Monday, July 26, 2010

No Rabbits Out of the Hat

Changing the top kick in charge of the Afghanistan theater and believing that this will have a material, long-term impact on the success of our effort there is delusional. There won't be any rabbits to pull out of the hat, like another surge, to turn things around quickly.

In the Spring of 2009, we spoke to a number of academic and international experts fresh from Central Asia; putting the current reports together with my own . In the post from a year ago, I wrote:

"Pakistan as a state, is near collapse and the policy choices here are not attractive, in the short run. The Inter-Services Intelligence (ISI) is a shadow government in Pakistan, operating outside of the control of a moribund civilian government and of the divided, discouraged military."


That is hardly news to any knowledgeable observer of the India-Pakistan disputes since Independence. The Wikileaks undifferentiated trove of documents will make the discussion too diffuse. Like the shadow banking system in our own financial crisis, the ISI will defy attempts to characterize it or regulate it; it will operate freely and independently, unless a cataclysmic event intervenes, which I hope does not happen.

The material about the Haqqani network is old news also. United Nations reports from 2004-6, as well as Human Rights Watch reports from 2007 painted a picture of a very dangerous and effective military operations and training organization with ties to Al Qaeda. Jalauddin Haqqani was a CIA asset in the 2001 time frame when the US propped up the Afghan jihad against the former Soviet Union. His son, Sirajuddin, has been in charge of daily operations of the organization for the past several years, and he is said by knowledgeable observers to have extensive connections in the Pakistan tribal areas with all interested parties.


The foreign policy machinery of the current US Administration seems to be chasing its tail on this whole issue. Despite energetic and intensive personal diplomacy on the part of the Secretary of State, there doesn't appear to be any real consensus on what to do about the significant divergence in interests between the U.S., Pakistan and other external actors in Afghanistan.

Friday, July 23, 2010

Humanistic Education

Professor Roosevelt Montas of Columbia University gave a lecture that I attended last year in New York, about the Core Curriculum, which is the distinctive foundation of undergraduate education at Columbia College, my alma mater.

It turns out that institutions in Asia are looking at making their undergraduate education more humanistic and less mechanistic. It's ironic that as they are humanizing their model, we are frantically trying to emulate the model that they're abandoning, but that's another topic.

In 2009, the University of Hong Kong and Lingnan University held their 3+3+4 Symposium on Core Curriculum, at which Professor Montas delivered a Keynote Address. With some of the volunteer teaching I do, and with a history of undergraduate and graduate teaching, it really made me think about the value of humanistic education and its relation to our recent financial misadventures.

Here's a quote from Professor Montas, "...education, true education involves personal transformation...college must be a place of moral education in a deepest sense, education about how to be human, education that fosters habits of self-examination, critical skepticism and an openness to the new."

Looking at the financial meltdown apart from the arcane discussion about derivatives, value-at-risk models and financial regulation one comes back to some of the fundamentals qualities of education that were lacking among the small and large actors in the crisis. Where was the self-examination during the lengthy process of foisting off toxic products onto customers for whom they were not suited? Where was the critical skepticism when looking at misleading and incomplete disclosures or risk models with poor foundations? What if the efficient market tenets didn't hold and a massive bubble was building? Then, some new thinking would have been in order.

Trading floors, executive suites, and board rooms may have been rife with mechanistically trained number crunchers who were all indoctrinated with the EMH and the CAPM, but their moral educations were sorely lacking.

For my undergraduate vintage of the Core Curriculum, we had to read Virginia Woolf's "To the Lighthouse." I confess to not remembering a great deal about the novel, but I was very taken by this quote from the author, writing in 1938 as European elites built up to the inevitability of World War II. Virginia Woolf wrote that she felt compelled to "doubt and criticize and question the value of professional life--not its cash value;that is great;but its spiritual value, its moral, its intellectual value...If people are highly successful in their profession, they lose their senses."

She had it right then, and now.

Wednesday, July 21, 2010

Free Trade

Professor Jagdish Bhagwati of Columbia has a note about the twin barriers to freer global free trade being the US and India. He has a point, although how he doesn't include India's neighbor to the north, I don't know. He exaggerates to make a point, and that's okay here.

He theorizes that the US refusal to end its agricultural subsidies has triggered India's resistance to endorsing the Doha Round, because of fear that its subsistence farmers would be wiped by subsidized U.S. exports. This in turn hamstrings the government of Dr. Manmohan Singh, an economist by training and an orthodox, free trader. So, we are hurting one of our supposedly stronger allies. Ever heard this before? Typical U.S. issue-by-issue foreign policy.

The constituencies aligned in favor of ending agricultural subsidies, especially corn and other grains, are many and varied: those concerned about obesity and the links to high fructose cornCheck Spelling syrup, to those concerned about the impacts of high intensity fertilization on dead zones in the Gulf of Mexico, all the way to orthodox economists and deficit hawks. Yet, the relatively few, but powerful Midwestern senators and representatives carry the day, and everybody pays.

Neither political party wants to spend the political currency to take on the problem of agricultural subsidies, but the benefits from addressing this issue, in spite of some near-term dislocations, would be substantial for our economy and for the economies of our trading partners.

Thursday, July 15, 2010

Good Reading on Financial Reform

As the ham-handed, absurdly complex financial reform bill has just moved closer to Senate passage, I wanted to recommend a new, free down loadable book about the brave, new post-reform world published through the London School of Economics.

It features essays by, among others, Lord Adair Turner of the FSA and by Simon Johnson, former Chief Economist of the International Monetary Fund and frequent contributor to the reform debate. I respect the analysis and refreshing perspective that these knowledgeable observers bring to the table. It will take me a while to get through the book, but I really appreciate the distribution model LSE has taken to get the work out.

Incidentally, the Davis Polk law firm's initial analysis of the reform bill suggests that implementation will not be a walk in the park; some 67 studies are required by aspects of the bill, and the regulation development process is labyrinthine. In the meantime, the uncertainty created by the content and timing of the final regs will impose significant costs on businesses and consumers.

I am proud to say that Mick Jagger and I both have spent time studying at LSE. I suspect that his economics training is why the Stones have managed their musical business affairs so well over the years!

Wednesday, July 14, 2010

Global Telecom The Indian Way


On the right is a photo taken a few months ago by my cousin, who was an executive in the software industry in Mumbai for several years before moving into biopharma. It's almost too much for words, but it says everything about the reality of electrical, telecom and cellular infrastructure in India.

No entity controls the connections to the pole, and anyone is free to add theirs to the jumble, without any consideration for external effects on existing connections. The local utility doesn't care about this situation and has no power to enforce regulations anyway. Everyone shrugs their shoulders and life goes on, until the daily brownouts or a failure. When you hear about the need to invest in Indian infrastructure, this is an image to keep in mind.

A recent study by McKinsey estimates that by 2030 India will, for the first time in its history, pass from being a country of villages to the majority of its citizens being urbanized. Mumbai will have about 28 million inhabitants, Pune will have 6 million, and Chennai some 8 million. McKinsey estimates that $1.2 trillion will have to be spent on infrastructure alone by 2030 to accommodate the needs of the urban population throughout the country. Some big chunks in their calculation are water and sewers, the latter being something that never receives public investment to any meaningful degree. Roads, trains and subways are critical investments also. $120 billion is required on an annual basis, according to McKinsey. They size this by saying that it's equivalent to adding infrastructure for a city the size of Chicago every year for twenty years.

Now if something like this were done, there would be tremendous export potential for US companies, since the materials and services requirements would be beyond domestic capabilities. Of course, India would have to export more in order to pay for this effort, but these are the kinds of things that should be the subject of Indo-American dialogue, not just selling more fighter planes and arms to the Indian government.

Tuesday, July 13, 2010

We Apologize For the Previous Apology

Monty Python, and John Cleese in particular, often bit the hand of their benefactor, the BBC, in their sketches. At the end of a rude sketch, they would then run a B&W written apology for the offensive sketch, gravely intoned by Cleese. Immediately afterwards, they would issue an apology for the previous apology, retracting some of the statements read by Cleese. It's a classic Python device, and I laugh every time.

However, the recent flap over GE CEO Jeff Imelt's comments at a Rome business meeting reminds me of the Monty Python bit. GE's PR department spokesperson first said that Imelt's comments were taken out of context, the evergreen apology phrase. Then, the spokesperson apologized for that apology and said that Imelt's views were not those of the company! Have some courage--he's the CEO, that's what he and other company leaders believe, and that's what the American Chamber of Commerce in China has been saying for years.

Here's the quote from the Financial Times, "I'm not sure that in the end they (the Chinese government) want any of us to win or any of us to be successful." The European Chamber of Commerce has echoed these sentiments, along with the American Chamber.

What's the problem, you say? The FT says that lots of companies are making money selling consumer products, like soft drinks. The problem is that GE is producing and selling engineered products like wind turbines and highly engineered systems like avionics, where the interests of GE and the Chinese state enterprises will eventually diverge.

The Chinese can easily mix sugar, water and caramel coloring to shut out foreign soft drinks, but they don't care enough about it to do so. They do care deeply about technology, about technology transfer and about being a global player and exporter, which is in line with their "beggar thy neighbor" trade and currency policies.

GE has been a model citizen in how they have approached the Chinese markets, and their actions are fodder for lots of business school case studies. However, the unfortunate truth is that the discounted present value calculations for some of their investments will have a shorter horizon and a lower terminal value than GE and other industrial conglomerates are used to seeing.

No amount of jawboning or complaining is going to change this. The question is: "How to live with the new reality?" There's nothing wrong with politely speaking one's mind and putting the cards on the table. No apology needed.

Monday, July 12, 2010

Not Being True to Your Self

I have always felt aggrieved for the Dutch football teams, especially the 1974 World Cup squad led by Johan Cruyff. In the final against Germany, Cruff made a dazzling run into the box where he was viciously hacked down by Uli Hoeness, after which Neeskens buried a penalty to take the Dutch into the lead. They lost the game to a brutal and negative German side.

The Dutch have always combined strong technical skills on the ball, with a desire to go forward and physical muscularity. Watch Clarence Seedorf of AC Milan, and you will see someone built like Ray Lewis of the Ravens with the silkiest of touches in traffic and a thunderous shot. He grew up in the Dutch system. On Sunday, they abandoned their footballing natures to become like the hated Germans of 1974 in order to slow the down Spain and to destroy their playmakers. They should have played with nine men, as DeJong and Van Bommel should have been sent off but weren't.

Had the Dutch been true to themselves and tried to be positive, it would have been a beautiful game and provided glorious football for the spectators. I believe that the Dutch might have had a chance to win, even if the score were 5-4.

Instead, they played a style that was unfamiliar to them and which was not true to their footballing nature. The coach clearly had to direct this tactical shift, as it was no coincidence that the fouls were focused on the Spanish midfield maestros: Iniesta, Xavi, and Alonso.

On a different front, BP will likely never recover from the disaster in the Gulf of its own making. It is a company that papered over a long-term drift and deterioration of its corporate culture and values. Industry people joke that BP stands for "broken pipelines." Instead of focusing on a culture of operational excellence and safety, the previous CEO focused on empty PR, stating that BP stood for "Beyond Petroleum." Both the CEO and board Chair have been permanently damaged by their incoherent and ineffective strategies for responding to technical, environmental, legal, and stakeholder concerns. One would wonder why most board members would want to stick around for the aftermath of the Gulf situation. A parallel with asbestos seems apt, as capping future liabilities, given the interests of the Gulf states and the Federal government, seems extremely difficult. The company has built up no goodwill to take the pressure off itself.

BP has not been true to its core self as an entity that extracts, transports and refines hydrocarbons in physically challenging onshore and offshore environments. No responsible or successful organization can dodge risk over the long-term by skimping on the construction and maintenance of their physical capital. The Libyans have made some public pronouncements about looking at BP shares as an investment--the trouble will be finding the bottom.

Tuesday, July 6, 2010

US Soccer and South Africa

As Sunil Gulati, the CEO of the United States Soccer Federation, mulls over the future of the USA team coach Bob Bradley, I've thought about the performance of the team in South Africa. Of all the US teams I've watched over the years, this was the team that had the best team spirit and concept, no question. Previous teams were built on a star concept, driven by the needs of the product marketers.

The current team was certainly centered around Landon Donovan. However, Coach Bradley created a team that played together, sacrificed for each other, gave 100 percent at all times, and refused to point fingers at each other on the field when things didn't go well. Thinking back to the days of Eric Wynalda, John Harkes, Alexei Lalas, Coby Jones, Casey Keller and other luminaries, this was never really the case.

The current team had players like defenders Jay Demerit and Jonathan Borenstein who were not even MLS stars, but who played with skill, passion, and fearless commitment. Kudos to them and to the coach for generating this kind of proud, fan pleasing performance. It's a real credit to this team-building skills. Newer players like Maurice Edu showed their potential at the tournament, and Edu in particular looked very comfortable in the holding position in front of the back four. So, Coach Bradley has an astute eye for talent also. His own son, Michael Bradley, has just begun to tap his own potential in the Bundesliga.

So, our discussion post-tournament is whether or not the coach should be replaced. He deserves another stint as coach. However, everything else in the U.S. Soccer infrastructure needs to change in order for him to succeed. This would force us to look at some uncomfortable truths about our soccer selves.

Aside from our goal keepers--Howard and Friedel--we don't have elite players who can compete at the highest levels of international professional soccer. Despite Landon Donovan's good few weeks at Everton, he is a solid, club level player, but not on the elite level. Our player development system is woefully inadequate, and we have no real out-and-out attacking players with ball skills to threaten a defense--like Ozil, Podolski, and Klose(Germany); Villa and Torres (Spain); Robben and Van Persie (Netherlands); Suarez and Forlan (Uruguay). Our youth coaching is woeful and focuses on producing players who can run all day, with poor technical skills.

Most of our players have been produced from organized soccer programs, may of which are in the suburbs. Potential stars, including those from minority communities in the inner cities, don't have street soccer venues to develop their skills and to enjoy the game. If we developed basketball players like we develop soccer players, the NBA would be a six team league. We need to think differently about growing players.

Jurgen Klinsmann, who was offered the US coaching job a few years back, was smart enough to realize that taking the position without reforming the entire apparatus of youth coaching and player development would lead to failure. In fact, he noted on ESPN that the German FA decided ten years ago that in order to become a World Cup winner again their entire system had to be re-invented. The current team is a product of that long-term, strategic and systemic effort.

We can learn a lot from the German retooling of their model. I don't know if it fits our short attention span or our fractured model of soccer governance, which consists of powerful, independent fiefdoms like the USSF, US Youth Soccer, the ODP, and the state associations. Here's hoping that we look down the road beyond the next tournament and keep improving ourselves in the truly global game of football.

Thursday, July 1, 2010

Coopting Good Governance

Professor Lucian Bebchuk and his co-authors at the Harvard Law School have produced an interesting paper concluding that while there may have been some excess returns to investing in a "good governance" portfolio in 1991-1999, no such excess return existed 2004-2008, just when the "good governance" investment thesis should have been paying off maximally.

Why? In a sense, "good governance" has been co-opted as a term. A good analogy is the term "organic" in the food business. The term was coined for small farmers using sensible land-use, water and pesticide practices and selling their products in farmers' markets to a narrow market segment. Now, that term has been co-opted by corporations of every size, and the consumer's Good Housekeeping Seal (remember that?) is certification by some body that no one knows about. We have organic Oreos (Paul Newman), organic coffee (Starbucks, Caribous) and organic vinegar. Quite often, in the case of chicken, the real practices used to meet the seal of approval are completely antithetical to the real meaning of the original label.

So it is with good governance. Enter businesses that label governance, like ISS, and public companies have learned how to game the system to get their seal of approval. But, it is almost impossible for an equity investor to truly know how well a portfolio company is governed without having tape transcripts of board meetings over a period of time. Since we get Fed transcripts five years later, we can forget this notion.

As academic research has pointed out, most corporate performance can be explained by the interaction of cyclical factors, random events, and intra-industry shifts in short-term market share.

Now that proxies are full of full of uninformative and non-measurable disclosures about processes, the focus on good governance and on aligning management's interest with those of stakeholders is abating. In fact, the article shows that publications in academic and NBER journals on governance peaked a few years ago.

Investors should continue more than ever to ferret out how a portfolio company is being run on a long-term basis but it can't be done by looking at proxies and governance ratings, as these have been stripped of meaningful value.