Come on down

When most people hear the word ‘mentoring’ they probably think of something like troubled teens breaking windows, or take your daughter to work day, or some medieval apprenticeship in axe smelting. Or maybe a couple junior partners ensconced in wing-backed chairs sipping vintage chardonnay while talking about penetrating market share. But they don’t usually conjure up images of themselves, at least not concrete ones. Mentoring has become a chore, a vehicle to log community service or pad a resume or atone guilt.

But for many young professionals, the familiar path for attempting to develop a meaningful career goes something like school, internship, cold calls, email solicitations, happenstance job postings, and submitting applications like buying lottery tickets. Getting a job you actually really want, or honing useful experiences in a field, is about as deliberate as falling through a trap door. It kind of either happens or it doesn’t. Harvard either sends you a big manila folder or a wafer-thin legal envelope. That principal either calls you for a second interview or fades into utter oblivion. You show up the first few weeks of work and either realize you found something that genuinely makes you happy and productive, or you realize you didn’t need the last 8 years of school to answer the phone when it rings or discuss 1970s cultural trivia with co-workers you can’t stand. It kind of just happens. And in the 21st century, innovations and widgets and databases designed to mute this uncertainty and randomness seem to just accelerate it. Now instead of a few job postings we’re not sure we’re interested in, we can see a thousand, or instead of five bosses we don’t know we want, we can network with fifty. But going in for that first face to face in some downtown office or stately board room while being offered free drinks and being peppered with questions still seems just as ice-cold evolutionary as antelope crossing the Serengeti. Degrees and core competencies and letters of recommendation may get you in the door, but you still either sink or swim. It’s all decided usually in matter of minutes or hours, or if you’re lucky days. There is rarely that trial opportunity, an environment that isn’t so clearly and awkwardly motivated by self interest. I want this job, you want to finish the paperwork and successfully close a headhunt, so just try to resist my effusive charm and unrestrained intelligence. The fact is most people think they’re more insightful and unique than they could ever hope to be, and so this shock and awe approach to dream career acquisition usually goes about as well as its military equivalent.

The reality is we can more easily follow a feed of Britney Spears’ daily caloric intake than vaguely describe what it is we want to do every day with job title ‘fill in the blank.’ We develop a better rapport with our cleaning ladies than we do with people we may potentially spend a majority of our waking hours with. Years of school and imagined lives and aspirations and resumes are crushed together in one giant professional particle accelerator, and it either spits out a job you like, or maybe consumes your life as fuel to swallow the universe whole in one giant eternal black hole. We test drive cars but not careers, we rate 30 second youtube clips but not vocations, we try on a pair of slacks at the mall but not a job offer, we scorn Wall Street bonuses but know we just wish it was us on the receiving end. And in these little gaps is where I think there is a role for mentoring. Mentoring can be more than trying to save people from entering the penal-justice system or reduce an uptick in attrition. Mentoring is where droves of teenage aspiring financiers can have a fail-safe environment to test their assumptions, and would be engineers can stress-test career pathways before they commit hundreds of thousands and years of their life. It's where people can actually pick up and hold that big shiny prize they've coveted forever. It's where people can discover what they want and what they like.

There’s a billion gray-haired professionals populating skyrise cubicle farms, slogging through subways in yellow sweat-stained polos, negotiating morning rush hour at the Starbucks drive-thru, sifting through folders of porn on the weekend, who deep down know they want more. And there are at least as many religiously, compulsively anally driven twenty-somethings whose main mental construct is centered around getting a usually painfully generic big break that will deliver them from their current stalled ascent up the career escalator. Seems like supply and demand groping for a market. And rather than unite them in a high-stakes, hire or fire, promote or shelf, judge or patronize, win or lose, zombie dance, how about actually try it, whatever it happens to be. This is why I created Plategro.com. And while I think it has a likelihood of success about the same as an AIG subprime mortgage getting paid back, I think it’s good to dream.

Ok, after seeing what Chase and Goldman and co have been able to do in the fixed income and commodities sectors this quarter, I officially rescind my last blog post. I want cap and trade to pass, I want it to be a volatile market, I want some index to short, I want as much consolidation as possible, and I want a bunch of government agencies with overlapping responsibilities and a slew of new regulations with no established case law whose fissures can be easily navigated. In the process there will be so much liquidity generated that banks will be able to underwrite lots of new clean energy investments. And with the intent of the cap being to actually incent new capital purchases, maybe it will be a sustainable boom not bubble. And as some have pointed out, the climate doesn't have a constituency, so how could we expect any different sort of political economy? Probably accurate. What was I thinking?

The Audacity of the Grand Bargain

Seventeen years after George H. W. Bush signed the United Nations Framework Convention on Climate Change, committing the U.S. to seek greenhouse gas emissions limits, one chamber of Congress finally passed the first U.S. climate change bill in history. Coincidentally this fell on my birthday- I always thought I was the climate messiah. Too bad the 1300 page American Clean Energy and Security Act of 2009 is full of so many complicated, unnecessary and potentially dangerous provisions. The proposal commits the U.S. to reduce emissions 17% below 2005 levels by 2020 and 83% below by 2050, sets up a 20% renewable energy portfolio standard by 2020, and establishes a menagerie of committees, criterias, offsets, definitions and standards on how to measure and verify everything, all to be figured out later when these regulations are drafted.

This bill hands out all rights to emit carbon dioxide and five other gases to industries for free, in direct contrast to Obama’s campaign pledge. The results are windfall profits and the potential for an energy driven asset bubble. It provides no assurances that the price placed on carbon will actually be one that makes clean energy profitable, which was exactly the experience in Europe when they established the same system in 2005. Credits were handed out for free, and in order to get votes everyone got a big piece of the pie (resulting in more credits being handed out than there were emissions), and the price has hovered at near $0 per ton ever since, while Europe has lived with a huge regulatory bureaucracy and burden while actually increasing its greenhouse gas emissions. And if the price of carbon gets “too high”, well then more permits are handed out for free to lower the price. And if the price is still too high, well then the cap no longer applies, so everyone paid a lot of money for a big complicated system that didn’t reduce emissions. Not to mention that we are in the midst of the worst recession in three generations, largely precipitated by an asset bubble and excessive speculation in the housing market, a market that has been studied and regulated for hundreds of years. This bill sets up a multi-trillion dollar market for the next 50 years, one in which the U.S. has no experience. The same people who pushed this through so voraciously will be the same ones decrying the excesses of carbon credit default swaps and derivatives in 10 years after we have seen another huge unsustainable bubble pop.

Then there is the issue of offsets, new emissions credits that can be generated when firms offset their emissions with something that captures carbon. Except, what exactly that means and who measures it will be figured out later by the Department of Agriculture. This will take years and many lawsuits to resolve, and even then the standards may be overly broad and subject to some very clever abuse by Wall Street, who frankly I put my money on over USDA any day of the week when it comes to cleverness. Not to mention the agriculture community is in large part the regulated party, a slight conflict of interest. Then there are the trade sanction provisions. This will allow the U.S. to bring action in the WTO and UN against countries who “artificially subsidize” their products by not attaching the same carbon price as the U.S. India and China have already drawn a line in the sand and said they will reciprocate any climate change tariff or quota and challenge our actions via arbitration, which typically takes about a decade to resolve. Of course by the time this is resolved we’re already supposed to have reduced emissions nearly 20%, so we’ll either have to march on with significantly high energy costs while India and China walk, or wait until a nasty trade dispute is resolved. And of course the bill raises $650 billion in new tax revenues, not to be recycled back to the American people.

Much superior to this convoluted grand bargain, we should place a price on carbon so it is the cheapest alternative, rebate it back to the American people, and cut out 1000 pages of special interests pay-offs in the process. If we want a clean energy economy, we don’t need the government telling every business and consumer exactly how much carbon they can emit every year for the next 50 years. And we don’t need dozens of new programs and thousands of new bureaucrats trying to figure out how much we’re emitting in the first place. All we need is for clean, renewable energy to be cheaper than dirty finite energy. If clean energy is cheaper, consumers will buy it, there will be demand pull. If clean energy is cheaper, it will represent a larger profit margin and greater return on investment for producers, there will be supply push. The price is the market maker, not the government. This bill could very well result in the grotesque situation of firms producing unprofitable products for consumers who are forced to pay more for them. Many people on the Hill act as though once you acknowledge the reality of climate change, there can only be one way to address it. There is no discussion of the multiple potential approaches and associated tradeoffs. Just one bill, and a lot of gray-haired men ramming it down everyone’s throat. The consequences of such little context for debate could be some very unintended consequences.

The Obama Administration is pushing hard on so many mega issues- health care, financial regulatory reform, energy and climate change, the largest budget in the history of the world, and now it looks like immigration too. The implicit tradeoff with this ‘boil the ocean’ approach, in contrast for instance to a more incrementalist one, is it requires engagement with the entire universe of very powerful special interests. You either have to commit to hard slow negotiations with the lobbies, and take very public and potentially damaging defeats in the process, or give them broad sway in order to get votes and flattering headlines, but live with policies you may come to regret. Obama and chief whip Emmanuel have consciously chosen to attempt to complete their entire agenda in what would be a truly historical first term (and guarantee for a second) in exchange for being very willing to play ball with the interests they want to regulate. The stimulus was a prime example. The White House sent a list of broad goals and top line numbers up to the Hill, and like throwing meat to a pack of ravenous dogs said, “fill in the details.” Lobbyists get a bloated bill full of new government contracts, Congress gets the support of their local haymakers, and the White House gets a resounding legislative victory. We also get a lot debt, a still increasing unemployment rate, and a bill the American people are increasingly souring on. If all that bill produces is a few hundred thousand jobs, and nearly a trillion dollars in new debt, that could be just the opening the GOP needs. (*POSTSCRIPT: Excerpt from Fall 2010 Paper: "Mr. Obama is already faced with the reality that voters have, fairly or not, decided that his first big effort to revive the economy, the $800 billion package enacted right after he took office, was a qualified failure, and that anything tagged as further 'stimulus' will be cast by Republicans as throwing good money after bad.")

And if all this climate bill produces is mountains of new regulations, costs, and system gaming, with few emissions reductions (like Europe), then the White House just gave the GOP a gaping hole to meander through. Obama said at the time he was pushing the stimulus, "my job depends on this bill"- he knew the risk he was taking. If politics is the art of the possible, then this is some very fine art. Perhaps it’s impossible to achieve much better, but we won’t know unless we try. The bill that was passed Friday shows more about how many people want to be Rahm Emmanuel’s friend, and who don’t want to cross Henry Waxman, than about who wants to actually usher in a clean economy in the most efficient way.

the royal treatment

The other day I tripped over a branch in Rock Creek Freeway (some would call it a park, but whoever thought putting a busy road absolutely parallel to a beautiful creek packed with birds, strollers and generally other important things should revisit urban planning school), except I didn’t realize I had tripped over this enormous Amazonian vine crossing the roadway until I had gotten off the ground to look back and indeed realize there was this freakish vine running across the road. In the time it took me to get up this erudite 60ish master of the universe gentleman type biking my way shouted at me “YOU should have picked that up!” To which I apologized profusely for tripping and agreed yes, I should have had some kind of pre-cognition that I was about to eat shit. Clearly being a selfish gen-y wasteoid meth addict, I had lazily chosen to trip over the vine rather than remove it. I really would have picked it up, just as soon as I realized it, and my face, was fucking there! I then asked him if he had any good stock tips, whether he was Yale ’67 or ’68 and inquired as to whether he wanted some grey poupon slathered on his ass.

This is my Mr. Rogers moment for why sometimes we need to look in the mirror, and see if the guy above is staring back. Because it’s too easy in high places like DC, with powerbrokers and lobbyists and lawmakers and Honorifics and executives sashaying through their populated schedules on the reg, to watch someone eat shit over a branch and blame them for not not de-littering the park. Sometimes this town can pass a $900 billion law before it can show kindergarten level humanity.

Majestic wonder

One of the most momentous and world impacting events of the 21st century occurred last week when Blink 182 reunited and took the stage once again. It included the usual incredibly choreographed and executed dance moves, poetic interludes and quaint heart wrenching double-necked guitar solos. All the hallmarks of punk rock mastery was there- most importantly perhaps telling the nation’s largest wireless carrier to go suck it, or how they’re planning High School Musical 5: The Tour.

Travis Barker is one of the most intense and effortless drummers to ever get behind the kit, Hoppus is a workaholic bassist and becoming a versatile producer, and Tom Delonge’s name rhymes, and when he wants can be one of the most irreverent and sensitive lead singers to ever strap one on. I have night sweats about turning into someone who goes to see John Foggerty or Styx 3-5 decades after their prime, where a concert feels like some previous generations’ past rock anthems were preserved on a slide and endlessly replicated in some tour promoter’s lab experiment, but Blink’s not there yet. Thomas is only 33 and still looks like he wants to push the boundaries, and they still have the youth to record new edgy, violent stuff.

Blink going on hiatus was unexpected, but I can’t help but feel they all got better in the interim. Travis started doing beats and drums with DJAM, and if there were any holes in his rhythmic Chinese wall he certainly plugged them. Mark became more of a musical philosopher, dishing out impressively thorough and researched podcasts and blogs while also becoming a producer. And Tom explored new synth sounds and still better dance moves. And I don’t think it’s a coincidence that Blink broke up within a month of George W. getting re-elected, when Tom’s brother was fighting in Iraq. It clearly permeated his playing and writing the next several years, and I don’t think them reuniting within a month of Obama taking office is random either. Blink springs eternal. But maybe I’m thinking too small. God himself may have reunited Blink. In the course of just a couple months, their long-time producer sadly died, two of their best friends were tragically and horrifically killed, and Travis literally walked away from a freakish plane crash. It was a reminder that sometimes there are causes and connections bigger and more important than you’ll know. That sometimes doing something because it feels right and good and crazy is enough, and maturity means often being okay with emotions, drama, egos and doubt- the hallmarks of immaturity. That you can still love people while you’re hating them. I guess this is growing up.

Stress Testing

Banks do stress tests all the time, you can’t plan for what you don’t understand or measure. And banking supervision is a full-time job. Balance sheets change in value daily, new assets come on the books daily, and the economy is fluid. Banks have full-time examiners who are continuously measuring their loan levels, estimating the potential loss exposure, and then requiring loss reserves accordingly. So the idea that these stress tests were rolled out as a big bold new policy, and then so publicly announced, seems off-base and represents an unnecessary policy risk.

One, the necessity of these “new" tests just show that the regulators failed to begin with, that they didn’t even know the basic exposure of the banks in the first place, and still didn’t. And two, the whole basis for the test is to prepare for contingencies, things that haven’t and very well may not happen. Like a “stress” case and a “worst” case. Chairman Bernanke characterized these cases as “unlikely”, yet they are the basis for requiring firms to raise more capital, either by selling off potentially valuable assets (like Citi did with its Japan brokerage), diluting existing shareholders by converting government loans to common stock, or by taking on more debt. All things that shouldn't be done simply because of unlikely assumptions. In addition, the tests created significant anxiety and hurtful market expectations for weeks preceding the tests. Once the results were leaked and it was clear the banks already had the ability to close the so called gap, the market cheered accordingly. But what if the gap was much larger, then this policy would have created a panic of sorts, causing many funds and investors to dump financials further- tangibly hurting the bank’s ability to raise capital, all because of hypothetical and “unlikely” assumptions about capital they might need should the situation deteriorate. Except that the reason for the deterioration could have been the anxiety created from the tests themselves. Thank goodness the banks had been stockpiling money for months anticipating this- if the gap had been larger this stress test would have just set back a huge rally by throwing its full weight behind assumptions and creating a self-fulfilling prophecy. To minimize this risk, the tests should have been called simulations and been completely internal between the supervisors and banks, so regulators could know exactly how much capital to inject under worsening conditions, and the banks could come up with a plan to execute in such an event. Instead, by forcing the banks to raise the money automatically, and practically broadcasting every discussion with the world, it was akin to evacuating a theatre full of people just as the curtain starts to rise because, well there’s no fire- but there could be.

This policy was a big roll of the dice and continues to show the youth of Treasury Secretary Geithner. These sorts of tests should not be confused with reality, and should be routine functions of the supervisors, not spectacles we all hold our breath for. Additionally, why they used tangible common equity as the definition of capital and not Tier I has yet to be answered. The big banks have 10%+ of capital they could access, but only about a third of it is common stock (considered a safe liquid asset). So, these tests probably understated their true capital level by about 70%. I’m glad this turned out as well as it did. But it’s only because we lucked out and didn’t have a full stampede out the door when the government yelled “fire!” in a crowded room.

The Markets could use some Pepto Bismol

As the stock market continues another whipsaw reversal of recent gains, counter intuitively 90 minutes after the largest deposit institution in the country reported double the profit from a year ago – I have one question: how is it possible that the markets, particularly financials, will not recover? Even disregarding the across the board strong profits of the remaining major financials in the last quarter, I defy anyone to explain how the fundamentals will not lead to a strong rebound in the mid-term (becoming shorter every day). Another interesting question is how much of the major bankruptcy and wealth destruction we’ve seen is a result of the bubble bursting versus people reacting to the bubble bursting? Washington Mutual for instance had significant write-downs on mortgages, but it also had $16b in withdrawals in its final week and a 90% drop in common share value over just 6 months. A situation like this will throw any company into trouble, whether it has a toxic or fortress balance sheet.

This is an especially interesting question because writedowns on assets are not losses. One, they are not realized, they don’t represent an actual outflow of cash, just a revised downward multi-year estimate which effects the current valuation, and two, they only really effect cash flow to the extent the market reacts adversely. Write-downs are serious and hurt balance sheets, but it is generally a very long-term signal with a lot of noise. Long-term because mortgages and bonds typically have a maturity lasting decades, and noisy because the characteristics of these securities as a whole is always changing based on the current underwriting standards of newly issued assets. But the market (read herd) takes this rather broad signal and immediately forces a translation into very short-term price signals. And I’m not sure the conversion factor is always spot on. To date the banks have written off several hundred billion in mortgages from their balance sheets, a significant shock no doubt, while the stock market has shed over $2 trillion in wealth. In other words, the market capitalization losses sustained is something like six times the actual writedowns. This is an even stronger shock when there is a run on existing contracts, from deposits to insurance product. The government realized in the 20s the unnecessary and preventable impact such reactions could have, and the FDIC has largely prevented it in commercial banks. That no such authority existed for multi-unit banking corporations like AIG or Lehman was rather remarkable considering how central to the financial system they had become.

Rather ironically, the only long term threat I see to robust bank recovery is the federal government. Unless people suddenly break a 10,000 year tradition, people will need shelters, likely, I know this is a stretch, in the form of houses. The rate of population growth and replacement dictates that about 1.3 million new homes need to be built in the U.S. as an annual baseline. In the last 12 months something like 400,000 were built. So the actual housing recovery timeframe is just a function of how big one thinks the bubble is, how big the surplus inventory is. I don’t think it’s much above 1 million, and we’ve already burned off about 900,000 of it. The rubber should finally hit the road soon. And once we get back to a supply-demand driven housing market, it’s hard to imagine that all these homes won’t require financing. In fact, 99.9% of them will. Pretty much everyone who doesn’t have a Louis-V with a milli in it like Lil Wayne will need the services of Bank of America or Citi or Wells Fargo. Thus, their first quarter earnings don’t seem to be mirage at all, more like a harbinger.

So there is more recovery in the pipeline, particularly when most of the recent earnings came from fixed-income arbitrage in a historically robust bond market. I have yet to hear anything close to a lucid argument that explains how housing and finance will not recover. And because prices have been falling for 16 months now, when it does turn it will likely have some strong inflection points. Balance sheets could reinflate relatively quickly as sideline homebuyers finally get on the field. The only potential long-term complicating factor here (assuming underwriting standards improve) then is the little issue of either servicing the government’s preferred stock loans, or worse selling off their common stock should they choose to convert it. The government should only consider converting their shares to equity if the stress tests show huge gaps that can absolutely not be filled any other way. And considering Citi, BoFa, JP Morgan, Wells all have 10% plus Tier I capital, and Treasury has $100 billion in the vault from TARP, and Goldman and Morgan already want to payback, I think the extent to which this has already been considered and bantered about as a serious idea is borderline irresponsible. We already know the market’s response to this rhetoric will dwarf the actual effects of any such real action. In fact, if the current sell-off continues investors can literally do whatever they want.

GM/White House need to think outside the box

The auto industry bailout should be a coordinated framework to re-imagine personal transportation in this country- including electricity providers and boutique next generation auto startups, not just two imperiled giants. Focusing simply on making GM and Chrysler cash flow positive with newly innovated offerings and lower debt burdens might do the job, but it ignores how integrated and market-infrastructure dependent the auto industry is. After this perfect economic storm, there will very likely be little space in the future for the government to intervene wholesale across the financial and auto landscape as they have in the last 6 months, and little opportunity to bridge the auto manufacturers and electricity producers’ interests.

The Administration only has so much credibility in lecturing the private sector how to make a buck, and only so much room to leverage the benefits of examining the sector in totality. By focusing on the manufacturers in isolation, the government risks supporting fuel efficient vehicles while leaving electric infrastructure developers on the sidelines. The Energy Department has $100 billion in new loan/grant authority, and could indirectly support the automakers by investing in companies like Better Place and Coulomb that develop the electric fueling stations that are a prerequisite for any true Detroit game-changers. The plug-in electric gas hybrid Chevy Volt will be substantially more expensive than an average car to begin with, curtailing sales and lengthening innovation cycles while stalling recovery. Costs will come down only with significant volume, which is a mere pipedream absent a national charging network. And in a world poised to add a billion new cars in China and India in the next 20 years, this is no longer just a matter of pristine design, but self-preservation. Making sure the market infrastructure is there when the new Volt rolls off the line is just as important as making sure they have competitive compensation agreements or streamlined supply lines.

Similarly, private startups operating today at the forefront of auto development, like Tesla Motors, could benefit from the breadth and relative financial depth of the big automakers, while the big automakers could benefit from their new platforms and next generation technology. Joint operating agreements or tech for equity swaps could speed up the bigs’ innovation while giving struggling and investment heavy startups (Tesla is asking for government cash) the market exposure they need to drive costs down. A note of caution however, this is not to say the government should impose anything. The big prize that awaits in the coming years and decades for clean energy winners, and the fierce competition among private actors it will engender, is a catalyst that should not be muted. However, the government and its auto task force is the perfect forum and moderator for getting these parties in a room to talk and see what pencils out. At a minimum they could talk about the non-exclusive aspects and infrastructure they will all need and brainstorm a general strategy, and at most cut some very lucrative deals.

It’s always the time for bold thinking, but very rarely is there the opportunity to actually implement it. The current public appetite for grand new economic architectures (whether TARP or TALF or the Legacy private-public partnership or the auto bailout or the Housing Plan or the Stimulus) is fast dissipating. Ad hoc investments in whatever the market would bare got the industry to this point, and ad hoc government negotiations and a spattering of tiny grants all over the place will just be further death by a thousand cuts.