Whatever It Takes

Every morning when I go to the health club, I’m reminded of just how much of a financial mess we are in, what it will take to get out of it, and why of some of us may be mired for quite some time in the economic muck and debris. That’s quite a bit for one trip to the gym, and it’s all because of the locker room attendant Andrew.

The other day when I saw Andrew, he was ecstatic: “I had good news today from the club. I get to work on Saturdays. Now I will be able to work six days a week.”

“Some things are lost forever. This includes certain jobs, industries and markets. It also includes the time and opportunity cost wasted while waiting for them to return.”

Mind you, Andrew is a laid off professional. He worked in the financial services business. Like many of us, he had a substantial portion of his savings invested in equities, and lost much of what he had in the market downturn. Now he works in the locker room of a gym attached to a financial services center. You would think that seeing the (remaining) well-coiffed, well-dressed, cell phone talking, Blackberry-tapping financial professionals who breeze through his locker room would get Andrew down.

Not at all. He is always upbeat, always with a positive attitude.

Why? Because he needs to support his family and he will do whatever it takes to put food on the table, and ultimately, get back on his feet. So working five days a week is a panacea to him. Getting the sixth day is a bonanza.

Whatever it takes.

I see a lot of Andrews out there. I find it encouraging. That’s what we need to navigate our way out of this mess. We need people to continue to work – no matter what the job is – to continue to spend, perhaps even save, and participate in the economy.

Unfortunately, I see a lot of people out there who should be a little more like Andrew but aren’t. That’s a source of concern. Because they won’t do whatever it takes. These people are a weight on our economy. They don’t inch it forward, but rather drag it backwards.

It makes wonder: What are they waiting for? The status quo to return? Some things are lost forever. This includes certain jobs, industries and markets. It also includes the time and opportunity cost wasted while waiting for them to return.

Andrew may never get back to the financial services industry. But you know what? He might find a whole new career path. He just might end up running that club one day, and will never look back. All because he always did just one thing: Whatever it takes.

When Worlds Collide

I have the privilege of interfacing with two different and distinct worlds: financial and academic.

On the financial side as a co-founder of ARKequity, a firm focused on start up and early stage ventures, I get to see comprehensive business proposals in their various incarnations: poorly constructed and presented transactions that will never get done, well thought out transactions that will get done because they are too good not to, transactions that may get done someday but will take time and refinement, and of course transactions (and their accompanying dreams) that are on the verge of dying because their entrepreneurs are close to giving up, wondering how financial firms with a lack of vision could derail their businesses by not recognizing upside potential.

“What I see in the worlds of business and academia – where the former increasingly requires a broad, generalized approach, while the latter is increasingly offering more narrow specialization – presents an interesting contrast.”

On the academic side, I serve as a trustee for an independent coeducational preparatory school. In this capacity, I think a lot about our educational system, where I see schools increasingly teaching and focusing more to narrow specializations and away from more generalized and broad-based curriculums. I frequently wonder if the ideas we held so strongly regarding what constitutes a comprehensive education are outdated.

This becomes ever more clear to me in my role as an investor. Specifically, it is essential to understand all of the components that come into play in a transaction to properly evaluate its suitability, not just the technology, or the market or the regulatory framework. For instance, I am not an expert in health care, but as a healthcare investor, I better have the ability to understand all of the operating activities of a health insurance company start to finish if I am evaluating whether or not to fund a start up health plan administrator, which I did, and which to date – fingers crossed – is prospering.

What I see in the worlds of business and academia – where the former increasingly requires a broad, generalized approach, while the latter is increasingly offering more narrow specialization – presents an interesting contrast. But this is more than idle armchair musing. I can’t help thinking about how they are connected and how there needs to be a proper balance between these approaches.

I came to this conclusion because I believe specialization is what got us into our current circumstances. Ford focused on gas-guzzling trucks. GM focused on behemoth SUVs. Airlines focused on air travel rather than transportation. Compaq focused on computers. Tower Records focused on CDs. The list goes on an on.

In finance, when banks originated, underwrote, funded and held mortgages, the chain of accountability/responsibility for these activities was clear and everyone involved was responsible for ultimate asset performance. And of course, there were fewer foreclosures. When the process evolved to origination being done by one firm, funding by another, servicing by another, then repacking/securitizing by yet another, it became difficult for all the specialists involved to see their way through the entire process. Compound this by large amounts of capital seeking yield, and you can see one of the reasons why we ended up where we are.

If over-specialization led to financial trouble in one world, this very naturally leads to the question for another: are we perhaps doing a disservice to our high school and college students by channeling them down a path towards narrow specialization? Perhaps. There are issues of career fulfillment, and I recognize there are many professions that require a great deal of intensive and specialized training. Still, are we taking a risk that the apparent costs of a narrow focus in the worlds of business and education will be so great as to be fundamental game changers for the next generation? It may be that the costs this generation has already borne for its trespasses have already changed the game for their own and future generations.

Ever since I can remember, people have been bashing the U.S. educational system: Our test scores are too low; not enough emphasis on math and science; our students lack discipline and are not as prepared as their foreign counterparts; our teachers aren’t motivating their students; there is too much emphasis on sports, and so on.

But throughout all this, the United States has continued to be the undisputed world leader by almost any economic or social measurement. I believe this is because our educational system, in it’s lack specialization, has always spawned creative thinkers and entrepreneurs who have been able to re write the rules in such a way that we continue to win. Warren Buffet, Bill Gates, Steve Jobs, J.W. Marriott, Jack Welsh, as well as the many trailblazers in the emerging social media that is redefining the news business, come to mind.

So, if too much specialization leads to costly errors, might more generalization lead to greater creativity and the generation of the kind of wealth that just might be able to get us out of the hole we’ve lately dug for ourselves ?

A Blinding Grasp of the Obvious

The other day someone who I respect a lot said something that was really quite remarkable.

He didn’t say it with any particular amount of drama, or build-up, as if it was something he’d thought about for a long time, and had finally reached a conclusion and had to spit it out. He said this, almost in passing:

“You know, the only transactions that are going to get done nowadays are those with government guarantees.”

Upon reflection, he’s quite right.

The evidence is all around us. According to Thomson Reuters, asset backed securities (ABS) volume declined 82.2% during 2008. The market for mortgage backed securities (MBS) declined 80.2%. Total residential real estate securitizations declined 95.1%. Dismal as they are, even these numbers are misleading in that they include deals from the first half, before shock and awe set in. The fact is, volumes in the forth quarter were virtually nil.

And while I am sure my friend’s conclusion is correct, I’m not sure of the reason why it’s so. Perhaps it’s because there’s so much TARP money out there in so many different forms, that fiduciaries would be foolish to not purchase riskless securities that gave them a 150 basis point premium over Treasuries. If that’s the case, it’s just a matter of time before we burn through the liquidity in pipeline, and once primed, things get back to normal.

But let’s say we burn through several hundred billion in government guarantees, and the pipeline is not primed, then what? Then – to borrow a page from my friend who has a blinding grasp of the obvious – then we go back to zero volume. And then we know that the only emotion left in the market is fear.

Personally, I don’t think it will come to this. The multiplier effect on $700 billion is just too large.

But meanwhile, while we await our fate, issuers and would-be issuers should take note of these historic times. The government, who was always your partner when it came time to splitting up profits, is now your partner when it comes to sharing and bearing risk. And to me at least, it’s quite obvious, that we’ll never, ever see a deal like this again in our lifetimes.