Aamer Ghaffar's Blog

The VIX is no where as high as it was towards the end of last year and the markets have been doing significantly better since then as well. However, that does not mean that the market and public are still not afraid of an over involved government. In these trying times everyone is tuning into the news and following every word coming out of Tim Geithner’s mouth. With such high scrutiny on every word uttered, I was astounded to hear about Tim Geithner’s simpleminded and pointless decison to regulate both Venture Capital and hedge funds. What surprised me more is the tepid response this issue has received both from the press and public. Secretary Geithner went onto justify his statement by mentioning the high risk and instability caused by these firms due to the high levels of leverage that they take on. Though I understand his concern regarding Hedge funds, Venture Capital (VC) by their very nature do not take on high amounts of leverage.

There is a significant difference between venture investment funds (what Berni Madoff ran) and venture capital (the kind of investing that started Amazon.com, Google, Microsoft and Apple to mention a few).

Where as venture investment funds, invest your money in the market and generate returns using their savvy investing skills (or Ponzy schemes). Venture capital invests money in small business without using much leverage (debt). Start ups traditionally don’t take on debt because they don’t have steady or at all predictable cash flows, they also make it clear from the outset that you may loose 100% of your investment if things don’t go as planned. Thus, it is not the average Joe that invests his life savings but wealthy institutions and investors that are looking to make high returns by ‘gambling’/investing a few hundred thousand.

Mr. James Freeman the author of the Op-Ed peace, makes a compelling case and there is little I can add to what he wrote.What I will try to do in this piece is try and understand what Secretary Geithner was trying to accomplish by making such statements.

I will give the treasury secretary the benefit of the doubt and assume that his intention behind the policy recommendation was not to regulate venture capital per se but to try and make it harder for hedge funds to pose as venture capital funds to avoid the vast umbrella of SEC regulation. We saw an example of such shenanigans at work with TARP 1.0, when insurance companies started to buy small and mid size banks in order to be eligible for TARP funds. However, what I don’t understand is why Mr. Geithner would explicitly go after VC funds, instead he could have made more caveats regarding hedge funds rather then explicitly talking about VC funds. The fact of the matter is that the NASDAQ has by far been the best functioning exchange this year. Small and medium sized industries suffered already due to the high expense incurred due to compliance with Sarbanes Oxley. Regulating VC funds is going to create more road blocks for start ups and make it harder for these companies to come up. By trying to mollycoddle the investor the administration is not encouraging risk (something the treasury secretary insisted he wanted to see more of) but instead is scaring people away from the mere thought of taking risk. This Results in the suffocation of yet another growth artery of the currently (growth) anemic economy.

I hate to quote fictional charecters such as Spider man’s grandad but the guy had a point when he told his grandson Peter Parker, “with great power comes great responsibility’. Think about it Timmy G!

Politics, The Economy

Re-Cap
Monday the 23rd of March was the best day for the market since October 2008 and consequently the best day of 2009. The S&P was up 7% (12% in March) making March 2009 the best month since March of 2000. While the Dow was up 6.8%  (10% for March) it has managed to be the best monthly percentage gain since October 2002. Technology continued to lead the charge with the NASDAQ up 6.76% (it has only been down 1% the entire year, and March has been the best month for the index since November ‘02)

Unlike the rallies of the past six months that were hard to explain, the reason for this rally can be primarily attributed to an Op-ED that Tim Geithner wrote (a couple of weeks ago) along with some other news that we will discuss further in this post. In short, Mr. Geithner stated that the treasury will vow to use $100 billion in funds from TARP (through its toxic asset plan) to buy distressed debt and pool these assets together. In return, the treasury secretary wants both individuals and banks to take more risk.

In spite of the S&P going south 3.5% on the news of the administration cracking down on the auto industry and FASB ditching mark to market accounting in favor of mark to model, I could not be happier. I think someone in the administration finally read my blog.

In regards to the auto industry I am ecstatic that the government has started taking some initiative and given Chrysler thirty days to make a deal with FIAT or else resort to bankruptcy. In principle I do not support a large amount of government intervention, nor can I be happy when someone loses his or her job. However, I whole-heartedly support the president’s decision to ask the GM CEO to step down. The fact of the matter is that unless the companies change their business plans drastically they do not deserve any money as they will continue to be non-competitive and be a recurring expense on the government’s already over leveraged balance sheet. The pressure on the auto manufacturers is not unpatriotic by any means. All it is doing is requiring that auto manufacturers take some serious initiative to try and right many years of inefficacy. To illustrate my point, the Ford Model T was more fuel efficient than a Ford Taurus.

In reference to the accounting standards, changing to mark to model will by no means solve the financial crisis. Mark to model accounting rates assets valued purely by mathematical models. This should be able to help value assets that do not have a market available. Contrary to popular belief this will not increase the big banks’ stock prices either because the market will ‘price in’ the fact that mark to market accounting is not being used. What mark to model accounting will do is boost the banks’ capital ratios (the ratio gives an idea of a company’s financial structure and some insight into the companies financial strength). In essence, the higher the capital the ratio, the less money will be required by the banks. It is important to note that this will not be retroactive (for past years) and will only be valid starting the first quarter.

Though I will be the first to admit that I am excited about the progress being made, I caution you not to ignore the past and to ensure that you put the recent gains of the market in perspective. Though things are looking much improved, the gains may be misleading as the market has taken such a beating the past six to eight months that 100 point days may lead you to believe the recession is long gone… Unfortunately, the truth is we still have a long road ahead.

The Economy