The Limerick of Finance for 01/17/16

Davos gathering is on edge
Market turmoil is harder to hedge
Some elites are in shock
Populists broke the lock
Long-held notions are tossed off the ledge

The Haiku of Finance for 09/05/15

Invest or gamble
Better to assess risk first
Rolling dice is worse

The Haiku of Finance for 06/26/15

Risky investment
Predict uncertain cash flows
Need high discount rate

Seeking A Market Price For Carbon

Carbon dioxide emissions occur in the natural environment.  Environmental scientists exploring the relationship between human-generated CO2 emissions and climate change advocate pricing these emissions.  Economists now seek ways to endogenize the value of carbon emissions within financial models.  Carbon pricing is a relevant topic for financial analysts if their models accurately encompass reality.

The Ceres Carbon Asset Risk Initiative looks sane at first glance.  It does not write off all hydrocarbon reserves as stranded assets and allows room for energy companies to use their carbon reserves productively.  The Global Investor Coalition on Climate Change gives the Ceres initiative credibility, although the language I read in some of the coalition's public materials takes a harsher tone than Ceres.  Carbon Tracker Initiative takes the hardest line on stranded assets and I am not convinced their analysis will withstand long-term improvements in energy technology.  More efficient internal combustion engines are one way to curtail emissions.

One widely known approach to estimating carbon costs is the social cost of carbon SCC.  The flaw in using a comprehensive approach like SCC is its inability to account for whatever the IPCC's climate models cannot estimate.  Approaching a financial estimate this way invites political meddling and artificial adjustments.  Regulators need to set the bar somewhere, but allowing for too many variables sets the bar too high.  An artificially high SCC risks exposure to Black Swan shocks from technology advances that will render it harmful to energy producers.  Lawrence Berkeley Lab's early work on insurance risks from climate change is so intertwined with IPCC model assumptions that it shares the same drawbacks as SCC.

Analysts can find helpful ways out of carbon pricing problems.  The CBO studied potential carbon taxes in May 2013 and balanced potentially high revenues with the regressive effects on low-income households and energy-intensive regions.  The SCC's framework would be stronger if it used a Monte Carlo simulation of different discount rates.  The World Bank noted in September 2014 that carbon pricing looks different in many parts of the world.  Local costs for extraction and transport matter very much.

The financial sector should take the same approach to pricing carbon as it does to pricing oil.  Investment banks track a global cost production curve for oil and gas fields.  Tracking a cost production curve for major carbon emitting energy companies and nations is a logical next step.  The IEA statistics on CO2 emissions are the first input for country-level analysis.  Energy producing companies' annual financial statements contain annual production statistics.  These are the starting points for a fuller understanding of the carbon cost curve.  Simplifying the SCC and running it through a Monte Carlo simulation will give the carbon cost curve an elegance divorced from political agendas.

Everyone Who Does It Can Still Be Wrong

I recently had a very unpleasant conversation with someone who thinks that brazenly unethical actions in business are somehow excusable because "everyone does them."  Her moral lapse was breathtaking for someone who claimed to possess more than one advanced degree.  I might as well describe what's wrong with this mentality.  Some of you will benefit.

If you had good parents, they probably told you at some point that you shouldn't do some dumb thing just because all of your idiot friends were doing it too.  Phrasing it for a pre-teen goes something like this:  "If everyone jumped off the Golden Gate Bridge, would you do it too?"  The pre-teens who don't listen become adults like the young woman I mentioned at the top of the article.  Lots of dumb kids grow up to be idiot adults.

Entrepreneurs often find the temptation to embellish their backgrounds irresistible.  Those who give in to temptation invite disappointment when investors complete their due diligence and find no corroboration.  Investors check out people's educational backgrounds.  Alluding to a nonexistent degree in a pitch is cringe worthy behavior.  Attending a couple of seminars at Stanford doesn't count as an educational qualification.  People should know this, but they don't and they pitch anyway.

Lying early and often about something leads down a slippery slope.  Misrepresenting product capabilities, warranty commitments, or the legal fine print of a contract is usually actionable in civil litigation.  Pitching lies to a lot of very stupid people is often a quick way to riches and a long road to court problems.  The court then forces disgorgement of said riches, with other penalties piled on top.  Check out case histories at the FTC and SEC for businesses that tried to get away with making false claims.

Even grown-ups need reminders that the lowest common denominator behavior of crowds is not an acceptable substitute for ethical reasoning.  Adults who can't take the hint need to stay far away from me forever.  Business people who lie cannot be leaders.

The Haiku of Finance for 11/07/14

Compare country ranks
Geopolitical risk
Some come out on top

The Haiku of Finance for 10/17/14

Warn systemic risk
Top elites see huge bubble
Falling on deaf ears

Amateur Investors May Go Nuts With Crowdfunding

Crowdfunding is in full bloom.  Portals are springing up all over the gall-dang place.  Startups are drafting pitch decks and sticking them willy-nilly on these portals with nary a thought about the audience that can now reach them.  Here's how the average amateur investor can get in trouble.

One guru at a tech conference last year openly wondered why amateur real estate investors are allowed to make poor home investing decisions but have been prohibited from seeking risk in startup investments.  I won't name this dude but I think of his diatribe more often now that crowdfunding portals are filling my inbox with startup pitches.  The difference between buying a house and buying into a startup has usually been about the due diligence banks put into a home loan application.  Home buyers must prove that their income, net worth, and credit history are sufficient to meet the bank's loan risk criteria.  Startup investors in a massively decentralized investing landscape never had to prove any of those things prior to the crowdfunding revolution.

Laws and SEC regulations growing around crowdfunding are bringing further specificity to crowdfunding investors' eligibility requirements.  The regulatory climate needs to be tight before large commercial banks start buying crowdfunding portals to expand their retail investment offerings.  Someone's grandparent is bound to log into their bank account someday and see a tab for "crowdfunding." Clicking on that tab and viewing a bunch of slide decks promising 30x returns may look too good to pass up for someone who doesn't know that most startups fail.  Your grandma and grandpa are used to watching their savings grow.  They're going to blow a whole lot of dough on failed startups if the finance sector doesn't get the controls in place now.

Amateur investors can be pretty dumb sometimes.  Creditworthiness matters in real estate and competence should matter in startup investing.  Crowdfunding can hurt a lot of people who won't know any better.  Regulations requiring proof of assets protect investors from their own tendency to overestimate their competence.  

The Haiku of Finance for 04/26/14

Essence of finance
Calculate cost, risk, and hedge
Estimate profit

The Haiku of Finance for 03/27/14

Issue high yield debt
Credit rating must be low
Piling risk on risk

The Haiku of Finance for 02/03/14

Immunization
Bond portfolio risk rule
Can't hold inflation

ACA Requires Gender Discrimination Without Actuarial Justification

The Affordable Care Act's supporters praise it for adding mandatory coverage to participating plans.  They allege that men who buy plans covering birth control, pregnancy, and endometriosis redress historic price discrimination against women who have bought insurance.  This flawed logic is easy to debunk.  This law enshrines a new form of price discrimination against men by replacing actuarial results with a contrived political argument.

Price differences in the insurance sector are not the result of discrimination against gender, race, or other protected categories.  Pricing for policies of any type is always the result of carefully calculated actuarial solutions that distribute the costs of rare but discrete events across a large pool of the insured.  If a policy covering pregnancy is more expensive than one that does not, its because that service has a cost that must be distributed among a pool of people likely to experience that condition.  Men do not experience pregnancy.  Forcing them to participate in a risk pool for pregnancy is like mandating that someone who does not own a car must purchase automobile collision insurance.

Arguing that men should share the cost of birth control and pregnancy policy coverage because they potentially share in procreation ignores participants' risk profiles.  A sixty-year old man is at far less risk of impregnating a woman than a twenty-year old man.  Women also have the option of pursuing pregnancy trough artificial insemination, and anonymous male donors typically do not incur paternal obligations in the eyes of the law.  Some emerging case law has begun to establish such paternal obligations for male donors who did not fulfill legal requirements that would have shielded them from parental liability for child support, but that is a minor issue with little relationship to insurance risk pools.

Requiring men to pay for coverage of endometriosis is even more ludicrous; that is a medical condition specific to women.  Taking this logic further would require women plan subscribers to pay for erectile dysfunction and prostate cancer treatments, which of course disproportionately affect men.  I have yet to see those arguments appear in public media.  Perhaps I haven't looked hard enough for those arguments or for plans' coverage requirements.  Requiring men to join a risk pool that covers women's specific conditions, without requiring the reverse commitment from women to cover male risks, is exactly the kind of gender discrimination the ACA's defenders should oppose if they are intellectually honest.

The ACA's authors in the health care sector knew that the appeal of cheaper coverage for female-specific conditions would help sell the law to women voters.  The price that health care providers can extract on the back end - higher deductibles, suppression of innovation through a device tax, and no real cost controls - was easy to hide with rhetoric.  The bait and switch worked and the health care sector maintains its ability to extract surplus rents in the manner of a rentier regime.  ACA plan pricing sets a precedent for politically determined investment outcomes.  This precedent suborns fiduciary duties and actuarial results to the will of a political majority.  This revelation is lost on many Americans.

The US Supreme Court upheld the legality of the ACA mandate as a tax, establishing a firm legal precedent for politics to determine investment outcomes with little regard for links between cost and consequences.  I expect further legal developments under the cover of fairness to redistribute wealth according to the wishes of a donor base.  The challenge for economic actors who want to safeguard wealth in this environment is to become an effective donor constituency.  

Financial Sarcasm Roundup for 01/27/14

The turmoil in global markets that began last week is wonderful news, from my perspective.  This means I can't afford to let up on the sarcasm directed against anyone who went all-in on any asset class this month.

Argentina is liberalizing its restrictions on foreign currency.  IMHO that signals the beginning of that country's hyperinflation end game but we're nowhere near the denouement.  Argentina would have to reduce the currency transaction tax to zero and allow other currencies as legal tender to truly end its crisis.  The Fernandez administration isn't ready to throw in the towel on its failed micromanagement of Argentinians' economic choices.  Argentina could have been a contender for world domination a century ago with its rich agricultural resources but its potential has been comatose since after World War II.  Maybe it's all the fault of the bizarre Peronist combination of incompatible ideologies.

Central bankers at the WEF in Davos are warning banks to quit playing games with rate benchmarks.  Global regulators are promising us even better benchmarks.  Well, sheesh, if they would have invited me to Davos I would have sold them on my idea for GIBOR as a benchmark.  These people need to appreciate my genius.  It's easy for banks subscribing to one benchmark to manipulate it, but a benchmark of benchmarks like GIBOR would be harder to peg.  I'm way more awesome than these global bank regulators.

The global elite confab is studying more than just rate benchmarks.  The Davos crowd sees broader risks in the emerging market sell-off.  They give themselves too much credit.  The crowd in the eye of the pyramid may be blind.  The biggest risk right now is the lack of confidence investors have in the transparency of markets and the trustworthiness of institutions.  The inability of elites to prosecute their own kind for financial malfeasance is the source of market distrust.  Solve that with prosecutions and trust will gradually reappear.

I have a couple of meetings this week in the San Francisco Bay Area with some business folks and an event to attend.  I'll let you all know what happens.  Alternatively, maybe I won't let you know what happens.  

Risk Management In VUCA Environments

Volatility, uncertainty, complexity, and ambiguity (VUCA) characterize any competitive environment.  Enterprises that develop systems to navigate VUCA risks should be more resilient than their competitors.  I've written tons of posts on knowledge management (KM) and decision management (DM).  If I were running an enterprise larger than my one-person show at Alfidi Capital, I'd have some KM and DM practices in place.  Let's discuss a few below.

Deconstructing decision trees.  Human beings have a hard time thinking in probabilities.  Weighing probabilities and using game theory don't come naturally to most of us but they are teachable subjects.  Decision trees for project options are particularly valuable but discarded options may come into play later as "branch and sequel" plans if a selected option fails.  This is why documenting rationales for decision tree options matter. The article "The Curious Case Of A Broken Crumb Trail" from KMWorld March 2013 describes the utility of creating an Option Outline documenting the reasons why various project options were considered and discarded.  This allows project managers to revisit archived knowledge for tips on alternate ways forward if a main effort runs into trouble.  I think this approach to documentation is especially valuable for documenting options in decision trees.

KM governance of DM rules.  This is a discovery I stumbled onto last year after hearing experts describe the advantages of automated business rule management systems (BRMS) engines.  Automating every routine thing is great, and AIs can help, but human decision makers must remain in the loop at the top.  Regular manual updates to the KM collection guidance insure that managers capture results that inform strategic key performance indicators (KPIs).  Top management must publish those KPIs in media where every subordinate manager can track them.

Business continuity planning.  This should be well-established by now in large organizations but small and medium enterprises (SMEs) should also do it.  This is more than buying insurance.  A business continuity plan should start from the SWOT matrix's identified environmental threats and continue with a risk assessment of hazards graphed in a 2x2 matrix.  That's right, folks, I'm talking about severity versus probability once again.

A culture of honesty.  I thought about putting this one up front but I decided it would be more effective as my last point.  Human beings typically don't use Bayes' Theorem to update their assessments of conditional probabilities; they instead overweight the most recently acquired information.  I may have misstated that explanation in the past.  Whatever; I have to include this to salve my own conscience.  Highly ethical organizations cultivate trust vertically and horizontally, which makes sharing information easier.  It also accelerates actions during a crisis because teams that are honest and trusting won't hesitate to execute good decisions.  This is my understanding from personal experience with both trustworthy and untrustworthy people.

These principles are worth incorporating into a continuous improvement model.  Most people won't do it; they'd rather just wing it through life with no data supporting analysis.  That's totally understandable in light of human nature.  My thinking is for the handful of people on this planet who truly think for themselves and care about things that matter.  

Alfidi Capital Checks Out Brown University West Coast Accelerator 2014

I truly admire the Brown University Entrepreneurship Program.  The university goes out of its way to connect student-run startups with investors and experts through its West Coast Accelerator program thanks to committed alumni.  I blogged about their event last year and I had to attend this year to see what's new.  I attended the accelerator's Innovation Summit yesterday and the caliber of experts they attracted was impressive.

Brown alum Jonathan Speed led off by thanking everyone for attending.  This guy is relentlessly positive and he's always loaded with business tips.  Jonathan's team recruited high-powered sponsorship from IDEO, Y Combinator, Singularity University, Salesforce.com Foundation, Presidio Graduate School, and others who offered their support.  Our hosts at the de Young Museum let us know about their own Artist Fellows and Artist Studio programs for innovators they want to showcase.  The Brown folks introduced this year's lineup of participating startups and remarked on how the good working relationship between Brown and the Rhode Island School of Design (RISD) has spawned ventures.  I'm not familiar enough with the startups' business models to evaluate their chances for success, but I was particularly impressed that students were willing to tackle India's "last mile" of water infrastructure and Big Data sorting in real estate investment.  Those are big market opportunities but startups will face tons of competition.

MIT's Jose Estabil was a featured speaker on the origins of innovation.  He graphed university-driven innovations in a 2x2 matrix I've never seen before, where the quest for understanding competes with considerations for practical use.  The ideal combination of both narratives gives us "Pasteur's quadrant."  I suspect a similar dynamic plays out at government research laboratories, so I'll have to show that chart to folks at the Federal Laboratory Consortium if I can get myself invited to one of their tech transfer events.  Jose made the case that entrepreneurial inclinations aren't as simple as a nature versus nurture debate and that innovation specialties can be taught much like health care disciplines.  I like his emphasis on probabilistic thinking, which is teachable but runs against our programming from evolutionary biology.  Studies in psychology and the social sciences have shown that most people don't incorporate more recent evidence into their presumptions (as Bayes' Theorem indicates is necessary for more accurate observations) because our programming biases us in favor of behaviors learned early.  Fighting our genes' inertia is an entrepreneurial trait, or as Steve Jobs put it while relaunching Apple, we should "think different."

I liked Jose's practical tips for success.  First, being crisp with the "grandmother rule" avoids overly long technical explanations and drives the point about how a startup's tech solves real problems.  Second, knowing your audience means understanding that not all investors have the same "win" scenarios.  Finally, recruiting partners with the "rule of three" means measuring your networking success by obtaining three or more commitments from a follow-up contact.  Jose also presented Roy Rodenstein's matrix of startup funding from how2startup and I found it in Roy's "Overview of Startup Fundraising" deck at Slideshare.

Phizzle's Ben Davis spoke on Big Data's relationship with innovation.  According to Ben, the holy grail of marketing is multi-service data aggregation leading to multi-channel delivery.  The key to understanding how to make that happen will come from sentiment analysis. aka opinion mining.  That's a new construct driving machine learning that will push marketing messages at us thanks to all of the likes we've clicked on Facebook and shares we've clicked on Tumbler.  I don't know enough about sentiment analysis to apply it, but rest assured that hot marketing careers will attract computer scientists for the next few years.  Google shows their developers how to build a sentiment analysis model with the Google Prediction API.  IBM's Social Sentiment Index shows how analytics results are customizable.  The good news is that we'll all get what we want before we even know we want it.  The bad news is that the era of privacy that coincided roughly with the first and second waves of the Industrial Revolution is ending right now.  Don't worry, we won't miss it once it's gone.

Intel's Brandon Barnett shared insights related to his work with the Business Innovation Factory and We The Data.  I'll give him special props for helping military veterans transition to civilian careers through Intel's hiring programs, according to his Factory bio.  My readers know how important that is to me.  Brandon reminded us about threats to a startup from outside its ecosystem when a Copernican Revolution changes sociocultural values.  These values are in flux today and we see their redefinition of ownership and productivity driving new business opportunities.  I consider outsourcing and the sharing economy to be symptoms of these changes.  Brandon cited a study by Bain and the WEF on personal data as a new asset class.  I'm pretty sure I heard about this concept at one of the telecom conferences I attended last year, and I'm still trying to find a decent accounting rule treatment for assigning a financial valuation to data.  I noticed this Harvard Business School blog mentioning Clayton Christensen's revelation that 95% of new product launches fail.  This supports Brandon's contention that disruptive startups win when they launch something that doesn't play to existing competition.  Check out Michael Raynor's book The Innovator's Manifesto for clues on how disruption engenders tremendous growth.  I think entrepreneurs can adapt Alex Osterwalder's business model canvas along the lines of Brandon's ideas to create some game-changing global experiment.

I've got a few game-changing ideas of my own.  My longtime readers know I'm optimistic about smart grid technology in energy use.  Much of the tech I've read about so far focuses on embedded sensors that transmit machine log data to utilities.  It is divorced from human-generated data in social media channels.  The first technology to bridge the two worlds, while protecting user privacy, will see the world beating a path to its door.  Some startup may have that answer.

I like that more startup accelerators are using emerging templates to reduce the errors entrepreneurs commit.  The growing acceptance of lean startup approaches, Customer Development, technology readiness levels, investment readiness levels, and the business model canvas are having the same effect on startups that Moneyball had on the conventional wisdom governing baseball.  Read what Steve Blank says about the relevance of a Moneyball approach.  Relying on less formal knowledge is so 1990s.  The Big Data era is formalizing paths to success and helping us avoid the things that don't work.  Moving from data to analysis to decision making should raise the odds of success for high-risk enterprises.  I believe Brown's West Coast Accelerator makes that happen.  

The Haiku of Finance for 01/01/14

Many risk sources
Startups need mitigation
Weigh cost against plan

Serious Entrepreneurial Knowledge for Patents, Financing, and Risk

I'd like to discuss some concepts I learned from attending a seminar last November in SVC Wireless' Advanced Entrepreneur Development Program.  I learned a lot about how legal experts solve problems in patent portfolios, startup financing, and sources of risk (both internal and external) to an enterprise.  I'm interspersing my own knowledge and observations with the concepts I picked up from the speakers, so none of this constitutes legal advice.  Aspiring entrepreneurs reading my stuff are welcome to seek out Fenwick and West's Silicon Valley office in Mountain View for a more professional discussion of risk management.

TechCrunch and CB Insights track the growing influence of angels and seed round investors.  I think the VC community is still getting over its reluctance to endorse crowdfunding but that is changing as more VCs establish a presence on crowdfunding portals.  Seed-DB shows the growth of accelerators and their ability to attract seed capital to participating startups.  Their list will never be complete because new accelerators pop up all the time.  If this database survives the accelerator bubble it can help us avoid survivorship bias among surviving accelerators once we analyze those that fail.

Term sheets decide valuation, dilution, liquidation preferences, voting rights, and board structures.  The largest corporate law firms have automated term sheet generators.  I like the ones from Orrick and WSGR.  Those are free because startups have to make their own term sheets in the early rounds.  VCs will have their own term sheets in later rounds.  Startups that don't hire attorneys to track their cap tables will have to do it themselves, and it is extremely important that they get it right the first time to avoid securities fraud.  The SEC doesn't like business owners who misrepresent the ownership of their companies.  Mapping cap tables to key employees tells those team members how much time they need to spend at the enterprise before their sweat equity options will vest.  Series Seed has a very interesting take on a term sheet that has what appear to be crowdsourced edits.

I once saw a very lengthy due diligence checklist on the website of a major VC firm.  That was back in 2007 but it stuck in my mind.  Larger VCs that have the resources to commit eight-figure sums to a round will have a multi-page checklist.  Smaller investors with less at stake can get away with simpler tools.  I use Google searches and superior court website name queries to see if any entrepreneurs I meet have questionable backgrounds.  That's how I uncovered the history of a Stolen Valor fraud who ripped off the San Francisco veterans' community.  That stupid jerk continues to prospect rich suckers around town.  Some people never learn anything.

Big law firms perform a public service by tracking VC funding trends.  These are usually located in the "entrepreneurial services" section of the firms' websites.  Every quarter entrepreneurs can see how much money is chasing the hot sectors.  I'm pretty sure funding for mobile software will dry up after what I saw at many tech conferences in 2013.  The world doesn't need another calendar app.  Pitchbook also has data on PE valuations so entrepreneurs can see whether VC-funded companies have matured.

Enterprise IP ownership matters.  Employment agreements matter.  Prior employees can bring lawsuits for IP infringement if the IP they created isn't clearly assigned to the company with an employment agreement.  Contractors who are specifically tasked to do something can end up owning what they create even if an assignment agreement governs their final product.  Clean IP assignment in the eyes of the law happens under an employment agreement.  Employment lawyers exist to review those agreements.  I am so glad to be a sole proprietor because I don't ever have to understand employees' needs or try to solve their problems.

Startups with little cash will have to figure out creative ways to employ people with non-cash compensation, which to me means sweat equity.  Entrepreneurs can do their part in building credibility with key employees by showing them where they stand on the cap table and by forgoing any deferred salary themselves.  More mature startups (i.e., those with enough revenue to pay salaries) should use publicly available compensation figures to lure the expertise they need.  That's part of the reason why Salary.com and Glassdoor exist.

I disagree with a lot of the conventional wisdom on patent protection.  A lot of what lawyers say about the importance of filing patents just seems like a sales pitch for hiring them.  Prior art can invalidate a patent and the wide availability of so much information through online searches makes it very difficult to write a patent that truly secures something original.  USPTO's patent manual section 2128 paints a very broad definition of accessible prior art.  Non-disclosure agreements (NDAs) covering trade secrets are probably more effective in keeping the lid on something proprietary, because a filed patent is immediately searchable and thus visible to competitors.

Fenwick and West helpfully provide a free guide to developing a patent strategy, with a separate patent checklist.  Once again, a lot of this strikes me as a full-employment program for attorneys.  The market ultimately decides whether a proprietary technology succeeds once its creators start executing their business plan.  I must admit I like the use of military-type terms like sword, shield, guard, numbers, and counterstrike that I hear mentioned in discussions of patent strategy.  It seems that some enterprises will protect a core tech by filing a decoy patent for some vaporware product just to throw a competitor off their trail.  I think the best patent strategy is a proactive search for existing patents.  That avoids duplicating something that already exists and thus inviting a lawsuit.

Legal risks come in three flavored layers:  occurrence (when some adverse event actually happens), detection (an attorney or regulator discovers the action), and challenge (the likelihood of an injured party launching litigation).  I think minimizing occurrence through good management is the easiest mitigation strategy, but my job is easy because I only have to manage myself and not a bunch of troublesome people.  Copyright infringement damages are quite hefty and DMCA makes discovery inevitable in our digital society.  Enterprises with in-house IP counsel like to keep them busy taking on infringers.

Startups that pivot from software to IoT devices are going to get hit with regulatory risk.  Our society has spent the last two decades incentivizing coding over making, and the smartest job creators need to learn the craft of manufacturing all over again.  A lot of coders have no clue how to get federal and state regulatory approval for new physical devices.  Adding network connectivity means adding the FCC to an approval list.  I question the legal strategy of playing for regulators to give up with repeated requests for delayed action.  Regulators may not be as smart as those of us in the private sector but technology means they won't even need to be alive.  Governments will eventually automate regulatory functions into BRMS engines that will automatically troll their responsible sectors for violations and send repeat notices demanding compliance.  Soft law can become hard law but I think that happens when sufficient industry lobbying demands it.  That's why startups can stay ahead of industry moves by joining relevant trade associations to watch pending regulatory changes.

FEMA's emergency preparedness guide for business includes a business impact analysis that is adaptable to non-emergency situations.  I think it behooves entrepreneurs to graph all of their legal and regulatory risks on a chart that compares severity of impact to probability of occurrence.  They can then design mitigation strategies for each source of risk, estimate the cost of mitigation, and then prioritize the solutions by either strategic importance or cost.  That's not taught in MBA programs but I learned how to do that in the military.  Startups don't think about insurance but policies for errors and omissions, or for directors and officers, may come in handy.

I'll make one final announcement about Alfidi Capital.  I don't have to register a trademark to own it.  I am the first and only user of the terms and logos for "Alfidi Capital" and I don't have to register anything.  I can and will sue anyone who tries to use or register my marks.  You can all see that I learn a ton of stuff from the free seminars I attend.  I love using free information from the public domain.

Nota bene:  Nothing in this article constitutes legal advice.  I'm not telling anyone what to do here.  I'm kicking these ideas around purely for my own enjoyment.  None of the organizations mentioned above paid me any money at all to publish anything in this article.  

Pricing Credit With a Global Interbank Offered Rate - GIBOR

Bankers can be as stupid as all get-out.  That should have been obvious after the recent revelations of collusion among bankers who fixed LIBOR to cook their own books and skim some quick profits.  There must be a more effective way to price short-term lending and assess credit risk among counterparties.  Let's go exploring.

Credit default swap (CDS) spreads are premiums that investors pay as insurance against the default of debt issued by an underlying company.  This is in effect a derivative bet on a company's solvency.  CDS data isn't available from conventional media sources or retail brokerages.  Investors would have to subscribe to a data service like Bloomberg Professional to get access.  That's probably a bridge too far for most folks and not every company will have debt that traders will want to exchange in CDS deals.  Companies with daily presence in credit markets need something uncomplicated and universally applicable.  I may have a satisfactory answer.

There are several widely available amalgamated borrowing rates that large investors use to price credit.  I'm thinking of LIBOR, HIBOR, SIBOR, TIBOR, and Euribor.  If I were evaluating the credit risk of a borrower, I'd use a simple average of all of these rates.  It just needs a catchy name . . . GIBOR.  That stands for global interbank offered rate.  You heard it here first.

GIBOR could even assess the health of the global financial system in the same manner as the Ted spread and LIBOR-OIS spread.  In this case, GIBOR would be the numerator and an average of several central banks' overnight lending rates (approximating a global version of a risk-free rate) would be the denominator.  A higher spread in basis points between the two means a rising price for short-term credit and increasing stress on the global financial system.

I wouldn't adjust the weight of each of the interbank offered rates by the size of their respective capital markets.  I'd weight them equally on the premise that a single overnight loan or issue of a debt security may be packaged for offer in any of those rates' jurisdictions simultaneously.  That means the issue could be immediately subject to any or all of the IBORs without regard to each market's size.  Capital markets are liquid and global.  Investment banks have the ability to reach across them instantaneously with offers.

I haven't worked out the kinks of this idea yet but it's worth a shot.  The individual IBORs are subject to manipulation but so is everything else in our modern world.  It would be much more difficult, but not totally impossible, for a participating bank to manipulate or front run all of them.  The advantage of my proposed method is that it removes credit risk from the impenetrable darkness of proprietary analytical methods or CDS data trapped in dark pools of liquidity.  Using all of the IBORs together brings credit risk into the light of day, for those with eyes to see.  Let's go GIBOR!

The Haiku of Finance for 07/13/13

Continuity
Plan business through disaster
Backup everything

The Haiku of Finance for 05/14/13

Pimco cuts its risk
No trust in global markets
Major disconnect