When Greed Is Good

For those of my generation, Gordon Gekko is the ultimate Wall Street caricature. Oliver Stone's movie Wall Street, in which Gordon is the main character, came out in 1987, just as I was getting out of business school and starting my career in venture capital. The big line in that movie is when Gordon says "greed is good."  Here's a ~3 min clip from the film and the whole thing is worth watching but the big line comes around 2:40 into the clip:

If you watched until the end, you also got to hear this line:

Greed, you mark my words, will not only save Teldar Paper, but also that malfunctioning corporation called the USA.

That's the first thing I thought of when I read this morning in the NY Times that the bank rescue plan that Geithner will announce tomorrow relies in part on private investors:

Administration officials said the plan, to be announced Tuesday, was
likely to depend in part on the willingness of private investors other
than banks — like hedge funds, private equity funds and perhaps even
insurance companies — to buy the contaminating assets that wiped out
the capital of many banks.The officials say they are counting on
the profit motive to create a market for those assets. The government
would guarantee a floor value, officials say, as a way to overcome
investors’ reluctance to buy them.

The smartest people I know have been saying this has to happen for over five months. Roger Ehrenberg has been pleading for the good bank/bad bank solution since the late summer early fall. In the good bank/bad bank scenario, the bad bank gets all the "toxic" assets and private investors are allowed to speculate as to their worth in an open and transparent market.

The single best comment I've received on this blog about the banking mess came last September from JLM, who was hanging around this blog community during the election but sadly seems to have left the conversation, at least he's gone silent.  JLM said:

Sometimes a bit of historic perspective is useful in trying to deal
with TODAY. Remember that quote about being doomed to relive the
history we ignore? Well we are not being very thoughtful about this. We
have actually seen this movie before though maybe it was a shorter

Remember the S & L crisis and the Resolution Trust
Corp? I do because I hit a very, very good lick in purchasing
distressed properties from the RTC, pension funds, insurance companies,
banks and S & Ls. I bought them for $0.20-0.30 on the dollar of
replacement cost, fixed them up, owned them for about 5-7 years, had
the numbers audited annually and sold them all to institutions in 3
transactions in 1995 — 6,000 apartments, 100 warehouses, 7.5 MM sf of

My partners were the likes of GE Capital (for whom I
also fixed up some of their problems), Fidelity and private foreign
investors. BTW, GE Capital is the smartest bunch of real estate folks I
ever met and the best risk takers a partner could ever have hoped for.
And they made a ton of money in the deal while conducting themselves
like perfect partners and gentlemen. Private money jumped in big time!

trooped around Wall Street trying to raise money for a long, long time
and shared my contrarian investment strategy (and believe me the folks
were looking for the lobotomy scars all the time) with the likes of
KKR, Odyssey, Bear Stearns, Allen & Co, Leon Black — the usual
suspects. And guess what? They never gave me any money but they all
went into the business themselves. Capitalism was alive and well.

the bottom line: If the RTC had held every property and just injected a
bit of management they would have recovered every penny of principal,
every penny of interest at the default rate and they would have firmed
up the national commercial real estate markets more quickly.

is not some mythical academic theoretical tale. This is something that
a bunch of guys did the last time the markets crashed (then it was more
commercial than residential) and the government stepped in to bail out
the transgressors. This is reality.

BTW, the final price tag on
the RTC was about $200B last time around. How much would that be in
today's dollars? Oh, about $700B maybe?

Here's a suggestion based upon what was learned the last time around —

Let all the originators of the problem fail. Suck their capital dry. Punish them like a VC would punish the first round guys.

use a penny of government money. If pressed, use government loan
guarantees only. The only entity left with real credit is the US
government. Use it. This will make the markets tell us what this crap
is really worth. Right now the issue is the pricing.

Fix the
problems that created this mess quick and do it publicly. No 100%
mortgages even for Warren Buffet. No low doc mortgages. No financing of
closing costs in mortgages. Make all borrowers have skin in the game.
No leveraging capital 30-40 times for any financial instititions. No
mortgage based derivatives of any kind — why? Cause you cannot
collect mortgage payments when the mortgage is "embedded" and "divided"
by securitization. Teach the guys with mousse in their hair how to
collect a past due payment. No extraordinary compensation for
investment guys who are primarily salary men — let them take a piece
of their own deal if they want an equity style upside. No naked short
selling. Ban short selling for 24 months. Then reinstate the uptick
rule. Bring all hedge funds out of the woods and under the regulatory
umbrella. If you want American markets, tax laws, securities laws, etc,
then you have to be regulated. Lower the capital gains rate to 0% for
five years — because that's how long it will take to work this
through. The private capital will come to that lowered capital gains
rate like a moth to a flame and it will be immediate. Merge Freddie and
Fannie and obtain meaningful merger efficiencies.

Stop the
foreclosure process on residential real estate which can be salvaged.
If a borrower can pay anything — owes $100 per month but can pay $70
— keep him in the house because real estate plummets in value the
second it is empty and every foreclosure ever sold has been sold at a
deeper discount than the foreclosure price. Make a trade. Rework the
mortgage in return for a 50% equity slice above the mortgage amount.
There is a certain irony in allowing the public to solve their own
problems rather than just sending them the bill. It shortcuts the flow
of money and it has a social benefit. Can every deal be reworked? No,
but many can be and should be.

Oh, yeah, get rid of Barney Frank, Chris Dodd and Chris Cox.

That's even better than I remember it. I should print it out and mail it to every single legislator and policy maker in Washington. But my favorite part of it is this:

I hit a very, very good lick in purchasing
distressed properties from the RTC, pension funds, insurance companies,
banks and S & Ls.

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

This crisis of confidence will only be fixed by you and me

Greed is good when fear rules the roost and fear is good when greed rules the roost. Now is the time for greed.

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Comments (Archived):

  1. stone

    This is precisely where NOT having a serious business person in the White House really hurts the country. Obama and Geithner are obviously well intentioned, but what can they possible know about capitalism? It’s hard to really understand until or unless you’ve raised money and run a company. It’s somewhat scary now to think that these people are making business decisions. If Obama’s first few weeks are any indication of how he’ll govern we are in a heap of crap because things have not been going well for him.

    1. example

      Maybe looking “serious business” is not the best use of government time.

  2. gregorylent

    can you explain the disconnect, or no-connect, between the many bright guys of the world, such as JLM, and the actual movers and shakers and policy makers and legislators and regulators and civil servants who don’t have a clue but are in power, in charge, in “control”?the lessen from Davos is that nobody knows, nobody will take responsibility.the lessen from washington is that … well, at least a few people are starting to whisper the T word, trillions …greed, fear, and ignorance seem to have such a lock, you could make JLM or whoever King, and nothing would change …who really wants to make systemic change? i think the answer is no one …

  3. Guest

    So the idea is this: the feds bid up a floor, say 20 cents, and get a preference with say, 5% interest on the funds invested. Private parties bid up on top of that and get all the upside minus the 5% on the 20cents (or 1% on book value). Since U.S. can borrow at ~2%, they make money. The private investors are buying allegedly in-the-money calls on the “toxic” paper. Or in other words, the U.S. government becomes a margin lender. Sounds smart, indeed.HOWEVER! The two questions that Krugman has been asking forever remain unanswered:1. What if the price (govt. floor+private bid) is not sufficient for the selling bank to cover its capital reqs? Roubini has been saying that the entire banking system is insolvent. If he is right, and if price discovery is assumed to be efficient, then we are still left with an insolvent banking system after the toxic assets are let go…and2. What if the floor is set high enough to ensure sufficient bank capitalization, but again, Roubini is correct and total recovery falls short of that. Everyone loses money, private investors and taxpayers alike…So either JLM is correct, and this is S&L redux, and things work out for everyone. Or Roubini is correct and then no matter you do you end up with insolvent banks… I like JLM’s comment, too, especially this line: “No extraordinary compensation for investment guys who are primarily salary men — let them take a piece of their own deal if they want an equity style upside.”However, it’s hard to argue with Nouriel’s track record. If I was Obama and had to make the best decision based on all the information (or lack thereof), I would go with Roubini, his track record, and his recommendation: nationalize the banks a la Sweeden, wipe out shareholders and bondholders, inject some capital and then re-privatize.Unfortunately, I believe he is thinking it politically and not prgamatically: with all the “socialist” name-calling he is afraid to go that way, even if he thinks it may be the best for the economy and the U.S….

    1. fredwilson

      That’s a great articulation of the choice facing obama and his team

    2. example

      Who is the natural constituency for huge wall street banks? I think most Americans would prefer temporary “socialism” to “wallstreet welfare”

    3. David Semeria

      Unless I’m missing something, the selling of the toxic assets is not intended to generate sufficient capital for the banks to become operational again. It’s only purpose is draw a line under the toxic assets, so that the banks can be recapitalized (with private money) and begin again.Whether the banks will be just as crazy with the new cash is an entirely different question, however.

  4. S.t

    1442 days until 1/21/13

  5. example

    I’m guessing “The smartest people you know” stand to lose quite a bit if the banks get nationalized. Unlike “the taxpayer”, who could end up losing quite a bit if it goes through.

  6. DonRyan

    I have long ago lost faith in the government when it comes to a solution to this problem. They are way to selfish, short-sighted, and ignorant to put forth a solution that will work and not screw taxpayers in the long term. A Congressman’s (or Senator’s) first job is to get re-elected. To do that, you have to buy votes- not directly but feed the various interests that have come to the trough. That’s how you wind up with the bills that are in the House and Senate now.That’s how you spend a trillion dollars and fix nothing.If this mess is going to get fixed, it’s up to people like you and Howard and me and anyone else who can look through the haze and see that there’s a buck to be made here. Not because, but in spite of the government.

    1. fredwilson

      In spite of them!!!

    2. example

      It’s the whole “There’s a buck to be made” attitude that disgusts people. Why exactly should the average American agree to huge debts so that rich people can “make a buck” off their misery.If you want to make money, sell some banks short. If you can’t tolerate the risk of doing that, then you don’t really deserve to “make a buck” by leaching off a government bailout.

  7. matt schulte

    Roger Ehrenberg has been saying the exact reason they don’t want to go through with the above, is they are deathly afraid that the system is in fact insolvent, and this exactly what “Mr. Miller and Treasury Secretary Geithner want to avoid; the transparency necessary to figure out exactly where the industry stands, in order that a proper prescriptive can be put in place to begin real healing”.Because they (not we, I would argue) can’t handle the truth.

  8. Kenosha_Kid

    The thing that makes me uncomfortable about any and all solutions so far, is that these all perpetuate the Ponzi scheme without addressing the root problem. Good/bad bank, rescue package, TARP, all of that is just putting more capital at risk in the hopes that some other capital in the future will provide the necessary “exit” or “refinance” to either create private sector returns or repay taxpayer money to the Treasury. Same old same old, like an addiction.The problem that needs to be addressed, which nobody seems to be, is that underlying economic value has stopped keeping up with capital growth for a long time. Supply side was maybe good at its origin in the 80s, but has been a smoke and mirrors act since, and capital infusions today without a corresponding fix of the root problem – the lacking substance, the lacking fundamentals – is at best going to postpone even worse disasters.What is required, in my opinion, among other things, is a cultural shift that emphasizes value creation rather than greed. Greed is not good, unless Teldar Paper invents a new product or improves its operating (as distinct from financial) efficiency.

  9. Chris

    Artificially holding up failed companies is not a recipe for success.Artificially holding up the prices of assets is not a recipe for success.It *rewards* past mistakes, and ties up assets that should be flowing into more productive hands.Our crisis is *not* one of confidence. We had a fantasy boom created by artificial credit. All of the malinvestments must and will ultimately be liquidated.Trying to prop up fantasyland, or worse, trying to bring it back, will only prolong the economic pain.

    1. lee

      It depends on your definition of success.In an ideal world you could be correct however this is the real world where numbers have, ultimately, to be balanced and accounted for and where businesses requir working capital and capital investment in order to hire and make and sell.a) Those “liquidated malinvestments” are real people in real homes with real children and real schools, and…..b) The economy will take longer to recover if you “burst the boil” in the manner you seem to suggest

      1. Brian

        What evidence to you have to support point b?We used to have boom and bust cycles all the time that cleared up in a manner of quarters. The track record of government interventions is that they prolong bad economic times. See the new deal. See Japan. See Paulson’s interventions.Folks who lose there homes can find something to rent that they can afford. We need to stop enabling people that make bad decisions. They will never learn how to do the right thing if we reward doing the wrong thing.

      2. kidmercury

        if this were really about easing the burden on main st the money the govt is printing (that’s what stimulus amounts to in our current environment, fed has already said it is monetizing) then the bailout money would be given to citizens, not to banks.

  10. KidCroesus

    The conversation around the Greenwich CT tennis courts this weekend was all about folks thinking about raising some money and getting into real estate “work-outs”.It seems pretty clear to me there is a lot of money and talent looking for an opportunity here — its the same folks who got us into this mess who want to make a pile of money getting us out.If I understand this approach, the rich will get much richer by buying equity in undervalued assets — the government gets no tax revenue — and we get a new landowner class in America of private equity shops, funded by international capital (Saudi Arabia, China, etc..)Do I have JLM right on this example? I am a middle class homeowner who bought a $500,000 house with $100,000 down and a $400,000 mortgage. The house is now worth $400,000 and I can’t make my payments, having lost my job. Banks are looking to foreclose. I no longer have equity in the house.JLM’s plan kicks in. Now a private equity shop owns the house with $200,000 of equity, and I am paying a new loan for $200,000, guaranteed by the government.So I am now a tenant to the PE firm. The private equity people (who are now the true owner) can just sell the house right under me — and they undoubtedly will within 5 years, to take advantage of that nice zero percent capital gains rate that was just enacted. As a tenant, I have no incentive to take care of the asset, or to build equity back up in the house.Do I have that right? Seems to me that the difference between the government and the private sector, is the government isn’t going to sell your house out from under you.(I do agree with all the smart, common sense things JLM says, like regulating hedge funds, and requiring equity for mortgages, and eliminating derivatives on mortgages. And trying to find alternatives to foreclosures.)

    1. lee

      “The private equity people (who are now the true owner) can just sell the house right under me — and they undoubtedly will within 5 years, to take advantage of that nice zero percent capital gains rate that was just enacted.”Not sure. They may just want you to remortgage within 5 years when, hopefully, you have a job and prospects again?

    2. example

      They’re just trading the derivatives on the original mortgage. The mortgage itself wouldn’t change. Which is kind of lame. If they’re going to go through this whole ripoff, they might as well let individual home owners buy their own mortgages at cheap prices.

  11. ameyer32

    Adding onto what Krassen Dimitrov said, I would like to add two points.1. During the S&L crisis, mortgages had not been securitized into the mind numbingly complex CDOs and CMOs that have to be dealt with now.2. Revaluing these assets has an unfortunate side effect. It throws contract law out the window. The people who purchased the CDOs, did so in good faith that the contracts would be honored. If home owners default, that is handled under the contracts. If the government comes in and “reprices” the assets, the government has broken the contracts.3. Guess who the government wants to have buy these “repriced assets”? Hedge funds, pension plans, private equity, financial advisors and other investors. Guess who bought the original CDOs and CMOs? Hedge funds, pension plans, private equity, financial advisors and other investors.The government may well attempt to “reprice” these assets to save the banks. If they do, they should call the plan “cutting off your nose to spit in your face.” Because that’s what they will be doing.

  12. Gabriel Griego

    I attended a UC Berkeley symposium with 4 economics and 1 business professor a few months ago, and they put this in historical perspective as well. Their perspective though wasn’t the S&L crisis, instead it was the Great Depression, and their collective thinking went something like this. In the 1920’s the government’s reaction was to clamp down on the markets, putting strict regulations into place, and not stepping in to rescue financial institutions. The professors seemed to agree that didn’t work, so their advice was generally what we are seeing now … government should step in to shore up market confidence and infuse capital where needed, and re-regulate where needed, but not to overdo it.I am by no means an expert in this, and am not advocating any position, I just wonder which history lesson we should be learning. And I wonder, when we look back on this 80 years from now, we will have gotten it mostly right, or mostly wrong?

    1. example

      Those guys are crazy. First of all, the time line is wrong. The depression started at the end of 1929, and I think any sane person would agree that there had been an insane bubble going, which means that any 1920s era regulation failed to stop the bubble from growing. These professors seemed to think that if we’d just deregulated even more, we’d have kept the bubble growing? That’s preposterous.Also, the idea middle class tax payers should have their wages garnished even more in order to ‘infuse capital’ into wall street at the very same time wall street charges outrageous credit card rates and bad mortgage deals while many Americans go without health care is politically unsustainable, and frankly perverse.

      1. Gabriel Griego

        Clearly I did no justice to their talk and probably should have included this link anyway: https://www.law.berkeley.ed

        1. Gabriel Griego

          Uh, sorry, the above link is for a similar, though different, talk. Here is the one I attended:http://www.law.berkeley.edu…I promise to be more careful next time 🙂

    2. kidmercury

      those professors are spreading phony history. the fed created inflation in the 20s, this resulted in a bubble, the bubble burst as all bubbles do. the govt did respond and try to prevent falling asset prices by doing things like restrictions on short selling and devaluing the dollar significantly by repricing it against gold. ultimately though the gold standard made it impossible to inflate to the extent needed to counter deflation. instead we saw govt get bigger and the problem drag on for a decade because govt would not get out of the way and let the free market work. also the socialist spending programs that began during the great depression are still with us and still burdening the tax base which in turn limits productivity and incentive.we are getting the lessons of the great depression mostly wrong. we are going to get the unemployment, and we are going to get price inflation on top. unless people and govt come to their senses quickly and act accordingly this will be worse than the great depression.

  13. example

    By the way, Gordon Gekko wasn’t the main character in that movie, he was the Villain.– SPOILERS –He gives the speech in order to convince a company to do a leveraged buyout, or some kind of financial shenanigan, and then he destroys the company. In other words, the audience for this speech is about to be robbed.

    1. fredwilson

      He’s the one I remember

  14. marshal sandler

    I find your views very interesting. I have among other things a family full of lawyers who have considered the Geeks and Businessmen in our family as not to bright ! Most of our major politicians are Attorneys they think a direct conversion conversion ratio is a video game ! Over the years I was called upon to bail out a few of their clients. They waste a lot of time attempting to win by intimidation . The buy out schemes scare the devil out of me since to save especially, real estate you must ignore bricks and mortar and understand income streams and math now, that the three musketeers Barney Frank, Chris Dodd and Chris Cox. have messed things up what do we do? and Nancy Polosi to me is like shaking hands with an empty Glove ! Putting the brakes on foreclosure is a key element, empty properties become five star crack dens-I may be a little off post but our financial community has self destructed the system (:> MS

  15. Andy Freeman

    > Stop the foreclosure process on residential real estate which can be salvaged. If a borrower can pay anything — owes $100 per month but can pay $70 — keep him in the house because real estate plummets in value the second it is empty and every foreclosure ever sold has been sold at a deeper discount than the foreclosure price.While empty houses are toxic, there are better alternatives that avoid empty houses.Namely, foreclose and sell the houses to people who can pay. Evict the current residents quickly, before they have a chance to destroy things, and get the new residents into the houses within days.Do it even if the new owners end up paying less than the current resident.Why? Because the current resident willingly bid up the price of said property. Said resident intended to gain from the scam that was subprime mortgages.Meanwhile, folks who “played by the rules” sat in rentals and watched the american dream go to others. Since they’re going to be asked to bail out the scammers, it’s only fair that they should reap any benefits and that the scammers at all levels should take the hit.Yes, “scammer” includes folks who took loans that they couldn’t afford. If they feel that they were defrauded in some way, they can go after the folks who defrauded them. I note that folks who didn’t borrow what they couldn’t pay back didn’t defraud anyone.

    1. marshal sandler

      Andy I respect your comments but foreclosure is time consuming and expensive it is not a 30 day process , we don’t have time for foreclosure a work out is a faster solution, it is very tough eviscting someone.

      1. Andy Freeman

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

  16. lee

    the irony is that I just got a mailout from TechRepublic plugging a webcast called “Protect your company’s financial assets the Goldman Sachs way” – GS, of course, already received USD$ 10 Bn of Government funds.

  17. David Semeria

    In general, all good stuff – apart from:”Let all the originators of the problem fail. Suck their capital dry. Punish them like a VC would punish the first round guys.”So if I understand correctly, a bona-fide angel who had the balls to invest early in a given startup should be viewed in the same way as a bunch of corporate muppets who couldn’t correctly value products they themselves created?And people wonder why VC’s don’t enjoy the love and affection of the general community…

    1. fredwilson

      Yeah, I cringed at that one

      1. GlennKelman

        Actually, it is galling to think that an angel would be treated any differently than the entrepreneurs described in hymanroth’s comment as “a bunch of corporate muppets.” If you fail, you fail together, just as when you succeed, you succeed together. And you can’t spur new investment by asking new investors to pay for others’ losses.Fantastic post Fred.

        1. David Semeria

          Steady, cowboy.Read JLM’s comment carefully. He says that first round guys should be ‘punished’. Not first round guys who screwed up, or first round guys who invested in companies that screwed up. No. Just first round guys in general.The ‘corporate muppets’ I refer to are not entrepreneurs at all – they are the Wall Street wizards who were not content with inventing the securitized sub-prime mortgage market. When they saw other investors making money off these products, they started using their own (company’s) capital to play the game. A bit like a real estate agent who becomes unhappy with his steady commission income and decides to take a direct punt on his underlying market (different business, different risks).But the real point was that JLM’s comment belies a general attitude in the VC world, where every round tries its damnedest to screw the previous one.I suspect this is the reason why Fred cringed.

          1. fredwilson

            Yes. It happens for sure buts it not the prevailing attitdude of the VCs

          2. GlennKelman

            My mistake Hyman; you were trying to make a distinction that I didn’t see.

          3. David Semeria

            No problem. I should have made it clearer that the ‘muppets’ in question were JLM’s ‘originators’.No harm done.

  18. hallson

    Another great discourse on ‘Greed’. This time from Milton Friedmanhttp://www.youtube.com/watc…

    1. Josh Morgan

      EVERYONE needs to see this! Milton Friedman, RIP!

  19. Josh Morgan

    Two words, market correction.How about the government step completely out of the picture? They had a hand in creating this mess.Get this, properties were bought overvalued by people who knowingly took on the risk of owning a home. Anyone who did so ought to be punished by the market just as some were rewarded by buying and selling at the right time.Yes, I understand this will hurt a LOT of people. Still, isn’t that what is best? Putting a bandaid over a problem with TARP, or “Stimulus” isn’t a solution at all. It is a short term “warm, and fuzzy.” It makes us feel like the government can actually do something about it.When prices are corrected, property inventories will lower, and banks will being to lend again. It probably won’t happen until 2010 or beginning of 2011, but this thing will turn itself around. We need to get out of the way or we could cause a bigger and longer term problem.My two cents…

    1. andyswan

      Josh….that’s just so uncompassionate. We have to nanny the citizenry, make their boo-boos go away and trumpet equality of results over equality of opportunity. Welcome to the soft version of the USA….where “hope” and “change” are good enough.

      1. Guest

        “equality of opportunity”? What a joke!!!George W. Bush, Mitt Romney, Hank Steinbrenner, Jim Dolan, Bill Kristol: all incompetent legacy kids with uncanny ability to screw everything up. The conservatives’ “equality of opportunity” reminds me of the joke “we are all equal, but some of us are more equal than others…”

        1. andyswan

          I never said either was reality…just defining the difference in ideals.

  20. kidmercury

    all good and well, all true. too bad no one wants to have any serious conversation about how to satisfy our greed.the problem is that the capital markets are broken. the wall street we have today is not gordon gekko’s wall street. his was scam, but could maintain a straight face. ours is completely broken, the illusion cannot be maintained. the lie has come to an end.the solution is to create new capital markets (“wall st 2.0”). realistically speaking, this is a political issue. and hence, few are up for the challenge, as it means going up against The Man.regrettably, folks are betting on fear, not on greed. hopefully that will change, as it becomes increasingly apparent that betting on fear (i.e. anything that comes from the govt and mainstream media) is the worst bet one can make in every possible sense. but to make the switch from fear to greed we need truth, no way around it. or at least none that i have seen.

    1. David Semeria

      Blue Horseshoe loves busted real estate!

  21. andyswan

    When the people find they can vote themselves money, that will herald the end of the republic. Right, Peggy? http://www.youtube.com/watc…The good news is, the “epiphany” is over….thud.

  22. JLM

    I’m baaaaaaaaaaaaack. Thanks for the props on the former thoughts. I think they are right on the verge of being acted upon in Washington through the next round of bailout proposals.A couple of quick notes:First, let me apologize to any VCs who I offended. I only made a barely passing grade on the sensitivity training. I did not mean to offend —- some of my best friends……………….I have borrowed over $1B in my life and have paid back every cent but one thing I learned early was always get enough the first time around cause it is painful to go back for more.Remember VCs inject a bit of financial reality into the lives of the creative folks — cause they track the cash pretty close. That is a good thing.On the issue of who gets to stay in the house, I suggest that the original homeowner stays and the workout has to be with the original homeowner. The government gets an Irish Sweepstakes cut of the equity when the home eventually sells — that’s what trues up the account in the end. Allows folks to maintain their dignity. People love their homes and that emotion can be tapped into to make folks appreciate the solution. You can’t rebuild confidence by turning folks out into the street. It is like the GI Bill of home ownership.The challenge with pricing is basic honesty — “does this dress make me look fat?” or “Hey, are we freakin’ insolvent?” Right now we have the worst of all worlds — a guy who ran on “hope” telling us it is becoming “hopeless”. I did not like Candidate Obama but I am starting to like President Obama except for his inability to see the necessity for leading a few cheers. He is playing the expectations game when he should be leading the cheers. I think the guy is wizard smart and he will probably get it figured out but the endless peeing on each other’s legs is getting very old.The President’s biggest problem is Speaker Pelosi and Majority Leader Reid. When the Republicans were wandering aimlessly in the desert, having been beaten like a red headed stepchild and were devoid of leadership or a unifying theme who brought them together, rejuvenated them, rearmed them and made them back into a cohesive and potent force? NANCY PELOSI!Let the prices fall where they will. Hell, it’s mostly real estate and if you hold real estate long enough inflation will make you into a genius.Some financial institutions are simply going to have to go out of business! Texas had no branch banking in the pre S&L crisis days, then they had a rush of consolidation including branch banking caused by the S&L crisis solution and now there is only one surviving Tx bank (Frost Bank in SA) which was not rebuilt with tax money. Hell, everything is fine in TX cause that’s where the $140/barrel money has been going! We can survive with 4 nationwide banking franchises just fine. The merger efficiencies will provide 10% of the necessary capital.Get the accounting for things out of the equation. When did the accounting ever make a bad deal into a good deal?This is not S&L redux — this is the applicaiton of sound principles to a game in which a couple of zeroes have been added but it is the same game. The good money has to drive out the bad money and the good risk takers have to drive out the guys who fumbled the ball. When March comes around who is going to be in the NCAA tourney — the teams who really know how to play the game. Why don’t bankers and banks get treated the same — if you cannot deliver wins, then you are out of the game. This is not kindergarten T ball where everybody gets a hit, everybody gets to be on base, no outs are ever declared and nobody keeps score.I love the idea of my becoming King as I had only hoped to become the Secretary of Offense.

    1. David Semeria

      Not pretty, definitely not *sensitive*, but without doubt RIGHT ON THE MONEY!

    2. fredwilson

      So glad you are baaaaack JLMI love the comments about ObamaSpot on

    3. David B,

      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.

  23. Nathaniel Whittemore

    Hi Fred,I thought that this was a really wonderful and thoughtful post. I think that the most important piece is the switch to seeing this economic environment as a real opportunity for action. I do think, however, that the term “greed” is problematic, and actually *doesn’t* get at what you’re talking about. I wrote a response on my social entrepreneurship blog on Change.org. http://socialentrepreneursh…Thanks, as always, for the thoughtful writing!Best,Nathaniel Whittemore

    1. fredwilson

      Great postI left you a comment. Bottom line, I agree with you.

  24. hypermark

    As they say, shadows are scarier than light. In other words, so much of the negative momentum in this crisis is fear of the perennial other shoe dropping – it’s psychological. Until we can get to a clear picture of what the floor looks like, it’s hard to formally reboot the economy – be that as a consumer, business owner or lender/investor.More to the point, I think that one of the most basic outcomes our governmental leadership can pledge to drive is separating the wheat from the chaff, by making the distinctions between the two realms transparent, and letting the market set the price.Part of the challenge is that no one trusts the so-called experts anymore, as the distinction between sage and hack is muddier than been in recent memory, something I blogged about in:Getting Real: On Doomsday, the Demise of So-Called Experts and the New Arbitragehttp://bit.ly/tjd3Check it out if interested,Mark

    1. JLM

      Your comment as the inability to distinguish between “sage and hack” is right on the money. I have begun to preach the mantra of — “nobody has 25 years of experience anymore because the world is moving so fast, we all have 1 year of experience 25 times.”Today I have begun to think it is — “we all have one month of experience six times”!Everything else is irrelevant. Do you remember how the world was ordered before we had cell phones, personal computers, e-mail, the internet and spreadsheets? How about credit default swaps?I argue not for nostalgia but for the simple logic that innovation also requires us to dissect things very carefully and to embrace the good while having the courage to get rid of the old but not to dispose of the fundamental principle in the process. Coke v New Coke. Cell phones v brain tumors. Basic financial underwriting of home mortgages v a chicken in every pot (Barney Frank) underwriting. We actually know the answers. But sometimes we have to review the principles involved.We need leverage in the financial marketplace while remembering to work with a safety net when possible and to measure twice and cut once. We already know this.I suspect that the recovery has already begun and like the idea that we didn’t get into this mess overnight, the recovery is going to take a long time. But I think it has begun.Recession — end of the beginning, now time to bayonet the wounded, declare victory and move on.Recovery — beginning of the beginning, time to marshal forces, consolidate capital and get ready to take the opportunities the market is going to provide.Can you imagine how hard every grant writer, community organizer and municipal CFO is anticipating the StimuloPork Bill? It’s like a 5-year old’s best Christmas on steroids.

      1. hypermark

        Specific to the experts topic, there is a great comment from Nassim Taleb (of Black Swan fame) telling the story of a group of travelers lost in the Alps.Against all odds, with no food, limited supplies and in snowy conditions, the lost travelers somehow found their way back to safe ground.Asked how they did it, the leader of the group, said, “Thank God, we had this map. It enabled us to find our way back.”But, the map was not a map of the Alps. It was a map of the Pyrenees! A member in the audience felt compelled to point out the obvious. Nonplussed, the team leader said, “At least we had a map.”Taleb’s point in telling the story is that we are sitting at a place in time when legions of so-called experts are armed with a map of the Pyrenees, when the situation at hand desperately requires a map of the Alps.Part of my hope is that from this crisis comes a real, thoughtful dialogue on what changes need to occur between the old map and the new map, especially as it pertains to the roles/relationships between business, consumers, the marketplace and government.

        1. JLM

          What a great comment! Brilliant!Leaders are people who take their followers to places they would never get by themselves and what your story illustrates is that sometimes leaders must lead even when they really don’t know what they are doing or where they are going in which instances I argue that they must therefore follow sound principles and continuously apply those principles even to situations in which the map is not a useful reference.This is why I think Pres Obama should stop talking doom and gloom. Nobody ever wants to follow a pessimist or a negative leader.In the military they say — “the first casualty of every engagement with the enemy is the PLAN” and the generals thereafter must fight the battle as it is presented rather than as it was originally planned. The generals begin to fall back on the instincts they developed earlier in their careers or what they learned at C & GSC or the War College.I was an S-3 of a battalion once upon a time and became quite offended when MY plan went awry because the enemy failed to do what they had been predicted to do. The Col told me — “get over it and let me know what you think we should do NOW!”Thereafter I was a much better S-3 because I constantly planned alternative actions for almost every possible failure of the original plan. Sometimes I even guessed right. It was a great learning experience.We have already begun to evolve from the first Paulson plan — “give me $750B and trust me and I will tell you what I used it for when it is spent or really bad things are going to happen.” Already in a couple of months, we realize that that plan will not survive contact with the enemy; and, that the threat has not really materialized. Though I do think we were on the verge of a money market meltdown.This is exactly why I say we have one month of experience six times! But we have principles of finance that have been developed and should be revered during these uncertain times. Never, ever, ever compromise the principles we know will work. Get to work early, stay late, work hard, invest w/ good people. Pray.

          1. hypermark

            Somewhat tongue in check, I was wondering last night whether if there was a news channel that focused on optimism over pessimism, would people watch/listen.So much of the underlying mantra of media is that “if it bleeds it leads,” which unfortunately has a way of becoming a self-fulfilling prophecy in times like these.The unknown answer is whether programming focused on chronicling ideals, optimism and achievement would garner audience or if we indeed prefer to rubber neck at the crash scene.As to Obama, I agree with you on not shoveling too much pessimism, but the challenge is counter-balancing that with a DO SOMETHING NOW message that cuts through the BS of a still hugely partisan congress that’s all too happy to throw pork and base feeding on the one side, and apply the same old salves and baubles on the other (tax cuts INSTEAD of stimulus).

          2. johndodds

            From a UK perspective (which I think applies in the US too), I think that in the past decade there were many channels focussing on over-optimistic messages – specifically about real estate and equity prices. That optimism fuelled the bubble and allowed the assets to become toxic.While I agree it has now gone into reverse, I think what we need to ask is whether a media that offers realistic assesments in good times and bad would garner an audience. And, if not, why not?

          3. gregorylent

            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

        2. fredwilson

          Is that the point that Nassim was makingOr was he saying that any map is better than no map when you are lost?

          1. hypermark

            Actually, he made two points. One is about holding the wrong map relative to the mountain you are climbing yet taking false comfort in having something to hold. Two is the nature of western thought that we have to “do something,” even if the plan isn’t fully formed, often doing real harm as a result.While I would argue that this is a case where it is better to be doing the “right things” versus having to do everything “perfectly right,” Nassim’s point was more snarky, a blind leading the blind comment. Here is link to video, if others interested (shout out to Paul Kedrosky as source I found this at): http://bit.ly/15340L

  25. GL

    Great post and terrific comments as well. We should send this post + comments to our representatives. Clearly, this would give them a starting point. Over the past few nights I’ve been watching our elected leaders on TV. It is so sad how much politics is played when people are getting crushed on Main Street. As someone mentioned in one of the comments we need more business people in government. Look at the funds that are coming into Miami to acquire real estate (Israeli, Saudi and Latin American). We need to get a program in place to keep homeowners in their homes. How long before these same funds start acquiring large strategic chunks in New York and San Francisco. I’m all for a free market, but, when the richest country on earth can’t pull the trigger on new programs opportunistic foreign back funds will. Let’s get to work!!

  26. Dorian Benkoil

    How, in all this, do the people who foisted the crap on us, then walked away with millions, come to a reckoning? Do they? Or is that immaterial? Shouldn’t the markets punish bad choices and unwarranted rapaciousness (greed) that goes bad?

    1. JLM

      Actually to me one of the greatest revelations in this entire mess is how completely tone deaf some of the participants truly are. The car guys coming down to DC in their jets. I imagine a conversation something like this:”Hey, wanta private jet pool to DC tom’w to testify before Congress? I got a hot new jet and I can get us some catered chow.””Nahhhh, I’ve got my own plane. See ya there, big dog!”A couple of weeks later:”Hey, you want to catch a ride down to DC in one of our cars?””Nahhhh, I’ve got to drive one of our pieces of crap or it’ll look bad.””Yeah, I know exactly whatcha mean, man. See you there.”Later still —“How much did you get?””Oh, about $25B.””Yeah, me too. Whatcha you gonna spend it on?””Dunno, but it won’t be a freakin’ plane, know what I mean?””You bet!”And they say that corporate CEOs are not trainable! LOL

      1. Dorian Benkoil

        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?

      2. fredwilson

        JLM, do you have a blog?You’ve got real talent

    2. fredwilson

      The thirst for justice and even revenge is often unsatisfied

      1. Dorian Benkoil

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

  27. Mat

    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?

    1. fredwilson

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

  28. joeb

    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.

  29. Dave Pinsen

    “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”.

    1. fredwilson

      Do you have a link to your post?

      1. Dave Pinsen

        Here’s the link to that post: “Profiting from the Credit Crunch/Real Estate Bust”

  30. Pierre D. Little

    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.

  31. kev501

    “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.

  32. FT

    I suggest you read “A Risky Tale” at Financial Taleshttp://financialtales.com/f…

  33. Ada

    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!!!

  34. Richard

    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?

    1. JLM

      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

      1. fredwilson

        Timmy Boy would have done a bit better with your style of talking than hisI think what investors want to see is that swagger that comes with someonewho knows what they are talking aboutLike you JLM

      2. fredwilson

        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?

        1. JLM

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

  35. Web Design company India

    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.

    1. fredwilson

      Pigs get slaughtered

  36. AshcroftB

    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!