Is Silicon Valley a Systemic Risk? (Geithner Again.)

[nodular]

http://online.wsj.com/article/SB123923644886203393.html

As Obama dazzles everyone on the world stage, I continue to have my doubts about Geithner here at home. Apparently, he has the idea he is going to be treating venture capital firms like hedge funds (in terms of the risks they create), and subjecting them to heavy regulations.

This is quite ironic, in light of the fact that Silicon Valley did expand into a massive bubble in the 1990s---crashed all the way down to the bottom---and hardly affected the economy at all in the long run.

One of the things that has been so devastating about the housing market collapse is the highly leveraged nature of house buying. The typical home owner only actually owns a portion---in many cases a very small portion---of the home. When all these relatively recent homebuyers start losing their homes, therefore, they themselves only sustain a small portion of the loss. Most of the loss is actually sustained by investors, which is part of why our economy was hit so hard.

The world of venture capital is nothing like this. What is Geithner thinking?

"The Obama administration wants to regulate venture capital firms to prevent systemic risks. Silicon Valley residents are scratching their heads and asking: What risks? The rest of us should ask why Washington is targeting a jewel of the American economy that had nothing to do with the housing bubble.

"The confusion began when Treasury Secretary Timothy Geithner recently told Congress that large venture capital (VC) firms should be forced to register with the Securities and Exchange Commission (SEC), and submit regular reports on their investors and portfolios. Data collected by the SEC would then be shared with a new risk regulator to ensure that VCs aren't "a threat to financial stability."

"Since then, venture investors have been trying to solve the mystery of how they could possibly threaten the financial system. Their work involves very little banking. Venture firms raise equity from wealthy investors to buy ownership stakes in small companies. The VCs and the companies in which they invest use little or no debt.

"'I cannot imagine any venture fund being of a size to pose "systemic risk," so they either don't understand the nature of the business, or by including this provision they are sharing that their agenda is not the overt one disclosed,' says Jack Biddle of Novak Biddle Venture Partners. What Washington needs to understand is that bank-style regulation could destroy the culture that created the microprocessor."



For more information, see my blog Potpourri http://random-potpourri.blogspot.com/

[xchrom]

1. all financial institutions should be subject to appropriate

scrutiny and regulation.
it's only sane.

[BlooInBloo]

2. Yah! Down with all R&D! That's the ticket!

:rofl:

Gawd - the things I hear on DU.

[amandabeech]

3. I disagree with this statement:

This is quite ironic, in light of the fact that Silicon Valley did expand into a massive bubble in the 1990s---crashed all the way down to the bottom---and hardly affected the economy at all in the long run.

That bubble looted 401(k)'s and pension funds just as surely and as quickly as any bubble ever has. A great many people lost huge amounts of money in such terrific dot.com plays as "Pets.com." It was modern tulip mania.

The way in which the average person started feeling financially stable after that one was the inflation, courtesy of Alan Greenspan and others, of the housing bubble.

Now that's deflating, and we'll finally see what the real wreckage of the initial dot.com bubble looks like.

I'm not sure what kind of regulation of the VCs would work to protect retail investors from themselves when going off to blow Jr.'s college fund on completely unproven NASDAQ stocks. Regulation, however, could alert the SEC and the stock markets to an upcoming hurricane. What we really need is a warning and evacuation system to attempt to protect the investing public when a financial hurrican is approaching.

Perhaps a

[girl gone mad]

4. Yes, things are worse this time in part because..

we didn't suffer the hit that we should have after the dotcom bubble burst.

[lapfog_1]

5. Venture Capital did not "create" the tech bubble.

You need stock markets and idiot investors to do that.

The VCs were guilty of taking companies public that never should have been listed, companies that had no record of sustainable income and massive R&D losses on their books. But were listed on the NASDAQ anyway.

I would be in favor of regulating the listing of companies on the public stock markets, making sure that before they are listed, they have a record of generating income, say 8 to 12 quarters of public disclosed financials, with a further requirement that they have at least 3 quarters of consecutive profits.

But regulating the VCs... not needed, only the very rich can play in that game and I don't care if they experience high risk / high reward for their money. If they lose it... too f'ing bad.

[Hugin]

9. That's the point though! Those who are taking the 'high risk' are not losing it and they feel...

"I don't care if they experience high risk / high reward for their money. If they lose it... too f'ing bad."

they are 'entitled' to those high returns anyway.

They are socializing those losses. They want to play without losing!

[DCKit]

6. Geithner wants to drink their milkshake. n/t

[truedelphi]

7. I didn't find this statement in the OP to be true at all -

" When all these relatively recent homebuyers start losing their homes, therefore, they themselves only sustain a small portion of the loss. Most of the loss is actually sustained by investors, which is part of why our economy was hit so hard."

It's hard, first of all to determine how much any given invester lost. Looking out my window, at a lot of land that could have gone from being a $ 12K lot in 2000, to a 37K lot in 2005, if a bank bought for itself these lots, and then put homes on them, and if the home buyer didn't make good on these home loans, how much would the bank be out?

However, the real loss to the Global Economy came about not because of mortgages not being paid off, and the investor then losing, but because of the SIV's and the CDO's and the Credit Default Swaps. The SIV's and what not were sold up to thirty five times above and beyond what they were!

Geithner would be far better off to consider why he is still allowing for Credit Default Swaps etc than to worry about regualting the Venture Capitalists.

[notesdev]

8. The REAL 'systemic risk'

is the revolving door between Goldman Sachs and the US Treasury.

[sendero]

10. "hardly affected the economy at all'

What universe is this moron living in? We never really recovered from the dot-com crash, other than blowing up a fake bubble.

I'm no fan of Geithner, but this guy is full of it.