Skype woes raises questions

One of the reasons I am so fascinated with the Skype saga is that it hinges on the management (or mismanagement) of a key intangible asset. Joff Wilds over at his IAM blog asks the yet unasked question about the Skype deal:

If I were an eBay investor, I would be asking the company’s board some very hard questions about all of this. And if I were sitting on that board, I would be thinking very carefully about how to ensure something like it never happens again.

Joff’s answer to the latter question is the creation of a Chief Intellectual Property Officer (CIPO). That person would go beyond the IP council’s role in the legal department to encompass all of the aspects of IP – “from strategic development and prosecution, through to litigation, exploitation and value creation.”

I have some sympathy for the CIPO idea. But I think it too limiting. It could end up treating IP as something outside of the company’s normal operations rather than a key asset. It also ignores the broader sweep of intangible assets. In truth, the job of fostering and exploiting company’s intangible assets is the job of the CEO (and the COO). Intangibles needed to be baked into the company’s DNA. The danger of the CIPO is that IP becomes seen as something over there that is someone else’s responsibility. A CIPO could help the CEO and COO; it could also become just another corporate silo.

And as Joff points out, it is also part of the oversight job of the Board. Should the Skype deal fall about because of mismanagement of a key intangible asset, I think eBay management (past and present) and the Board will have a lot to answer for.

Shiller on complexity in financial products

And speaking of securitization, Robert Shiller makes an interesting point in his a recent piece in the Financial Times “In defence of financial innovation”:

New products must have an interface with consumers that is simple enough to make them comprehensible, so that they will want these products and use them correctly. But the products themselves do not have to be simple.

Intangible asset backed securitizations are likely to be complex. As we noted in our report Intangible Asset Monetization: The Promise and the Reality, such deals require a number of backstops. For example, a securitization of a trademark/brand needs to have an active management and marketed entity to ensure that the assets are protected and utilized to their fullest extent. Such deals are also likely to be “covenant-heavy” (in contrast to the covenant-lite deals of the recent bubble).

Thus, deals themselves are likely to be complicated. They don’t have to be opaque, however. Those who structure the deals should take Shiller’s point to heart. The deals need to be comprehensible. That will be the key to market acceptance: investors understand what they are buying.

Going after toxic assets — again

It looks like there will be another attempt to clean up the financial system’s toxic asset problem. According to a story in this morning’s Washington Post (More Help Coming To Clean Up Crisis):

Since July, the Treasury Department has been working with a group of private firms to build investment funds that would combine public and private resources to buy troubled bank securities. The firms plan to buy the assets at bargain prices in hopes that they will turn profitable over time.
This week, the first round of financing from the Treasury is slated to go out the door, sources familiar with the program said. The department plans to commit more than $2.5 billion to match dollar-for-dollar what has been raised by the private firms, the sources said. The investment funds can then borrow another $5 billion from the Treasury in a form of leverage intended to provide a further incentive to the private firms.
The total size of the program is expected to eventually reach $40 billion and can be expanded if needed, administration officials have said.

As the reader of this blog know, I have long advocated such a step. If the program can take the assets off the books, it will go a long way to restarting the securitization market (see earlier posting). And that will help the financial markets for intangibles.

But, as I’ve also said, watch for the flood of red ink as the banks are finally forced to write off those assets at the prices that the markets set for them, rather than the assumed value of the mark-to-myth models.

UPDATE: According to a story in the Wall Street Journal, the IMF estimates that banks still have $1.5 trillion to write off. However the US is ahead of Europe in the process: “Banks in the U.S. have recognized about 60% of anticipated write-downs, the IMF calculated. Banks in the Britain and continental Europe have recognized only about 40% of their potential losses.”

Restarting Securitization

Last week, the IMF released an advanced chapter from its Global Financial Stability Report (the full report is due out on Oct 1). The released Chapter 2 of that report was on Restarting Securitization Markets: Policy Proposals and Pitfalls. According to the IMF, the secutization process remains a useful means of mobilizing illiquid assets, reducing credit costs and spreading risk. The problem, as has become widely recognized, was the slicing and dicing of the securities into highly complex transaction where the risk became almost unknowable, and then hiding that risk in off-book entities.

The report goes on to discuss various proposals to reform and restart the securitization market. These include the now standard items of credit rating agency reform, improving transparency, realigning regulatory capital requirements, and originator retention requirements. On this last point, they argue for careful implementation of policies requiring more “skin in the game” as those “can have dramatic effects on the incentives
to improve loan screening, in some cases with the unintended effect of making some types of securitization too costly to execute, effectively shutting down these markets.”

On the issue of transparency, the reports notes that American Securitization Forum has a Project on Residential Securitization Transparency and Reporting (Project RESTART) which is focused mostly on the mortgage backed securities process. That is a good step, but I strongly believe that such efforts are not enough.

There is another recommendation called for the report that would greatly strengthen the market: more simplification and standardization:

Most products could usefully be standardized at least to some extent. This should increase transparency as well as market participants’ understanding of the risks, thus facilitating the development of liquid secondary markets. Although there will always likely be investors that demand bespoke complex products, securitization trade associations and securities regulators should encourage standardized building blocks for securitized products. It would also be useful if some standardization could be imposed on the underlying assets to maintain higher quality pools or at least verifiable pools (see the covered bond discussion below).
Valuation difficulties could also be alleviated if securitization products were simplified. Some of the product complexity was well intentioned, such as excess spread traps and triggers designed to bolster the creditworthiness of the senior tranches. Others, such as micro-tranching, were designed to game rating agency models. In any case, this product complexity has made some securities extremely difficult to value and risk-manage, and to the extent that regulation or market practices encourage such complexity, these components should be eliminated.

Those are good objectives: “facilitating the development of liquid secondary markets” and “alleviate valuation difficulties.” The IMF report notes that the American Securitization Forum is also working on legal documentation standardization, but not on product standardization. Maybe they should.

For the intangible asset securitization process, simplicity is the key. Intangibles are already view with suspicion. As I have argued before, we need some plain vanilla transactions to make that case that these are not overly risky. With patents are becoming more accepted investment asset class (see earlier posting), maybe a few basic patent securitization deals could help get the market going again.

Basic, plain vanilla, uncomplicated. That is a formula for re-starting a market previously see by many (and with good reason) as rather dubious.

Jon Low on reputation

Jon Low (full disclosure alert and shameless plug: Jon is a member of Athena Alliance’s Board) has a new three part series on reputations and brands as intangible assets over on Jonathan Salem Baskin’s DimBlub blog:

From Pitchforks To Profits

Public Actions; Private Realities

Social Media In The Post-Crash World

As Jon notes:

Trust and reputation are intangibles; frequently taken for granted and not accounted for on traditional balance sheets or income statements. And yet, research suggests that as much as 50 percent of a company’s market value may be attributed to them.

And they are fragile and in constant need of management attention – as these essays explore.

Commerce to create new office on innovation

This morning Secretary of Commerce Gary Locke announced the creation of a new office for entrepreneurship and innovation. The announcement was first made during a CNBC interview (see below – note that the interview covered a number of other issues as well, including G-20 protesters and health care).

http://plus.cnbc.com/rssvideosearch/action/player/id/1274793004/code/cnbcplayershare

The official announcement will come this afternoon when Secretary Locke gives the keynote speech to the Council on Competitiveness’s National Energy Summit the Inc. 500/5000 Conference.

UPDATE: Here is the link to the press release Commerce Secretary Locke Announces New Commerce Initiatives to Foster Innovation and Entrepreneurship.

What happened to Pittsburgh

Every G-20 Summit (formerly G-8 Summit) has two side stories. The first side story is about the protesters. The second side story is about where the meeting is happening. In this case, the story is about Pittsburgh’s transformation from steel to the knowledge economy. For example, this morning’s Washington Post has a story on Pittsburgh Shows How the Rust Belt Can Be Polished Up. The emphasis of these stories has been the rise of the educational and health care sectors of the city’s economy. (See also this OurFuture.org blog posting on the coverage.)

But that focus may be misleading. A report from OurFuture – Pittsburgh: The Rest of the Story – offers a more detailed analysis:

First, manufacturing did not disappear entirely. In addition to steel, Pittsburgh industry diversified into products ranging from advanced metal alloys to surgical implants and sophisticated robotics. With roughly 100,000 workers, or 10 percent of the area workforce, manufacturing remains a vital part of the regional economy. Manufacturing jobs are generally unionized, so they pay well and generate economic activity beyond the company payroll.
Second, these changes didn’t happen automatically. This wasn’t an unstructured evolution from gills to lungs. It was the result of deliberate plans, of partnerships between government and private industry to achieve shared goals. It involved public investment in infrastructure, private and government subsidies, and express plans to “pick winners” and support them until they gained a lead. It is a story of industrial planning, a piece that has been missing from our national economic equation for the last 30 years.

Interestingly, that transformation includes metals:

The manufacture of steel grew and transitioned into the manufacture of specialty metals and sophisticated alloys. Allegheny Technologies Incorporated manufactures titanium, hafnium, tungsten, and cobalt. With 9,600 full-time employees and $5.3 billion revenues in 2008, the company forges custom fittings for the defense, aerospace, and nuclear energy industries. Over 300 other metals technology service firms provide steel production equipment, engineering services, parts, and supplies.

In other words, manufacturing in Pittsburgh is part of the knowledge economy.

That is a lesson we need to remember.