A VC - Latest Comments in Financial McCarthyism

Re: Financial McCarthyism

fredwilson — Sun, 29 Mar 2009 15:10:15 -0000

Indeed

Re: Financial McCarthyism

Charles Edward Frith — Sun, 29 Mar 2009 06:27:45 -0000

I like your blog but I think you're being naive about the ability of the Wall Street to accept their responsibility. Populist measures like the guillotine are appropriate with the sociopaths now on 10% bonus.

Differences of opinion are of course the start of discourse.

Re: Financial McCarthyism

fredwilson — Thu, 26 Mar 2009 18:17:34 -0000

All good points and well said.

But post bankruptcy companies do enter into contracts that are recognized by the court as valid. I agree that AIG should have been liquidated and still think it should be

But if it had been thrown into bankruptcy protection, the court could have approved bonuses like the one this guy was promised and got and is now giving away to charity

Re: Financial McCarthyism

fredwilson — Thu, 26 Mar 2009 12:14:34 -0000

Great points Pat

This has been a great discussion. I'm a lot smarter about these issues because of the conversation

Re: Financial McCarthyism

Pat Moore — Thu, 26 Mar 2009 11:55:58 -0000

Fred --

I am not saying that because someone makes a lot of money they are bad. I am working to be rich myself. But all Jack did was make money, he didn't create value.

Bonuses of this size should only be paid out in the form of restricted stock that can only be sold in 2 years. That way we can see if the money being made is truly made or is just fraud.

For me the biggest sticking point is that there are no clawback provisions. No penalties for destroying the company (and the economy). All bonus compensation should have maluses provisions as well.

But the worst thing about all of this, is that a few years ago these titans of wall street were lording over the rest of America their superiority and their wealth. This is the undercurrent that fuels the rage.

Re: Financial McCarthyism

Pat Moore — Thu, 26 Mar 2009 11:40:23 -0000

Fred --

Read sob letter. My answer is .... so?

Look AIG is bankrupt. At a bankrupt firm, bonuses aren't paid, contracts are torn up - usually by bankruptcy court. Look at the UAW, GM, GM's creditors, and bondholders - pennies on the dollar for them.

AIG should be in receivership. Instead, we the sheeple taxpayers, *paid* for the privilege of declaring AIG bankrupt. Instead of dumping billions down the AIG rathole in the first place, AIG should have just been seized like a bank in a similar situation would have been.

My wife and I both at various times were promised bonuses at startups that went through an asset sale and shutdown. Not always were those bonuses delivered. Should we have have been able to write such a letter to the NYT. What would be your attitude toward a person at one of your portfolio companies writing such a letter?

Some more points:

1. The letter writer (Jack) claims he had nothing to do with CDS. How do we know? Was he in meetings when the issue was brought up and went along with/and or encouraged CDS? We only have his word on this.

2. How do we know that his work didn't "blow up" in later years? Only his word on it.

3. "$742,006.40, after taxes". As a bonus. In a bankrupt firm. "$1" annual salary. Show me many people who could take that kind of salary cut. My wife who is a tax accountant has some people coming in with $300K+ in W-2 wages crying about how much taxes they have to pay. A client who makes more in tax-free California muni's than my wife and I have all year. I am sorry, cry me a river. The *average* income for a family of 4 in the San Francisco Bay Area is about $85,000. Cry me a river.

4. Jack claims to have suffered as a result of the economic downturn. Oh really? Is Jack being foreclosed on? Are his kids having to pass up on dreams of going to college? Is Jack looking at his medication and deciding which prescription he isn't going to renew? Or maybe its powdered milk this month, or a trip to Second Harvest. Are creditors calling him? Considering that Jack's firm helped with the 2005 bankruptcy law re-write, that helped result in so many foreclosures -- cry me a river.

5. When deciding to hold out for the bonus, he should have factored in the possibility that AIG wouldn't be able to pay up on the promises. Are GM and Chrysler execs writing such letters? Probably not. Would a UAW member looking at a slashed pension get the same sympathy?

Once again, Jack is not an innocent victim. Jack may not be a criminal. No one is talking jail for Jack (yet). But Jack just learned a hard lesson in not-counting-chickens-before-they-are-hatched, and he is "upset". I bet half the country would switch places with Jack and not be upset at all. Maybe Jack needs to step back, clear his head, and go work at a homeless shelter for some time to get a proper perspective.

Final question -- how come is it that people like Jack who don't actually *make* anything, who don't actually increase the value of the world are so highly compensated? Jack is just a fancy pants banker. Fred, you as a VC add value. You help create companies and bring new ideas to fruition. My wife makes sure that her companies spend their money wisely. I am building a company (http://amplafi.net ). What did Jack and his ilk build or create? Near as I can figure, they built a fancy casino.

Re: Financial McCarthyism

fredwilson — Thu, 26 Mar 2009 10:17:30 -0000

I agree that main street's view needs to be understood by wall street. That
was my favorite line of the president's appearance on 60 minutes

But main street ought to take a second to understand wall street too

The reason a hedge fund managers made $2bn last year is he generated $10bn
of profits to his investors

That $2bn is earned compensation and should not be demonized

Now guaranteed bonuses are another story and they are not acceptable, period

But just because someone makes a lot of money does not mean they are a bad
person

Re: Financial McCarthyism

fredwilson — Thu, 26 Mar 2009 10:07:22 -0000

Howard is focusing everything on stocktwits

He's given up youtube for twitter

Re: Financial McCarthyism

fredwilson — Thu, 26 Mar 2009 10:03:26 -0000

I totally agree with your last point. I am very lucky and I recognize that.

I also prefer a split government and like a democrat in the white house and
republicans in control of at least one part of congress (ideally the house
since the senate approves supreme court justices)

Re: Financial McCarthyism

fredwilson — Thu, 26 Mar 2009 10:00:32 -0000

Maybe the top guys and a few bad actors, but by and large those who work in
these firms are not bad people

Check out the resignation letter an AIG employee wrote for the NY Times
yesterday

http://www.nytimes.com/2009...

That sort of sums up why I wrote this post

Re: Financial McCarthyism

Randy Miller — Thu, 26 Mar 2009 09:40:54 -0000

Read the entire Desantis letter, then read the 500 comments. A large number of those comments were well thought out, and some of them were actually supportive of him. But the central themes of the comments were:

What makes this guy think that his year of work has almost twice the value of the President of the US?
What makes him think his year's work is worth ten to twenty times the work of the guy out on the manufacturing line?

You guys will never understand this populist rage until you get out of New York and Wall Street for awhile, deal with real people and real lives. Wall Street, and most of the media that covers Wall Street, lives in this insulated castle, where compensation is based mostly on the ability to BS, to convince somebody that you are worth far more than you are.

Maybe, just maybe, instead of attacking the populist rage, you tried to really understand it, you might change the way you look at things. Because, right now, if people really believed that Global Warming would lead to the flooding of Manhattan, they would vote for Global Warming.

Desantis did not do himself any good, and the media that shows sympathy for him needs to introduce him to the real world.

Re: Financial McCarthyism

Druce Vertes — Thu, 26 Mar 2009 08:02:14 -0000

was inspired by previous video parody that predates youtube... - will leave that in the public domain for a better Jack Nicholson imitator and better man than me... speaking of which, where is YouTube meister Lindzon in all this? hope his training regimen didn't impair his Blackberry thumbs.

Re: Financial McCarthyism

JLM — Thu, 26 Mar 2009 01:27:44 -0000

The magnitude of VC investment is not the keystone of my argument but it is a useful touchstone to indicate that the investment climate was healthy --- regardless of what targetting mechanism was at work --- and that the country was growing.

I suspect that many good things --- large and small --- happen when the economy is good (e.g. charitable contributions, booming Broadway) which are the result of a good economy rather than the reason for a good economy.

Cause and effect are both credible markers of a healthy economy for a keen observer.

The late 1990s were a great time in the history of our country --- perhaps in great part because no one party controlled both the White House and the Congress at the same time.

If I could write the script, I would give the Democrats the White House (they are more fun and create more scandal), the Republicans the Congress and ask only that we have no big shooting wars going on. Oh, I wouldn't mind a few pirates or a smidgen of overseas terrorism to keep everybody on their toes.

Money is only money and at some time you cannot eat another taco --- the luckiest people in the world are paid in a different currency. They love what they are doing. In that regard you are very lucky.

Re: Financial McCarthyism

Pat Moore — Thu, 26 Mar 2009 00:57:47 -0000

Sorry Fred -- "Financial McCarthyism" ?

McCarthyism was tarring the innocent with innuendo to ruin the accused lives.

What is happening now is anything but. AIG, Merrill Lynch, Bank Of America, et.al. are NOT innocent victims. They are the perpetrators of the biggest heist of all time.

These financial "wizards" have demonstrated that the only financial knowledge and ethics they have is that of a swindler.

This is a perp walk for a reason. They are the criminals - not victims.

Re: Financial McCarthyism

Harmiclir — Thu, 26 Mar 2009 00:51:13 -0000

Point taken.

Re: Financial McCarthyism

fredwilson — Wed, 25 Mar 2009 20:50:18 -0000

I don't feel sorry for him but he did give away the entire $740k to charity

Re: Financial McCarthyism

fredwilson — Wed, 25 Mar 2009 20:49:35 -0000

The VC boom was driven by the internet boom and telecom reform, not a cap
gains reduction

I made 90% of my compensation in cap gains and I have no idea what tax rate
I pay on cap gains

It's irrelevant to me. If it was taxed as ordinary income, I wouldn't care.
I'd keep doing what I do

I and I don't think gp carry should be treated as cap gains. It's a fee,
and should be taxed as ordinary income

Re: Financial McCarthyism

litmus — Wed, 25 Mar 2009 19:24:57 -0000

recommended reading: http://www.rollingstone.com...

Re: Financial McCarthyism

fredwilson — Wed, 25 Mar 2009 17:52:27 -0000

I am so with you on this JLM

Re: Financial McCarthyism

Mxdavis — Wed, 25 Mar 2009 15:33:31 -0000

Re: Blame to go around. I'd put the rating agencies at the top of the list. Unlike consumers, the government and the bankers, the are PAID to make the right risk calls for the entire market and failed at their primary mission. AIG could not help it that they grew without peer to eventually underpin the financial system. Effectively they were too close to the bankers they rated and their integrity seriously compromised. They were huge enablers in this catastrophe and alone could have prevented it.

Re: Financial McCarthyism

justinsail — Wed, 25 Mar 2009 14:16:20 -0000

Read it and enjoyed it. I even agree and sympathize with much that he said. But two comments on the NYTimes site struck me as sage:
"And, Mr DeSantis, what if the federal government had not bailed out your company and allowed it to go under? Would you have received your bonus then?"
and:
"Hint: If your company accepts tens of billions of dollars from taxpayers, consider your bonus renegotiated."

But then again, it's a tricky combination of private contracts and public trust as this guy points out well:
http://community.nytimes.co...

So I'm still torn. I mainly think that a $1/year salary is ridiculous. These people should be paid reasonable amounts and get bonuses if their companies do well... is that too much to ask?

Re: Financial McCarthyism

JLM — Wed, 25 Mar 2009 14:04:28 -0000

Pretty damn...........................................................funny!

Re: Financial McCarthyism

nickdavis — Wed, 25 Mar 2009 14:00:04 -0000

I agree on the theory of this, but as for "evidence", beware a simple correlation. With so many POSSIBLE data points, you can always find something to correlate. We should be very wary of boiling this whole situation down to something simple, when it is in fact very complex.

But yes, we're all to blame. We've all reaped the rewards of the boom, and should now sober up and understand there is a price to pay.

Re: Financial McCarthyism

nickdavis — Wed, 25 Mar 2009 13:55:47 -0000

I just read it. And I see your grander point in it.

But it still contains this piece of glaring hypocrisy:

>>Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid.

and then goes on to say:

>>On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes.

Which was a contractual "guaranteed" bonus payment. Which means that he did NOT agree to work for $1. He agreed to work for $1+ million dollars.

I don't feel sorry for this guy. Hell, I've worked in struggling business units for a normal salary (most people do!) The only reason he still has any job with AIG is the taxpayer. I'm sure we can find plenty of smart people who will step in for a sixth of that, even given the uncertainty.

Re: Financial McCarthyism

JLM — Wed, 25 Mar 2009 13:51:51 -0000

You may want to doublecheck your facts as to what created the boom of the 1990s. In the 1990s, we had both a Clinton tax increase but more importantly we had a Republican Congressional tax cut. I think you are remembering the effects of the tax cut rather than the effects of the tax increase. Take a look at the facts.

Clinton raised taxes in 1993 --- when GDP was expanding after the 1990-1 recession. He raised the highest rate to 36% and added a "temporary" 10% surcharge on highest levels resulting in 39.6% rate. Of course, the temporary surcharge never went away. Capital gains rates were 28% and corporate rates were raised to 35%. Tinkered w/ medicare and SS taxation caps.

The Republican Congress cut taxes in 1997. Reduced the capital gains rate to 20%, child credit of $500, education tax credits, Roth IRAs, education IRAs and other excise tax changes.

In 1995 (two years after the Clinton tax increase), VC funding was $8B. For the four years following the Clinton tax increase, GDP grew at 3.2%, employment grew by 11.6 mm jobs and hourly wages grew a miserable $0.05/hr or 0.8%.

In 1998 (one year after the Republican tax cuts), VC funding was $28B and in 1999, only a year later, it was more than $55B --- capital gains tax cut impact? For the next three years following the Republican tax cuts, GDP grew at 4.2%, employment grew by 11.5 mm jobs (3 years v 4 years, please note) and real wages grew at 6.5%. The S & P rose by 95%.

The comparison speaks for itself. What folks rememember about the 1990s is the last three years when lowered capital gains rates spurred investment, when jobs were being created at an accelerated rate and when real wages really grew and when the stock market surged.

It was the tax cuts not the tax increase.

Remember Clinton proposed the tax increases and opposed the tax cuts but he signed the tax cuts when they were put on his desk, so in many ways he gets credit for both increased taxes and cuts.

Last point --- where did the Clinton surpluses really come from? When did they occur? Increased tax revenues and restrained spending. The Clinton surpluses occurred in 1998, 1999, 2000 --- after the Republican tax cuts.