Posts Tagged ‘Timothy Geithner’

Regulating Venture Capital: Off the Hook Now But “Very Far From the Finish Line”

October 21, 2009

Earlier this year, Silicon Valley freaked out when U.S. Treasury Secretary Timothy Geithner told Congress that large venture capital firms should be declared as systemic risks and put under tight restrictions as part of the broader re-regulation of financial firms.

Such regulations would force VCs to register with the Securities and Exchange Commission, and submit regular reports on their investors and portfolios, costing firms up to $1 million. Data collected by the SEC would then be shared with a new risk regulator to ensure that VCs aren’t “a threat to financial stability.”

But techies breathed a sigh of relief earlier this month when Financial Services Chairman Barney Frank proposed draft legislation rejecting the Treasury plan, carving out an exemption for VCs from the “Private Fund Investment Advisers Registration Act of 2009.” (see draft below)

That was good news for innovation. VCs do not pose a systemic risk to the economy, as Gordon Crovitz pointed out in this astute column in the Wall Street Journal. The venture capital industry is small compared to other capital markets. VCs do not use debt, so that sharply limits their risk. And they are not tightly interconnected with other financial firms, like AIG or Lehman Brothers.

But they do represent an incredibly important part of the economy that helps generate significant wealth and job creation–a unique economic pillar the Treasury Dept. should be strengthening, not weakening.

But National Venture Capital Association President Mark Heesen says the VC industry is not out of the woods yet. “We are very far from the finish line, but in a better place than many expected at this point,” Heesen wrote me in an email. “There is still no House or Senate bill, but House Chairman Frank’s comments certainly are encouraging.”

Financial reform hinges on, you guessed it, the passage of health care reform. “Many Senators sit on both Committees of jurisdiction so can’t focus of financial reform until they see how health care proceeds,” added Heesen.

To make sure VC regulation does not reappear in future versions of financial reform legislation, Heesen says the NVCA is continuing to work with the Administration and members of the House and Senate “to make certain Venture capitalists do not have to register under the 40 Act while giving the government the assurances they need to understand we do not pose a systemic risk to the economy.”

Discussion Draft of the Private Fund Investment Advisors Registration Act


Phrase of the Moment: Stress Test

February 15, 2009

If I hear the word stress test one more time today I think I am going to hurl.

“Before Stress Testing Banks, Find a Pulse,” reads the headline for Gretchen Morgenson’s New York Times column in the Sunday Business section. Listening to the Sunday morning talk shows, I heard the word stress test used at least three times. My editor at BusinessWeek recently inserted the words stress test in a story I wrote about a company’s finances that were under pressure.

What’s going on? Well, the global financial system is in a crisis, so we’re inventing new phrases to describe the horrific situation. In fact, part of Treasury Secretary Timothy Geithner’s plan to fix the banking crisis actually involves a stress test of every bank to determine its financial health. So I guess we’re going to be hearing these words a lot more over the next few months.

A CreditSights analysis, reported in the Times blog DealBook, found that according to its “severe” case situation, all the major banks and brokerages — Citigroup, Bank of America, Wells Fargo, JPMorgan Chase, Goldman Sachs and Morgan Stanley — might require further capital injections from the government. The future losses for some banks are staggering by CreditSights’ estimates: Wells Fargo, $119 billion; BofA, $99 billion; JPMorgan, $124 billion; Citi, $101 billion; Goldman Sachs: $47 billion; Morgan Stanley, $34 billion.

It’s not such a bad metaphor, given that our financial system is clogged up like a bad artery with all these toxic assets. The concept of a stress test actually derives from the medical field. Stress tests are given to patients with heart problems to determine the ability of the patient’s heart to pump blood.

It also has other uses. Apparently, there are tests that can gauge the level of stress in your life. I suppose a lot of people are taking these tests right now with the economic implosion. And engineers do stress testing to figure out the strength and durability of physical structures.

Ok, now that I am stressed out talking about all these stress tests, I am going to go to the gym and get rid of my stress.