Forgive Us Our Debts

So I was doing some post-holiday reading (my son’s gift to me Invictus; my wife’s gift to me The Magna Carta Manifesto, and the FDIC’s 2009 Failed Bank List) and, while I know I’m biased, my family was far more in tune with “interesting” than our dear friend Ms. Bair. That said, I don’t want, for a moment, to have you think that there wasn’t a good dose of intrigue in the FDIC’s bestseller and I figured that the year wouldn’t be complete without one more FDIC moment of incredulity. I guess, in a strange way, as Congress’ actions on Christmas Eve showed us, we really should take our debt situation seriously. So, I thought, it may be worth one more visit with the Keeper of the Scythe into the Crypt of Failed Banks 2009 to see what tales the dead could tell.

In my desperate plea for someone to recognize that this involved some effort, I should point out that this journey involved reviewing, as best I could, the capital positions of over 120 banks, the FDIC’s stated exposure on each, and the identities of the financial institutions which stepped in to acquire the assets of failed institutions. Let me summarize some observations that will certainly lead to deeper inquiry on my own part and, with all luck, on the part of others.

First of all, I found it quite fascinating to see that the distribution of bank failures was anything but a normal distribution. Outside of Illinois, with 14% of this year’s failures, the FDIC found its primary prey in the southlands with Georgia (17%), California (12%) and Florida (10%) leading the nation in collapses. That’s right, four states accounted for over 50% of the nation’s bank failures. Arizona (4%), Texas (4%), and Washington (3%) were in the distant second tier. Banks failed in 31 states 43% of which would be considered Northern.

The assets of the banks reviewed were approximately $143 billion with 20 institutions listing assets in excess of $1 billion. But this is where it gets a bit murky. According to the data listing the FDIC’s exposure to these institutional failures, it appears that they hold approximately $32.4 billion in insured exposure but were “aided” or “absolved” of a total of $110.4 billion. Now, I realize that this appears to have a perfectly rational explanation – namely, that many of the assets were acquired by other institutions and therefore are not at an insured loss exposure at present. Eight institutions had no buyer of record whatsoever. However, in each of these instances, the nominal assets and the FDIC exposure were incongruous and the delta is worth considering. Almost $6.7 billion appears to have vanished. No one bought the assets and the FDIC doesn’t claim that it has an obligation to cover them. And there’s more. There seems to be discrepancy between what the FDIC thinks acquiring banks took on and what the FDIC outstanding liability may be.

The obvious conclusion that should explain this is that there are a number of deposits that exceeded the maximum insured benefit and therefore have no insured benefit. Maybe, depositors were just foolish and put way to much cash in bad banks. While all these questions may appear the product of blurry vision after reading too many spreadsheets, there’s a material reason why this really matters.

You see, to stave off it’s own insolvency the FDIC has decided to accelerate an advance-paid premium scheme assessed against insured deposits. And the scheme, per the FDIC’s most recent posting, is based on actual insured deposits at a variety of capriciously set times calculated against rather arcane actuarial assumptions. So, the $110.4 billion (against which premiums have been already paid by the now defunct banks) sits in a fascinating limbo from the standpoint of those who wish know the true actuarial position of the FDIC. To further confound the matter, the FDIC, through it’s actuarial and investment negligence, required the aid of other financial institutions to step in mightily and bail the insurer out of its own insolvent position. Therefore, the approximately $32.4 billion that is currently the responsibility of the FDIC does NOT conform to historical actuarial data with respect to secondary market recovery. It is “junkier” junk than was the case in the past meaning that the FDIC will be more on-the-hook than usual.

So, as we look through the soiled diaper on the little baby called 2010, we find ourselves realizing that the FDIC accounting creativity and actuarial acrobatics is merely the warm-up for what Congress will face between mid-January and the end of February at which time the mystery moves into the realm of trillions, not these pesky billions.

For all those who suggested that we weathered the storm and we’re coming out with a healthier financial sector, be cautious. Remember that the fee income that led to bank profitability in an era where NO meaningful commercial lending origination was going on was based on moving government money – commissions on TARP on the way in and commissions on TARP on the way out. Oh, sure, technically this couldn’t have actually happened but, remember, the same entities that jumped to aid the Treasury in managing bailout funds actually wound up being consumers of the very funds they were moving and, yes, they collected fees for moving taxpayer money. The automotive industry got its bite at the apple with clunkers. The real estate market got its bite twice with homebuyer tax credits and Freddie and Fannie illusory capacity. And the banks got the windfall by moving it all and collecting fees each time anything moved.

The Bretton Woods and Nixon debt currency experiment is ready for examination. The vaunted institutions that were promoted to “protect” the American citizen from the recklessness of the past and to insure that some perversion of Keynesian monetary theory persisted have lost their moorings. No new acronyms are going to rescue us from ourselves. Our reflexive response to Irrational Fear which has led us into countless, unconsidered yawning chasms, deferred accountability, and reckless excesses must be brought into refinement.

In the throes of the Cold War in 1956 (the year after Rosa Parks’ bold stand for equality which was met with oppression), we intertwined our national identity to our money enshrining as our national motto “In God We Trust” – a motto that was not derived from piety but from the presence of that statement on coinage minted to unify the nation during the Civil War. I think what we really meant was that in the debt dependent American Consumer Capitalism (and in the government institutions that are there to shield us from our own wanton excesses) we trust. Well both the unconsidered consumption and the prophylaxis for irresponsibility have failed us. What took the chosen ones in the desert 40 years of wandering to learn took us 50 years. Following an idol animated by fear and greed gets you nowhere. Our “promised land” – then defined as “not communism” – has been leveraged and the note has come due. So there’s some gallows humor in realizing that it is China – the last bastion of our greatest animating fear for which we had to proclaim our “Trust” in “God” – that now holds the Sword of Damocles over the great experiment.

As we peer into that which is coming, I am convinced that prudence dictates a careful consideration of precisely how we want to manifest a new future. And here, I’m inspired by my other two readings to which I made reference at the beginning of this piece – Invictus and The Magna Carta Manifesto. You see, these two books merge a most insightful narrative evoking the possibility of a more conscious, considered future. Whether it is the Springboks “One Team One Country” that helped carry South Africa past the certain ravages of bloodshed that was thought inevitable at apartheid’s end, or whether it was the truce embodied in the 1215 accords at Runnymede – the Magna Carta and the Charter of the Forest – in which economic, religious, and government tyranny were addressed by people dictating the terms under which THEY would be governed, the essential message of both is that we, the people, must first accept and then expect responsible actions from each other and then our governments. One way or another, we’re going to need to re-examine “In God We Trust” through the lens of E Pluribus Unum.

Happy New Year!

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A Lump of Coal, Carbon Credits or Christmas Cheer?

‘Twas the night before Christmas in the Washington’s halls;
Blankets of snow kept shoppers from malls;
The year that was closing was almost wrapped neatly;
But Congress had one toy that wasn’t boxed completely.

While Ma in her kerchief, and I in my hat;
Had just settled in for our last Yuletide chat;
A tiny default that would collapse the dollar;
Needed containment so markets wouldn’t holler.

You see, there was a matter that kept up Beijing;
The gold in our debt was loosing it’s ching;
Our debt limit pressed through a blizzard of spending;
Concerned Hu and Wen at the government’s year ending.

When through Senate halls there came a solution;
While no one was watching came economic evolution;
To fix the default and keep holidays jolly;
The Congress embarked on a February folly.

You see, in this year, when a problem arises;
The prudent solution that wins all the prizes;
Is to extend much more credit, abolish debt ceilings;
The future be damned, it’s all about feelings.

So down the chimney on Pennsylvania Avenue’s cold night;
Over self-righteous, duplicitous, Grinchy protests from the Right;
To $12.4 trillion the debt limit was raised;
A move that was sure to earn Treasury’s praise.

On Freddie, On Fannie, On Pensions and Banks;
On Goldman, and Citi and legacies of Hank’s;
We need not be burdened with debt default sorrow;
As long as we have our solution – Tomorrow.

In case you had too much eggnog and figgy pudding, you may want to recall that also in this year’s December stockings were:
- another 16 banks “protected” by the insolvent FDIC;
- a record of your neighbors officially no longer unemployed (we’re making so much progress) because now they’ve been without work long enough to no longer be unemployed – they’re the uncounted;
- fiscal conservatism immaculately conceived in the Republican party – the same folks that spent us $11 trillion into the hole – making the Virgin birth downright plausible; and,
- record non-compliance with Basel II for another year insuring that U.S. banks and financial institutions will simply compound the problems created by 2010’s arrival of Solvency II – the capital adequacy standards for the insurance industry that, you guessed, enjoy non-compliance at present.

Accountability does not find itself a frequent bedfellow of expediency. In 2010, I hope that fewer of you look for change to “believe in” but rather change that has the maturity to confront reality and deal with tough problems head on. When the February note comes due on the Christmas Eve debt ceiling limit charade, we will be confronting the consequences of deferral. And, if we don’t learn from the past year’s folly, we’ll have to choose between noses… will we follow a red nose through the darkening night sky or will we continue to look to a wooden puppet wishing he was real?




_P.S. More like the SAIC posting coming... stay tuned

Archimedean Theorem III – Obscurity’s Reign is Ending

AIG reassured its shareholders – the taxpayers of the United States – that, given more time, the probability of repaying bail-out funds increased. When AIG CEO Robert Benmosche informed the markets that it would take at least “two years” to sell enough company assets to repay taxpayers, I was struck with the incongruity intrinsic to the logic that sees that the strategy to “repay” the shareholders one should off-load value from the company to monetize a repayment. Did anyone stop to realize that, between now and then, to “repay” us, they have to devalue our stock by selling assets? What seems to be missing is that the American taxpayer continues to be swindled out of much more than the $182.3 billion provided to AIG to keep if from “failing”.

Just so we keep some semblance of accountability, I hope you all saw that the Federal Reserve Bank of New York (a private shareholder with no reportable financials) exchanged $25 billion in debt for preferred equity. The blatant nature of the lies that the public are being told is beyond the pale when AIG’s CEO characterized this transaction as a, “clear message to taxpayers: AIG continues to make good on its commitment to pay the American people back.” This, in any other country’s use, would be held as a case study in public corruption. Former New York Attorney General Eliot Spitzer, University of San Diego’s Frank Partnoy, and University of Missouri’s William Black had the decency to call for a release of information about the true beneficiaries of the bail-out in their New York Times op-ed this Sunday (December 20, 2009) – a call that goes part way. Their request for transparency MUST include a full disclosure of the nature (including fees paid but not reported) of the Federal Reserve Bank of New York’s debt conversion program.

When one considers the recent rush to repay bailout funds (or convert them into nonsense preferred equity), a clear question rises to the fore. With the approximately 750 institutions bailed out to the tune of approximately $450 billion in TARP alone, why are so many firms attempting to accelerate an exit before year-end? Regrettably, the answer is found in one word – accountability.

The public has been hypnotized by those who seek to continue to steal as much as possible from the public treasury before the music stops. However, those who believe that they control the illusion now face a certain, uncomfortable future. That future is comprised of a growing number of people who are seeing that to sit idly by and watch a bank being robbed is no longer acceptable. When Time Magazine picks Ben Bernanke as their Person of the Year, when the Nobel Peace Prize is awarded to a President who is expanding conflict in Afghanistan (and soon Pakistan and Iran), and when “repayment of taxpayers” involves converting public debt to private equity, the insanity is deafening.

"This is tyranny, which through stealth or force appropriates the property of others, whether sacred or profane, public or private, not little by little but all at once. If someone commits only one part of injustice and is caught, he’s punished and greatly reproached – such partly unjust people are called temple-robbers, kidnappers, housebreakers, robbers and thieves when they commit these crimes. But, when someone, in addition to appropriating their possessions, kidnaps and enslaves the citizens as well, instead of these shameful names he is called happy and blessed, not only by the citizens themselves, but by all who learn that he has done the whole of injustice."
Socrates in Plato’s Republic.

Just for the record, our collective, greatest example of the above didn’t receive much press but one day will come back to haunt our collective conscience. When Standard & Poor’s added SAIC to the S&P 500 Index officially on December 18, 2009, they rounded out the week of moral carnage. Those familiar with SAIC should recall that the company had difficulty going public in 2006 due to “accounting irregularities”. Among the most tedious and opaque were the mysterious missing funds surrounding the Greek Olympic security contracts – a matter that in its most recent 10-Q filing is still unresolved. Are you listening? A public company, now a component of the S&P 500, is still failing to have accountability for a contract entered in 2003 for work for the Greek Olympic security. Six years later and they’re protecting WHAT??? Where is the “missing” $120 million? What security did it purchase?

And what do AIG, the recent awards, SAIC’s entry onto the S&P 500, and Greece’s impending bankruptcy all have in common? Let’s just say that bankruptcy has a remarkable and negative impact on intentional obscurity – particularly those associated with missing money. The government couldn’t let AIG fail, not because it was vital to the economy. Rather, it was vital to preserving secrecy of transactions that the government and its shareholders never wanted in the light of day. SAIC, in their most recent financial statement (page 16 and following) has conveniently shared the spotlight of corrupt practices with Siemens building the case for the fact that they are potentially the victims (clearly not the perpetrators) of corrupt transactions associated with Olympic security contracts. And, when the EU has to review the financial transactions of the Greek government per euro policies, won’t it be interesting to see where SAIC’s $120 million showed up on the books?

I wonder if one of this weekend’s editorial writers has more knowledge of the contents of e-mails then first meets the eye. After all, Eliot Spitzer was New York State’s Attorney General on October 20, 2005 when Bulf Oil, that mysterious oil-for-food company was convicted of grand larceny. For those of you not familiar with it, the “Romanian Company” Bulf Oil – is one of the most fascinating untold stories of the run-up to the Iraq war. Even more fascinating is the Reston, Virginia trading company, Midway Oil Trading Inc., which wired funds through one or more New York banks to subsidize the oil-for-food scam. Midway Oil Trading Inc. reportedly had offices in Virginia, Switzerland and Greece. Wouldn’t it be interesting to find out whether any of the folks implicated in the web of obscurity actually were outed by bankruptcy?

Let me be blunt. The real story of the bailout is not one of “too-big-to-fail”. Rather it is one of “too-many-skeletons-in-the-closet”. So we arrive at Archimedean Theorem III – Accountability and Transparency are the ultimate arbiters of public good. As we have seen with carbon credit indulgences, Olympic security for games 5 years over, oil-for-food, peace through war, and Copenhagen’s absurd conclusion, when subterfuge and obscurity are utilities of choice, no public good will follow. Yes, we need the AIG bailout records. Yes, we need the Federal Reserve audit. Yes we need genuine accountability for the propagation of a war that has NOTHING to do with freedom. Obscurity’s days are numbered as long as you, the reader, decide to wake up. If not, this blog, and my efforts serve as an epitaph on us all. WAKE UP!

Relaxatio – Indulgences in Copenhagen

The Council of Epaon in Burgundy in 517 CE was the first step towards Copenhagen in 2009 CE. In its canons, the church legislated that altars must be built from stone rather than wood and it initiated the expedient dogma which opened the door for the suggestion that one could pay for sins and, in so doing, mitigate accountability. Embodied in its extreme, Johann Tetzel, the Dominican from Saxony was alleged to say that, “As soon as the gold in the coffer rings, a soul from purgatory springs.” Attempting to purchase our salvation as we wallow in our addiction to carbon, we feign abhorrence to the “breaking news” that over 5 billion euros of carbon credits have been based on fraudulent transactions. Say it ain’t so! You mean bad people are abusing this great utility which was designed to save us from ourselves?

It doesn’t take Martin Luther or a door in Wittenburg to see our systemic myopia. The reason why the Eco-Indulgences have been abused is because they are born of a corrupt logic. The notion that climate degradation, or any other human condition, can be mitigated through the sixth century madness embodied in the canon of Relaxatio – the facilitated transmutation of bad behavior for a lesser penalty by means of payment – is as subject to abuse now as it was five centuries ago. And turning the fraudulent conveyance into the news story is an unfortunate social commentary on the real moral bankruptcy. It is the faux credit, not the fraud, that is the original sin.

Copenhagen has, as many forecast, turned into a frenzy of Johann Tetzels. The poorest nations are going to get largesse from rich nations – in the form of money – so that they can cope with the toxification of the Earth. But while French Foreign Minister Bernard Kouchner calls for the “World Environment Organization”, Russia and the U.S. agree that humans are culpable for environmental threats, and the U.K. and Canada call for urgent action, I’m reminded of Tetzel’s currency – gold. After all, these recently converted eco-activists currently promote some of the world’s most horrific gold mining activities – owned by their shareholders, and listed on their stock exchanges – including sea-bed mining in the Pacific tuna breeding grounds, enabled by their publicly-financed technologies. While we claim to care about the toxins we’re pumping into the atmosphere, we ravage the land and destroy the water upon which life depends.

The path to reconciliation with the ecosystem will not be denominated with indulgences. We cannot carbon credit, cap, or trade our way to humanity. As I am surrounded by the cacophony of horns on the streets here in Sao Paulo and as I pass by the favelas filled with unimaginable color, my mind wonders when we will transcend the thinking that was state of the art in 517. When will we realize that accountability – not indulgences – are our collective destiny? When will we realize that to alter the course of our indulgences takes innovation of consciousness? Here in Brazil, we are suggesting that the compost of economic asymmetry can serve as the garden in which fruitful futures can germinate and grow. Our future humanity will be born not from our indulgence largesse but rather from our shared commitment to obsolete that which degrades and replace it with that which creates and restores.

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Copenhagen and UN Obscurity or Blindness?

Obscured under layers of soil, fossilized life forms and atmospheric carbon dioxide are heated and compressed into combustible material. Stripped from the tops of mountains or pumped from beneath the sands, this material is extracted, processed and transported over hundreds or thousands of miles by means of rail or ship to where it will begin its journey of reincarnation yet again. This carbon laden substance is oxidized (15% energy lost) under extreme thermal conditions heating water to boiling. Under pressure, the water vapor escapes past turbine blades which propel masses of copper converting mechanical energy into electrical energy (65% energy lost). The electrical energy is pumped onto an distribution grid (9.5% energy lost) so that it can be distributed to locations of consumption like homes, offices, or businesses. Once in the house, we can convert the AC electricity to DC (10% energy lost) to use the electricity to heat a thermal resistive coil (40% energy lost) to boil water to heat soup or heat homes (20% energy lost). Yeah, so let me get this straight. Our problem is with coal and oil, right?

What if, for one second, the experts assembling in Copenhagen decided that our supreme deity did not animate all creation with the single eucharist called electricity? What if, for one second, we considered the madness of our consensus dogma that holds that all that is energy must pass through copper? Yes, even those who are advocating for cleaner energy. Can you consider the futility of the reductionism that is the genuine opiate of the masses?

Remember, to refrigerate is to create variable pressure. Heat can as readily come from focused optics, from oxidation of fuel, or from the application of a charge to a resistive conductor or ceramic. Animation of mechanical parts involves selective gradients of friction and smoothness. You see, while we lament the destruction of our Earth and its ecosystem, we still obsess with our unifying principle that for anything to achieve acceptable modernity, it must be denominated in kilowatts.

Where is the ethical call for eliminating the outlet and the plug as the arbiter of advanced? When can we incentivize those who assemble appliances with rewards for linking power harnessing with end use with as few steps between production and use as possible?

Recent pronouncements have celebrated the amount of venture capital and private equity that has been invested in climate friendly technologies. As electricity is to our obscurity above, so is venture capital to our impulse to incentivize. However, let’s review, for the bidding. Venture capital deployed in new enterprises historically operates with a notoriously horrific efficiency (>90% failure). Not to worry, we are told. Because the less than 10% that make it make up for the 90% that fail. But do they really? Is this a tested hypothesis or is this consensus myth. The data, regrettably provides conclusive evidence of the latter. In fact, over the past seven years, bets taken on enterprise value erosion or full enterprise failure, exceeded all venture capital by two orders of magnitude and bets against future performance in the private equity markets outstripped forward fruitfulness bets 5 to 1. And these statistics are derived from markets where public offerings on stock exchanges and merger and acquisition liquidity is a mature market. How then, can any climate advocacy initiative have ANY credibility if it is suggesting that venture capital models are a key to helping the world escape its destructive tendencies? We are using the most inefficient form of capital to build the most inefficient appliances to feed from the most inefficient consensus utility created in our march toward evolutionary ecstasy. A pledge for $10 billion per year for 10 years to put in the hands of private equity in emerging markets is nothing short of another subsidy for the incumbent financial marketeers and is an affront to illumined social interest.

When will we deploy capital that is explicitly linked to taking to scale those technologies that are ecosystem aligned but grid incompatible? When will we invest not in usurious passive private equity (DC) which must be converted back into transmitted value (AC) so that it can be inefficiently consolidated for the utility of a few (DC again) but rather create innovative investments in forward purchase contracts on the production of future efficiency and the artifacts thus aligned? When will we think with more than one synapse at a time and engage our full creativity to free ourselves from our grid addiction on power (electricity) and power (capital accumulation)?

What we need is not the next commission laden bolus of cash from which private placement fees can further insulate those who have fed off the thermal loss of the systems that have empowered the last 100 years. When Edison and Westinghouse built the temple to whom all now must pay homage, few could have known the depth to which they would have enslaved even those who call themselves agents of change. As we look past the Klieg lights of Copenhagen (ironically, the illumination of carbon) and into the future of 2010 and beyond, I trust that at least a few understand that linking the source of energy to the intended use not only has merit for our appliances of convenience but also the appliances of our financial system.


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No One Gets Fired for Buying Big Blue… until this past week.

When Gene Amdahl left IBM in the mid 1970s he commented on the utility of Fear, Uncertainty, and Doubt (FUD) in the IBM sales process. Popularized under the adage “Nobody gets fired for buying IBM”, the FUD principle just showed the length of its reach this week in Dubai. In my posting today, I am honoring one of Dubai’s most interesting characters who, but for the weight of axiomatic conventional wisdom, would be a household name. Instead, he has become a recent casualty in the global financial crisis. However, as you read about this fascinating personality, I trust that you see that he is a metaphor for many others. In his departure this past week, I consider the inscription on so many of the tombstones in the cemetery of Trinity Church on Wall Street:

All you Good People
that here pass by
as you are now so
once was I, as I am
now so Shall you be
therefore Prepare
to Follow me.

The one about whom I’m moved to write is Dr. Omar bin Sulaiman. “Dr. Omar” – as he is known to most – is a brilliant professional in the Emirates. Rising to the rank of Governor of the Dubai International Financial Center and Vice Chairman of the U.A.E. Central Bank, Dr. Omar was, indeed, deeply dedicated to manifesting the vision of Dubai as a regional and global financial center. And, left to his own intuition, may well have succeeded. However, like so many of his contemporaries in places like Singapore, Qatar, Saudi Arabia, Malaysia, and much of Europe, intuition just a few years ago was jettisoned in favor of “Big Blue” – figuratively and, regrettably, following the acquistion of PricewaterhouseCoopers consulting practice, literally as well. And mind you, whether you’re looking at Saudi Arabia’s growing interest in being the next “Silicon Valley”, Singapore’s A*STAR, or Vietnam’s newest technology centers, the price for consensus thinking will include sharing consensus outcomes.

I first met Dr. Omar on a phone call arranged by business associates in the United Kingdom and a dear friend in Egypt. The substance of the phone call was a discussion of how the planned Dubai International Financial Center and Exchange (DIFC and DIFX, respectively) could become a differentiated financial market – one that offered a global, unique position. I discussed the rare opportunity that the DIFX’s creation had in the world of equity markets – an opportunity afforded no other exchange on the planet. You see, if you really wanted a transparent exchange in which the market was not subjected to information asymmetries (“ignorance arbitrage”, as I like to call it), what better a place to do this then a market sympathetic to Islamic Finance and its strictures on ethical disclosure and risk sharing.

To understand the opportunity, let me take you on an exemplary journey through an actual market case…

You see, when I started M•CAM in the mid 1990s, we started reviewing the intellectual property of the world’s largest companies – many of which were (and still are) publicly traded. In many instances, technology alleged to be “core” to enterprises, was either inadequately protected or not protected at all by means of proprietary assertions made in the marketplace. Representations about drugs, cell phones, power systems, materials, transportation technologies, business methods, and countless other technologies, were incomplete in most cases and were outright misstatements quite often. Earnings projected off of patent licenses were often based on completely fraudulent positions. Against that backdrop, M•CAM was asked to review patents held by competitors but not to look at any information that could adversely impact the prospective client’s portfolio. In short, if you wanted to damage someone else’s assertion on a proprietary claim, that was fine, but if you used the same methodology on your own, it would be devastating.

After the United States’ and the European Patent Offices found out that they were caught issuing counterfeit properties to industry participants who then went on to represent their proprietary interests to the market, they closed ranks to defend the industrial base. Unfortunately, what they didn’t contemplate was that many companies, realizing that their patent portfolios were smoke and mirrors decided to abandoned their useless innovation artifacts and some – regrettably for the tax-paying public, decided to throw them away by way of patent donation. This process frequently involved colluding with a third party – usually a research institution who would vouch for “valuation” – and donating the properties for 10s or 100s of millions of dollars in tax deductible “donations”. The recipient institutions generally abandoned these “assets” as soon as they had completed using them as evidence of corporate sponsorship justifying Federal sponsored research grants.

Many of these same companies continue to flagrantly violate U.S. Treasury rules with what’s known as the In Process Research and Experimentation Tax Credit which is supposed to reward companies for new R&D. This loophole – estimated to be the second largest tax fraud in the U.S. at present – exposes the public markets to enormous tax liabilities and fraud penalties should the government ever decide to tackle this abuse.

So, back to the DIFC opportunity. What if you started a public market for companies that DID NOT have massive fraud skeletons in their closets? What if you launched a market, we suggested, where transparency included things like compliance with tax, intellectual property, and financial accountability? What if you launched a market where mining and oil companies were required to report on their use of indigenous lands and lands taken from displaced people so that the market could see the real price and real profit of an enterprise? What if you really made market ethics and transparency a differentiator? What if you actually used Ethical Standards – as set forth in numerous fatwa – as a global market differentiator?

For the record, Dr. Omar actually deeply considered this. In many meetings in Dubai prior to and immediately following the launch of the DIFX, we sat with him and administrators at the Dubai Financial Services Authority (DFSA) and discussed standards for a different market. However, when one is confronted with the inertia of incumbency, the appetite for differentiation wanes. And so it was that the bright vision of Dr. Omar and his patron, Sheikh Mohammed Bin Rashid Al Maktoum vanished in the dust storms blown by easy credit, credit default swaps, and sukuks which were indistinguishable from financial products unmoored from any responsibility or risk sharing. In short, the sirens of convention and ease, fully engulfed one of the most promising market opportunities of modern times. And, by September 2005, one of the most promising global market opportunities relented to the “Big Blue”.

The DIFC and NASDAQ Dubai are not lost. In fact, in the face of this past week’s announcement of Dubai World’s massive liquidity challenge, we may actually see an opportunity re-emerge. What we know is simple. Dubai is not unique. It followed many. Raising Tokyo a ski slope as the Japanese were razing theirs. Out malling Singapore and Hong Kong as the high fashion retail sector was being mauled in the rest of the world. Building castles in the sky while the atmosphere was toxifying for commercial and high-end residential markets.

As we see the global market continue to reel, the world needs a market based on transparency and ethics. While Dr. Omar has been the professional casualty of the tectonic tremor in Dubai, his intuition was not off. He came closer to the next financial reality than anyone else. And with so many other GCC and North Africa efforts trying to mimic Dubai, there is a lesson to be learned here. And if learned, the world will be better for it.

Tribute to Caden

On Sunday, November 22, 2009 a young man named Caden joined the morning Light. I was deeply moved by this seven year-old both in his life and in his passing. And so, a few days late, this week’s InvertedAlchemy post is my way of sharing with you a story that bears retelling.

I met Caden on the same day I met my dear friend Bob Kendall. From that day to this, I learned that Caden would teach me, in a few short months, wisdom that I never aspired to know. I didn’t want to know what it feels like to stand in a hospital with beautiful parents while the details of a tumor are described and find the end of words where all I could do is be present. I didn’t want to know that there comes a time when McDonalds French fries and Chicken Nuggets are too exhausting to eat so that a Happy Meal cools with time and tears into an inedible mass. I didn’t want to know that the empathy that binds humanity could invade days and nights for months as child and parents implored the universe for one more day on the lake, one more ride in the forest and that this empathy would find its way to me whether I was in Virginia or on the other side of the world in Papua New Guinea. However, I needed to learn through these catechisms and needed Caden to be my teacher.

Caden carried light in life. He communicated with all of us and for all of us. As his voice failed, he took to drawing and began linking color and image in artifacts which will be long held in their cipher. However, Caden drew one image on the night of our first meeting which will live, for me, as the message of hope in these times of puzzle. The image is in purple marker. At first glance, one can make out a form that could at one moment be a tree branch and the next could be the wanderings of a caged bird. None of these. The image is of a bridge. The bridge has an anchor only on one side and juts into the whiteness of the page. It goes to? Nowhere? Anywhere? Everywhere?

Caden’s Bridge is a gift of wisdom. For in it, a child of six years invited a reconsideration on many planes. Does a bridge only have its identity and essence if it looks like a bridge? Does a bridge contain its utility only when it connects two identified points? Can a bridge merely be the beginning of a connector which is sufficient for others to draw their own destiny? Can any image drawn in purple be a bridge not to a destination but linking inquiry between planes, times, and understanding?

Caden has crossed. Lux Invictus. Peace.

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