Locked and loaded their going for bear in New Jersey’s Highland Region. The Highlands is one of the states last stand of expansive underdeveloped woodlands and critical watershed that provides drinking water to over two million state residents. The Highlands is also the preferred habitat and home to most of the states black bears. But starting Monday, the Highlands will become a deadly killing ground for the lovable species as the state appeals court threw out a suit brought by two animal rights groups to halt a six day bear hunt.
Environmental Commissioner Bob Martin signed off on this year’s hunt, saying it’s needed to help control a growing black bear population. The agency estimates the state’s black bear population at 3,400, up from 500 bears in 1992.
“The Comprehensive Black Bear Management Policy is full of scientific flaws and outright fabrications,” APL contends. “In their zeal to hold a recreational trophy hunt, the council has slapped together a scientifically sloppy, self-contradictory document that pretends the hunt is necessary when in fact, the science does not support a hunt.”
The suit filed by the Animal Protection League (APL) contends that the scientific assessment of the bear population and its environmental impact is flawed and its findings are biased. The suit also alleges that proponents of the hunt, The New Jersey Outdoor Alliance made illegal contributions to Gov. Chris Christie’s election campaign. The New Jersey Outdoor Alliance disputes the claims made by the APL and issued a response that appears on the Ammoland website.
During public hearings comments ran 3 to 1 against the bear hunt. Public opposition to the hunt has been vocal and considerable. If the voice of the public counts for nothing why go through the charade of soliciting public comments? A recent public hearing on the expansion of the El Paso Corp gas pipeline through the Highland region had a similar tenor to it. Of the twenty of so citizens and groups who spoke at the meeting not one supported the expansion of the pipeline. Local residents and groups affected by the El Paso expansion initiative are concerned that their opposition to the project is falling on deaf ears of regulators and government officials responsible for green lighting the project. If the project is a fait accompli regardless of public criticism why solicit public comment and go through the motions of participatory democracy?
The Highlands Commission was formed to determine how the resources of the region are managed and how the area will be developed. The Highland region is a critical watershed area and a vital open recreational space for an overwhelmingly urban state. The Highlands Commission is the stewardship body chartered to reconcile the competing interests of a complex community of stakeholders. The immediate needs of wildlife preservation, smart development and long term sustainability of an environmentally stressed ecosystem will require effective engagement of all Highland Community stakeholders. Governor Christie’s slate of nominees to to the Highland Council is being criticized as too pro development. This may auger well for stakeholders like El Paso Corp but it may have deadly consequences for endangered bears and other species struggling to hang on in an increasingly hostile environment.
You Tube Video: Junglebook, Bare Necessities
Risk: environment, bears, sustainability, water, open spaces, democracy
This is how the world ends
This is how the world ends
This is how the world ends
Not with a bang but a whimper
The Hallow Men TS Elliot
A few interesting news items recently passed without much notice. Two nuclear reactors located in the Northeast had to be brought offline due to operational failures. The Vermont Yankee reactor sprang a leak and had to be shut down. The other incident occurred at the thirty six year old Indian Point reactor located about twenty miles north of New York City. The cause of the problem at Indian Point was a transformer fire. Both reactors are owned and operated by Entergy and mirror similar problems at the Excelon operated Oyster Creek reactor located in south central New Jersey.
These incidents are endemic to aging nuclear power facilities. These plants came on line during the the 1970’s and are now approaching the half century mark of service. When these plants were commissioned it was believed they would have a shelf life of 40 years. As the expected useful life span of these facilities approach regulators routinely grant extensions to the operators. Operating these facilities past that point heighten potential risk factors. As nuclear reactors age, the stress on these complex systems and containment facilities raise risk factors heightening the potential of system failure that lead to catastrophic events.
Leaky plumbing at the Oyster Creek nuclear plant is the culprit in poisoning the Cohansey Aquifer with 180,000 gallons of tritium contaminated water. Regulators and environmental officials assert that the level of radio active isotopes in the water supply that serves South Jersey and parts of Philadelphia is well within acceptable levels for human consumption. I guess that all depends on your definition of human; but I and many others remain skeptical on the subject of drinking radioactive laced water.
The aging nuclear infrastructure of the United States is a growing cause for concern. The nuclear power industry was halted in its tracks in the 1980’s by a strong No Nukes environmental movement. At the time it was generally understood that the cost of catastrophic risk and the industries inability to solve the long term problem of disposal and management of nuclear waste turned the public against the industry.
The Three Mile Island accident in Pennsylvania and the disastrous meltdown at Chernobyl in the Russian Caucuses led to a moratorium on new plant construction in the United States leading to the actual abandonment of plant construction in the Washington and New York. It created a capital market crisis as the fear of defaults on WPPSS revenue bonds spread to cast long shadows on the entire Muni Bond market. The state of New York stepped in to purchase the facilities of Long Island Power in order to make bondholders of the closed facility whole with tax payer money. It was kind of like socialism for investors.
While most of the world has continued to build nuclear plants to address growing energy needs; the United States has not built a nuclear plant since the 1980’s and has lagged the world in using nuclear power to address energy needs. Sentiment on the desirability of nuclear power is beginning to change. The Pickens Plan, former VP Dick Cheney’s secret meetings to develop a national energy strategy, the Gulf Oil Spill, the need to reduce dependence on foreign oil and the growing acceptance that the burning of fossil fuels is slowly cooking the planet has placed nuclear power back on the table as a viable component of America’s energy portfolio.
China is committed to building 100 nuclear power plants to wean itself from its crippling dependence on coal. The United States is charging hard to keep up with its fast growing Asian competitor in a 21st Century nuclear power race. The aggressive pursuit of nuclear plant development will increase the power and control of corporate entities charged with their construction, management and on going administration. To accomplish a dramatic build-out in nuclear infrastructure large areas of land situated near a plentiful water supply will need to be secured. Environmental impacts, regulatory oversight and public transparency will be sacrificed at the alter of cost efficiency, expedience in implementation and security to protect the vulnerable facilities against the pervasive armies of terrorists that lurk in the shadows near every nuclear plant.
The controversy surrounding the collusion of government and business to exploit the Marcellus Shale natural gas vein is an instructive model of what we can expect from the stakeholders pursuing an aggressive campaign to develop Americas nuclear power infrastructure. The dismissal of regulatory controls, the eminent domain of corporate interests, the opaque wall that shrouds risks factors and hides the environmental degradation resulting from the practice of fracking and the sacrifice of watersheds and aquifers to the expeditious extraction of natural gas are some of the documented behaviors of a wanton corporate will imposed on the body politic. Tragically this near sighted perspective willfully sacrifices the sustainable ecology of communities to the sole purpose of the profitable extraction of resources to serve shareholders of private corporations. The nature of the nuclear beast will require that its interests be enforced by courts of law guided by extreme prejudice and protected by police battalions, state guard units and private security groups in the name of national security interests.
The recently discovered Stuxnet computer virus is an indication of how the stakes are being raised in the nuclear power shell game. The launch of a successful cyber attack on a nuclear facility anywhere in the world is a real game changer. Self deluded uber patriots act more like real pinheads if they believe that the destruction of Iran’s nuclear power capability is a harbinger for Middle East peace or enhances the security of either Israel or the United States. A nuclear event in Iran or North Korea are real game changers for the course of human history and the well being of humanity. A clandestine service that can take out Iranian nuclear reactors can also be deployed to take out a reactor that is twenty miles north of New York City. Or consider the consequences of a summer heat wave ravaging the citizens Philadelphia dying of thirst because the water supply is contaminated with radiation. The extent of civil unrest would be extreme overwhelming the local law enforcement and judicial capabilities. If these bleak scenarios come to pass, Americans will be pining away for the good old days when a quick feel up at the airport by a TSA gendarme is fondly recalled like a high school make out session. The pernicious yoke of marshal law under the nuclear challenged corporate security state will be incessant in practice and swift, sure and dire in its execution.
You Tube music video: No Nukes Concert 1979: Doobie Brothers Taking it to The Streets
Risk: democracy, energy policy, nuclear power, civil liberties
…“the “money-management business” (with its plethora of mutual funds, investment counseling firms, and hedge funds) has so many practitioners who’ve grown up in an era where it’s all been about marketing and not risk management,…” “If 2004 goes bad, it will go really bad “ Bill Fleckenstein Contrarian Chronicle
This candid remark is an astonishing observation. The assertion that money management is more about marketing then risk management is a bit disconcerting. The most recent Security Exchange Commission’s (SEC) announcement concerning its investigations of brokerage firms for receiving commission payment premium’s by asset management firms for directing investors into purchases of preferred mutual funds is the latest example of how this statement is a tragic reality for investment product consumers.
We live in the era of radical capitalism. It is characterized by fierce political pronouncements of the sanctity of laissez-faire principles and the ultra aggressive pursuit of free markets, resulting in the increased rationalization of the market mechanism into our culture and daily lives. For many readers this statement is not surprising or profound. Marketing is king, and if you have any doubts about it, try locating a music station in New York City that is not wed to a Top 40 play list or Talk Radio format.
However, as this Milton Friedman vision of utopia continues its inexorable march of rationalization, a strange alchemy is taking place. As businesses damn the torpedoes to pursue markets, ethical business practices and sound corporate governance principles are being sacrificed at the alter of EBITDA, ROE, P/E’s and the Holy of Holies those sacred stock options. The ironic twist to all this is that these aggressive business practices defended on the grounds that they enhance shareholders value are actually seriously eroding the values of brands, profit margins and market capitalizations. Ask a shareholder of Enron, Parmalat or WorldCom about the clever corporate stewardship of these company’s former management teams and you’ll get a resounding thumbs down.
But there is something deeper going on here. When investors entrust their money to an investment manager, they may be attracted to the sizzle (remember past performance is not indicative of anything) but what they want is still the steak. Investors want an investment manager that can understand their investment goals and risk tolerance and provide them with an investment vehicle that can balance that risk tolerance with the capability of realizing an expected return. The act of giving a manager discretionary power over an individuals retirement fund, a union’s pension portfolio, a family office or child’s educational financing vehicle is a tremendous act of faith that requires an extraordinary degree of confidence in the manager’s ability to provide an acceptable return, but to also be a trusted fiduciary that has the requisite operational support and controls in place that will safeguard and honestly seek to grow and protect an investors capital.
Mr. Fleckenstein’s assertion that risk management has taken a back seat to marketing and product placement is unfortunately an accurate assertion. The financial services industry is unique in the sense that it is the loam of all capitalist constructs. Yet as a business, financial services companies are no different from any other economic enterprise. All companies create products and differentiate themselves through the value proposition incorporated into their product. Intrinsic to the product creation process is a determination of the type of materials that will form its composition. A conscious decision is made as to how the product will be positioned and marketed, its performance metrics determined, customer service resources required to support the product as consumers use it and how it will be distributed. Once those variables have been determined, a profit margin is added and a value proposition to potential customers is conveyed. The value proposition that is communicated to consumers comes to be known and identified as the product brand. An investment product is designed to essentially address current and future financing requirements and the risk profile of the consumer are central to the design and purpose of the product. That is why this bifurcation is so dangerous. It undermines the inherent purpose of the investment product and should more truthfully be marketed as a product that enriches the commission merchant that may over a specified period of time garner a return for the investor. Think about all the Enron employees who had their 401k’s invested entirely in Enron stock.
This is probably the most significant point and primal differentiator of companies that manufacture financial products with that of companies that manufacture consumer durables. Financial products facilitate the flow of capital through the markets. It feeds the invisible hand that guides and directs all economic activity. If the flow of financial products is impeded, or abates due to consumers lack of confidence, a consumer driven economy like that of the United States will suffer greatly. Foreign governments and institutions buy US Government bills, bonds and notes because of the well-earned confidence they have in Uncle Sam’s stable currency and it’s ability to pay it’s debt and provide a fair return to all note holders. However if that confidence goes away, Uncle Sam will have to curtail its deficit spending, raise taxes on its people and enter into other messy measures to remain economically viable. Confidence is a lovely thing both for nations and companies and once that confidence is lost it is a difficult, if not an impossible thing to regain. Confidence is the basis of risk management. Credit risk and rates of return, the key variables of risk management, all start with the certainty of confidence.
Yes, from an investment performance point of view 2003 was a terrific year. All major equity indices were up. Thanks in large part to a federal tax rebate program the US economy grew by 8% during the 3rd quarter, prompting Mr. Greenspan to proclaim with a certain degree of confidence that the recession had ended. Yet from corporate governance, business confidence point of view, 2003 business news makes the turn of the century robber barons look like acolytes of Mother Teresa. To restore confidence investment managers need to develop a Sound Practice program that will repair the breech and bridge the bifurcation of marketing and risk management within the investment management enterprise. Lets turn our focus on how and why this bifurcation must be bridged.
Sound Practices Builds Confidence
The explosive growth of the global hedge fund industry and the important role it plays in providing market liquidity and as an alternative asset class for high net worth investors and institutions is increasingly placing the industry in the global spotlight and many regulators, interest groups and institutional consumers are demanding greater transparency and advocating increased oversight and government regulation.
The Long Term Capital Management debacle, George Soros’s unilateral assault on and profitable dismantling of the Pre-Euro Exchange Rate Mechanism, numerous hedge fund blow-ups through poor management controls or outright fraud, and the most recent disclosure of the widespread collusion of hedge fund arbitrageurs and mutual fund managers to conduct market timing trading, is seriously eroding investor confidence in financial institutions. This is creating a political climate favorable to enhanced regulation and oversight of financial institutions. The recent investigative actions of New York State Attorney General Elliot Spitzer, and the appointment of William H. Donaldson to head the SEC are clearly political responses to the crisis in corporate governance and regulatory malfeasance.
At last count, there are approximately 20,000 companies engaged in investment management within the United States. Some investment companies are regulated by the SEC, some by the Commodities Futures Trading Commission (CFTC), some by the National Association of Securities Dealers (NASD), some conform to best practices required by custodial counter-parties, and some are guided solely by the good conscience of the fund manager.
In this rapidly expanding market, managers are seeking to differentiate themselves and attract investors assets through slick marketing campaigns, presentations, road shows, and shameless boasts about a mangers progeny, experience and past performance. Attestations of operational readiness and management’s commitment to ethical corporate governance is usually covered with a statement that lists the prime broker, the accounting firm for auditing and the administrator for transfer agency and shareholder communications. The manager believes that by listing the service providers (corporate brands) they convey a message to the investor that they are operationally sound and have the operational controls in place to satisfy all contingencies. Unfortunately, these service providers are retained for a very specific purpose and taken in aggregate do not amount to the implementation of a unified sound risk management program. Indeed, Arthur Anderson was a leading provider of services to the alternative investment management market and reliance on this brand to infer regulatory compliance or adherence to sound operational practices was clearly a miscalculation.
In the day-to-day operation of the business the tension between regulatory compliance and entrepreneurial zeal is usually resolved in favor of doing the transaction. When we asked an executing broker working a large sale transaction for a first time hedge fund customer if the hedge fund identity had been properly documented and verified in conformance with the rules of the USA PATRIOT Act he stated, “They’ll never answer these questions and if we ask they’ll simply go to another broker to work the order. We’ll take the hit to do the deal.” Yes this broker made a calculated decision based on the potential that the hedge fund was not entering into this transaction to launder money through the capital market system or was a front for terrorist financing. He was probably right, and earned his firm a nice commission for working the 100,000-share block at $.05 per share. But what if he was wrong? Was the premium commission rate a fair return for a ruined reputation, a million dollar fine, the revocation of your industry license, a lifelong ban from the industry, or even a prison sentence?
What are Sound Practices?
Sound Practices are a set of standards and operational controls that mitigate numerous risk factors in the investment management enterprise. Sound Practices address the investment process, its decision and operational support functions, capital introduction, compliance requirements, business continuity, fund strategies and investor communications within a set of defined expense ratios.
What’s the difference between Sound Practices and Regulatory Compliance?
If we accept the definition that compliance is a set of externally imposed rules required to insure that counter-parties of a transaction and the rules governing the transaction meet acceptable minimum standards to facilitate an ethical and efficient exchange of value; I think we come pretty close to the meaning and nature of compliance and the purpose of the functions required to support it.
In the United States, depending upon the type of products a financial services firm offers, there may be or may not be a governmental agency or Special Regulatory Organization (SRO) that is charged with compliance oversight and enforcement of its business practices. The Office of the Comptroller of the Currency (OCC) is charged with the responsibility to oversee compliance with regulatory statutes for savings and loans, thrifts and banks. For broker/dealers the NASD is the SRO oversight body. For mutual fund companies and publicly listed companies, the SEC is the regulator. Future Commission Merchants are regulated by the CFTC; and hedge funds, -sometimes referred to as an Unregistered Investment Company (UIC)- at present escape any formalized regulatory oversight body.
Each regulatory body has its own set of compliance rules, guidelines and enforcement mandates. One can imagine the overlap and confusion that occurs when a bank owns a broker dealer, which owns an asset management firm, that offers mutual funds and off shore hedge fund products to institutional, retail and high net worth investors. The maze of regulators and the differing and sometimes contradictory regulatory requirements creates a reactionary and possibly antagonistic response to regulatory examinations and demands. At the very least, compliance is a significant cost of doing business and adds little to the intrinsic value of the product offered by the institution. The added expense of compliance deals with the structural aspects of the market, not the intrinsic value of the product. This is a dangerous bifurcation in its own right. A financial product, (specie for the capital markets) requires a denigration of value to assure a controlled velocity through a regulated market structure.
For companies that view regulatory compliance as a necessary evil that tempers entrepreneurial pursuits and whose function is an added cost of doing business; these organizations will develop a best practice culture that is inherently restrictive. This type of corporate response to regulatory or best practices initiatives will always be overwhelmingly reactive and places the enterprise at great operational and regulatory risk.
Sound Practices are different. Sound practices are a set of internally (organically) developed operating principles that inform the values of ethical corporate governance, is enforced by internal management and seeks to become invisible as it ingrains itself into the operational and business culture of the firm. Sound practices must be viewed as fundamental to a firm’s value proposition, organically grown and endemic to the corporate culture and proactively conveyed to the market as a premium brand.
The internal development or organic growth of best practices as a central desire and objective of the corporate enterprise is revealed as central to product brand and the value proposition offered in the market. This positions the firm and its products as a premium brand. The business benefits of a sound practice program are enhanced margins, product performance and the attraction of quality clients and vendor relationships. More importantly it differentiates the firm in a crowded market because its quality brand is perceived by the market as endemic to the firm’s corporate culture and as such is inherently superior to something that is externally imposed by some governmental or regulatory body. On a macro-economic level the socialist or state capitalist experiments in highly regulated planned economies are the logical extreme and true antithesis of a sound practice culture.
Within the hedge fund industry in the United States the concept of Sound Practices first surfaced in an industry study entitled Sound Practices for Hedge Funds. The study was an industry response to the Clinton Administration’s request to examine the lessons learned from the Long Term Capital Management implosion and recommend basic guidelines to avoid similar disastrous occurrences in the future. The paper was a breakthrough on a number of fronts, placing the science of risk management and the utilization of risk measurement tools at the center of the investment management enterprise. Though the study was a political response to a catastrophic market event, the real purpose of the study was to temper the drive to regulate the hedge fund industry. In essence, the authors of the study asserted that regulatory oversight is not needed if hedge funds implement and maintain a sound practices program. Sound practices will allow investment companies to remain unregulated and will assure that the industry is fully capable of self-policing through the creation of practice standards. Indeed, any regulation or governmental oversight will further drive the industry offshore to more discreet and tax friendly domiciles and could potentially drain capital and liquidity from the US capital markets.
Operational Risk Mitigation
As previously stated, developing and adhering to a set of best practices principals and guidelines will add intrinsic value to product and corporate brand. The purveyors of Business Performance Management (BPM) solutions routinely boast the claim that publicly listed companies that practice BPM have P/E ratios that trade at a 15% premium to industry peers who have not implemented a BPM strategy. The question whether BPM is a silver bullet to enhance market value or whether BPM practitioners are leading companies dedicated to implementing programs and mechanisms to build shareholder value are irrelevant. What is important is that BPM practitioners are implementing processes and tools to understand and isolate operational risk to create product delivery and decision support mechanisms that build intrinsic product and corporate brand value. Thus at its heart, BPM practitioners seek to heal the bifurcation of marketing and operational risk management and firmly establish and display the synthesis as central to the value proposition a company delivers to its clients.
Operational risk factors in the investment management complex are numerous. They include valuation practices, system infrastructure, business continuity contingencies, vendor and service provider dependencies, risk management tools, risk management function segregation and asset gathering or capital introduction and investment acceptance principles. All of these risk factors are significant and each one on its own could threaten the ongoing viability of the enterprise. Each risk factor must be addressed in detail with a comprehensive programmatic approach to develop and implement processes and controls to enhance best practices to support the function and mitigate the risk factor associated with the business process. The Basel Capital Accord (Basel ll) proposes the introduction of a capital charge related to the operational risks of financial institutions. Basel II defines operational risk as “the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events.”
As an example, poor record keeping or an honest miscalculation on a corporate action treatment or security valuation can be forgiven. After all, the restatement of earnings -even during the Sarbanes Oxley Era- in corporate America is common. Laundering money for criminal enterprises, or heaven forbid, financing terrorism goes way past lax controls. In the eyes of the law it is criminal, in the eye’s of regulatory authorities it’s a serious offence, and a heavy fine and asset forfeiture is possible. If this occurs, in the mind of the consumer the fund manager is guilty of two counts of treason. The first count of treason the fund manger is guilty of is against his country. The second count the fund manager is guilty of is the betrayal of a sacred fiduciary duty. A hedge fund manager would probably never recover from this type of avoidable catastrophic risk event.
Fund managers need not look at compliance with the USA Patriot Act as another cumbersome compliance requirement that will be expensive to address. The belief that compliance will antagonize or annoy potential clients and may in fact drive them to a competitor whose controls are not as stringent and whose compliance laxity facilitates transactions by making it easier for investors to place assets with the competitor may hold some truth. But shouldn’t a fund manager avoid those types of clients anyway?
Compliance with The USA Patriot Act requires that investment companies conduct due diligence and maintain and administer a Customer Identification Program (CIP). Investment companies should view compliance with the Act as an opportunity to develop a Know Your Customer (KYC) capability that enhances and enriches the client relationship with the firm. When fund managers make KYC the cornerstone of their product development initiatives marketing will then truly serve the risk management requirements of clients.
The process of conducting the KYC due diligence exercise results in a more in-depth understanding of the customer. As managers are verifying customer identification information they will routinely uncover residential, employment and family histories that give them a better perspective on the client’s needs, their appetite for risk, other fiduciary relationships the client has and the source of the clients wealth. The regulatory objective of the KYC process is to verify the clients identity and to make sure they are not a money launderer or terrorist. The sound practice objective of the KYC process is to cover the regulatory requirements and more importantly to gain insights and understandings into their personal and business motivations. Armed with this understanding the manager can design or offer an investment product that will address the client’s risk management requirement. Client’s will appreciate the fact that managers are conducting this due diligence to insure that their funds will not be commingled with money launderers or terrorists, and that the firm is taking appropriate steps to insure that they transact business with reputable clients whose ethical and moral standards are similar to their own high standards.
As clients experience the KYC discovery process, they will begin to understand that the firm is committed to delivering a qualitatively superior value proposition. The client experience will help them to understand that the marketing focus of the firm is to acquire trusted customers and the depth and quality of client relationships are established to understand client needs and requirements. The client will also gain the assurance that regulatory risk and the potential for large fines and asset forfeitures are minimized due to the care the firm has exercised in determining that its clients are the right type of clientele and that the firm’s management has created operational controls and processes to prevent the risk of money laundering within the investment management enterprise.
Furthermore, subscription and redemption releases are facilitated due to proper controls in place with administrators and custodial institutions. This places enhanced liquidity at a fund manager’s disposal allowing the manager to practice effective cash management techniques that position the manager to take advantage of investment opportunities that may arise. This raises the possibility of developing a more effective collateral management capability that will tighten spreads on haircuts and dramatically reduce financing expenses. The credit rating of the firm would improve allowing lenders to further reduce financing rates to capture the funds business in a competitive credit and financing market. The reduction in the cost of capital can dramatically affect investment performance and the marketers can truly boast of a source of alpha that is directly attributable to operational sound practice processes.
Having proper procedures and business processes in place with administrators and custodian institutions will also facilitate the transfer of shareholder data to accountants for tax and audit purposes. This will expedite the delivery of tax and performance information to shareholders, generating savings in preparation fees and lessening the possibility of costly restatements. This will reduce and maintain fund expense ratios to absolute minimums. Marketers can clearly demonstrate that the fund managers are good stewards and are as concerned with minimization of business expenses as well as investment performance and high watermarks.
Increased transparency and the opportunity to dramatically enhance shareholder communications and reporting will be a strong attraction to many investors. Indeed, many institutional investors demand a level of transparency, communication protocols, and reporting tools that would have been unthinkable only a short while ago. As sophisticated institutional participation grows within the industry, the implementation of a sound practice program will be the only way hedge fund products can incorporate the necessary value proposition that addresses their risk management profiles and requirements. Sound practices and the compliance function become significant differentiators and powerful marketing tools. At last, the bifurcation is healed.
James Wolfensohn, President of the World Bank has been quoted as saying, “Corporate governance is about promoting corporate fairness, transparency and accountability.” Sound Practices is a necessary prerequisite for effective and ethical corporate governance. Fund managers must accept it’s precepts and sell side institutions and other industry participants and service providers must demand compliance, disclosure, ethical trading principals, honest research, operational integrity and a full commitment to its implementation and adherence. Effective corporate governance practices will restore the faith of the investing public in the global financial services industry and maintain the rationality of the world’s capital markets. It will also please investors to see realized enhanced returns on investment portfolios and help fund managers to fully participate and enjoy the benefits of a thriving hedge fund practice.
Originally written January 5, 2004, the article is significant because it raises concerns about financial services product marketing practices that still need to be addressed six and half years later.
You Tube Music Video: Mike Oldfield, Tubular Bells
Risk: regulatory, consumer confidence, sound practices
Louisiana has declared an emergency shrimping season for the off shore beds at the mouth of the Mississippi River. The emergency harvest of shrimp, oysters and stone crabs is a desperate attempt to grab a final yield from a once bountiful aquaculture that sustained and defined the regional Cajun identity for many generations. The spreading oil slick gushing from a toppled offshore oil platform threatens to bury that life as it covers the delicate ecology with a toxic cloak that may spell a death blow to a regions way of life.
It is estimated that 210,000 gallons of crude oil are gushing into the Gulf of Mexico every day following the explosion and collapse of British Petroleum’s Deepwater Horizon offshore drilling platform that killed 11 workers. The Transocean rig was reportedly not equipped with a special safety devise that should have capped the well with the collapse of the oil platform. This assertion is being denied by Transocean stating that the well was equipped with the devise but unfortunately it failed to work. The use of the safety devise is a regulatory requirement for any offshore drill platforms in Europe but in the United States this safety devise is not required and is considered an optional operational risk devise. Like the recent coal miner disaster at Massey Mines, and word today that two more miners have died in Kentucky, occupational wages sometimes result in death. We need to understand that preservation of life and environmental safety are critical components of a cost of doing business that must be factored into ROI calculations and risk assessment scenarios.
The Coast Guard is in charge of emergency response to this growing disaster. The Coast Guard is skimming surface oil and using containment booms to control the growing oil slick. The Coast Guard is also considering igniting controlled burns of the surface oil which would release toxicity into the air. Another strategy being considered is the injection of chemicals into the spill to coagulate the oil. This strategy has never been attempted at such an extreme 5,000 foot depth and would also release additional toxins into the water. Technological solutions like the drilling of a relief well or the construction of a containment vessel would take months to accomplish. Man made solutions to cap the environmental disasters of their making always seem to pale in comparison to the scale and fury unleashed by the unrestrained power of nature.
This event marks yet another example of making an honest assessment of the true costs of our behavior and choices. Like the global economic meltdown that was the result of the unfettered credit orgy the bill for risky behavior always comes due. The continued focus on the exploitation and extraction of fossil fuels at the expense of alternative sources of energy comes at a great cost. This disaster may indeed be the death blow to an aqua industry that nurtured a region for many generations and informed a cuisine and culture respected and treasured by throughout the world. And like any excursion to a fine NOLA restaurant, someones always got to pick up the tab.
The bill always comes due. We want to gorge ourselves at the well of cheap energy only to discover how dear the price of this devil’s bargain really is. Environmental degradation is the most obvious tip of a precarious iceberg that threatens to tip as it melts into an ocean of unsustainability. A destroyed eco-culture of marshlands and animals, abandoned hamlets and townships no longer able to extract a living from the land are the immediate visible signs of the cost of this deal with the devil gone bad. We must begin to realize that the cost of cheap energy also requires our nation to continually engage in wars and military actions to protect this vital resource.
Cheap oil has badly skewed our economic infrastructure. It has encouraged our businesses to produce inefficient cars that led to the decline of a strategic industry and destruction of cities like Detroit and Gary Indiana. It caused the terrible moniker of rust belt cities to be pinned on a region of our country that was once the source of our nations wealth. Cheap energy help turn our prized manufacturing centers into economic anachronisms. Cheap oil has forestalled commitment to developing innovative green technologies that continues us to cede our position as a global manufacturing power. As we watch China and Brazil march forward with massive commitments to the development of energy innovation industries that will serve future needs of an energy dependent global economy, America is engaged in a bloody rear guard action to defend the ways of an old dying world too protect depleting trickles of oil.
Tonight as Americans go to sleep in their energy inefficient homes it is hoped that they may pause to consider that drill baby drill is a rallying cry for an unsustainable dying future. Think of the villages along the Louisiana bayous and how their way of life is coming to an end. Its time to consider the real costs of a Drill Baby Drill economy and begin to chart a course to a sustainable future.
You tube Music Video: Cajun Music: DL Menard and Louisiana Aces, Out My Backdoor
Risk: economic, environmental, culture
The deal is closed. American democracy has been sold. The US Constitution, discovered in a discount bin at a cheap dollar store at the Mall of America will now be fully privatized to serve the greater corporate interests of America. The deal will enable the global fraternity of capitalists to finally unlock and fully realize the hidden value of an unencumbered American dream. Profit-Us-Maximus will replace E Pluribus Unum as the national slogan. Undoubtedly it will appear on our national currency for the freedom of commercial interests and the uninhibited power of capital has triumphed. Commercial interests have trumped “we the people”. American liberty, a political currency once recognized as the worlds leading example of representative democracy has been severely devalued.
The Supreme Courts decision overturning laws that restrict corporate freedom of speech now allows corporations the unrestricted right to financially support candidates for public office. This paves the way for an installation of a more corporate friendly oligarchy to rule over the citizens of the worlds first and now defunct representative democracy. The courts ruling in the Citizens United vs. the US Federal Election Commission overturned existing laws that prohibited corporations from exercising free speech. The ruling now sanctifies the corporate purchase of air time to fund media campaigns that support or attack candidates running for public office. The wisdom behind the overturned law was to protect the interests of citizens from a corporations ability to use its considerable capital resources to finance and influence the election of political candidates favorable to their corporate interests. That law is yesterdays newspaper.
The decision opens the possibility that the governance of our nation, states and townships will be administered by elected officials financed and paid for by corporate largess proffered with the proviso to do their bidding. America risks becoming one giant company store. Once free citizens endowed with the protection and empowerment of a Constitution and a Bill of Rights will become beholden to the whims of corporate paternalism.
If your a shareholder in one of the corporations this is a bullish market event and your equity position has surely appreciated in value. The special dividend of political power born from purchased access to legislators will accrue favorable returns to investors in The United Corporate States of America. No longer will senators hail from the great state of Georgia or the Live Free or Die State of New Hampshire. It’ll be the senator from “Do No Harm” Google or “Have It Your Way” Burger King.
There will be a million unintended consequences resulting from this decision. How government administers and delivers services and how institutions fulfill their social mission will drastically alter. Institutions and functions that serve and support education, military, roads and infrastructure, health care, consumer and environmental regulations, labor protection laws and provision of social services will be transformed. The very nature of the liberal nation state will change.
This decision will create conditions for the privatization of governmental assets and institutional service structure to accelerate at mind numbing speed. The New Jersey Turnpike can now be sold to a private equity firm from China. Drilling and the exploitation of resources found on National Parks will proceed without prohibition. Public schools will be offered on a Dutch Auction hosted on e-bay; attracting the participation of a well capitalized confederation of publicly traded Charter Schools. The mission to acquire the listless brick and mortar carcass of a once venerated public school system will commence. The promise of the systems renewal with the breath of a new life fired by entrepreneurial zeal and taxpayer support will create a new Dow Jones Index constituent, Education Inc. Many functions of government will be downsized and outsourced to sophisticated data processing and business process companies. Military units will also be privatized, becoming mercenary divisions of corporate security firms. This will enlarge their market opportunities because they will no longer be beholden to exclusively serving the needs of a single client, the USA.
As Keith Olbermann pointed out in his Special Comment concerning the Supreme Court decision, the parallels with Dred Scott Decision are ironic. The decision ruled that Dred Scott was not a man, but merely a commodity to create wealth for a person with full rights of citizenship. Now corporations are blessed with all the rights and privileges of a person and the rising ascendancy of their power will soon supplant the interests of individuals. In so doing, the Supreme Court has once again proven itself to be an activist political tool to protect the interests of political and economic elites.
We can at least be thankful that the Supreme Courts decision allows us to dispense with the charade of participatory democracy. Rampant cynicism about the unfair influence of money on the political process has always been understood as a problem. This has undermined the people’s trust in the electoral process. It has eroded a collective sense of political enfranchisement. It has contributed to creating a pervading malaise of ambivalence within the electorate. The monied interests with fathomless pockets can now come out into the open and make their presence plain for all to see. It remains to be seen how this will alter the structure of K Street.
A new business model for how money is dispensed to politicians will need to be considered . Perhaps a new derivative called a PIMP, (Politician In My Pocket) should be considered. A PIMP Exchange could be set up in Washington DC. This future exchange would surely prosper and would propel Washington DC as the fast rising global financial center on the come. PIMP trading would be recognized as a fast growing emerging market. The trading in PIMPs would attract capital from all over the world and may even rise to supplant the future pits in Chicago as the place “where the world goes to manage risk.”
The PIMP Exchange will add that much needed transparency on how the political influence market is performing and what the going price is to buy and sell politicians. We should be grateful to the Supreme Court Decision that laid the judicial foundation that will finally shine light on this aspect of our political process. Now that its out in the open its all above board. No more under the table deals will be necessary. This ruling and the PIMP Exchange makes it very easy to follow the money. Perhaps legislation should be considered that require senators and congressmen to wear the corporate logos of their three largest sponsors. If a corporation wishes to remain anonymous feeling that the interests of their shareholders are better served they can continue to operate under the radar. A Generic Omnibus Politician In My Pocket or a (GO PIMP) will be designed specifically for this purpose.
The laissez faire approach to freedom of speech unfortunately confers all the power to those with the deepest pockets. “Politicians will be bought and sold by the gross”, according to Alan Grayson a congressman from Florida. Mr. Grayson is proposing legislation to protect citizens rights from being trampled by an avalanche of corporate money. The first amendment guarantees citizens that no one shall abridge or prohibit the free and open expression of ideas. Unfortunately money speaks the loudest and facilitates access to media channels and distribution. The free and open internet provides an individual little protection. The tussle in China between Google and the government is an instructive warning of what we can expect to occur as corporate control of the internet grows. It is an indication of a growing rift born from competitive postures of power capitalist institutions.
Our birthright of liberty was orphaned by a pervading cynicism and the seeming ambivalence of citizens who cared little for the rights democratic republics confer and understood less about the responsibilities required to guard them. The decision by the Supreme Court is a watershed event. Our political culture has changed. The United States model for governance is moving closer to the Chinese model of governance. The state capitalism of the United States is is a mirror image replication of the Chinese model. A ruling oligarchy of economic interests acting in concert with its hand picked governmental representatives is common to them both.
Did we awaken this morning to the sober realization that American’s best hope is a trust in a benevolent corporate paternalism? Can we believe that the rule of unencumbered enlightened capitalists is the way to realize the promises of a post scarce society? Can we still believe in the promise that innovation and social progress and our democratic impulses will continue to inform America’s historical evolution? Has America and the rest of the world arrived at a tipping point, a harbinger of a dystopian future where property right trumps human rights and the hard edges of economic deprivation, class marginalization and political disenfranchisement are ills that continue to infect society. We need a doctor. We need a strong antibiotic to cure this disease metastasizing in the body politic.
You Tube Music Video: Tennessee Ernie Ford: 16 Tons
This years Schulte Roth Zabel’s (SRZ) 19th Annual Private Investment Funds Seminar stuck a very different pose from last years event. One year on from the global meltdown of financial markets, languishing institutional certainty and the pervading crisis of industry confidence has been replaced with a cautious optimism. The bold swagger of the industry however is gone, in its place a more certain sense of direction and expectation is emerging. Though managers continue to labor under unachievable high water marks due to the 2008 market devastation, 2009 marked a year of exceptional performance. Investment portfolios rebounded in line with the upturn in the equity and bond markets. Liquidity improved and net inflows into the industry has turned positive during the last quarter as large institutional investors and sovereign wealth funds returned to the sector with generous allocations. These are taken as clear signs that the industry has stabilized and the path to recovery and the healing of economic and psychological wounds are underway. Yes the industry will survive and ultimately thrive again but it will do so under vastly different conditions. The new business landscape will require an industry with a guarded culture of opaqueness to provide much greater transparency while operating under a regimen of greater regulatory scrutiny.
The 1,900 registered attendees heard a message about an industry at a cross road still coming to terms with the market cataclysm brought on by unfettered, unregulated markets and excessive risk taking. SRZ offered an honest assessment in examining the industries role in the market turmoil. Speakers alerted attendees to an industry at a tipping point. To survive the industry must adapt to a converging world that believes that uniform market rules and regulations are the surest safeguards against catastrophic systemic risk events. A global political consensus is emerging that expresses support for industry regulation as an effective tool to mitigate the pervasiveness of fraud and market manipulation that undermines investor confidence and ultimately the functioning of a fair and efficient open free market.
Paul Roth, Founding Partner of SRZ, noted in the events opening remarks that the market is beginning to recover as evidenced by industry AUM once again exceeding the $2 trillion mark; but he warned that any exuberance needs to be tempered with the understanding that the new normal would not resemble the pre-crash world. The days of cowboy capitalism and radical laissez-faire investing are clearly over. Indeed Mr. Roth wryly observed “the industry must develop a maturity about the need for change. He concluded “that the industry must respond by playing a constructive role in forming that change.”
The conference subject matter, speakers and materials were all top shelf. Break out presentations on risk management, regulatory compliance, distressed debt deal structuring, tax strategies and compensation issues all reinforced the overriding theme of an industry in flux. The presenters passionately advocated the need to intentionally engage the issues to confront accelerated changes in market conditions. By doing so, fund complexes will be in a position to better manage the profound impact these changes will have on their business and operating culture. Subject issues like insider trading, tax efficient structuring, hedge fund registration, preparing for SEC examinations and the thrust of DOJ litigation initiatives and how to respond to subpoenas were some of the topics explored.
To highlight the emerging regulatory environment confronting the industry, a presenter pointed to the Southerization of the SEC. This is an allusion to the hiring of former criminal prosecutors from the Department of Justice, Southern District of New York to go after wayward fund managers. The SEC is ramping up its organizational capability to effectively prosecute any violations of the new regulatory codes. The growing specter of criminal prosecutions and the growing web of indictments concerning the high profile case of Mr. Raj Rajaratnam of the Galleon Group was presented as evidence of an emerging aggressive enforcement posture being pursued by regulators. Managers beware!
Presenters made some excellent points about how institutional investors are demanding greater levels of TLC from their hedge fund managers. This TLC stands for transparency, liquidity and control. Creating an operational infrastructure and business culture that can accommodate these demands by institutional investors will strengthen the fund complex and help it to attract capital during the difficult market cycle.
The evening concluded with an interesting and honest conversation between Paul Roth and Thomas Steyer, the Senior Managing Partner of Farallon Capital Management. The conversation included increased regulatory oversight, compensation issues, industry direction and matching investor liquidity with fund strategy, capacity, structure and scale. Mr. Steyer manages a multi-strategy fund complex with $20 billion AUM, his insights are borne from a rich industry experience. He made the startling admission that Farallon has been a registered hedge fund for many years and he believes that the regulatory oversight and preparation for examiners reviews helped his fund management company to develop operational discipline informed by sound practices.
Mr. Steyer also spoke about scale and that additional regulatory oversight will add expense to the cost of doing business. Mr. Steyer believes that it will become increasingly difficult for smaller hedge funds to operate and compete under these market conditions.
Another interesting topic Mr. Steyer addressed were issues surrounding investor redemption and fund liquidity. During last years SRZ conference investor liquidity was the hot topic. Fund preservation during a period of market illiquidity and a fair and orderly liquidation of an investment partnership were major themes that ran through last years presentations. Mr. Steyer struck a more conciliatory tone of investor accommodation. He confessed his dislike for the use of “gates” as a way to control the exit of capital from a fund. In its place he offered a new fund structure he referred to as a “strip” to allocate portfolio positions to redeeming partners in proportion to the overall funds liquid and illiquid positions. He stated he believed that strategy to be more investor friendly.
Schulte Roth & Zabel has once again demonstrated its market leadership and foresight to an industry clearly in flux, confronting multiple challenges. These challenges will force fund managers to transform their operating culture in response to the sweeping demands of global market pressures, political impetus for regulatory reform and the heightened expectations of increasingly sophisticated investors. The industry could not have a more capable hand at the helm to help it navigate through the jagged rocks and shifting shoals endemic to the alternative investment management marketplace.
You Tube Music Video: Beach Boys, Sail On Sailor
Risk: industry, market, regulatory, political
As we start the second decade of the new millennium, innovation is understood as a critical driver to overcome the economic malaise plaguing the global economy. Economic stasis and political factionalism has made it increasingly evident that faltering economic and social institutions cry out for sweeping reform. These reforms can only be achieved with innovative approaches in policy and practice. Innovation is realized by giving flight to uninhibited thought and the clear application of ideas with decisive action. Though most agree that we badly need reform, we remain at painful odds as to what those reforms should be and how to implement them. The destructive legislative debates on health care and the ugly political theater of town meetings that occurred in the United States over the summer accomplished little in regards to meaningful reform. The exercises only served to drive a deepening wedge into the ability of a democratic culture to form a transformative consensus.
Our society is a complex ecosystem comprised of many competing interests. The classic definition of politics, “the means to decide how limited resources are allocated to disparate interests” is clearly a truism that must be applied if we are to realize the reform that we desperately need. In a post scarcity society that definition may seem a bit crude or antiquated. America’s history is marked by a culture of innovation and the incubation of industry. Innovation and its commercial expression in entrepreneurialism is a national asset that tempers the hard edges of stringent allocation or resources and has been the source of our great social wealth. Democracies continually require citizens to arbitrate how competing interests are reconciled and converge. As a self professed democracy the United States must break down the barriers that inhibit innovation by confronting the challenges posed by convergence.
Convergence has been the watch word in the tech industry for the past few years. Convergence aggregates, joins and aligns discreet trends, competencies, technologies and missions to spawn innovation and progress. Masters of business innovation understand that a precondition of convergence is the ability to collaborate. Collaboration requires extended conversations and dialog to understand how competing interests can be reconciled and brought together so that innovation and progress can be achieved. Marketeers invent neologisms like coopetition to brand the idea and lend heft to its thrust. We believe that innovation borne from convergence is the path to rebuild our economy, heal cultural wounds and take a step toward political maturity the United States needs to sustain the great experiment of our democratic republic.
With that in mind we offer a list that outlines the inhibitors to innovation. It is hoped that our nations leaders and people can begin an earnest conversation to address these barriers to growth. Maybe I’m wrong with offering this modest list but I remain willing to discuss it, hopeful that people of good will with a different viewpoint will be open to correct my thinking and contribute to my enlightenment.
1. War: War is inherently wasteful. The current wars in Iraq and Afghanistan are grievous examples of waste and national distraction that hampers the United States economic recovery. At an Ecumenical Memorial Service held at Yankee Stadium following the 9/11 terror attacks a Buddhist Monk stated that he believed “it was wiser to drop refrigerators on Afghanistan then bombs”. Almost a decade later and two wars on I can’t help but to think what a meager $100 billion investment in Afghanistan would have returned to the United States tax payers. More importantly it would have shown the world that above all else America values the sanctity and preservation of life. It would have also minimized the rising toll of casualties of both citizens and soldiers. We developed some great bunker buster bombs but we can’t figure out a way to stop a suicide bomber with exploding underpants. We succeeded in stirring up a hornets nest of angry insurgents and failed to build innovative pathways to peace with steadfast bridges to secure allies and pacify combatants.
2. Politics: To be sure politics is omnipresent but the politicization of faith institutions and government functions is a great separator of people. When politics infects faith institutions their ability to breach the social divide and join people together is seriously compromised or downright destructive. The Catholic Church’s practice of denying the Eucharist to parishioners based on political biases of the communicant places politics at the center of the Lords alter. The recent occurrences of radical Islamists burning down Christian Churches in Malaysia is tragically ironic. The violence, a response to the Christians appropriation of the word Allah as a name for God; is a violent rejection of language convergence of two great faith traditions. It would seem that unity is a threat that God cannot abide and is a growing threat that must be abolished. In the secular world government agencies were instructed to withhold scientific climate change research of the National Science Foundation because it did not conform with the politics of the party in power. The extent of the politicization of the judicial branch of government under the Bush Administration was a seditious move worthy of dictatorships. Innovative application of constitutional law in defense of civil liberties is one of the greatest challenges the war on terror poses to this country. The creation of kangaroo courts to support the politics of the ruling party would undermine our system of justice. It would transform our judiciary into a repressive apparatus of the state, our laws into stale dogmas ill suited to meet the legal challenges of our time and a justice system that is indistinguishable from the justice offered by our opponents.
3. Ideology: Only good ideas need apply. Deng Xiaoping said it best “does it matter if its a communist or capitalist mouse trap. The question is, does it catch mice?” Seeing this as a threat, Mao Zedong unleashed the cultural revolution and routed the capitalist roaders as a threat to the Great Proletarian Revolution. After the death of Mao, Deng would be rehabilitated and play a key role in China’s adoption of a market economy and its current ascendancy as a world economic power. In my mind there is a striking resemblance to the debate about heath care. Socialized medicine is bad. Do you want to turn into France? Canadian health care is too expensive. UK heath care system is overloaded and can’t cope with demand. These problems would be solved however after the death panels had a chance to meet and decide who shall live and who must walk the plank.
4. Entrenched Commercial Interests: Though we are ardent believers in capitalism as an engine of innovation the dictatorship of ROI, entrenched concentrations of capital and an unwillingness or inability to adopt longer term investment horizons hamper innovation. The failure of the United States automobile industry to develop fuel efficient vehicles is a good example of market intransigence. The development of junk bonds by Michael Milken and Drexel Burnham Lambert dismantled the manufacturing base of the US economy accelerated the countries decline as a net exporter of products creating the foundation of a debtor nation. During the presidency of Jimmy Carter solar panels were installed on the roof of the White House. The succeeding administration had them removed. Imagine where the alternative energy industry would be today had it developed this leading edge idea and capitalized on this first mover advantage.
5. Unbridled free markets: The economic carnage of the banking meltdown is a startling example of the excesses the pursuit of profit will create. The boom in commercial and residential real estate construction created massive stocks of unused inventories that misdirected and wasted enormous resource. The energy and capital expended on these wasteful endeavors misdirected funds and created huge social hazards that requires massive amounts of capital to mitigate. Also worth mention is the development of video gaming. Lots of energy and creativity is being expended on the best techno music to use while your Mafia Avatar bashes open the head of your opponent with a baseball bat. We are not suggesting censorship or a prohibition of video games nor centralized economic planning. Its a compensation and social value issue. Perhaps a communicants denial of participation at the Lord’s Table lead them to leave the church and miss the message about social values.
6. Technology: It may seem odd to include technology as an inhibitor to innovation but technology for technology sake may inhibit the development of innovative applications solutions that are not technological in nature. The technorati of the world is transforming technology into a religion. Deprived of its human dimension it can become a dogma that grows in an antagonistic relationship with its human masters. The United States continues to trumpet its technological prowess as the deciding factors in its war in Afghanistan. But that paradigm was explored during the war in Viet Nam where pungi sticks ultimately trumped napalm bombs. The power of an idea and how it connects and motivates people is force that is mightier then the sword.
7. Fundamentalism: The Pharisees once asked Jesus, “is it lawful to heal on the sabbath?” Jesus answered that it was always the right time to heal those who are sick. The world recoils in horror at the capacity for destruction fundamentalism regularly visits upon the world. The denial of equal civil rights to LGBT people creates a bifurcated system of citizenship. It is an ugly stain on our democratic heritage. The gravest peril to democracy is the abridgment and denial of civil rights to any group of citizens. Democracy necessitates that all republicans enjoy equal access and rights in order for it to function. The denial of that right based on a fundamentalist reading of religious scriptures makes it particularly abhorrent because civil rights of citizens in a secular democracy is not an issue that is decided by theologians or the adherents to a particular theology.
Tolerance and consensus are both antithetical to the precepts of fundamentalism. Fundamentalism is not the sole province of religion. It has its secular and ideological adherents as well. Fundamentalism is a pillar of dictatorship; either of a political or theocratic nature both are enemies of secular democracy. Secular democracies require tolerance to respect the diverse ideas and competing viewpoints require in the democratic process. Secular democracies require the trust to converse and hash out the best ideas that serve the greatest good. This is only possible if consensus can be achieved. It is how “out of many becomes one”. It is the true genius of America. It is a worthy innovation of governance that every freedom loving citizen should jealously guard and consciously pursue.
8. Public Education: The public education system that the United States built is the true arsenal of democracy and the nations source of wealth and its many contributions it has made to the world. Without the vast network of learning institutions built and supported by successive generations of Americans the worlds great experiment in representative democracy would have long ago perished. The public schools sole charter is to create an enlightened citizenship with the skills to discuss, discern and decide in a civil and constructive manner the ever evolving dialectic of a democratic consensus placed at the service of the republic. It is one of the true geniuses of America and remains her enduring strength.
Today public schools are under attack by forces whose agendas are the pursuit of parochial goals that first and foremost seek their enrichment and interests at the expense of the greatest good of the republic. The charter school movement is a trend that threatens the public school system by privatizing some of the systems assets and draining away much needed resource and financial support. It forces public schools to dispense with curriculum offerings like music and arts, sports programs and civic excursions that will convey an understanding of how institutions interact and support the greater social good. This aspect of the educational experience is supplanted by an exacting examination regime that destroys the love of learning. Secular learning is also being threatened through the introduction of theological precepts like creationism into the science curriculum of public schools. Religion and faith are important precepts to offer in a public educational curriculum; however theology that masquerades as science is an ideological stricture that has no place in public schools. These trends are pose great challenges to the public schools mission to form enlightened citizens free to think and free to act in the sole service of liberty and participatory democracy. Innovation and progress is in danger of becoming a secular sin a disease of the soul that needs to be eradicated from the public schools as its threatens to infect the greater body politic.
You Tube Music Video: Louis Armstrong, I Get Ideas
Risk: innovation, convergence, progress, tolerance