HermannM

Posts Tagged ‘financial literacy’

Who Said You Can’t “Bite” City Hall

In Business, Finance, New York, Politics on December 16, 2009 at 9:58 am

HERMANN MAZARD
STATEMENT
CITY COUNCIL OF NEW YORK
12/16/2009

I would like to thank the Chairman on the Finance Committee and the members of the Council for this opportunity to speak with you this morning.  My name is Hermann Mazard, I currently teach a graduate course on innovation at Polytechnic Institute of New York University and I am the CEO of a technology startup, HomeShop Technologies, Inc.

My company, HomeShop, has developed the framework for a digital grocery list. Our goal is to create a tool that allows consumers to save time in the grocery store, reduce impulse shopping and eliminate unnecessary trips. We are staunch advocates of the home-cooked meal and given the high concentration of foodies in the metropolitan region, New York would be an ideal location in which to deploy our technology. I am here today because I question the City’s commitment to technology entrepreneurs.  And I am not alone.

Over the last six months, there has been a mass exodus of entrepreneurs who  have found it increasingly difficult to grow a technology business in New York City.  Lack of capital is often cited as the primary reason but the real problem in New York is a lack of structure for attracting and retaining investment capital at the stages needed most. Specifically, at the seed stage.

Historically, federal government has been able to create liquidity for technology investments by lowering the capital gains tax. This tool was instrumental in fueling the flight of capital from the bond market to the stock market; it was also a factor for attracting venture capital and IPO investments during the late 1990s. But times are different now.  Manipulating the capital gains tax rate alleviated a bottleneck at the growth & expansion stage of technology development. Today, that bottleneck exists at the seed stage and early stage of development. Because investing at this stage involves more risk, there needs to be greater proximity between investors and entrepreneurs. In other words, there is no federal program that can address this issue, it has to be done at the state and local level.

Silicon Valley is often referred to as the model for innovation but there are successful technology communities in many other cities including Boston, Austin (TX), Denver & Philadelphia.  What these cities have in common is (a) a partnership between the private sector, the university system and government and (b) a robust investment community.  New York City has the former, not the latter. The City is home to only seven venture capital firms, of which only two are nationally recognized and actively investing. The City also has only three angel investment funds, of which only one is actively investing. The concentration of capital in the hands of so few investors creates a death-trap for any entrepreneur looking to raise capital, especially at the seed and early stage of development. This is why we are leaving. More competition is needed to create a robust investment community. If the goal of members gathered today is to turn the Big Apple into an orchard of innovation, I urge the City Council to address the barriers to attracting and retaining investment capital at the seed and early stage of development.

New York City is the financial capital of the world and the resources to build a robust investment community already exist within the city limits. That capital, however, exists on the sidelines earning a low rate of interest as it waits for the next “bubble” to emerge.  For many years, New York investment houses have made a name for themselves by trend-surfing and riding investment waves. There is one more wave left to be surfed in the form of energy-investing and sustainability-investing as a result of federal stimulus programs.  But that does little to create opportunities for the 95%+ of entrepreneurs who have neither experience nor training in solar energy, sustainable farming or wind-turbines.

What is needed is an investor literacy program that empowers high net worth individuals with an appetite for risk to effectively evaluate the merits of a business plan. The shutting down of the IPO markets coupled with the private sales of social media companies has reduced the public disclosures about new revenue sources and business models.  The net result has been a widening of the education gap between investors in-the-know and those out-of-the-loop. An investor literacy program can change that; a curriculum has already been developed by the Kaufmann Foundation, which promotes the development of angel investment funds.  Such a program could easily be administered in partnership with NYU, SUNY Levin or the CUNY system. It would be an essential first step in broadening the base of investors in New York City startups.

What is also needed is a tax incentive to attract investors, such as the seed stage tax credit implemented in over 20 states nationally. NYC’s QETC tax credit attracts investors to companies that are post revenue but this not where the bottleneck exists. In fact, there is adequate investment capital available at the Series A & Series B stage for companies that generate revenue.  Where the incentive is needed is at the seed or angel stage where entrepreneurs are proving the viability of new business models.  This program, sometimes called a High Tech Investment Tax Credit or Angel Investment Tax Credit creates liquidity at the earliest stage of investing. Implementing such a program in New York City would go a long way in creating jobs and re-energizing the local economy.

I spent time speaking about what the City Council should consider; if time permits, I would like to spend a minute talking about what doesn’t work. As much as we need the money, entrepreneurs could not in good conscience accept a direct investment from the City. State-sponsored investment programs don’t work because the interests and risk appetite of the municipality may not be aligned with that of the entrepreneur or his/her investors.  Too much oversight and the investment vehicle becomes vulnerable to patronage and corruption; too little oversight and it becomes vulnerable to krony-ism with the private sector. A so-called “public option” in technology investing may have seemed like a romantic idea. But the interests of the City are better served by building a robust base of private investors rather than trying to beat the venture capital community at their own game.

That having been said, there are gaps in the funding universe where a public option would continue to prove helpful. This gap exists for immigrant entrepreneurs, women, blacks and Hispanics. Refocusing the City’s direct investment programs (micro-lending, seed fund, pension investing) to groups that have historically had limited access to capital  would level the playing field and create a technology sector that is more reflective of New York’s diversity.

I would like to conclude by saying that New York City is the greatest city in the world.  One source of our greatness, that is rarely talked about, is the high concentration of churches, synagogues, mosques and temples within the five boroughs.  What it tells me is that faith lives in Gotham City.  Well, innovation is as much about faith as it is about technology; given the City’s religious leadership, there is no reason why we should rank behind Boston, Denver or San Francisco in any category much less believing in its people and our believing in ourselves.

Thank you again for the opportunity to speak frankly today. I strongly believe that the key to solving the capital issue is to address the structure of the investment landscape. I am available to answer any questions and look forward to working in partnership with you as we turn the Big Apple into an orchard of innovation.

Why Good Mortgages Go Bad

In Finance, Lifestyle on March 21, 2009 at 11:27 pm

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.