Schooling vs. Education Charity Auctions vs. TARP and PPIP

For some of us, as repayment for our multiple sins, this is the season for the benefit parties and auctions of many worthwhile charities. When meeting people at these events for the first time, often one of the opening conversational gambits is “Where did you go to school?” (meaning college), or what they think is the same question, “where were you educated?” As an unrecovered analyst I try to be precise in my answers. To the first question, I state somewhat sheepishly, Columbia College in Columbia University. (The proceeding comment has to do their left-leaning or perhaps left-falling inclinations, which we can discuss another time.) On the other hand, when asked where I got my education, I reply proudly the racetrack and the U.S. Marine Corps. The distinction that I make is one is exposure to other people’s thinking as compared to education, the practical lessons that can be applied to life. Actually what I should have said was that I graduated from college in 1957, but my education continues everyday. Lessons from this weekend are an example.

Ruth and I have just returned from a very successful “Auction by George” at Mount Vernon the home of our first and greatest President, George Washington. In these very troubled economic times, a near record amount of money was raised to be used to continue to restore the property and to benefit future generations of school children. We are particularly pleased that a special fund raising effort was initiated at the party to place, I should say replace, a portrait of our first President in I believe, 40,000 class rooms, along with appropriate learning materials. But I am getting ahead of my lesson plan for this blog.

My good wife commented to me that the items that got the most spirited bidding were not various elements of historic merchandise, but offers of unique experiences. Some of these were lunch with the “talking heads” of the leading news channel, a live back stage visit during another news broadcast, and the ability to have a character named in a forthcoming historical novel. These were special experiences that were being offered, perhaps never to be repeated in one’s lifetime. One particular “unique experience” item attracted such spirited bidding that a second session was awarded to the very close under bidder. We also noted that some merchandise did not sell at the expected prices and were bid back by their owners.

The value of education as mentioned already, is the lessons that one learns in one sphere of activity that can be applied to another. Much of the conversation these days at gatherings in DC is about the economy. In NYC and environs it is about “the market.” The presumed link between the two topics is the various government intervention programs. If one applies the lessons from the Saturday night charitable auction to Monday morning investment positions, one could well postulate that the ability to borrow from the government to buy troubled assets on a nonrecourse basis is a unique experience which may raise the value and possibly the price for these mortgages and other loans. The concept of only being at risk for my investment, not the 5-6 times leverage utilized, is unique and has an appeal similar to highly leveraged fixed income oriented hedge funds. If the prices to be paid for troubled assets are too low, they will be withdrawn. On the other hand if demand is so strong as to raise prices high, additional supply will be forthcoming.

In these cases the raising of capital for such worthy causes as Mount Vernon, American school children and the over-leveraged banking system are worthwhile. As the bidding Saturday night produced near record results, let us Republicans, Independents and Democrats become pleased with the results of the government sponsored auction. Remember in earlier days governments raised money through lotteries (as many do today).

Perhaps most importantly, I hope to increase my education every day and wish my readers the same good fortune.

Financial Community Restructures

For close to fifty years I have participated in the financial community as a worker and/or investor; in the U.S. markets and as an investor overseas. I see our financial world undergoing massive changes, both as a unit and through its interactions with organizations and individuals. Amidst these changes, I have been formulating a course of action for the money I have been, or will be, entrusted to invest. Some of my ideas are starting to congeal into view. These thoughts were reinforced by Jason Zweig, the always thoughtful and well-researched author of “The Intelligent Investor” column in the weekend edition of The Wall Street Journal. A friend for many years, this weekend Jason points out the hopelessness of trying to control the level of bonuses on Wall Street. He recognizes that the large firms inflicted by the TARP will out-source most of their high compensation work to firms in which they have some ownership.


My thought pattern is more encompassing, and to some extent a throw-back to a Nineteenth or early Twentieth Century model. My basic concept might be called the “Single Capacity Approach.” First, an entrepreneur or group of entrepreneurs would find a banker (most likely a merchant banker or venture capitalist) to provide the next level of capital and to offset risk from its own resources. Once additional capital was needed, then an investment banker would be sought. In the old days, this firm would be called a buying firm, somewhat analogous to the role often played by the old First Boston. Up to this point, as all of the participants would be using their own, relatively small amounts of private capital, one would think they would exert a reasonably high level of prudence in their risk aversion. There would not be much systemic risk if any participants failed.

In this model, the buying firm would have no direct customers and would turn to a selling firm who has commissioned brokers to sell the new merchandise. As the selling firm would only have investors as clients, they would research the prospects of their underwritings very carefully. Because of the need to underwrite these issues, some public ownership would be desirable. If the selling firm would go bust, it would not create a major failure. The ownership of selling organizations has always been problematic for the marketplace because of the over-zealousness of commissioned sales people, or the risks of the selling organization pushing its own proprietary products. (The latter event can create a major risk). Recently, there have been press reports that Bank of America turned to its newly-owned Merrill Lynch to sell Bank of America’s own capital-raising issue. Similar lapses in judgment are ill-advised and may quickly bring the reversal of the repeal of the two sections of the Glass-Steagall Act that prohibit commercial and investment banking from cohabitating. When properly supervised, the selling firms, as well as commercial banks could provide custodian services, including margin lending and securities lending to their clients.

To protect the public investor in these underwritten and publicly traded securities, there should be a bunch of intermediaries/fiduciaries independent of the commercial bankers, investment bankers, venture capital firms and most important of all, the selling organization firms; they could be independent advisers, mutual funds and hedge funds with enhanced disclosure. While the need for substantial capital for these intermediaries is not enormous, they could be publicly traded to facilitate internal transfers of ownership and the settlement of estates.

The structure that I outline is far from perfect, but it has the advantage of keeping the required capital relatively small and reduces the need for TARP-like intervention in the capital base and compensation tables.

I look forward to hearing your views, please comment.