The Valley vs. Wall Street
I've been a founder at three VC funded computer companies, and when I look at the deals these bankers are getting from the Treasury, I just have to laugh.
No Silicon Valley VC would give you one million dollars, much less billions of dollars, on the terms that the bankers are getting from the the US Treasury. It looks like Secretary Paulson is abusing our trust to help his old investment banker friends.
A typical VC deal requires revealing all debts or potential debts to the funders. The funders get voting share and board seats, for their investment, and the board carefully monitors executive salaries and other major expenses. The shares issued are *not* non-dilutive, nor non-voting, and usually have additional protections over existing common shares.
If the VCs are recapitalizing a company, the existing shareholders are given relatively little protection, typically keeping 0-10% of their initial share of the company; key employees are given new options, if necessary, to retain them.
This same approach should be taken with these banks. Before a dime is invested, the Treasury should receive full disclosure of the liabilities on the bank's books, including the details of complex derivative contracts and SIVs, to see if the bank can even be saved. New funding should then depend on getting bonuses and other badly chosen expenses under control, but if enough individuals refuse to renegotiate their bonuses, Treasury should simply refuse to invest -- the banks assets will no doubt be less expensive to obtain from a bankruptcy court.
Any Treasury funding should come along with *voting and highly dilutive* shares, as well as board seats. The newly recapitalized banks may have to write down the value of some structured assets, or sell them for nearly nothing to the Treasury, but at least they'll be able to lend again, and once the Treasury has certified that the bank no longer holds toxic derivatives, the banks will be able to go to the capital markets again. New regulations on both bank size, and acceptable investment classes should be put in place, to avoid a repeat of this mess.
Finally, the bank shares owned by the Treasury can be sold on the open market and the government can get out of the banking business again. Because the Treasury department will be able to certify that the bank is now free of toxic derivatives, the banks' shares will value again,
No Silicon Valley VC would give you one million dollars, much less billions of dollars, on the terms that the bankers are getting from the the US Treasury. It looks like Secretary Paulson is abusing our trust to help his old investment banker friends.
A typical VC deal requires revealing all debts or potential debts to the funders. The funders get voting share and board seats, for their investment, and the board carefully monitors executive salaries and other major expenses. The shares issued are *not* non-dilutive, nor non-voting, and usually have additional protections over existing common shares.
If the VCs are recapitalizing a company, the existing shareholders are given relatively little protection, typically keeping 0-10% of their initial share of the company; key employees are given new options, if necessary, to retain them.
This same approach should be taken with these banks. Before a dime is invested, the Treasury should receive full disclosure of the liabilities on the bank's books, including the details of complex derivative contracts and SIVs, to see if the bank can even be saved. New funding should then depend on getting bonuses and other badly chosen expenses under control, but if enough individuals refuse to renegotiate their bonuses, Treasury should simply refuse to invest -- the banks assets will no doubt be less expensive to obtain from a bankruptcy court.
Any Treasury funding should come along with *voting and highly dilutive* shares, as well as board seats. The newly recapitalized banks may have to write down the value of some structured assets, or sell them for nearly nothing to the Treasury, but at least they'll be able to lend again, and once the Treasury has certified that the bank no longer holds toxic derivatives, the banks will be able to go to the capital markets again. New regulations on both bank size, and acceptable investment classes should be put in place, to avoid a repeat of this mess.
Finally, the bank shares owned by the Treasury can be sold on the open market and the government can get out of the banking business again. Because the Treasury department will be able to certify that the bank is now free of toxic derivatives, the banks' shares will value again,
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Good post Mike!
As you probably know Bloomberg has a suit filed Bloomberg LP v Federal Reserve in District Court, Southern District of NY (Manhattan) to force the Treasury to disclose the collateral presentations of the banks. There has been a FOIA request to the same effect outstanding for some time that has been stonewalled with some claims of proprietary information privacy.
If the suit is successful and given the venue I think it might be, we might find that there the collateral was aereated and based on some sophisticated accounting practices that look ahead to blue sky outlooks on counterparty solvencies.
But given the lending lockup, it was wink and a nod all the way and how do you expect the parties involved to explain that to the public?
As far as your recommendations, agree completely. They seem to summarize the consensus opinion of the saner heads in the financial sector.
What I worry about though is that it won't be clean or easy. The gov is headed for an "occupation" of the financial sector that will be as long lasting and many times more costly than our military occupation of Iraq....
November 8, 2008 10:12 AM | Reply | Permalink