R.I.P Good Times

October 12, 2008 7:53 AM

Sequoia Capital presentation on the bleak scenarios for the economy and how start-ups should prepare.Last week the famous (the firm funded Apple, Oracle, Cisco and Google, among others) venture capital firm Sequoia Capital held a meeting for the firm’s portfolio companies. There, partners presented their views on what went wrong with the economy, what the prospects are for a quick recovery (Hint: the presentation is called 'R.I.P. Good Times' ) and what startups can do to survive. Here are the PowerPoint slides used in their presentation. I suggest a stiff drink before viewing. VIA

Two points: (1) What's striking this the banality of the analysis. I could have put most of this together, and I'm an ad salesman with a liberal arts degree. Which leads me to point (2) this is just some guys' opinions. Sequoia has no lock on accurate forecating

posted by mojohand (55 comments total)

I would have to agree entirely with your two points.
posted by norabarnacl3 at 8:07 AM on October 12, 2008

It's kind of exhilarating, really. Never has it been more apparent that "nobody knows nuthin'." My barber's opinion is about as good as Warren Buffet's, right now. It's so totally out of anyone's hands. Wheee!
posted by Faze at 8:16 AM on October 12, 2008 [1 favorite]

From everything I know, they're exactly right. Just because it's straightforward doesn't make it stupid or wrong. Economics is pretty banal, ultimately; you have to pay for what you consume. We haven't been doing that for twenty years or so, and that game is ending.

All the complexity and noise in global markets, especially in derivatives, are just ways by which smart people are manipulating the system to extract wealth; it has virtually nothing to do with actual wealth generation. We will either learn that, and actually start generating real wealth again, or we will fail entirely.

A very great deal of the economic growth of the last decade has been false, built on the unstable foundation of artificially low interest rates, massive deficits by the government, and huge borrowing to finance consumption by consumers. Much of it will disappear as we readjust to a world in which we have to pay for what we use, PLUS the stuff we've been using for the last twenty years.

Yes, this is simple analysis, but at its core, it's a simple problem: way, way, WAY too much debt, and too little real wealth.
posted by Malor at 8:16 AM on October 12, 2008 [7 favorites]

The advice for small business sounds reasonable no matter what the times are like. The little company I work for is disobeying two of these pieces of advice and that has been worrying me for some time.

The housing/morgage/credit market problems have taught me that nobody knows what's going on, so I'm done believing any predictions. I'm not an economist and it seems bizarre that people like Bernanke and Paulson (sp?) who couldn't predict what happened are still employed and are still throwing out predictions which seem to still be believed. Would dismissing and replacing these economists, like management in a failing company, produce better results, worse results or more of the same?

on preview: Malor, was this sort of train wreck inevitable? If it was, why were more and more investment vehicles increasingly divorced from real wealth? You'd think -someone- would have seen this coming and figured out how to profit by it; can you give an example?
posted by jet_silver at 8:31 AM on October 12, 2008

I suggest a stiff drink before viewing.

At 11:30? Well, if you insist...
posted by paisley henosis at 8:37 AM on October 12, 2008 [3 favorites]

Can't Sequoia hire a $50k/yr college grad to design better slideshows? I'm continually disappointed by the presentations of well capitalized companies, Tufte is sitting in his room crying somewhere. What do presentations look like with companies that have huge marketing departments, like Coke or NBC? Please tell me they have pretty slides.
posted by geoff. at 8:38 AM on October 12, 2008 [1 favorite]

and too little real wealth.

I agree with most of what you said, but the above strikes me as missing the point. It's not "wealth" that we're after, per se. Wealth is a by-product of monetary volatility (churn) and savings. Ultimately, the US hasn't been churning enough money in the real economy, and has instead focused on the paper economy. So the point is that we simply don't have the innovation to create enough real jobs to create that volatility, and ultimately wealth. And to add insult to injury, we've spent ourselves into a massive, massive debt (both government and consumer) without a real economy to show for it. We mortgaged our future, thinking that we'd earn it later. Except later is now.

I'm trying to do more research on infrastructure and energy as a means of churning money. Spending hundreds of billions on energy research and production (solar, wind, nuclear), and making our national infrastructure more efficient (cleaning up the electricity grid, getting rid of some roads, expanding airports and re-energizing our rail system) would help create the millions of jobs necessary, and may even allow us to export our products down the road. The problem is we're already in a massive deficit-spending mode, we have HUGE social welfare costs coming in the next two decades, and we're faced with increasingly modern competition (China, India).

The US somehow always innovates itself out of these messes; I wish I was smart enough to know how we're going to do it this time, so I can get in on the ground floor.
posted by SeizeTheDay at 8:43 AM on October 12, 2008 [4 favorites]

that people like Bernanke and Paulson (sp?) who couldn't predict what happened are still employed

They knew what was going on but had they been honest we would have had last week's market crash last year [yes I know this makes no sense per se]. Their job is not to be honest but is similar to the diplomat's job (utter "'Nice doggie, nice doggie.' until you can find a stick.").

If it was, why were more and more investment vehicles increasingly divorced from real wealth?

Once the party gets started you need sober adults to come in and shut it down; otherwise, the party-goers will just drink themselves into oblivion, along with destroying whatever they can lay their hands on in their revelry. The administration and congress of 2001-2006 were of the "Laissez Les Bon Temps Roulez" ideology -- the Free Market Fairy is always optimal and prefers operating without onerous "Big Government" Central Planning Socialist regulatory intervention.

someone- would have seen this coming and figured out how to profit by it; can you give an example

Who's profiting from the subprime bust (article from March, 2007).

There was also a small hedge fund operator who made like $5B from being right on the blow-up, forget the name. Goldman Sachs also made money shorting subprime.
posted by troy at 8:55 AM on October 12, 2008

While it's true that the slides look pretty amateurish they do explain what's going on - at least they repeat an explanation I've seen before and which I can follow, which may not be what's actually happening at all. If the "truth" is simple, why not keep it simple when explaining it?

Also it's certainly possible that the people at Sequoia aren't as smart as they would like people to think they are, something that seems to come up a lot in this financial crisis.
posted by Horatius at 9:15 AM on October 12, 2008

It's not "wealth" that we're after, per se. Wealth is a by-product of monetary volatility (churn) and savings

Adam Smith described wealth as "the annual produce of the land and labour of the society". Henry George reexamined this, and came up with:

Thus, wealth, as alone the term can be used in political economy, consists of labor impressed upon matter in such a way as to store up, as the heat of the sun is stored up in coal, its power to minister to human desires.

This is where I get my definition that wealth is "that which satisfies human wants and desires".

They say that $2.4 trillion of wealth was lost in the stock market last week, but what is paper wealth is not really wealth, because valuation alone is not wealth.

I think it's important to understand that wealth is stuff created by labor -- not money, or savings, or other assets.

The problem is we're already in a massive deficit-spending mode, we have HUGE social welfare costs coming in the next two decades

Massive to the extent that everyone involved in the healthcare industry will be pulling in a million or three per year. Obviously, this cannot be. Health services will have to be rationalized and nationalized, perhaps (hopefully?) like the Canada model.
posted by troy at 9:16 AM on October 12, 2008 [7 favorites]

Slide 19: Japan May Be Instructive

lol
posted by troy at 9:22 AM on October 12, 2008

Can't Sequoia hire a $50k/yr college grad to design better slideshows?

I'm bothered far less by the underwhelming design than by the fact that, apparently, they can't spell "vicious", nor have anyone on staff that can proofread.
posted by pineapple at 9:23 AM on October 12, 2008

All the complexity and noise in global markets, especially in derivatives, are just ways by which smart people are manipulating the system to extract wealth; it has virtually nothing to do with actual wealth generation. We will either learn that, and actually start generating real wealth again, or we will fail entirely.

I and a heck of a lot of other people I know have been saying this for many, many years. And I'm not trying to pump myself - I'm trying to disparage the morons. I've put up with a lot of grief about this.

Take the .com boom, for example. I was trying to shop useful schemes during the boom - but we suffered from the fact that everyone else was presenting pie-in-the-sky, ridiculous projects with absolutely no revenue plan. In fact, I was told twice that having a revenue plan made us seem old-school and insecure.

In fact, I don't even think the bottom has really been shaken out of the .com boom yet! I think a lot of the weaker companies went under - but by weaker I meant their financing, not their business models. But I think most of the .com companies are basically not viable - and if you don't believe me, look at how many of their ads are just for other .com companies.

In my heart, I consider there are two types of value generated, "real" value and "fake" value. If I grow a potato or make a chair or fly an airline and have a seat to sell or even even write a book, and I sell it to you, real value is generated. You have something that has more value to you than the money you spent - I have money that was more valuable to me than I sold you - we both profited.

Now, there are many events which apparently generate economic activity but don't in fact generate real value.

For example, suppose my house is destroyed in Katrina and must be rebuilt. On paper, this rebuilding appears to be really good for the economy - in actual fact, real value has been destroyed - humans as a whole have taken a net loss.

The same is true (mostly) of crimes, lawsuits, fires, accidents, sicknesses and other disasters.

More subtly, mergers and acquisitions, bond issues, restructurings and the like do not actually generate any real value directly, and in fact often involve destroying real value ultimately.

The theory behind all of such transactions is that by allowing a financial entity to restructure in a way that makes them more profitable, more real value is generated.

It's absolutely the case that this is sometimes true - very often true for common-or-garden transactions like a bond offering - but even then these activities aren't directly generating real value - they're facilitating other activities that do in fact generate real value.

The medical analogy seems to be good here. If I get deathly ill and a doctor saves me, clearly the doctor's work has enabled a lot of useful economic activity from me that wouldn't have happened - we all agree about that but I think no one would say that the doctor had made that money I made after I was well.

The unfortunate fact about many of these large-scale economic restructuring activities is that financial insiders benefit disproportionately to anyone else - the stockholders and particularly the workers generally don't do well.

If real value isn't being generated, where's the money coming from? Well, there are only two ways - raiding assets or puffing up the size of the company to make it appear larger.

Raiding assets is a classic. And it doesn't have to be obvious at all. A classic law of economics is that you get rewarded for assuming economic risk. If you manage to assume a lot of hidden economic risk, it'll look as though you made something for nothing. You can even get away with it - unless the risks come due.

Puffing up the size of the corporation to make it appear larger is also as old as the hills. And it isn't even necessarily wrong. Perhaps you have really been undervalued and displaying what you do better will make you appear more valuable. But in most cases, it involves again concealing risk.

Both of these ploys basically involve robbing yourself in the future to pay yourself in the present. And despite my negative tone here, this isn't a bad thing at all in a healthy economy. A healthy country or a healthy company should be in debt! You shouldn't pay for things like infrastructure in advance - these are real, solid investments that are very appropriately paid for by debt. Having some degree of leverage is extremely important but if you keep increasing your leverage while having insiders extract money you will eventually collapse.

For a long time, double digit percentage profit increases year-over-year have been almost required in many areas of commerce. To a realistic person, these increases are simply not sustainable indefinitely. America has cooked the books as I described above, in numerous ways but they can all be boiled down to "assuming risk and then undervaluing your subsequent liability".

A "soft landing" would have happened if about three years ago, people were smart enough to start to mark their assets to market. If we had actual adults running things, the Fed alone could have done this - but despite the $1000 suits and long words, they are not adults, they have no strength of character at all. It was inconceivable that the Fed could ever do anything to stop a boom because they are in the role of fluffer and coke dealer for the economy, they're never going to say, "Take that straw out of your nose and your dick out of that ass and get some sleep."

Let me also add that almost all of these activities are actually against the law. You're not just required to show up in the morning - the SEC requires you to go very far, you have specific legal obligations requiring you to expose your risks and requiring you to do the due diligence to find out exactly what that risk is in the first place.

Amongst this administration's many destructive activities has been their refusal to enforce such rules - this started way back with Reagan's deregulating the banking industry while simultaneously firing about a third of the bank examiners - an act which immediately came back to bite the taxpayer as we immediately ended up in the hole for over a trillion dollars - and, I was working on the Street at the time, it was completely clear that the government/taxpayer ended up being very lucky - there were huge quantities of securitized mortgages that the government ended up assuming liability for and if interest rates had gone up, if the fixed income market had gone down, we'd have likely been on the hook for well over two trillion. And note that the Bush family was strongly implicated in that last crash, e.g. Silverado.
posted by lupus_yonderboy at 9:35 AM on October 12, 2008 [19 favorites]

(On preview, troy is saying much like I am about wealth vs. money...)
posted by lupus_yonderboy at 9:36 AM on October 12, 2008

I like the brutal simplicity of these slides. It says, "We're so fucked that we let go of the interns. No one's even making the coffee anymore. BYOB."
posted by naju at 9:38 AM on October 12, 2008 [3 favorites]

Well that officially scared the shit out of me, since I work for a tech startup.
posted by empath at 9:40 AM on October 12, 2008

Oh, and the slideshow really wasn't that bad at all, fairly entertaining in fact.
posted by lupus_yonderboy at 9:59 AM on October 12, 2008

My venture capital money will be with slideshare.net which appears to be a YouTube of PP, pretty cool, a whole new media to explore (it's not all business slides).
posted by stbalbach at 10:02 AM on October 12, 2008

Well, we shouldn't get too excited over a bunch of PowerPoint slides.

We're probably only getting about 25% of the intended message, because we're just reading them. I give a lot of presentations and a good speaker (not claiming I'm one) adds far, far more detail and livens things up more than simply reading the text on the slides back to the audience! And I have no doubt that the folks at Sequoia can give good presentation; that's an essential skill for the VC guys.

So the message here is very, very light.

But that being said, some of their slides are interesting alone, while others are deceptive without the accompanying dialog:

• Slide 16, Huge Growth in Derivative mentions that their nominal is a breath taking 35x US GDP, but fails to take into account that we know many net off against each other.
• Slide 17, Significant Excess Capacity totally illustrates that we're missing something by only reading these slides. Is this good or bad? Excess capacity could be argued either way. Which side is Sequoia taking?
• Slide 18, Very Tight Credit Is discussing current conditions; from similar presentations I've seen the speaker should be talking at the same time about projected interest rates and long term trends. We're missing that here.
• Slide 19, Japan May Be Instructive is actually pretty good on it's own
• Slide 20, Key Themes hits all the proper points, but the last line item should Sequoia is a little out of touch - there is no potential for increased regulatory scrutiny. I'm aware from industry chatter and publications that the regulators both in The US as well as Europe are moving into most institutions in a very, very forceful way. There is a backlash brewing against this in some banking circles that mainstream will might pick up on in three to six months. Maybe. So this is not a possibility but something happening NOW and is ongoing. In a BIG WAY.
• Slide 21, Our Take as jet_silver points out, this is an effective way to run a business, ANYTIME. I wonder what we're missing from the speakers dialog, as this is hardly earth shaking advice.
• Slide 27, MEWs Became the New Piggy Bank Curious, what is a "passive" MEW?
• Slide 28, From Virtuous to Vicious Cycle is actually pretty decent, and as this is a current topic in my research cluster at University, I've been thinking about this a lot. Just a few thoughts:
The mainstream media unfortunately presents the sub prime crisis as a single, monolithic event. And that's totally not true. Many of us working in industry started sounding the alarm bell about declining loan standards as early as 2005. Each year since additional mortgages were advanced, mortgages that all too often were floating rate with what are called resets ; in other words, the introductory interest rates end, monthly payments change, and not for the better. I always like to tell folks if you can't explain something simply then you don't understand it yourself. I just explained the current situation to Maw, and I used the Supertanker US Economy analogy. Think of the US Economy as a Supertanker; huge, immensely powerful but ponderous, slow to start, stop and maneuver. The Supertanker US Economy is traversing the Global Economic Ocean. We spot troubled seas ahead. What we can see now - declining house values and sharply increasing foreclosures - should be considered the first wave of a large number of resets that we'll probably continue to see until perhaps 2011. We're getting battered, some damage is done by this initial storm, but we expect this wave to crest Q4 of this year, and gradually decline in and through 2009. 2010 is when it gets interesting. Far more interesting than now, as we will see large numbers of Options ARMs resetting. As many loans will be reseting then as are now, but with a BIG difference. And that is you ask? Well, many of these lending facilities were used to drive NINJA and Liar Loans. In terms of nominal value, we believe that the wave of resets due to hit in 2010 will be of comparable size to what we're now experiencing. The difference? Our economy is marginally healthy now, at least healthier that it may be in 2010 when this wave hits. So determining how to dampen wave two of mortgage resets MUST a key concern to whomever inherits this mess from the existing Administration. A secondary concern, but just as if not more important to the reset problem, will be strengthening our ship, making sure that the damage Supertanker US Economy undergoes during the current storm is repaired. What will have to be done is Federal oversight of refinancing wave two, done en masse. This is something that we've never seen on this scale in The United States. And even in the best of times refinancing is a troublesome task factoring in multiple variables, including, but not limited to:
1. Loan to Value (LTV)
2. Salary, net of discretionary bills
3. Credit score
4. Total assets
5. Employment history
6. Age
Loan to Value is the metric to watch here, as the latest Standard and Poors and Case-Schiller report [ .pdf] tells us "...not one market is showing a positive return over the past 12 months and seven of the metro areas are reporting declines in excess of 20.0%." Not good. And broad measures of the markets health are off as well, with "...the 10-City Composite has fallen by 20.3% and the 20-City Composite is down 18.8%.”. We're seeing prices crater across the nation even as wave one drives folks to refinance their mortgages. And high up there in the crows nest we can see wave two inexorably approaching. So the upcoming wave of refinancing activity is both a key concern and golden opportunity. Done right we could see a systemic weakening of the US Economy, perhaps a moderate recession that would burn itself out in perhaps twenty four months. The data and analysis' I've seen from multiple banks and academic researchers seem to support this hypothesis, and it does seem to be where Bernanke / Paulson / et al are aiming Supertanker US Economy. Another possibility would be inept navigation, and the Supertanker isn't just slowed by the incoming waves but rocked, maybe severely buffeted, even capsized. Either scenario isn't pretty. Think of a picture of Louisiana post-Katrina. Parts of the financial system would be intact (the FDIC, US Government funding operations, etc), while other components of the system (e.g., LIBOR, other market rates) drift aimlessly. Still other elements aren't recognisable, as they've been torn and battered to pieces (large parts of the global trade and financials systems). Rebuilding under such a scenario would take perhaps decades. Everyone, no doubt about it, absolutely everyone, would be dependent upon government assistance for some degree of their existence, some more than others. I've taught Forecasting Financial Markets at the Masters level and in my opening lecture I always like to tell students that all predictions are wrong when it comes to economics. We can make useful predictions across sufficiently short horizons, for specific instruments in certain asset classes (e.g., a share price in five days times, Dollar/Yen in ten minutes). But broadening out the time period or attempting to generalise to entire asset classes or, as we're looking at now, entire ECONOMIC SYSTEMS is a particularly intractable problem. It's very difficult to do, at least precisely. The systems are just too damn large and complex, with hundreds of millions of independent agents all acting and influencing the system to some extent. Bernanke / Paulson / et al can only direct Supertanker US Economy in the broadest possible terms. Unfortunately, it isn't possible to chart a specific port of call for Supertanker US Economy, even in the best of times. And in these stormy seas, these incredibly treacherous waters we find ourselves in? Batten down the hatches. Don't worry about the storm we're in now; prepare for wave two of resets, the storm that is on the horizon.
• Slide 30, Earning Beginning To Roll is a little of a misnomer; we're seeing S&P 500 earnings crater.
• Slide 33, Retail/Ecommerce Deteriorating Well, the rate of change would be more informative here, as I've seen data saying this is leveling out. I wonder where they're sourcing this from (can't read the fine print!)
• Slide 37, Amazon.com & Buy.com Curious - why does their data end at 2005??
• Slide 38, Salesforce.com & Siebel Same observation - why does their data end at 2005??
• Slide 42, Recovery Will be Long Wow fluffy. As in devoid not only of units but what are they saying with this slide?
• Slide 44, New Realities This is a positive. The VC guys were tossing far too much money about. I know folks in The Valley that were getting $10M speculative infusions, just after demonstrating a prototype, but with NO CUSTOMERS. VC was another bubble.
• Slide 46, Survival Great points even in the best of times.
• Slide 48, Death Spiral Another slide where I'm annoyed as I don't know what the speaker is saying!
• Slide 53, The Solution I've got a small startup here in London, and we use zero based budgeting as we've got little money. On the other hand, when I was working in banking I NEVER was compelled to use this. It's a great tool, and a simple technique that imposes much financial discipline
• Slide 54, Get Real or Go Home Heh

Hey thanks for the slides. Interesting. I'll just mention that when I took my MBA one of our professors always said the absolute best time to start up a business is during a recession.

As funding is tight, customers difficult to come by and competition truly atrocious, if a start up business makes it through a recession when the money's easy they'll be strong and competitive and truly outperform.

So I wouldn't be afraid of launching a new business now if one believes in their idea. Go to for!


As Chairman Mao said The situation is excellent. There is great chaos under heaven.
posted by Mutant at 10:23 AM on October 12, 2008 [30 favorites]

Mutant, there are notes on what the speaker was saying here:

It's always darkest before it's pitch black.
posted by empath at 10:33 AM on October 12, 2008 [1 favorite]

Mutant:

"Passive equity withdrawal happens when a house is sold and the seller has a smaller mortgage on the property than the buyer."[1]
posted by troy at 10:34 AM on October 12, 2008

In terms of nominal value, we believe that the wave of resets due to hit in 2010 will be of comparable size to what we're now experiencing. The difference? Our economy is marginally healthy now, at least healthier that it may be in 2010 when this wave hits. So determining how to dampen wave two of mortgage resets MUST a key concern to whomever inherits this mess from the existing Administration.

Slide 48, Death Spiral Another slide where I'm annoyed as I don't know what the speaker is saying!

This one was pretty clear to me, from recent experience. It's better to preserve capital by cutting to the "Core Team" NOW and resume growth from that more limited basis, rather than trying to keep the full crew going and cutting them down by degree, burning capital and hoping things turn around before the capital runs out.

One is reminded of the Scott expedition to the South Pole. On the way back, they kept the geologic finds -- rocks -- as part of their baggage that they were man-hauling back to their base camp.
posted by troy at 10:45 AM on October 12, 2008

Troy and Lupus are definitely onto something. Adam Smith too for that matter ("Thus, wealth ... consists of labor impressed upon matter in such a way as to store up, as the heat of the sun is stored up in coal, its power to minister to human desires.). It seems we've lost a lot of theoretical wealth in the last 3 weeks but no actual "coal". No great buildings have disappeared in a puff of smoke, no acres of corn, no hard drives. Yes, we've lost a lot of so-called "futures" in the past three weeks. The Future on the other hand is exactly where it's always been (somewhere after the day after tomorrow), committed to being no more or less than the result of the choices we make, the labors we invest and the strange and fractal consequences thereof.
posted by philip-random at 10:46 AM on October 12, 2008 [1 favorite]

oops, for this:

In terms of nominal value, we believe that the wave of resets due to hit in 2010 will be of comparable size to what we're now experiencing. The difference? Our economy is marginally healthy now, at least healthier that it may be in 2010 when this wave hits. So determining how to dampen wave two of mortgage resets MUST a key concern to whomever inherits this mess from the existing Administration.

I was going to say that this chart is the map ahead, and I fully expect we will have to plans ready to do some mix of principal reduction, interest reduction, and silent seconds to keep people in their homes at reasonable DTI ratio.
posted by troy at 10:47 AM on October 12, 2008

Slide sixteen: $525T in derivatives, 35x US GDP.

It's greenbacks all the way down, innit.
posted by mwhybark at 10:52 AM on October 12, 2008 [1 favorite]

# Slide 19, Japan May Be Instructive is actually pretty good on it's own

I arrived in Japan in September 1994, about four years after the asset bubble had burst. The economy stilled seemed to be humming, certainly more so than in Canada, where I had had to line up and go through and interview process to get a short order cook job. For a guy like me just out of university, Japanese was still considered to be *the* place to go and teach English and earn some cash, and so that's what I did. I worked 16 hours a week, with paid accommodation, and made $3000 a month.

By the end of the decade it was a different story. The term "fu-keiki" (slump or recession) had entered the vocabulary. A friend of mine who ran a small metal fabrication business employing eight people, was having a hard time getting loans (there was and still is tremendous liquidity problems in rural Japan) and getting business.

My wife and I started our own small business in Japan in 1999, nearly ten years after the bubble had burst. Luckily, we didn't need to rely on loans - we were self-financing, partly from revenue, partly from savings. The first three years, until the end of 2002, were good. But by the start of Fiscal 2003, we were in trouble.

We were running a "cram school" and employed four instructors. What started happening was families were deferring payment because they couldn't make ends meet, or withdrawing their kids from our school. We came back to Canada in 2004.

The period of 1999 to 2004 also saw the development of "defurei" - deflation. It was great in one way because food prices and the price of clothing and cars and appliances came down. But wages also declined - workers in Japan are paid "bonuses" (actually withheld salary) twice a year, and, for several years, bonuses were trimmed or even eliminated.

So, I've lived through economic collapse and chaos. My assessment is it's not so bad (unless you lose your house), but it is loooooooooooooooooooooooooooooooooooong.
posted by KokuRyu at 11:00 AM on October 12, 2008 [2 favorites]

Slide 56: Now that we've asked all our startups to lay off 30% of the workforce, a nice manhattan soothes the adrenal pleasure of firing people.
posted by mwhybark at 11:02 AM on October 12, 2008 [2 favorites]

We need to innovate our way out of this mess by making everything more efficient and durable, especially energywise. We can start by eliminating most of the middlemen.
posted by Brian B. at 11:08 AM on October 12, 2008

Slide sixteen: $525T in derivatives, 35x US GDP.

Here's an example I saw on another board. . . since credit-default swap derivatives didn't trade on a public exchange, it was entirely possible for the following to have happened:

Party A gets $100M of protection on asset X from Party B for $8M. Party B gets the same protection from Party C for $7M. C->D, $6M, D->E, $5M, E->F $4M.

The system shows $500M of CDS on X in existence. Asset X gets liquidated for only $2M of value. Party F owes Party E $98M. Everybody else in the chain was hedged, so the $98M bubbles back to Party A, and everybody is happy except for Party F. But F just got an $85M loan from Party G -- yes, the US GOV -- so he can meet his obligations and the system survives.

So $500M of notional CDS exposure was only really $100M, due to the great number of middlemen and hedging going on.
posted by troy at 11:25 AM on October 12, 2008

ow that we've asked all our startups to lay off 30% of the workforce

that's going to do wonders for rents here.
posted by troy at 11:27 AM on October 12, 2008

Slideshare does allow uploading an mp3 and syncing it with your deck (they call it a "slidecast"). I wonder if anyone at Sequoia recorded the audio for this presentation? It would seem to answer many of the questions Mutant and others are asking.
posted by cali at 11:29 AM on October 12, 2008

Didn't read this, but was discussing it with my boss the other day.

If anyone needs to cut back on ludicrous spending, it is VCs. it's an industry based almost entirely on speculation (in the tech field anyway)- rich kids invest in 10 companies with cute names and literally no revenue model, hope some even dumber richer kid than you will buy out one of them.

If things got scaled back so that they only invested in companies with an actual plan to make money someday, I don't think that would be a bad thing for anyone. (Except maybe people who are still starting these dumb-ass companies like its 1998)
posted by drjimmy11 at 11:36 AM on October 12, 2008

As Chairman Mao said The situation is excellent. There is great chaos under heaven.
This I like.
posted by bonaldi at 11:38 AM on October 12, 2008

The end of the slideshow - the last ten slides or so - has some practical advice for startups. If you need to cut, cut now. Spend each dollar like it's your last. Obvious, and yet a lot of companies don't do the obvious thing.

I started a company a year ago, and my partner and I have run a very tight ship financially. We're in a much better position that a company that is used to living off a $10M VC investment. They're going to have to make major changes, we're just going to motor on.
posted by zippy at 11:50 AM on October 12, 2008 [1 favorite]

I need a PowerPoint presentation explaining this crisis like I need a bullet point in my head.
posted by twoleftfeet at 11:54 AM on October 12, 2008 [3 favorites]

Best regular paychecks I've ever received? From a .com company funded by VCs 1999-2001.

Least amount I've ever accomplished on a job? The same .com (1999-2001).
posted by philip-random at 12:52 PM on October 12, 2008

Easy credit ripoffs? Good Times!
posted by Eideteker at 12:53 PM on October 12, 2008

determining how to dampen wave two of mortgage resets MUST a key concern to whomever inherits this mess from the existing Administration.

Or more to the point, we can't save anyone who's been wiped out by wave one. We're facing an economic hurricane, and we weren't as ready as we could be. The measures we're taking to save the economy are nothing more than us desperately trying to save what's left of our town. And stepping outside is NOT a good idea.

Whether we're going to be able to save ourselves from a depression, in my liberal arts mind, comes down to three things:

1. Steady, intelligent leadership driven by bright economic minds
2. A willingness for banks and lending institutions to cut their losses early and often, esp. with these ARM resets
3. Transparency on every level of the financial sector, from dismantling the MBSs to see what's in there to getting a clearinghouse for CDS to improving controls on derivatives.

I'm hopeful that Obama's team can provide #1, because if they can't, my daughter's generation is absolutely screwed, and I'm probably eating shoe leather with I retire in 30 years. I have zero faith in McCain's economic team, since they seem to be busier pandering to their base than actually coming up with real solutions.

#2, though, is more critical to me. It's what kept Japan pinned down for ten years in their economic malaise -- an unwillingness to write off unrecoverable debt. I think it should be imperative for banks to do haircuts and flip these ARMs with teaser rates into fixed rates. (And personally, I think they should made to write off the NINJAs outright and just give the houses to these people they or the originating company loaned to.)

#3 will take time. But it's a lack of transparency causing this crisis of confidence more than anything else.

And on America innovating their way out of hard times: Not exactly. The Panic of 1893, which ran for six years and might have actually been worse than the Great Depression, was finally broken decisively by the Klondike Gold Rush. The Great Depression ran for most of the 1930s (though with a recovery and a recession mixed in) and was broken by the WWII buildup and later by the post-war boom (with a recession in the late 40s thanks to demobilization). The 1981-82 recession ultimately broke thanks to cheap oil from Saudi Arabia and the North Sea fields coming online. OTOH, we live in a time of the bubble. The Internet bubble of the late 1990s collapsed into the 2001-02 recession, which was alleviated by the housing bubble and global economic growth. If it's a bubble that gets us out, it's going to be an alternative energy bubble. If it's not a bubble, it could also be alternative energy. But something will give.

And who will fund all these alternative energy startups? People like Sequoia Capital. Goes both ways, you see. We don't like how they pumped up the Tech Bubble and the Web 2.0 Bubble, but at the same time, VC is what drives innovation in the tech world.

My hope is we don't fall into a deflationary cycle and the hard times are over by the end of 2010. And I think we can still avoid it. But in the meantime, I'm trying to find a decent interest rate for my savings -- and I'm putting as much by as I can.

I talked to my broker on Friday. He was telling me that he hadn't been in the market in a week, and the last time he went the stop he set popped five minutes after he set it. The sound of his voice, I can't forget it. It was real, actual fear. Like the sound of a man calling 911 because he was trapped out in the hurricane and he needed rescue.
posted by dw at 1:17 PM on October 12, 2008 [2 favorites]

This is where I get my definition that wealth is "that which satisfies human wants and desires".

Exactly. A lot of stuff in a pile somewhere does not satisfy anyone's wants or needs. Stuff evenly distributed doesn't satisfy many (not everyone wants the same stuff). Wealth is not just about stuff. It's about the what, the where, the when and even the why of that stuff. In a global scale this is staggeringly complex. I for one cannot estimate with any confidence what kind of value, if any, these quite complex financial instruments bring to the world.
posted by Authorized User at 1:46 PM on October 12, 2008

And personally, I think they should made to write off the NINJAs outright and just give the houses to these people they or the originating company loaned to.

OH HAI I don't buy things I can't afford. Where's my free house?
posted by TheOnlyCoolTim at 2:24 PM on October 12, 2008 [5 favorites]

OH HAI I don't buy things I can't afford. Where's my free house?

Lest those of us who didn't participate in this spending spree get too smug, foreclosures on rental properties are up too.

Here in Chicago the sheriff is currently refusing to perform foreclosure evictions because of the effects on unsuspecting renters:

"I've come to this point after spending the last year trying to work with the banking industry, even asking the Legislature to pass a bill requiring them to - at a minimum - let us know if any children, disabled or senior citizens live at the home, so we can connect them with social services," [Cook County Sheriff] Dart writes himself in the Sun-Times. "That effort was killed by banking industry lobbyists." (source)

Think you'll have plenty of notice if your landlord isn't paying the mortgage?

Illinois law requires that renters be notified their residence is in foreclosure and that they will be evicted in 120 days, but the sheriff told the Associated Press this law has routinely been ignored. As such, some tenants have gone off to work in the morning completely unaware that sheriff’s deputies would be arriving to remove their possessions from the property and leave them on the curb. Lately the sheriff's office has been handling 400 to 500 foreclosures in a month, and of those roughly one-third are rental properties and not owner-occupied properties, AP reported. (emphasis mine) (source)

You ran a credit check on your landlord before signing that lease, right?
posted by enn at 3:09 PM on October 12, 2008 [2 favorites]

Economics is pretty banal, ultimately; you have someone has to pay for what you someone consumes
posted by ZenMasterThis at 4:05 PM on October 12, 2008 [2 favorites]

# Slide 37, Amazon.com & Buy.com Curious - why does their data end at 2005??

# Slide 38, Salesforce.com & Siebel Same observation - why does their data end at 2005??

The point here seems to be about how they survived the dot-com bubble--thus the years shown. So maybe companies can use the same strategies (pointed out in each slide) in the current environment.

# Slide 42, Recovery Will be Long Wow fluffy. As in devoid not only of units but what are they saying with this slide?

Seems to be same point they made in a previous slide, that this won't be a "V-shaped" event (down fast & back up fast) but rather fast down & slow up.

Point being (presumably for their firms) precisely that no one knows exactly how long the downturn will last, so better plan on it lasting a rather indefinitely long while.
posted by flug at 4:14 PM on October 12, 2008

and the last time he went the stop he set popped five minutes after he set it. The sound of his voice, I can't forget it. It was real, actual fear. Like the sound of a man calling 911 because he was trapped out in the hurricane and he needed rescue.

I was daytrading for much of last week. %$)#@* power went off Wednesday AM for about an hour, costing me $4,000.

yeah.
posted by troy at 4:24 PM on October 12, 2008

Slide 21, this is an effective way to run a business, ANYTIME.

... or one's personal finances. Thank you for your analysis and comments Mutant.

Slides 21, 46, 52 and 53 are of particular importance to the sole proprietors, the self employed.

Max out that emergency fund (slide 52) - get it as close to one year's expenses as you can; take exceptional care of your current clients, exercise financial prudence (slide 21) and take great care (slides 46, 53) in choosing your next client and project team.
posted by seawallrunner at 6:40 PM on October 12, 2008

someone- would have seen this coming and figured out how to profit by it; can you give an example

Yes. A year ago, I did some research on AIG for a hedge fund that had taken a short position on their stock. The fund's managers made a very, very large amount of money from this crisis.
posted by foxy_hedgehog at 6:42 PM on October 12, 2008

That whole thing about the evictions; I know a lot of people say that renting beats home ownership right now, but I beg to differ because you're really subject to the whims (and financial health) of your landlord.

At the same time, I wouldn't want to be in a house that I paid too much for right now, either -- but if I can keep making the mortgage payments, at least I won't come home to be evicted.

Those of us (and to hear the media, there are very few of us, although I think there are actually lots of people in this position) who are in a house that doesn't break the bank, mortgage-wise, and have some money packed away to cover payments in the event of an extended job loss are in the best position to weather this storm, I suppose. And yet, I need more than two hands to count the number of times relatives, financial professionals and others told me I was being too risk-averse when I avoided an ARM, avoided an interest-only mortgage, or elected to buy less house than I could technically afford.

On a related note, my father passed recently, and between his retirement fund and life insurance, my mother should be in really good shape. Still, with the collapse, I gave her a call to make sure she was okay. Here's what she did:

- As soon as my father was old enough (but before he died) she pulled all of his retirement fund money out of his 401K and put it into CDs;
- When the life insurance paid out, she put all of that money into CDs;
- She kept out enough to cover the upcoming property taxes and some repairs the house needed (the house is paid off.)

When she tried to do the second, the manager at the bank came out to talk to her, and tried really, really hard to push her into letting him manage a stock portfolio for her. My mother refused, and despite his best efforts (he tried really hard) elected to keep her existing personal banker and stick to the low-risk CD-based investments she was already doing.

The market collapsed less than a month later.

She told me that when she goes to the bank, he's very friendly, and asks how she's doing. I encouraged her to answer "better than your portfolio", but she won't do it. I guess I know where I got my risk-averse nature from. Heh.
posted by davejay at 7:09 PM on October 12, 2008 [2 favorites]

I walk into the branch of my bank and cheerfullyh ask of the teller: What's the name of your bank today?
posted by Postroad at 7:31 PM on October 12, 2008 [1 favorite]

OH HAI I don't buy things I can't afford. Where's my free house?

The issue with NINJA loans, to me, is they are so blatantly stupid from a banking perspective that they never, ever should have been made. No Income, No Job or Assets is what it stands for. And honestly, if you're giving people without a job, income, or assets a mortgage, you should be made to write it off 100%, since the chances of you actually collecting are diddly over squat.

Of course, the mortgages aren't with the originators, since they were bundled up and sold off for cash by these unscrupulous mortgage writers. Even then, though, the banks were too stupid to look under the hood.

Honestly. Make the banks eat the NINJAs and let them sue the originators into oblivion.
posted by dw at 7:33 PM on October 12, 2008 [2 favorites]

And I'm renting right now. We did qualify for a mortgage last year, but it wasn't going to get us anything of a reasonable size within 5 miles of my work, so we waved it off.

There are now three houses within 5 miles of work that are listed for less than what we qualified for, one of which is one we might look at if we didn't think Seattle prices still have 10-20% more to give back.

But we do worry about our landlords and whether they can make the payments. They bought our 2-unit place earlier this year right before the bottom fell out here in Seattle. I have no idea if here in this state how tenants are treated in a foreclosure process. I'm hoping it doesn't involve having your crap thrown on the curb while you're at work.
posted by dw at 7:37 PM on October 12, 2008

Batten down the hatches. Don't worry about the storm we're in now; prepare for wave two of resets, the storm that is on the horizon.

I recall pointing to a version of this graph a year or two ago in one of these threads, back when suggesting that things could get very bad indeed would get shouted down by a veritable swarm of optimists. How things have changed, huh?
posted by stavrosthewonderchicken at 8:19 PM on October 12, 2008

Stav, nobody likes the "I told you so" ;-)
Interesting that Malor, who I think bore the brunt of the naysayers harangues has been comparatively quiet (although I realise he posted up thread). I for one would like to thank him. He and Mutant both helped me get a view on what was coming, and while I didn't go out and short banks, I did cancel some equities purchases, and made sure to beef up my emergency cash.
More importantly, when discussing these things with my father last Christmas, he moved all his retirement savings into bonds, from a position that was mainly equities. So thanks Malor!
posted by bystander at 9:02 PM on October 12, 2008 [1 favorite]

'R.I.P. Good Times' - now? I thought that ended just after Bush got elected.

I mean, I don't know much about finance, but I was reading here and elsewhere about this or that being taken out of economic equations by the administration. This or that becoming opaque. All kinds of transparency being lost, etc. etc. I knew something was coming.

Not that I had a clue what to do about it, there's a huge difference between being a meteorologist and some guy on the ground going "those clouds look mean."
posted by Smedleyman at 11:13 PM on October 12, 2008 [1 favorite]

(dw, Seattle has some pretty tenant-friendly rental laws. I don't see an explicit mention of “owner got foreclosed” in this eviction ordinance (which, btw, you're required to be given a summary of when you sign a lease), so I'm not sure how it'd be handled— but the ordinance claims to be an exhaustive list of legal reasons for eviction, so…)
posted by hattifattener at 11:46 PM on October 12, 2008

The parallels between 'you can't call it a quagmire' bleatings from the early Iraq war threads and people being "shouted down by a veritable swarm of optimists" kind of tipped me off to the fact that the optimists didn't have a clue what they were saying. It's also interesting to note the phrase "moral hazard" seems to have gone to hide with "Weapons of Mass Destruction"

OH HAI I don't buy things I can't afford. piss away all my company's assets on get rich quick schemes. Where's my free house bailout?

Would you rather give the money to the idiot who came up with NINJA loans?

The gall of corporatists claiming you can't write off the bad mortgages whilst simultaneously looking for somewhere to put their trillion dollar cheque is Cheneyesque in size. It's impressive, in a wearing a parka to Auschwitz kind of way.
posted by fullerine at 12:21 AM on October 13, 2008