg laid out a very different vision of the city’s future. Standing in a large, empty space a mile north of the financial district, he pinned hopes for a financial revival on businesses of a different scale: start-ups conceived and managed by the defrocked wizards of Wall Street.

Rather than write them off as losers in the casinos of capitalism, city officials are encouraging them to start over, the Silicon Valley way. As part of a $45 million program, the city will subsidize garage-size offices as hatcheries for their most promising ideas for new businesses in finance or other fields.

“This represents a fundamental shift in public policy,” said Kathryn S. Wylde, the president of the Partnership for New York City, a group that represents the interests of big corporations. That shift, she said, accelerated rapidly last fall as it became clear that the big firms that had been the pillars of economic growth would be shrinking and recasting themselves for years to come.

“When the financial crisis started to hit and we began to get the first information about the potential losses of jobs and revenue, I think that made the conversation about how does the industry change,” Ms. Wylde said. “One of the things we were interested in changing was the global image of New York as a center that welcomes entrepreneurs and that we won’t cede that position to Beijing or London or M.I.T.,” she said, referring to the Massachusetts Institute of Technology.

Or Chicago. One new focus of city officials’ attention is maintaining and developing financial exchanges and other infrastructure for the sector. Among the current concerns is catching up to the Chicago Climate Exchange, which is trying to establish itself as the hub for the trading of greenhouse gas emission credits. The New York Mercantile Exchange started trading a few environmental securities last year as a prelude to what it calls the Green Exchange.

The Green Exchange employs only a few people so far and all of the trading on it is expected to be conducted electronically, said a spokesman for CME Group, which owns it. But city officials are more interested in the cachet and magnetism of being the home of what could be the next big thing in trading and finance.

That is why Mr. Bloomberg introduced Barry E. Silbert at a news conference last week. Mr. Silbert, a former investment banker, is the founder and chief executive of SecondMarket, a five-year-old company that creates markets for trading of obscure securities and assets, including claims against Lehman Brothers in bankruptcy court.

Mr. Silbert’s company may never replace more than a handful of the tens of thousands of jobs lost in this downturn, but his attitude about the possibilities is what city officials want to capture and spread.

“Why start a company here?” Mr. Silbert said. “Aside from the robust infrastructure, entrepreneurs come to New York for its most abundant resource: smart, ambitious, innovative people.

“The next chapter in the history of Wall Street is being written right now,” he said. “Never has there been a need for such a cultural and intellectual shift in thinking on Wall Street.”’

There are many accounts of our current global economic crisis – characterized by volatility, dislocation, and market failure – that lay out its historical antecedents and the resultant draught of credit and liquidity—including the specific failure of the IPO markets in the United States.  In quick summary, the world financial markets have been shaken by a collapse of the U.S. mortgage market – especially in subprime – as these problems have destabilized global credit markets, previously inflated on uneven footing.  Global productivity gains over the past 25 years and low central bank lending rates resulted in falling inflation and a low cost of debt.  Easy credit fueled U.S. consumption and deficit-spending which, in turn, led to uptake of U.S. treasures as surplus-earning countries invested in these assets, and this demand in term restrained borrowing rates, thereby sustaining easy credit – the total value of which ballooned.  Access to low-cost credit allowed an expanding base of Americans to purchase homes, and the resulting demand uptake sustained artificially high and growing housing prices.  Accelerating this mortgage credit expansion was the design and distribution of a range of structured products – Mortgage-backed securities (MBS) as a simple example – that allowed default risk to be spread and fixed income rates to be distributed to those most willing to bear their underlying risk.  When housing prices eventually started falling in the United States the music stopped — and credit markets froze.  With no access to credit, significant mortgage default exposure and un-measurable counterparty risk, banks globally began to fail.  These problems cascaded across the business ecosystem, hammering corporate incomes and leading to massive layoffs, further mortgage defaults and declining corporate and consumer spending, culminating in a continued downward economic spiral, the bottom of which we likely have not yet seen.

Even before this cascade became widely recognized, US IPO markets were already in trouble.  Swept upward by the “tech bubble” of the mid-to-late 1990’s, the IPO markets skidded off-course between 2000-2002, as a threefold impact of the tech collapse, 9/11, and a series of corporate governance crises combined to constrain investor appetite for U.S. equities, undermined interest in still-developing business models, and fomented a set of regulatory overhauls that increased the cost of becoming and staying a public company.  Down from their peak level in 1997-99 of hundreds of exits per year, the IPO markets started to recover in 2004-2007, but with the global financial crisis in full-swing, fell to their lowest level in years in 2008 – with only several dozen exits, of which only 7 were for venture-backed companies.  Gone are the days when a company can reasonably expect to get to a public exit (IPO) within 5-6 years—dramatically changing the game for venture funds who had relied on speed-to-exit and portfolio-adjusted risk to support high IRRs and ever-enlarging funds, bequeathed by LPs eager to earn high returns.  Along with this, traditional strategic acquirers – Microsoft, Oracle, IBM, Yahoo, and now Google – have tightened their belts, unwilling to deploy capital in a down economy.  And as limited partners globally seek to rebalance their portfolios in the face of heavily-declining equity markets and a desire to get away from leveraged-based funds (LBOs), venture funds face redemptions that they can’t meet due to longer portfolio company holding periods.  Returns are sagging, capital is skittish about piling into the venture fund class, and as a result a fundamental engine of American innovation – functioning capital markets for early-to-growth stage companies – is idling in neutral.

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Things I Wish For In The New Year

Ascent of Money – Niall Ferguson

Ferguson is one of my favorite historians, hands-down.  His hitiographic approach — international history — seems like an optimal one for tracing the thematic emergence of the most important aspects of our modern financial system: banking; bond markets; share ownership in limited liability companies; credit/money markets; risk management systems — insurance and other hedge instruments.  He also does a great job of capturing many of the more colorful characters involved in these historical developments. 

While I do think this is a must-read for anyone interested in the topic, one nit I have with the book is it’s facile jump from historical examination to an explanation of our current, emerging crisis.  To me, the book both failed to tie its various financial themes together in this current events study, and didn’t give this study the depth required to have these chapters stand as one of the most significant parts of the book.

The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means – George Soros

This was a great paper — but a book it should not be.  Soros’ separation of the housing bubble v. the long-term credit/leverage bubble we’re seeing — and the associated de-gearing we’re experiencing — is useful and extremely well argued.  For these reasons this is a worthy read.  That said, his repetitive intro chapters — how many times does a smart person really need to be introduced to the conecpt of reflexivity?! — and overall lack of coherence from section-to-section really make this a good paper bookended by interesting supporting essays.  If you read it as such you won’t be dissapointed.

The Crash of 1929 – John Kenneth Galbraith

The Great Crash.  Galbraith.  ‘Nuff said.  A history most relevant to what we’re seeing: the vagaries of varying government involvement and de-regulation; investor panic; rampant speculation; non-transparency.  Sound familar?  Read this book.

The Theory of Economic Development – Joseph Schumpeter

I admit I tend Schumpterian — even as Keynsianism seems to be sweeping back into favor.  This is a classic, and an expansion on a set of Schumpeter’s essays that I devoured when I read Growth Economics way back when.   Fluidly written, this book separates and rigorously — and interestingly — examines the key components of an economic growth system: Capital; Interest; Capitalists (risk capital lenders); and Entrepreneurs (process and product innovators — separate of Managers).