A VC - Latest Comments in When Greed Is Good

Re: When Greed Is Good

AshcroftB — Fri, 27 Feb 2009 21:58:44 -0000

Our current economic atmosphere is undisputedly a result of massive greed and corruption on the part of governmental and financial institutions.
So why is this viewed as a crisis instead of progress if, in fact, greed is good?

The problem is we hold onto the myth that greed is integral to the success of Capitalism.
The reason this myth hasn't been universally denounced is because it is caught up in language and how we choose to define greed.

Ambition is defined as a desire for rank, fame, money, power, or to achieve a particular end.
It does not speak to the motivation for that desire or one's intentions after having achieved the desired end.
It is neither good nor bad, but is generally regarded as a virtue and the driving force fueling competition.

Greed is often defined as an excessive desire to acquire and possess more than one needs or deserves.
The key element (the element distinguishing from ambition) is 'more than one deserves' since what one actually needs is arbitrary.

By one interpretation, greed offers the most practical incentive for people to work harder than the next guy, get a good education, invest in a business, and acquire wealth. This implies hard work, ability and determination and is, by definition, not really greed. This is actually just ambition and can be good and healthy and a necessary component of our economic system.
Another flavor of greed is being the motivating factor to lie, cheat, scam, and do other unethical or illegal things in order to achieve one's ambitions. This form of greed defies the tenets of the free market.

The blanket statement "Greed is good" ignores such distinctions of interpretation enabling cheaters and, in turn, degrading the free market system. As a matter of common sense, we can say "Love is good", but when we further qualify it to love hurting people or loving a child sexually, it no longer holds water. So the legitimacy of the statement "Greed is good" is more a matter of language than of ideology.

In the most basic sense, a Venture Capitalist is just another job in the free market system.
The responsibilities are to analyze and speculate as to the actual value of commodities, stocks, etc. and invest accordingly thus driving the free market. If you do your job well you should make a profit, but this alone does not imply greed. I think we can all agree the system works when properly checked and balanced, but the effectiveness of the system is perpetually hamstrung by greed (2nd form).

In short, Gekko was wrong. Greed is NOT good.

Where do we go from here?

We may or may not sympathize with home-owners who have been foreclosed as they did take their chances and hopefully understood the conditions of their loan contracts, but we all agree the burden of this catastrophe (if that's what it is) should not be borne by Main Street.

To quote Michael Josephson, "If you have an unregulated arena, cheaters win".
That isn't to suggest that the answer is more regulation, but perhaps better regulation - simpler and more transparent regulation.

The legal system in the United States is by far the most complex in the world and each year it only grows larger and more convoluted, especially in economic policy and tax legislation. This ensures that fewer and fewer people are capable of understanding and vetting proposed legislation before it goes into effect.
Our uneducated congressmen, let alone our citizens, have almost no chance of catching bad legislation in time to prevent the inevitable exploitation by those who have the resources and foreknowledge to take advantage of the changes.

Then we have the Federal Reserve, the hidden power-players who are accountable to no one.

We all realize the game is fixed, but we still play because no one truly believes that systemic change is possible and we figure, "Hey, at least we know the rules well enough to gain some ground this year."

I daresay if you go back to one year ago we, as a nation, had less faith in the American Dream than anytime since the war in Viet-nam so it came as no surprise when last years' presidential election boiled down to one word. Change. The same rhetoric that is guaranteed to work at least once per generation. In pessimistic times change is a surefire bet and Obama was a shoe-in. We, as a populace, suffer from the battered citizens' syndrome, telling ourselves that "this time will be different." Why? Because we need to believe again.

Don't get me wrong, I am an Obama man. I'm not sure if we ever had a candidate that exuded so many of the qualities we all look for in a leader: intellect, empathy, composure, integrity, and even moderation in divisive times. Also, not enough can be said about boons that come with being in the right place at the right time.

It's way too early to pass any judgement, but the pledges to introduce more transparency to the legislative process is inspiring. Sure, the bailout is more of the same, but it was on the table even before the election and it's just too early in his term as president to try anything too radical. The jury is still out and will be for some time, but I truly think there is a sense of optimism in the minds of the people these days, despite the continual doom n' gloom overtones. Also, I agree with poster David B that Obama is still managing expectations in anticipation of more bad news. You can't start selling optimism if things are about to get worse. The one thing I think we can all agree on is that these are some interesting times in which we are living.

btw, love the discussion here. Please keep it going!

Re: When Greed Is Good

JLM — Thu, 19 Feb 2009 10:06:11 -0000

Sure, please send me an e-mail address to use.

Re: When Greed Is Good

gregorylent — Thu, 19 Feb 2009 09:33:36 -0000

whatwentrighttoday.com got parked by someone when i mentioned it, and cnn was not interested in the concept years ago, even with interested corporate sponsors .. new day, new way? .. maybe

Re: When Greed Is Good

fredwilson — Thu, 19 Feb 2009 09:16:52 -0000

JLM - what do you think of Obama's housing/foreclosure plan? any interest in writing an email to me that i can post as the first guest blogger ever on AVC?

Re: When Greed Is Good

fredwilson — Fri, 13 Feb 2009 12:26:20 -0000

Pigs get slaughtered

Re: When Greed Is Good

Web Design company India — Fri, 13 Feb 2009 12:11:48 -0000

Greed is definitely good but it is like the upside down pyramid structure and eventually makes the house falls down after a certain point. So, either you stop before that point or get out much before that point.

Re: When Greed Is Good

Andy Freeman — Thu, 12 Feb 2009 21:14:27 -0000

The time to do a foreclosure is not written in stone. It's the result of man-made decisions that can be changed.

Re: When Greed Is Good

fredwilson — Thu, 12 Feb 2009 06:17:08 -0000

Timmy Boy would have done a bit better with your style of talking than his

I think what investors want to see is that swagger that comes with someone
who knows what they are talking about

Like you JLM

Re: When Greed Is Good

JLM — Wed, 11 Feb 2009 14:09:50 -0000

I think the issue --- as it always is with real estate, real estate based derivatives and even traditional real estate securities --- is actually getting to the physical collateral on those elements of the securitization which have "failed" and to conduct some form of triage on them to actually determine their true residual value.

While everybody agrees that "pricing" is the issue, it is only the pricing of the failed elements that is difficult to ascertain.

The elements that have not failed are simply going to perform as advertised and if you are able to buy the securities @ $0.15/$1.00 face value and strip out the failed elements --- well, that's going to be a spot of "all right", now isn't it? Those securities could even arguably be re-securitized and at today's interest rates, that's going to be OK too.

I have a sneaking suspicion that there is a whole lot more stuff that is 'perfect, good, OK, close' than anybody realizes and the reason is that even at their worst foreclosure rates are anecdotally in the 10% range in the WORST parts of the country. Triple it and you are still in fairly shallow water at 15 cents on the dollar.

The challenge is what to do with the failed securities. This is an exercise in "walking the cat backwards" to see from whence they come and what is there when you get there. The big issue, I suspect, is that you have a "piece" of something rather than a coherent whole. This could be a big problem but then the other "piece" holders have the same problem and are likely motivated to cooperate.

As you walk backwards, you also run into incompatible skill sets. The traders don't know how the security was really formed, the architects of the securitization don't know how to collect a past due payment and the payment collectors don't have the real estate expertise to know what to do when they get the property back. A lot of these guys are MIA also. Part of the discount is created by the chaos, so expect a lot of chaos. I suspect there is a Mr Video course in there somewhere.

If one could get comfortable with walking the cat backwards and getting possession of the real property, it is very, very difficult to believe that the recovery rate will not be about 50% on the face value and 3 x on the investment less the cost of recovery. I get to 50% by discounting the original value by 20%, the market declining by another 20% and cost to administer of 10%.

A guide post out there is the original deal that ML did with the folks in Dallas wherein they seem to have disposed of a huge pool of securitized mortgages of truly unknown value for about $0.25/$1.00 with more than a bit of seller financing. [Operating from memory here but I did look into the deal @ the time. I could be a bit off. Sorry.]

The recovery equation is probably something like this: [0.95*(the percentage of good stuff) + 0.5*(the percentage of bad stuff)] --- now you gotta plug in the percentages and the numbers. If you said that the good stuff was 75% and the bad stuff was 25%, then you stand to recover approximately 84% less your actual overhead cost to recover it plus some discount for the time value of money. Hard to see how you could fail to recover about $0.60/$1.00 face value all in.

Seems very, very high to me but it is consistent with the actual recovery percentages and experiences during the S & L crunch. The other odd thing is that money --- if you can actually get it --- is fairly cheap which is a big difference v the S & L crunch.

I am sure that this is exactly what Timmy Boy Geithner was talking about yesterday. LOL

Re: When Greed Is Good

Richard — Tue, 10 Feb 2009 20:45:28 -0000

I just read an article about the mortgage backed securities selling for $0.15 on the dollar because no on knows how the mortages were bundled. It is a risk, but since it was stated that 93% of the mortgages in the U.S. are still being paid on time, seems like it's a bit cheap. Even if it went down to 50%, you'd stand to make triple the investment? Seems like a high return. Maybe greed is good?

Re: When Greed Is Good

Ada — Tue, 10 Feb 2009 19:33:41 -0000

Great re-post, I missed it the first time. The question that first occurred to me is how can individual investors be apart of this game? Also please do copy and send to every legislator!!!

Re: When Greed Is Good

Dorian Benkoil — Tue, 10 Feb 2009 16:41:01 -0000

I just want my childlike desire for proof that capitalism works to be satisfied.

Re: When Greed Is Good

Dave Pinsen — Tue, 10 Feb 2009 15:08:58 -0000

Here's the link to that post: "Profiting from the Credit Crunch/Real Estate Bust"

Re: When Greed Is Good

FT — Tue, 10 Feb 2009 13:11:14 -0000

I suggest you read "A Risky Tale" at Financial Tales
http://financialtales.com/f...

Re: When Greed Is Good

kev501 — Tue, 10 Feb 2009 10:58:41 -0000

"House of Cards," the definitive look at the origins of the economic crisis, premieres on Thurs., Feb 12 at 8pm ET on CNBC. See the inside accounts from key players, tracing the calamity from Main Street to Wall Street to Washington. CNBC even reveals how one savvy investor even profited - by 600% - as the house of cards fell. Watch preview and see web extras at http://houseofcards.cnbc.com.

This is the definitive record of today's unprecedented economic crisis.

Re: When Greed Is Good

Pierre D. Little — Tue, 10 Feb 2009 09:03:22 -0000

The debacle of the credit crisis, is just that, a credit crisis. Banks got caught with their pants downs in the derivatives market which is the source of the failure. You and I both know this is a casino. Betting 2 or three times the WORLD's GDP at this casino is IMMORAL. That is greed.

Truth is the fact that the culprits are getting bailed out. They should have let them fry. Propping up the US economy by debt capitalization only spreads the losses upon the masses. Inflation will be the one that will rule the roost over the next 5 to 10 years.

I have to say its quite a grand plan that flies under the radar screen of most men. The Fed and the other Centrals are laughing all the way to the bank. They believe we are lemmings.

The bankers have blackmailed the government. It has happened before in Japan in the 90s and the government in Japan blinked. The banks are holding business owners hostage in this crisis. The dirty little secret no one is talking about is that the bankers threaten catastrophe if they are not bailed, and they get bailed out, then in the face of their angels -they hoard.

Japan tried to force the banks to provide credit to businesses if they receive bailout funds and the banker balked.

The tail is wagging the dog.

Re: When Greed Is Good

fredwilson — Tue, 10 Feb 2009 09:02:13 -0000

Do you have a link to your post?

Re: When Greed Is Good

fredwilson — Tue, 10 Feb 2009 09:01:17 -0000

Companies do that all the time. Individuals should be allowed to do it as well

Re: When Greed Is Good

fredwilson — Tue, 10 Feb 2009 09:00:14 -0000

JLM, do you have a blog?

You've got real talent

Re: When Greed Is Good

fredwilson — Tue, 10 Feb 2009 08:59:18 -0000

The thirst for justice and even revenge is often unsatisfied

Re: When Greed Is Good

Dorian Benkoil — Tue, 10 Feb 2009 08:20:21 -0000

I hear ya. And it's funny, in a sad sort of way.

Doesn't Gekko, at the end of "Wall St.," end up being hauled away by the Feds because his greed led him to manipulate stocks, and insider trading? Well, that's one retribution. But where's the market force here?

Re: When Greed Is Good

David B, — Tue, 10 Feb 2009 05:09:48 -0000

I understood that the President is managing expectations (and not leading some cheers) because he doesn't think it's bottomed yet. I've been assuming he's waiting for the hedge funds to shake out more, along with other indicators, before switching from brakes to gas.

Re: When Greed Is Good

Dave Pinsen — Tue, 10 Feb 2009 02:33:59 -0000

"It's time for America to get up off its ass and start looking for some "good licks".

Some Americans already are. I wrote about two groups of them months ago, "Profiting from the Credit Crunch/Real Estate Bust".

Re: When Greed Is Good

joeb — Tue, 10 Feb 2009 02:20:46 -0000

DonRyan got it right below--the government boyz are too interested in their own political survival to do the right thing and clean out this diaper. They are all naricissitic people who make their living dispensing pork to each other while they draw the pigs to the trough....to feed on pork. Remind you of Soylent Green?
i gave up trying to help or get involved...get into stuff they can't find, tax or confiscate. it's every man for himself.
If that means some of us make a killing off their idiocy, so be it.
capital doesn't have a conscience..
This is the best plan i've seen and a lot of smart business people have been espousing it in one way or another for months--the politicos ignore it....no pork opportuinites for them in transparent markets.

last word--do yourself a favor and read Ayn Rand. i think hse had the tax and governmental policies we are going to see soon nailed down 50 years ago.

Re: When Greed Is Good

Mat — Tue, 10 Feb 2009 02:03:24 -0000

Involving private equity in that way is a great solution, but is restricted to including professional investors and institutions in the solution.

Why not let the man on the street get involved as well? If the security backed by their mortgage or credit card debt is trading at x cents on the $ why not let them buy the security and retire their own debt?