Why Good Mortgages Go Bad

There was a time when the banker who approved a loan was the banker who opened the account, handled deposits, accepted the payments and issued a handshake when the debt was retired. Those days have long gone.  With the advent of teller-less transactions and electronic transfers, the movement of money has become so fast that nobody can afford the time to get to know you anymore. The bank on Wall Street whose tagline was “The right relationship is everything” was a liar.  That statement couldn’t be farther from the truth, because there are no relationships in the financial sector anymore.  Everything is a transaction.  And this, my fellow Americans, is at the heart of our financial problems today.

Specialization of duties was supposed to improve efficiency in the banking sector. But instead all it did was add complexity to a system that was already hard to understand. The pace of financial innovation was too fast for even the smartest and brightest of accountants and financiers.  Sufficient checks and balances were never put into place and this vacuum of mutual accountability is what allowed the barons of greed to corrupt America’s once proud banking infrastructure.  I do not envy the challenges faced by Tim Geithner; he carries a heavy load.

There are so many moving parts that comprise a loan transaction.  While no one entity was responsible for creating the house of cards, an attitude of indifference at all levels was absolutely responsible for tipping it over.  In any mortgage transaction, there are even more moving parts and the risk of system collapse was greater which each successful transaction.  Everybody was making money and no one thought to ‘slow things the fuck down’ because they assumed some other entity would do it instead.

America’s financial collapse was a creation of our own undoing.  While it is easy to point to Bernie Madoff or AIG for the failures of the system, their trepasses don’t scratch the surface of what is at the heart of the problem.  We are the problem. We, you and me, can at times be our own worst enemies. Until we take a good look at our contribution in creating the monster, there won’t be anything Secretary Geithner, President Obama, Sarah Palin or Rush Limbaugh will be able to do to save us from ourselves.  So where shall I start? The following is my list of culprits and the reasons they are in desperate need of an attitude adjustment.

1. homebuyers, especially the snot-nosed yuppies who want what they want, when the they want it and at any cost.
2. the friends of homebuyers, who compete socially with their friends and one-up each other, resulting in peer-pressure to buy more house than they can afford.
3. mummy and deddy, who spoil their kids with down payments for houses instead of teaching them the value of savings, trade-offs and deferred gratification.
4. real estate brokers, who create a false sense of scarcity and urgency to drive up the values of homes and ultimately increase commissions.
5. renovation contractors, who underbid to get a job then underdeliver until the promise of more payment is made from the proceeds of an unnecessary second loan.
6. mortgage brokers, who steer borrowers into loan products, some of which may be unsuitable.
7. home appraisers, whose payments are made by the mortgage brokers and lenders and whose compensation volume is tied to successful loan placements.
8. boiler room telemarketers, who targeted the elderly with 30 year cash-back loans as a supplement to an underfunded retirement and social security.
9. local governments, who don’t investigate local corruption because of the additional tax income generated by a corrupt system.
10. lenders, who sell approved loans into a secondary market and bare little, if any, of the risk for the ones that go bad.
11. subprime lenders, who compete with traditional lenders for traditional mortgage clients by offering ‘too good to be true’ teaser deals which end up being just that.
12. moneycenter banks, who set up single-purpose corporate entities that package the loans into a new financial instrument that gets resold into a tertiary market.
13. financial engineers, who bundle the new financial instruments with cute ‘tricks’ like credit enhancement, over-collateralization and tranches as a portable hedge against risk.
14. insurance companies, who sell a credit enhancement product but don’t set up internal controls to limit exposures, monitor performance of the product or hedge the impact on the rest of the organization
15. re-insurance companies, who use one financial ‘trick’ to hedge the risk of another financial ‘trick’ not realizing that, as a result of their being 4x removed from the original transaction, they’ve inadvertently doubled or tripled down on the same risk.
16. rating agencies, whose investment-banker-wannabe underpaid salaried staff can’t tell the difference between a true credit enhancement and ‘lipstick on a pig’
17. television networks, who canceled classics like One Day at a Time, Good Times, Alice & M*A*S*H in favor of aspirational shows like Dallas & Dynasty, effectively shaming the ‘have-nots’ for how little they actually have.
18. financial regulators, underpaid, understaffed, underfunded beaurocrats who are  underinformed as to the newest financial innovations on wall street
19. legislative overseers, who are as financially illiterate as homebuyers
20. legislative aids, who spend less time on policy and governance issues (despite Ivy League political science degrees) and more time on raising funds and getting their boss re-elected so they don’t have to go into the private sector and ‘get a real job.’
21. hedge fund managers, who think their Harvard & Wharton MBAs render them invincible so they start their own firms and lure investors by promising a higher return than is statistically possible, ceteris paribus.
22. Robin Leach, whose Lifestyles of the Rich & Famous showed the ‘haves’ in America how little they actually have.
23. hedge fund investors, who aren’t satisfied with the consistent 8% returns of the equity markets yet miraculously expect to achieve higher returns without higher risk.
24. financial media, who are journalists at heart but eventually succumb to the market’s incessant demand for entertainment over information.
25. lifestyle media, who stimulate demand for house and home products by encouraging a sense of entitlement while understating the responsibilities of homeownership with programs like ‘Extreme Home Makeover’ and ‘Design on a Dime.’
26. real estate speculators, who played a game of hot potato by entering into ‘no-money-down, interest-only, balloon payment’ exotic (read toxic) loans but mistimed the market, abandoned the property, left the banks holding the bag and then pointed the finger at government-sponsored working class homeownership programs when the crisis was made public.
27. people, who believe everything they see and hear, then act on what they believe; all without applying a scintilla of common sense or asking someone who knows better.
28. Other _____________________________________

I can’t stress it enough. America’s financial collapse was a creation of our own undoing.  While it is easy to point to Bernie Madoff or AIG for the failures of the system, their trepasses don’t scratch the surface of what is at the heart of the problem.  We are the problem. We, you and me, can at times be our own worst enemies. Until we take a good look at our contribution in creating the monster, there won’t be anything Secretary Geithner, President Obama, Sarah Palin or Rush Limbaugh will be able to do to save us from ourselves.

What Black Entrepreneurs Can Do To Fix Silicon Valley

I hate blogging. I haven’t blogged in over two years and there’s a reason for that. But an issue has emerged that is too important for me to sit back and watch unfold without offering a dose of perspective. You don’t need a Twitter fight to recognize that Silicon Valley exhibits bias in its investment decisions. And, while it’s great that CNN has made waves with previews of its upcoming show on the subject, you don’t need cable TV to tell you that, either. I could quote statistics or hide behind anecdotal accounts of who-said-what to-whom and when, but the end result is still the same. Silicon Valley has a race problem. The question before us is: what do we want to do about it?

I was proud when I read Dylan Tweney’s post about fixing the problem. It was refreshing to hear someone with clout acknowledge publicly what most Americans know, but hesitate to discuss. What also surprised me was his willingness to call out his peers who question or deny the existence of a problem. He showed great leadership in paving a path towards reconciliation across racial lines. I felt compelled to do the same in the spirit of cooperation. The truth is, Silicon Valley’s race problem wasn’t born in the Valley, it is really just a reflection of the last vestiges of America’s 400 plus race problem. The issues are deeper than we think and if we’re going to address it, we’re going to need to do it together. So the following is my advice to black entrepreneurs (existing, budding and otherwise) on what they need to do to fight racism in Silicon Valley.

Consider the history. Although we live in a post-racial society, Silicon Valley social DNA was formed many years before President Obama was ever elected. The majority of venture capitalists are in their 40s or older, which means they attended college during the tumultuous 1970s and 1980s. My undergraduate experience was rife with racial tension and it seemed like every few years, a new issue would occur to deepen the wedge of social distrust. The Stuart murder, the King beating and the Simpson trial all played a role in shaping our racial views and social alliances. While most people have moved on intellectually from that, our emotional networks and spheres of influence take longer to adjust. Just as African American students might have banded together at the “black table” for lunch, so to did our white counterparts who also dined and socialized in an unforced but segregated manner. College was never the melting pot it was designed to be. And divisions that formed along racial lines then, only widened once we got into the workplace. This explanation doesn’t excuse the racial isolation we experience. But it may help explain the reason blacks and whites remain divided on the role of race and bias in the decisions made on Sand Hill Road.

Lighten up. Some of the hostility we’re experiencing now is a tension arising from people who struggle to make sense of what they observe, relative to what they’ve long believed to be true. Don’t react. Let people work out their issues in the absence of public scrutiny. What disappointed me most about CNN’s interview with Michael Arrington was it captured an awkward moment without giving him a chance to reconcile any conflicting views on race, many of which had just emerged when he was introduced to a house full of black entrepreneurs. That moment created a great sound bite from which to generate buzz for the documentary, but I found it to be an irresponsible piece of journalism. When I say lighten up, what I mean is you need to give people time to process your existence, especially if it conflicts with the steady reinforcement of traditional images they’ve experienced of black people and of entrepreneurs. Mistakes are going to happen and black entrepreneurs will do themselves a disservice by succumbing to knee-jerk reactions.

What may sound like ignorance to you may very well be a moment of naive honesty for others. Don’t look for negativity where it doesn’t exist. Not everybody is against you, although it may seem that way. The temper of the times has changed and people from all backgrounds recognize the vulgarity of outright racism. When someone makes a comment that may be construed as insensitive, consider the context. As an example, being called “articulate” is, more often than not, an uninformed but genuine complement. Accept it as such. And let people make their mistakes. Over time, you’ll learn to discern the hateful comments from the ones borne of unfamiliarity. You’ve got to believe there is long term value in letting the other guy off the hook.

Be In The Present. When in Rome, do as the Romans do. And when in Silicon Valley, do as they do there too. Whether we admit it or not, we carry our culture with us and many aspects of black culture are counterproductive to our success. So we have to leave it behind. When I was growing up, my mother told me I had to be three times as smart as my schoolmates and four times as smart as colleagues to get ahead. What resulted is an over-achiever with a perfectionist attitude. This is something I fight hard to overcome. In entrepreneurship, great is the enemy of good enough. The time it takes to get a project from 20% to 70% is half the time it takes to take it from 70% to 90%. When speed of execution matters, we have be comfortable with projects at 70% of its theoretical potential. I heard someone say that “if you’re not embarrassed by your first release, then you released it too late.” I never understood what that meant until I finally released a beta version of HomeShopr. It sucks but it’s out. I’m actually proud to not be behind a LaunchRock Splash page as so many ventures remain.

Also, THERE IS NO SUCH THING AS STEALTH MODE. A common behavior amongst African Americans is to keep their ideas close to the vest. This usually occurs out of fear of it being ripped off or out of doubt that it’s worth discussing at all. In either case, this line of thinking is counterproductive. If you’re operating under the radar, most VCs will assume you lack the confidence to stand by your convictions. As a result, they won’t, and shouldn’t, waste their time with you. And you will have made a bad first impression from which it takes time to recover. Be present and be willing to sometimes make a fool of yourself. There is no shame in having made a bad assumption. If you recognize it quickly and pivot, you won’t be penalized. The myth of the perfect idea is simply that. Your startup has flaws, my startup has flaws, they all do. But the quicker you subject yourself to the scrutiny of the market, the quicker you’ll gain external feedback, identify any major flaws and refine the idea. Don’t lock yourself out of that valuable feedback loop.

Expand your network. If you know another startup founder, ask them for feedback on your startup. The best advice I get is from other founders who want me to succeed. Don’t be afraid to ask for an introduction to others; most people have at least one contact to share. Then go talk to them and so on. Over time, you’ll develop a robust network, some contacts you’ll keep for yourself, some you’ll share. From time to time, it also makes sense to network beyond your comfort zone. I call this venturing into the “unknown unknowns.” The easiest way is to attend a meetup and talk to total strangers. Meeting people is not an art, it is a science and anyone can do it. When I walk up to someone I don’t know, I just look them in the eye and say name name, that I’m working on a digital grocery list and I ask the magic question, “What do you do?” That is usually enough to get a conversation started. A great place to engage new people is at a co-working space. I am also a big fan of meeting strangers via office hours. The bottom line is, you have to be comfortable striking up conversations with total strangers and converting them into allies. The more people you know and the more who know you, the more likely they are to extend certain courtesies they wouldn’t extend to a stranger.

Temper your expectations. Horny men & women have sex on the first date, VCs don’t. If the first time you meet a VC is the day you pitch to him or her, don’t expect them to write you a check; it doesn’t matter how great you are. Very few VCs invest in points, they invest in lines. So help them construct a two-dimensional data set that best describes you. Many investors attend tech events, meetups, pitch nights and demo days. These are the best times to speak with them and establish a first data point on their radar of possible deals. If you see them on a panel, ask an interesting question. If they blog, tweet about a contradiction you’ve observed. Be smart and get noticed. By the time you’re ready to pitch, you won’t be pitching to a total stranger, you’ll be pitching to a stranger who might have heard of you. It’s a start.

Get noticed. If you really want to get noticed, get out in front, way out in front. Every tech community needs leaders to run the myriad of events that holds it together. During Internet Week, or Social Media Week, or Entrepreneur Week, Blogger Appreciate Week or I Hate This Week Week, plan one of the events. Investors say they’re not impressed with entrepreneurs who waste time managing a meetup group but there is merit in demonstrating a willingness to lead and an ability to execute.

Respect the source. The funding bottleneck for most African American entrepreneurs occurs at the seed through Series A stage of capital raising. Unfortunately, these are the riskiest stages and there is no community reinvestment imperative in venture investing. If an investor’s source of funds is from the sale of a business or from generational wealth, they are under no obligation to invest it in a racially diverse or representative manor. Charity and guilt are poor arguments for justifying an investment decision… so don’t suggest them. Unless you’ve got pictures of the investor in a compromising position, you’re only left with making the strongest business case possible to attract investment dollars. This requires you to refine your concept even further, prioritizing pain points, layering feature sets, developing multiple revenue models, accelerating scalability and incorporating defensibility measures every step along the way. If you’re not familiar with any of those words, please consider attending my Art of Pitching workshop next spring (#shamelessplug).

Stay the course. Even if you do all the things mentioned above, there is no guarantee you’ll get funded because, as we stated above… Silicon Valley has a race problem. The hardest part of entrepreneurship is knowing when to pivot, when to give in and when to stay the course. This is largely a function of the size of your wallet, the strength of your support group and the depth of your convictions. But if you choose to stay to course, please know you’re not alone. I am in the same boat with you and so are many other entrepreneurs, black and white.

What I hope comes that out of the current debate is a widespread acknowledgement of a problem and a comprehensive strategy for addressing it. Amidst the initial hostility, I am encouraged by an air of unity that is fighting to emerge. The economics also favor greater inclusion. Venture capital returns have slid in recent years. I strongly believe the lack of diversity in the pool of ideas that get funded plays a role. While there may be an economic imperative for Silicon Valley to change its ways, it isn’t going to happen over night. But I believe it will happen. The question is how long will the current base of investors continue to hide behind a veil of bias to avoid admitting that the best ideas don’t always emerge from the usual suspects, namely young white males. Only time will tell.

Lost Boys of Integration

I was pleasantly surprised to learn that “Welcome Home Roscoe Jenkins” had premiered on USA Networks this past weekend. It is rare to see mainstream attention awarded to African American films that don’t involve drugs, crime or poverty. Perhaps Hollywood is turning the page on how African Americans are portrayed in media.

I first saw the movie when it was released in theatres in February 2008. Despite negative reviews from Rotten Tomatoes and Metacritic, it ranked #2 on its opening weekend and earned $16 million. So it begs the question, how did so many critics get it so wrong?  My motivation for seeing the movie was three-fold. First but least importantly, I support black filmmakers. Second, I am a fan of Malcolm D. Lee and his parents, who live across the street. I enjoy chatting with or getting chatted up by his mom and dad from time to time; I wouldn’t want to risk being caught having not seen a work of their son. I catch enough hell whenever I miss one of nephew Spike’s films and can’t imagine what might happen to our friendship if I missed one of Malcolm’s. Third, Malcolm (I call him Malcolm) tells stories with which I can relate and WHRJ was definitely one of them.

“Welcome Home Roscoe Jenkins” is a coming of age story for RJ Stevens (played by Martin Lawrence). He’s a southerner who escapes his humble beginnings in pursuit of a better life in Los Angeles. To reinvent himself, he loses the name Roscoe Steven Jenkins in favor of RJ Stevens and alters his diet to exclude certain Southern delicacies, amongst other changes. When the transformation is complete, he finds himself atop the talk show ratings with all the accoutrements of mainstream success. It is only when he returns home for his parents’ 50th wedding anniversary that he learns that no transformation had ever taken place. Instead, the boy from Georgia learns that his once suppressed childhood anxieties can’t stay hidden forever.  I call it a coming of age story because, despite being a grown man, RJ Stevens’ transition from childhood to manhood doesn’t occur until he faces his demons and insecurities during this visit.

The story of Roscoe Jenkins is all too common for boys/men of my generation. I was born in 1965 and represent the first wave of a new generation of Americans, Generation X. After segregation was abolished, my parents emigrated from the Caribbean and I grew up fully expecting to inherit America’s promise of equality. For black boys of that era, achieving that dream required us to depart from commonly accepted stereotypes as we forged a new path. Some of us did, many of us didn’t. The end result was the forming of a rift within black communities that served to divide us from each other. This is ultimately what happened with Roscoe Jenkins.

By the time I turned 5, my family had moved to the suburbs and we lived amongst the Jews and WASPs of Dix Hills, Long Island. Education was a big thing in my community and our public school system was probably ranked better than most private schools in America. Every few Sundays after church, it was a ritual for my family to jump in the car to visit relatives in the Laurelton section of Queens, which is where many Haitians bought homes. While my  parents chatted with aunts and uncles, I played with my favorite cousin Louie and his friends in the neighborhood. While I spoke differently from them, we communicated just fine. I probably acted like a know-it-all so it doesn’t surprise me that I earned the nicknamed “Professor” at the ripe age of eight or nine (ironic, huh?). The moniker was a term of endearment but I didn’t feel endeared to Louie and his friends. I always felt that the nickname was their way of telling me that I wasn’t one of them. I am in the books, they are from the streets. This is a theme that played itself out many times throughout my life. In high school, the students from the junior high school south of the Long Island Expressway used to call me an Uncle Tom or a sellout because I socialized with different people and in different ways from them. As a student at Dartmouth, a fraternity brother dubbed me WBLI. It is a radio station not far from where I grew up but what he really meant, though, was White Boy from Long Island. Other names that hurt just as much include “Oreo” (black on the outside, white on the inside) and Incognegro (or incog for short).

I have since come to learn that intra-cultural divides are common across all races. Asians who integrate within the mainstream culture are often called “Twinkies” (yellow on the outside, white on the inside). Even worse is the term reserved for Indians, namely “coconuts” (brown and hairy on the outside, white on the inside). I chuckle now when I think about it but, at the time, it was no laughing matter. They say “sticks and stones can break your bones but names will never hurt you” but I disagree. I can recover much faster from an ass-wooping than I can from an assault on my identity. Physical wounds heal, emotional wounds linger. Just ask Roscoe Jenkins.

While I believe men of my generation comprise a segment called the “Lost Boys of Integration,” our childhood was not all bad. Much of my identity was forged from within the diversity of images seen on television and cinema. I rejected the Lamont and Rollo characters from “Sanford & Son” but connected with the original Lionel Jefferson (played by the late Michael Evans) on “All in the Family.” What I appreciated most was that his character was authentically black but not stereotypical, confident & engaging but neither arrogant nor offensive. I thought he was a better foil against Archie Bunker’s ignorance than was flower-child son-in-law Michael Stivic (played by Rob Reiner). When the Jefferson family was featured on its own show, I had hoped more stories would be developed for Lionel’s character. What actually happened was event better. Michael Evans left the set of “The Jeffersons” to write for “Good Times” which featured a character named Michael Evans (played by Ralph Carter) whose innocent defiance is the trademark of a certain confused enthusiast we all know. In fact, my best guess of President Obama’s personality growing up leads me back to episodes featuring the “Militant Midget.” My most admired portrayal of a black man of my generation, however, was Denzel Washington who played Dr. Philip Chandler on St. Elsewhere. In one episode, he uttered his frustration about being “too black for my white friends, too white for my black friends” and, for the first time, Hollywood wrote exactly what I felt.

Throughout the 1980s, the images of African American men was that of a fish out of water. Whatever gains were achieved in the 1970s were quickly undone. In “Trading Places” Eddie Murphy played an outsider who momentarily looked into the world of Wall Street. On “Different Strokes” Willis & Arnold were exceptions to the rule, not the rule itself. No two movies did a better job of telling African American men they didn’t belong than “Strictly Business” featuring Tommy Davidson and “Livin Large” featuring a young Terrence TC Carson. I might also have pause to complain about the Steve Urkel character on “Family Matters” were it not for the character being based on me or someone strikingly like me. If you don’t believe it, check out this picture of me in 1986, three years before the show first aired. I was Urkel before there was Urkel.

All in all, the journey of African American men of Generation X (aka “Lost Boys of Integration”) comprises a unique collection of stories worth telling via television, cinema or online video. Malcolm D. Lee gained notoriety with the short film “Morningside Prep” about an African-American male teen caught between black and white culture. His most prominent films “Soul Men,” “Undercover Brother” and “The Best Man” continue to explore the journeys of black men, as does the story of Roscoe Jenkins. If you missed the airing last weekend, you can catch WHRJ in July and August when it gets re-aired on USA Networks. The film is also available to rent via Netflix.

With Barack Obama in the White House, America is beginning to recognize that black men don’t fit the Hollywood-controlled stereotypes anymore. Like all other people, we come in many different shapes, sizes and archetypes. I applaud the works of Malcolm Lee, Chuck Stone III (“Paid in Full“, “Drumline“), Mario van Peebles (“Posse“) and many more who have aspired to broaden America’s embrace of its black male brethren. Their contributions help make my journey easier and they render my limits endless. For them, I am truly grateful. Well done!