

Washington Versus Silicon Valley - jsyedidia
http://online.wsj.com/article/SB10001424052970204313604574328621808977640.html

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tici_88
While this regulation will clearly be disastrous for America, can you imagine
the windfall of campaign contributions and lobbying frenzy that will ensue as
a result of this thing passing?

Timothy Geithner or whoever is crafting this proposal is probably licking
his/her lips at the thought of a $200bln industry on their knees willing to
write a check to anyone who has the power to decide who are the winners and
who are the losers in this regulation madness.

Administration: 1, Rest of America: 0

Could it be that the political system in Washington is corrupt beyond belief?

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pj
OMG, this is the most absurd thing I've heard in a long time.

I think it's really a symptom of a much deeper problem with American
government and that is that the "system" is getting so big that no one really
knows how to fix it. I see this kind of thing happen with software too. Your
IT department buys software or adopts a new platform and builds all these
great interconnected applications with messaging busses and information silos
and then one day everyone who knows anything about the system is gone and what
to do now?

Well, you start building systems on the platforms that are easier to
understand and try to work around problems and in the meantime, the people who
don't know what to do are trying to keep their jobs by _doing something_ at
all which is just making the whole package even worse!

At some point, a company has to make a very tough decision to "rip and
replace." It's costly. It takes time. And while you are ripping and replacing
you have to try to do the best with what you have working now. But the
consequences of _not_ ripping and replacing are just going to continue
crippling you and eventually, you are going to be leap frogged by an agile
startup who doesn't have the legacy deficit you've run up by not doing things
right in the first place!

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ricaurte
Agreed this is a completely absurd move by the Treasury Department. What
brought the financial industry to its knees was too much leverage. Venture
capital firms don't use leverage, so they can't be a systemic risk.

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joubert
But the institutions that invest in them do.

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byrneseyeview
And many people who have physical dollars also have credit card debt. Should
we force dollars to follow the same rules?

Your comparison is absurd. You're making the case for regulating the same
amount of leverage twice -- once when it's borrowed, and once when it's
invested. That doesn't do anything but make life inconvenient for the folks
who _don't_ lever up.

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joubert
The issue is that the investors are overwhelmingly public and corporate
pension funds, endowments, fund-of-funds, etc.

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ricaurte
Then it is the public and corporate pension funds, endowments, fund-of-funds,
etc., that should face scrutiny, not the venture capital firms. Figuring out
their expected return from their venture capital investments shouldn't be very
difficult because of how long the industry has been around, not to mention
that venture capital investments on average are only 1-3% of their portfolios
(due to venture capital's lack of liquidity), so the amount of money at risk
is insignificant compared to the size of the portfolio. If losing 1-3% will
collapse an investors fund, then they were over-leveraged to begin with, just
like Lehman Brothers.

If the Treasury Department is worried about how much people are putting into
venture capital, then they should make a ceiling of 1-3% of the fund's
portfolio being able to be invested in venture capital. No regulations are
needed on venture capital firms.

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matt1
From the article: _Treasury’s position is that if it doesn’t drag VC firms
into the bureaucratic swamp, then high-rolling hedge funds playing with
borrowed money will present themselves as venture funds to avoid regulation._

How does this work? Isn't there a clear distinction between hedge funds and
venture funds?

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tjic
I note that the relatively little regulated hedge funds did NOT collapse and
need a taxpayer bailout in the current recession.

Folks like to trot out hedge funds as bad guys, but in fact they do a ton of
good, and prove that a lightly regulated environment works as well (or much
better) than operating with the government's hands all over them.

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pyre
I was under the impression that lack of regulation is what caused many of
these mega banks to collapse. Mostly because the regulations preventing banks
from merging with investment firms and such were lifted in the 80's or 90's.
I'm not necessarily saying that regulation is a good thing, though. Just that
there is a balance to be struck.

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anamax
> I was under the impression that lack of regulation is what caused many of
> these mega banks to collapse.

You may be under that impression, but it's wrong. (It's being pushed by folks
who like regulation.)

They were all regulated to the hilt. AIG especially.

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pyre
Well, obviously mismanagement, greed, and stupidity caused them to collapse,
but regulations forbade even the formation of such multi-national investment
house+bank combinations in the past. I assume that the hope was that it would
prevent banks from taking unnecessary risks with people's money. Which was
obviously reversed with a good old, "private industry always comes up with the
most efficient model, never fails, never commits fraud, and is always perfect"
crap that like to get pushed around in government.

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anamax
> Which was obviously reversed with a good old, "private industry always comes
> up with the most efficient model, never fails, never commits fraud, and is
> always perfect" crap that like to get pushed around in government.

The only folks who ever say that do so as above, attributing that belief to
others in an attempt to cover up their lack of an actual argument.

Govt is subject to exactly the same failings, with one important difference -
it gets to tax and coerce folks and there's even less connection to results.

Even the most corrupt company would have problems keeping Barney Frank around,
yet he's still a major player in govt, driving housing policy....

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grellas
Politicians, lawyers, and regulators impeding entrepreneurs and investors in
the name of protecting against non-existent systematic risks to our economy.

This type of regulation originated many years ago with the broad idea that
unsophisticated persons (the "little guy") needed various forms of disclosure
to enable them to make informed decisions about their investments. How that
rationale can even begin to apply to VCs and their LPs (who are typically
large institutional investors) is an absurdity only Washington could possibly
begin to fathom.

The article nails it when viewing this development as a further extension of
Sarbanes-Oxley and other recent regulatory changes: much more of this and it
will be time to put the IPO on the endangered species list.

This will definitely hurt startups in the long run.

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hristov
Non-existent systemic risks???? Did you suddenly forget about the last year.
Have you been asleep for the last 18 months? Systemic risks are very much
existent.

And if banks and financial institutions are going to cry for federal bailouts
every time a "systemic risk" rears its ugly head, the only thing any
responsible government official can do is put in regulation to make sure that
the systemic risks are controlled.

The financial industry loves to complain about regulation but it is the
financial industry that brought this on their own heads by (1) fuckign up, and
(2) asking the taxpayer to pay for their fuckup.

As far as the rationale, it is different from what you said. The rationale is
that certain parts of the economy are so intertwined that if one financial
company craters it can cause a chain reaction disaster for multiple other
completely healthy financial institutions. I am not sure I buy this logic, but
again the financial industry used this very same logic to say it was not their
fault when the economy imploded, so it is only fair that the same thinking
should be applied to them now that the feds are starting to regulate them.

Now you could make somewhat of an argument that VCs are not systemic risks,
and that may be true if they were mostly owned by wealthy individuals, but
that's not the case. VCs are mostly owned by financial institutions that may
borrow against their property, so if the value of a VC craters they may cause
a sell off spiral in a larger financial institution. Again, I am not I believe
the above sentence, but if you buy into the theory of systemic risks, it is
pretty obvious that VCs are one.

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bhewes
Systemic risk is a risk that can cause the financial industry to collapse. VCs
are not a systemic risk they are only $28 billion in size, are positively
exposed to extreme market moves and are not leveraged. With a VC investment
the most you lose is your initial investment. With any form of leverage you
can possible lose more then your actual investment and are negatively exposed
to extreme moves in the market. If a VC's principles are leveraged up that
still does not change the systemic risk exposure of the VC fund. The
institutional investor is the one carrying the systemic risk.

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catzaa
I always wonder if the cost of complying with new regulations is contemplated.
If I think of how long our family take just to do stupid and inane
administrative tasks (VAT, Union payments, tax, unemployment insurance, etc…).
All this administration is really hampering small businesses.

Why aren’t these regulations simplified? Why aren’t employees paid on a cost
to company” basis and are responsible for their own administration (i.e. own
union payments, own unemployment insurance, own health insurance, etc…).

Maybe it is just because I hate admin – but I doubt that admin should take up
40% of a small business owner’s time.

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kirubakaran
Suits go out and owe money all over town and the government pees on our rug?

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bokchoi
Oh, the other Washington.

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rottencupcakes
Misleading title. I assumed this article was about if Seattle or the Bay was
better.

Please make it more clear, since this is a great article that everyone should
read.

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AndrewWarner
"As part of their regulatory redesign, Team Obama and Congress still don’t
have a plan for reforming the giant taxpayer-backed institutions like Fannie
that caused the credit crisis. Yet they’re moving to rewrite the rules for
investing in tiny technology companies that had nothing to do with the
meltdown. Under the proposed rules, venture firms will be declared systemic
risks until they can prove themselves innocent."

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joubert
That's quite rich. Don't VC's receive most of their money from institutional
investors, like, uhm, public pension funds, corporate pension funds, insurance
companies, endowments, foundations, fund-of-funds, etc.?

