Case Blog

The amount of populist rhetoric coming from both sides of the political aisle in the U.S. has been escalating over the past several weeks. Sarah Palin has been out on the talk show circuit promoting her book, Going Rogue, and has certainly continued her approach of appealing to her base’s populist sentiment. Meanwhile, President Obama has once again renewed his attack on our banks and bankers in reaction to Senator-elect Scott Brown’s surprising victory in Massachusetts.

This populist approach to challenging problems reminds me of earlier times in our country’s history. A perennial Democratic presidential candidate, William Jennings Bryan, who ran for president in 1896, 1900 and 1908, was also a strong orator and a “critic of banks and railroads.” (Wikipedia: William Jennings Bryan) Bryan never became president, but he did serve for a time as President Wilson’s Secretary of State. If you look back on this time from around the turn of the century and study the impact the populist rhetoric had leading up to the Great Depression, I believe you would agree with me that it is time for both parties to allow Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner, together with Congress, to move forward with the necessary reforms and safeguards that need to be put in place, without all of the noise that distracts us from constructive solutions.

In a step in the right direction, President Obama reached out across the aisle on Friday when he accepted an invitation from House Republicans and traveled to a Baltimore hotel to engage in a give and take on the issues. At one point he remarked that he was not an “ideologue” and that his health care plan was not a “Bolshevik plot.” (NY Times 1/30/2010) He was introduced by Congressman John Boehner, the minority leader, who handed him a publication titled “Better Solutions.” The reporters for the New York Times article remarked that the event seemed much closer to the British tradition of the opposition party questioning the prime minister. I must admit that several times I have sat in a London hotel room during the Blair years and enjoyed watching this live example of parliamentary democracy.

As we move toward the midterm elections both parties would be better served by focusing on innovative programs to create jobs. All of the recent polls show this to be the #1 concern of the American people facing an unemployment rate that remains stubbornly above 10%. We know that in the recovery cycles from all the past recessions since World War II that small businesses are the first to hire as they move to meet renewed demand. The President’s proposal of tax credits for small businesses that create new jobs is one that should be supported by Congress.

In closing, I have been reading The Prince of Silicon Valley: Frank Quattrone and the Dot-Com Bubble, by Randall Smith, a Wall Street Journal reporter. As I read it, I come away with the distinct feeling that the author and I have a very different view of Silicon Valley and the tech industry, where Frank Quattrone remains highly regarded and his new firm, Qatalyst Partners, is actively advising many of the Valley’s top firms.

With one week left in Fed Chairman Ben Bernanke’s first term, a sense of unease rattled the stock markets yesterday as several Democratic Senators (Boxer & Feingold) announced that they would not support President Obama’s nomination of Chairman Bernanke for a second term. I wrote “A Second Term for Ben” (see below) in late August and shortly thereafter the president nominated him for a second term. I stand by my original position: Chairman Bernanke has earned a second term. We would be better served without the revisionist history that is taking place in Congress and with a forward look to the ongoing recovery from the Great Recession.

A Second Term for Ben

In my last posting, “Goldman Sachs’ Swagger,” I received more feedback than usual and it was more mixed than usual, but I stand by my position that while the company’s over performance has resulted in some arrogant behavior, the firm and its partners are not evil. One of the people I heard from was the famous journalist and columnist, Robert X. Cringely. Bob and I were colleagues long ago in the early ’90s at InfoWorld, where he wrote the well-read “Notes from the Field” column. We have remained friends over the years, but we have always seemed to come at things from a slightly different vantage point. My last blog inspired him to write “Is Technology Evil?” (www.cringely.com) He clearly did not like my sports analogies and found wisdom and inspiration in the Google motto, “Don’t be Evil.”

Now I am not ready for a steady diet of point counterpoint with Cringe, but our exchange lead me to the question: Should President Obama appoint Fed Chairman Ben Bernanke to a second term when his current term ends on January 31, 2010? I am confident that Cringe and I will arrive at very different conclusions.

Alan Greenspan’s long tenure as Chairman of the Board of Governors of the United States Federal Reserve began when President Reagan appointed him in August of 1987. He was appointed to successive 4-year terms by President George H.W. Bush, President Bill Clinton and President George W. Bush until he retired on January 31st, 2006 and Ben Bernanke was appointed to succeed him. Today, historians are re-evaluating Greenspan’s tenure, particularly in light of the sub-prime crisis that shook the foundations of the financial systems around the globe. Prior to this, though, he was heralded for maintaining stability and continuity in the global markets and for keeping down inflationary pressures. (We should never forget the inflation of the Carter years.) When faced with the option of reappointing a Republican appointee or replacing him, President Clinton twice decided that the country was better with Greenspan at the helm. During this period, the country experienced unprecedented growth and actually ran large surpluses.

President Obama is faced with a similar choice: should he reappoint Ben Bernanke or go to his own bench for Larry Summers? Chairman Bernanke has studied and written extensively about the causes of the Great Depression and understands that one of the underlying causes was the lack of credit. When he saw the credit markets freeze after Lehman Brothers filed for bankruptcy, he immediately worked to pull us back from the abyss with then Treasury Secretary Paulson and Tim Geithner, who was then head of the New York Federal Reserve and is the current Treasury Secretary. I sense that as confidence is slowly restored in our financial institutions globally, we would be best served, as would President Obama’s own interests, by his reappointment of Ben Bernanke to a second term.

Cringe, your turn at bat.

On a very long flight west last evening, I started Pat Conroy’s latest novel, South of Broad, which takes place as all of his novels do in Charleston, that charming, historic, southern city. This is his first novel since Beach Music, which was published over 14 years ago. I am finding it to be a very special way to end August, with Leo King narrating and bringing us back to the South Carolina coast.

As we closed out calendar year ‘09, our largest financial institutions were able to end a very difficult chapter of the Great Recession by paying back their TARP funds. These funds were paid back with interest and the federal government realizing an additional return through warrant coverage. This signified that our financial system was on the road to recovery. At the time, it was pointed out by the press that this freed these institutions from government oversight of their compensation plans, just in time for bonus season. Once again, Goldman Sachs (GS) was singled out along with JPMorgan Chase (JPM) and several others for the size of their bonus pool.

On Thursday of this past week, President Obama and his financial team took aim again at our 50 largest financial institutions, those with more than $50B in assets, by proposing a new Bank Tax. [This tax would exclude the Tier 1 Capital of these 50 large financial institutions. (NY Times 1/14/10)] The President outlined a plan to recover $90B over the next 10 years to cover TARP funds that would not be able to be paid back by Chrysler, General Motors, AIG, Fannie Mae and Freddie Mac. President Obama has called this new tax “a financial crisis responsibility fee.” (NY Times 1/14/10)  He also said that his determination was tied to “massive profits and obscene bonuses” as well as “to their reckless risk taking” that lead to the financial crisis from which we are slowly recovering.  This new tax will be presented to Congress along with the budget in February and would go into effect after June 30.  It would need to be voted on and passed by both the Senate and the House.

I sense that this populist appeal will play well with both main street Democrats and Tea Party Republicans, but it will not strengthen our financial institutions during a recovery cycle and will probably result in curtailed lending and could end up being passed on to companies and consumers.  If both parties were really interested in avoiding a replay of the risk taking that lead to the meltdown of the global financial system, they would be trying to find ways to strengthen the capital base of these institutions and avoid the amount of leverage that resulted in the risk taking in the first place.  I believe that the leaders of our largest financial institutions would react positively to a call to strengthen their capital base, as opposed to being singled out again for blame and to pay for the government’s decision to bail out the automotive industry.

After a U.S. jobs report from the Labor Department showed modest gains in November, last Friday’s report for December showed a loss of another 85,000 jobs. We also learned on Friday that the Eurozone’s unemployment rate has now joined the U.S. at 10%+. These unemployment rates remain stubbornly high, in spite of the fact that both economies grew in the second half of ‘09. (FT 1/9/2010)

So it’s not surprising that job creation remains at the top of the list in most political polls, but politicians on both sides of the Atlantic seem more interested in tax increases, as opposed to tax incentives, to drive job creation. For example, the U.S. Congress is starting to once again discuss changing the way “carried interest” is taxed for venture capital partnerships. (Yes, I am backed by Austin Ventures, but I have held this belief for more than 20 years.) I believe a more productive discussion would be how to incentivize venture capital firms to make more investments that lead to new jobs, rather than trying to tax their partners’ gains as ordinary income. To get a better understanding of this issue, I recommend visiting the site of the National Venture Capital Association and reading “Carried Interest Tax Policy.”

President Obama did acknowledge that the December data represented a setback, “while outlining plans to deliver $2.3 billion in tax credits to spur manufacturing jobs in clean energy.” (NY Times 1/9/2010) As I have stated in the past, the U.S. midterm elections in the fall will revolve around jobs and both parties will need to address this issue. This will also be a major issue in the U.K. election this spring that will determine if the Tories replace Labour.

As we have made our way through this very difficult economy, most of my wine recommendations during ‘09 were driven by value. I decided to kick off 2010 on a more optimistic note, at a small dinner party Mary Claire and I hosted at our home in Blackhawk, by tasting several older California cabernet blends. I went into my cellar and chose three wines:

1982 Dunn Howell Mountain: Randy Dunn has a long history working at some of northern California’s best-known wineries, including Caymus and Pahlmeyer. His Dunn Vineyards offerings have a storied past, particularly his Howell Mountain wines.

1985 Rubicon Estate: This is the flagship release of Francis Ford Coppola’s Rubicon Estate. Coppola is still best known for the Godfather, which was released in 1972. 1985 was a very good year in Napa Valley.

1995 Dominus Estate: This winery is owned and operated by the celebrated French winemaker Christian Moueix, of Château Pétrus fame.

The votes came in and gave a slight edge to the Godfather’s ‘85 Rubicon,over the ‘82 Howell Mountain. Both wines still had fruit that was remarkably young, soft tannins and excellent balance.  The only disappointment was the Dominus, which did not stand up well next to the two other contenders.

Here’s to the winners and a recovery that creates jobs in 2010!