All part of giving the folks at Citi and BoA and elsewhere the tools needed to rebuild their balance sheets by leveraging their new capital in new assets….*(fictional(?) future press release)
But joking aside, I can only applaud this apparent breach in congressional insanity, having long railed at the ridiculousness and sheer hypocrisy of the current state of US law with respect to this industry. And indeed I always thought this day would come(February 2010, c. minute 4 in video, although in a dumb error, I changed my script from President Obama to Senator Obama at the last edit, as I thought reader/viewers in 2005 would find the former too far-fetched…)
* tried but failed to find a video of a great comedy sketch (Monty Python?? not sure) where the Board of the Bank of England bets all the country’s reserves on the “1:15 at Cheltenham” and loses, very funny, if you’ve seen it and know where to find it please post in comments!
As you know, one of the key fundamental foundation pillars of our investment thesis here at Nauiokas Park is the migration of value in many (most?) markets from transactions (matching, broking) to data. Quick and dirty: technology is driving the marginal cost of matching buyers and sellers to zero, and is driving the ability to collect, store and analyze previously unimaginable amounts of data and metadata to a different dimension. The value (and creativity and innovation from a business model point of view) now lies in thinking up ways to harness this new ability to good effect. The possibilities seem vast to us and we love discovering clever entrepreneurs and technologists who identify opportunities along this vector.
If you are a data geek, (or just a wannabe/groupie like me) you need to add Joshua Reich’s i2pi blog to your RSS feed. Not only does he know alot about data and technology, but he can leverage that knowledge through his excellent and lucid understanding of markets and business:
The premise that led us to this mess was that with only a modicum of data and some threadbare models trading would be the final arbiter of value and the collective intelligence of efficient markets would result in fundamentally sound pricing. Now that liquidity has gone from the markets, traders of these illiquid instruments are bulking up their data and models to try and better their understanding of fundamental value. And so it is that when markets are liquid the market relies on trading to assimilate the information of individual agents. Without this method of price discovery these agents need to gather their own data as the market no longer performs the role of grand aggregator. Data trades inversely to liquidity.
And he gives great math lessons too (which is great for those of us having mid-life worries about having forgotten more than they’ve remembered…) He’s just (re)started his consulting business i2pi, but I’ve got my eye on him for my new bank so if you are interested in his services, you better move quickly!
Better to be wrong collectively than to be right alone is what they say… But I’m just not built that way. Oh and btw, email isn’t just a childish fad either (just in case McKinsey hadn’t cleared that one up too…)
Ok full disclosure: I just totally made up the silly marketing claim in the headline…but the good folks at Weatherbill have just launched a new, sexier, easier to navigate website. Check it out and please send them feedback – the good, but especially the bad and ugly – either in the comments here or on their blog.
I’m going to miss the farmer though…we hardly knew him at all.
The debate du jour around the world’s capitals and financial centers is of course “How do we save the banking system?” Good banks. Bad banks. Private banks. State banks. Capital injections. Credit insurance. Etcetera. But in this Dr. Seuss world of solutions, and despite thousands upon thousands of articles, blog posts and editorials, I have been very surprised to see that one crucial element seems to be missing from all the solutions being discussed: innovation and entrepreneurialism.
Governments should invest (at least) a small amount of the billions and billions they are ploughing into the financial system into new banks. That’s right – start-ups. But not carbon copies of the banks we have today. 21st century banks. Banks that aren’t built on foundations of obsolete business models and technologies. Banks that are “digital natives”. Banks that by design answer the question: “If you had a blank sheet of paper, how would you build a platform and and organization to provide banking services in today’s (and tomorrow’s) world?” Banks that not only understand the importance of Moore’s (and Kryder’s) and Metcalfe’s and Linus’ and Amara’s laws but also their ramifications for a business that is intrinsically and structurally about managing digital information flows in a connected society and economy. Banks without (literally and psychologically) the corrosive burden of legacy costs and structures. Banks who apply Coase’s theories in the context of transacting in a networked world. Banks who embrace the lessons of Dunbar and Kahneman and Thaler (and Sunstein) when designing their management and compensation policies. Banks that strive to live up to Einstein’s suggestion that “things should be made as simple as possible, but not any simpler” and have an instinctive bias against complexity and a copy of Maeda‘s The Laws of Simplicity in the Board room. Banks that recognize that when you boil it all down, the product they are ultimately selling is trust.
(adapted from Wikipedia) A bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. It is an institution for receiving, keeping, and lending [and investing] money.
Obviously in order to build such a bank you need a team of leaders who not only understand banking and finance but understand intuitively the social and technological landscape of the 21st century. Bankers who refuse to trivialize novel tools and modes of communication and interaction simply because they are unfamiliar. Bankers who are as comfortable on Facebook or Twitter as they are on a trading floor or in a branch. Bankers who collect and collate their daily information via RSS readers and wikis and blogs and not just from the FT or CNBC or Bloomberg. Bankers who have accepted that the value they can create no longer comes from arbitraging information scarcity and building black boxes that hide complexity but from embracing abundance and building tools to help people navigate this complexity as partners. Bankers who would be equally comfortable discussing the future of finance with the founders of Google as they would be with the governor of a Central Bank. Bankers who are passionate yet sober. Bankers who are focused on the future and on providing a service that doesn’t rely on coercion or inertia or lack of alternatives to keep their customers satisfied. Bankers who realize what a tremendous opportunity exists to start afresh and be part of creating a new paradigm in financial services.
These individuals exist. Many are readers of this blog. I am one of them. So is Amy. We are connected to many more via our networks. I suspect that many of them would jump at the chance to participate in a venture (or ventures) like this. And not just because the financial opportunity cost of doing so has plummeted (although that clearly helps, everyone has bills to pay…) but because it’s exciting. Because it would be challenging. Because it’s the right thing to do.
So why not just do it? Why the government? Why a billion dollars? Because building a bank by bootstrapping from nothing is exceedingly difficult, perhaps impossible. There are many reasons, importantly:
The fundamental nature of the business – selling trust-based products and services in a highly regulated environment – means that the minimum level of operating costs and capital required to be credible is substantial.
Perceptions are important, especially in these turbulent economic times; no matter how abusive the relationship (with their existing bankers), people and companies are going to be initially very cautious about giving their custom to a new bank, especially one that is obviously not too big to fail (indeed the implicit endorsement of the government in this context is probably even more important than the capital itself.)
Much can be achieved within the existing legal and regulatory framework, but many of the most interesting opportunities rely on this “institutional framework” evolving to “catch up” to the technological and economic reality; having the government as a partner would facilitate the dialog and help to counter the inevitable resistance from incumbents who have a vested interest in maintaining the (old) environment to which they have adapted.
Because as a taxpayer if I am forced to invest in the old (to mitigate catastrophic systemic risk), I want to also invest at least a part of my money in the future (to help build and profit from the reinvention of banking): remove the cancer yes, but start working on the cure.
As for the billion dollars, this was just a nice round back-of-the-envelope (somewhat informed) guess (plus it fit with the song!); this would be sufficient equity to build an operation with credibility and critical mass, and would support a sufficiently large but conservatively leveraged asset base to produce enough operating income to sustain growth and profitability (and pay back the government in full over a 5-15 year horizon without jeopardizing the business.) The right (minimum) amount needed could well be less, is unlikely to be more and would not need to come 100% from government coffers – indeed private co-investment would be desirable – and further the bulk of the capital would likely be called over a period of 1-3 years as the balance sheet is built up.
I’m deadly serious but to be frank, I’m not sure where to go with this. Although I have a pretty interesting and diverse network that includes a number of even better connected people, I don’t think I’d have much success cold calling Mr. Brown or Mr. Darling and getting a chance to pitch this over a latte at the local Costa… Even less Mr. Obama or Mr. Geithner… But perhaps if nothing else, I can catalyze the conversation and bring this option – earmarking at least a small portion of the various btrillions of rescue funds to seeding a new generation of 21st century banks – to the attention of the politicians and the public.
I know there is a risk that this proposal sounds like just one more in a never ending line of petitioners going to the government for a handout. I hope that (at least, especially regular) readers will not doubt my integrity when I assure you that this is not my intent, and I genuinely believe that this is an idea worthy of serious consideration. And most importantly that – in this context - the government’s money is actually more valuable than anyone else’s. To get started. Essentially I’m suggesting the government(s) have a unique competitive advantage that makes them the ideal incubators for a new generation of banks (and that they would realize excess financial returns by exercising this advantage.)
Well after 6 days essentially without email or web access, I’m back online. From the giant number of unread emails in my inbox, I’m sure one or two of you are wondering why the radio silence. Apologies. Now you know.
I must admit, although I wouldn’t say it was surprising per se, this episode did open my eyes on how indispensible (only 15 odd years after it’s popularization) fast, unfettered, continuous access to the web is for the way I (and many others I’m sure) work.
Had I known that I would not have access to the web for 6 days, I obviously would have organized my time differently (and I wouldn’t have spent the better part of three days in a futile bid to fix it) – there are still things that can be done offline, but even for many of these – reading, research, writing – my default mode has evolved to weave in annotating, footnoting, elaborating, complementing these activities with online tools (the most common, but by no means exclusive being Google, social bookmarking, wikis, social networks…)
I guess if there is a silver lining to this disaster (I feel like I’ve fallen a month behind in my ‘to do’ list…), a ‘learning’ to take away, it is that the productivity enhancing power of the ubiquitous web (at least or especially for ‘knowledge workers’) is truly incredible. And I’m not sure we really appreciate it. It’s like aging: if I look in the mirror, I don’t think I look much different than I did 15 years ago; until I look at a photo of myself from 15 years ago!
So here’s a challenge. Take a moment to reflect on how you live and work today. Now try to transpose this to 1994: could you do what you do today? more slowly? at all? And if you have the luxury and inclination to do so, try switching off the internet/email and your mobile phone for a week (landlines and fax machines allowed.) If you do, what you might find will surely excite – because you will appreciate how much more productive you now are – and frighten you – because you will realize how dependent you are – in equal measure.
If banks are systemically important to our economic and social system, then telecommunications infrastructure is vital. I wonder if our politicians understand this.
When did you ever go to a drug dealer banker, and the drug dealer said, “you know, you should come back tomorrow, this is not very pure. a good deal.” It doesn’t happen.
The mission of the Semantic Web Health Care and Life Sciences Interest Group, part of the Semantic Web Activity, is to develop, advocate for, and support the use of Semantic Web technologies for biological science, translational medicine and health care. These domains stand to gain tremendous benefit by adoption of Semantic Web technologies, as they depend on the interoperability of information from many domains and processes for efficient decision support.
The group will:
Document use cases to aid individuals in understanding the business and technical benefits of using Semantic Web technologies.
Document guidelines to accelerate the adoption of the technology.
Implement a selection of the use cases as proof-of-concept demonstrations.
Explore the possibility of developing high level vocabularies.
Disseminate information about the group’s work at government, industry, and academic events.
Now if I were 20 years younger, I might well be diving feet first into the realm of data, meta-data, and the semantic web. In 1990, there was a lot of opportunity and value to extract if you were skillful and comfortable understanding and manipulating cashflows; being a bond or interest rate swap trader was both financially and intellectually rewarding. That time has passed. (Although this didn’t stop the banks from flogging the horse until well after it was dead and decomposing…) In the 2010′s (the teens?), I suspect an analogous opportunity will exist for those that have mastered the art of managing or “trading” data. Hal Varian at Google articulates this well:
I keep saying the sexy job in the next ten years will be statisticians. People think I’m joking, but who would’ve guessed that computer engineers would’ve been the sexy job of the 1990s? The ability to take data—to be able to understand it, to process it, to extract value from it, to visualize it, to communicate it—that’s going to be a hugely important skill in the next decades, not only at the professional level but even at the educational level for elementary school kids, for high school kids, for college kids. Because now we really do have essentially free and ubiquitous data. So the complimentary scarce factor is the ability to understand that data and extract value from it.
I think statisticians are part of it, but it’s just a part. You also want to be able to visualize the data, communicate the data, and utilize it effectively. But I do think those skills—of being able to access, understand, and communicate the insights you get from data analysis—are going to be extremely important. Managers need to be able to access and understand the data themselves.
I may no longer be young enough to master a completely new domain like this, but I think I’m wise enough to spot something important when I see it. And the semantic web and financial markets were made for one another. But even if I had the time, I don’t have the knowledge or the skills to get a Financial Services and Markets Interest Group up and running, even though the mission statement is pretty much a cut and paste from the one above. But I am fairly confident that amongst the very clever readers of the Park Paradigm and beyond – amongst your network of friends and colleagues – there is the Ocean’s 11 dream team needed to make this happen. And I’d be thrilled just to ‘hang around the edges’ shouting out ideas from the peanut gallery and pouring coffee so to speak.
This is big. This is important. President Obama calls for transparency in financial markets (hallelujah!): the financial semantic web is an important piece in that puzzle. Perhaps Secretary Geithner and the President’s Working Group on Financial Markets can lend moral and financial support to this project?
If I had a billion dollars. (If I had a billion dollars.)
Well I would buy you a Skype. (I would buy you a Skype.)
I would buy a Twitter for your Skype (so you could tweet and chat and call all your friends.)
The news has left many in the industry wondering if eBay will put Skype, which it paid a hefty $2.6 billion to buy in 2005, on the auction block. Donahoe had said last year that eBay would consider selling the business unit if it couldn’t be integrated with its auction or PayPal payment system.
And according to statements made during the conference call, it looks like Donahoe doesn’t think there is much the Skype technology can do to help eBay’s other businesses. When asked what eBay was doing to add shareholder value to Skype, Donahoe admitted that “the synergies between Skype and the other parts of our portfolio are minimal,” the paper said.
Well if it were up to me, I’d sell eBay – maybe Ken Lewis at BoA might be interested, would look innovative and might distract the federales from the Afghanistan that is the Merrill acquisition – and keep Skype. eBay could have been the Betfair of consumer goods, instead it became the Microsoft of marketplaces…
Anyhow, I’d buy Skype. Maybe not for $2 billion, but I think it is potentially a very valuable asset and I’m convinced that it is not even scratching the surface of its potential. The problem is that they seem to be trapped in linear thinking with respect to their business model. Selling minutes and add-value telco services. A telco. An alternative and innovative telco. But a telco. Nothing wrong (well you know what I mean…) with telcos but if you want to buy a telco, buy BT – its a lot cheaper. And its not just management (that can’t think out of the box) – it’s the press, analysts etc:
So an acquirer would likely be buying Skype for its 370 million registered users, which is nothing to sneeze at. But the big question is how much money can be made from these users? Sure, people love using Skype’s free services, but most of its revenue is made from a small portion of its users. Skype generates most of its revenue from its SkypeOut service, which charges users to make calls from the Skype service to regular landline phones and cell phones.
The SkypeOut revenue stream is sufficient to sustain Skype’s business model today, but as IP networks are deployed throughout the world and all communications becomes IP-enabled, there will be fewer opportunities to make money from connecting Skype calls to the regular phone network. What’s more, as Skype adds more subscribers, those users are more likely to talk to one another over the free Skype-to-Skype network rather than paying to call these friends and family on regular phones. Of course, it will likely take years for this scenario to play out, but this fact could color a potential acquirer’s willingness to pay a premium for the service.
“As more people adopt Skype, there’s potential for the asset to peak in value,” Friedland said. “It won’t likely happen for another five to eight years. And unless Skype comes up with a new meaningful revenue driver, it could start to decline.”
370 million registered users. Three hundred and freakin’ seventy million. And growing. Fast. And more people joining is a bad thing?!?
Let’s just pause here for a moment. So Mr. Friedland, if Skype ended up having say one or two billion – BILLION – registered users and so like became the de facto communications substrate for the vast majority of the connected citizens of the planet, that would be…ummmm…bad?
There are a hundred and one ways to bootstrap amazing, profitable, cash generative businesses off of Skype’s brilliant platform and installed base, and they are all in my new book: Managing Skype for Dummies. Actually, I didn’t write it. And it’s usual title is the Cluetrain Manifesto but still…
1. Markets are conversations.
I don’t know what Meg was thinking (those of you who listened to the eBay analyst webcast and pored over the accompanying presentation the day eBay announced it was buying Skype will surely remember that at the end of both you were even more confused than at the beginning…) But even if it was by accident, she was on to something (admittedly she did get a bit punchy with the pricing, although if she had paid in paper instead of cash…) It’s just that that something wasn’t being able to call EvilRabbit467 and haggle over the price of an iPod nano to ‘close the deal’…
Seriously if I was the captain of some vast private investment capital pool, I would be sitting around with my partners and a handful of clever young associates and putting together a plan for Skype. But if I were Donahoe, I’d spin Skype out to my shareholders as a separate listing, this would create value and possibly more importantly, especially in these interesting times, give Skype an explicit valuation and an acquisition currency. Then it gets interesting.
Oh, yes there it is…Banking! No wait, bigger…financial services!!! Yep. Busted. Definitely broke.
My quote of the day today from Paul Graham reminded me of why Amy and I created Nauiokas Park:
Don’t look for solutions, look for problems. Look for stuff that seems broken.
For several years Amy and I have been pointing out the fact that many aspects of the traditional banking business models were clearly broken or at least no longer fit for purpose, and as such subject to (catastrophic?) failure. Almost six (!) years ago, in May 2003 when I wrote this article – Minority Report: Capital Markets in the 21st Century – it (mostly) seemed to fall on deaf ears. My 2003 recipe I imagine has a few more supporters today:
I wrote:
Firms in our industry are constantly reshaping themselves: merging this business and that, creating new teams and silos, breaking down walls on one hand and building up new ones on the other.
For the most part this combinatorial ballet has avoided real innovation and has yet to break free from the chains of past experience. It is a classic example of turkeys not voting for Christmas. But clinging to the status quo only avoids the inevitable. The death of the salesman. And the trader. And the syndicate manager. Etcetera.
Not only did banks cling to the status quo, in the subsequent years as we all now know, they rode it past the point of exhaustion, past the point of diminishing returns to almost no returns and magnified these with enormous doses of leverage. But the main thing is, coming back to Paul Graham’s insight: great opportunities arise when things are broken. And it is this opportunity – the opportunity to re-invent a new financial services paradigm for the 21st century – that we are so excited about. And since it is a whole industry that is broken, rather than start one company, addressing one problem, we think the best way for us to be successful and help to drive this change is to participate in creating many new businesses, support many entrepreneurs, help build a new financial ecosystem. Change the world. World peace. (That last one is admittedly a ‘stretch’ goal…)
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and despite thousands upon thousands of articles, blog posts and editorials, I have been very surprised to see that one crucial element seems to be missing from all the solutions being discussed: innovation and entrepreneurialism. 
in the Board room. Banks that recognize that when you boil it all down, the product they are ultimately selling is trust.![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_c.png?x-id=fa42bf9d-8ac6-4c1b-9352-1646d9d5134a)
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