Is Meg Whitman McCain's economic savior?
or how qualified is this former CEO - who stuck her shareholders with a $3 billion "lemon", while benefiting a political ally - to give advice on the current financial/economic mess?
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Current events on Wall Street are making it obvious to more and more people how the corporate and financial elites wrecked America. The systemic defect is becoming apparent, summarized by some descriptive expressions:
Privatization of profits, socialization of losses.
or
Heads I win, tails someone else loses.
See, free market capitalism has worked well for centuries driven by two basic emotions: greed and fear. Greed to get more and fear to lose what you already have. The counterbalance of these two, by its very nature, has forced market participants to (mostly) make decisions by what lies in the middle: reason and respect for reality.
Once you take "fear" out of the equation, by shifting the loss potential to somebody else, the game changes completely. In recent years this ruinous asymmetry has allowed the most unscrupulous and despicable market participants to float on top and prosper.
The examples are ubiquitous:
* The unscrupulous mortgage broker who gets paid a commission, regardless if the loan ever pays off.
* The investment banker who packages toxic loans and sells them through, collecting a fee.
* The CEO of a major financial institutionwho collects an exuberant bonus and proceeds to destroy the company.
* The fund managers operating on the "2 and 20" schedule, where they collect money from investors, charge a 2% yearly fee, and (if profitable) 20% on the profits, without any exposure to the losses. Which logically leads to examples like this.
My interest is not in rehashing the examples that are already exposed in public. Instead, I have focused on an area that is less known, and where I have had personal experiences and contacts: Venture Capital
Venture capitalists fund new startups and some of them are the brightest people on the planet: enlightened sophisticates who drive technological progress, creating jobs and benefiting their investors. Others are scumbags, happy to collect their annual 2% fee and to generally screw around, passing the losses to their investors; the majority of such investors being pension funds and college endowment funds.
In 2007 I started blogging about a venture capitalist I know - Jennifer Fonstadfrom Draper-Fischer-Jurvetson, and her irresponsible investment in a startup that contradicted the laws of thermodynamics, GreenFuel Technologies.
http://algae-thermodynamics.blogspot...
My public exposure of GreenFuel's unscientific claims generated a surprising level of publicity and led to media enquiries from the likes of BusineesWeek, Times of London, and Wall Street Journal.
However, this diary is not about GreenFuel, it is about Skype. Or how a club of Mitt Romney political activists fleeced E-Bay investors of $3 billion.
Mrs Fonstad started her career at Romney's Bain Capital and over the years has been an active supporter of Romney's political ambitions. She took a year off to work for Romney's failed Senate campaign in 1994. In 2007 this vice chair of Women for Mitt held a highly publicized fundraiser for him. Understandably, political power is badly sought after by people like Fonstad, in order to preserve and perpetuate the system of "heads I win, tails someone else losses" that serves them so well. But I digress, things from here are short and straightforward.
Fonstad's firm, DFJ, was an investor in the Internet-telephony startup Skype. Skype was sold to E*Bay in 2005 for an obscene amount of money, $2.6 billion to be exact. The entire business press was stunned, and the consensus was that E*Bay overpaid. Of course, public consensus was not going to stop E*Bay's CEO to pull the trigger on this extravagant deal. That CEO: another former employee of Bain Capital, the Chair of Women for Mitt and current McCain economic advisor, Meg Whitman.
But wait, there is more. Here's how Jennifer Fonstad defended the deal and her fellow "Women for Mitt" chair in the Seattle press:
"The breadth for any acquirer to be able to access that subscriber base is tremendously valuable," Fonstad said. "And then you also have at play the overall VoIP space, which is a real opportunity to disintermediate the telephone company. If you think about that type of market opportunity as an acquirer, that also plays into what you are willing to pay because of the tremendous upside potential."
Lots of fancy words, for sure. At the same time, though, even the insiders at Skype knew that E-Bay was overpaying.
The rest, as they say is history. The inevitable blowup, charged off to shareholder equity:
THE BIG SKYPE WRITE-OFF (link)
And of course, no mention of Mrs Whitman being disgorged of her bonuses and exuberant pay. Remember, it's "Heads I win, tails someone else losses"
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I fully expect in the next days and weeks Whitman to be positioned front and center by the McCain campaign as his economic/financial credibility booster; possibly even touting her as his future Treasury Secretary. After all, who else is left after the disgraceful "gaffes" by Gramm and Fiorina. Whitman will be sold as the Silicon Valley innovator who "gets it".
What we will hear ad naseum is "She built E*Bay into a multi billion dollar powerhouse", giving Whitman full credit for the Founders' brilliant idea and the hard work of numerous engineers, programmers and other employees. We will not hear, however, how in that one case where everything was up to her, where she had to exercise her best judgement and to fullfil her duties of protecting the interests of her shareholders, Mrs Whitman decided to stick them with a hefty bill, to the benefit of a political ally.
Is that a person who we can trust with fixing the Mess?