August 6, 2010

The May Report: 8/6/2010: A jewel in the crown I had not heard about until
tonight — yet another resource for start-up firms no one seems to know about;
Jim Orrico on Assistive Medical; The Music Producer2.0 (TMP) gets enthusiastic
support at BNC — and has Kevin Harrington of Shark Tank fame as an adviser

Editor and publisher: ron@themayreport.com, ronaldmay@aol.com,
www.themayreport.com , 773-525-3944.

If you missed an article, go here:
www.tmronline.com/A55951/tmrarticles.nsf/vwFullNewsletter

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_______________________________________
TABLE OF CONTENTS

The Scoop section:

— News about Flip’s Company in 8/5/2010 May Report
— Nicole Duhoski writes up The Chicago Social Media Club Event last week, July
29th
— Briefly noted, by Ron May
— Nik Rokop: Attendance at IIT July 29th
— Martin Glotzer in “real life”
— Information about Flyovergeeks from Ed Domain and the launch party on August
5th at Rebel
— Who was at the TBIF summer party
— Business Innovators Conference Announces World-Class Keynote Speakers Lineup
— Miscellaneous notes (4 messages)
_______________________________
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______________________________
The Scoop section:
________________
News about Flip’s Company in 8/5/2010 May Report

From: Joseph Koblich
Subject: News about Flip’s Company in 8/5/2010 May Report
Date: Fri, 6 Aug 2010 17:32:22 -0500
To: ron@themayreport.com

Ron,

You’ve probably heard about this by now, but there is a cover story about
Flip’s company in the July 26th print edition of Crain’s Chicago Business still
on some newsstands. According to Crain’s, the HQ is now officially in Chicago
(this is also consistent with the current “About Us” page on the Interact
website), although most of the staff will remain in North Carolina.
Coincidentally, there is also a news story on Crain’s chicagobusiness.com dated
8/6/2010 about Flip suing BDO Seidman over a tax shelter:

www.chicagobusiness.com/section/search?q=filipowski

www.chicagobusiness.com/article/20100806/NEWS04/100809907/filipowski-sues
-bdo-seidman-over-tax-shelter

www.chicagobusiness.com/article/20100724/ISSUE01/100033710/divine-evangel
ist-andrew-flip-filipowski-returns-to-chicago-with

Joe Koblich
___________________________________
Nicole Duhoski writes up The Chicago Social Media Club Event last week, July
29th

From: nicole duhoski
Subject: Re: Write up for Ron May – The Chicago Social Media Club Event last
week
Date: Thu, 5 Aug 2010 15:11:38 -0500
To: ron@themayreport.com, ronaldmay@aol.com
Cc: kmcgorisk@gmail.com, willingerj@gmail.com, Melanie Adcock

Ron,

I’m sorry to hear you are not feeling well. Below is a summary of the July
Social Media Club Chicago event. Please let me know if you have any questions.

Social Media Club Chicago’s Summer Social was held on July 29, 2010 at Uncle
Fatty’s Rum Resort. The tropical island themed social event was sponsored by
Buick. Dressed in island attire, (see @tamcdonald and @jwillie pics) attendees
mingled in a laid back atmosphere while sipping on rum paradise punch and
munching on delicious Domino’s Pizza, courtesy of @Ramon_DeLeon. In addition to
socializing and networking, several members of the club including Carla Furca
(@ShesAllWrite), Amy Korin (@Interactive Amy) and Jeannie Walters (@JeannieCW)
took a few moments to talk to the crowd about the impact social media has had
on their lives.

Check out the Social Island pics courtesy of Barbara Rozgonyi of
www.thesociallens.com for SMC Chicago – ht.ly/2jksV
As Buick was the sponsor of the summer social, they offered guests a ride in
the Buick Remix VIP vehicle from Uncle Fatty’s to the River East Art Center
where their Buick Regal Remix event took place that same evening.

For more information about Social Media Club Chicago, visit smcchicago.org,
join SMC Chicago on Facebook, LinkedIn and follow @smcchicago on Twitter.

Nicole Duhoski
312.622.0045
Skype: Nicole Duhoski
Let’s Connect LinkedinFacebookTwitter

On Wed, Aug 4, 2010 at 4:37 PM, Melanie Adcock wrote:

Hey friends,

You all know how ill Ron is. He wants someone to write something about the
Chicago Social Media Club event last week. Can one of you or all of you send
him something please? It doesn’t hurt his report to have a few new people’s
opinions every once in awhile. It may as well be yours. Also, please feel free
to forward this to any event-a-holics you know and tell them to start sending
stuff to Ron (copied above). The more the merrier, right?

Thanks in advance for your help on this.

Smiles,

Melanie

Melanie Adcock
iPHONE: 312-259-0610
DROID: 312-833-1825
E-Mail: melanie_adcock@msn.com
Facebook Fan Page: bit.ly/MelanieAdcockFacebookFanPage
Bio: bit.ly/MelanieAdcockARC
LinkedIn: www.linkedin.com/in/melanieadcock
Twitter: twitter.com/melanie_adcock
Facebook Profile: www.facebook.com/melanie.a.adcock
_____________________________________
Briefly noted, by Ron May

* First, thanks to Melanie Adcock who has kindly become an emissary for TMR
with the goal in mind to get more people involved in writing up what happens at
various events. To that end, Nicole Duhoski has come through. She wrote up a
summary of the Social Media Chicago event on July 29th. Thanks, Nicole.

* Filipowski sues BDO Seidman over tax shelter
www.chicagobusiness.com/article/20100806/NEWS04/100809907/filipowski-sues
-bdo-seidman-over-tax-shelter

* There were 60-65 people according to Len Bland at the BNC Capital Group
Tuesday night and the first firm presenting wowed the place. The presenter,
Whitney Belker Vauvelle (Miami), was quite attractive, I have heard from
several people. OK, they all agree, she’s hot.

Not all attendees choose to vote — and the vote is on which firm you would
invest in –but Whitney walked away with about 24 votes vs. 15 (I also heard 11
or 12) for Tom McCalley, CEO/CFO i-Guide Robotics (from Carmel, Indiana) and 4
votes for Liz Ackerman, President/CEO Lux Life (Chicago).

One thing Whitney has going for her firm is Kevin Harrington of Shark Tank fame
as an advisor. I believe she has also run ads on M-TV.

en.wikipedia.org/wiki/Kevin_Harrington_%28Shark_Tank%29
en.wikipedia.org/wiki/Shark_Tank_%28TV_series%29

The companies were:
+++++++++++++++++++++++++
The I-Guide Robotics system www.i-guiderobotics.com/ is an on-board
computer that automates the commercial mowing process. By the end of 2010, the
i-Guide Robotics system will be integrated into the standard manufacturing
process of two commercial models produced by the rapidly growing Bad Boy Mower
Company with 310 dealers in 35 states.

Luxe Life shopluxelife.com/about-us/ offers turnkey online consignment
sale services for luxury and collectible goods to Individuals and Businesses.

The Music Producer2.0 (TMP) www.themusicproducer.com/ is a music
creation software application enabling ANYBODY to write and produce their own
music and ring tones from their home PCs. With virtually no marketing,
individual customers from 50 different countries have already purchased the
software from the website.
++++++++++++++++++++++++

* Here is a great story and I stumbled onto it effectively by accident. I
happened to notice that Jim Orrico and his firm Assistive Medical Equipment,
www.assistiveme.com, got some funding through the BNC Capital Group in Len
Bland’s newsletter, but beyond that I got the story wrong. The funding they got
came from a single investor who was in attendance at the December 2009 meeting.
Len Bland reports in his newsletter that “Angels take an average of 67 days to
close a deal.”

I wrote yesterday that they brought in a CEO on a quid pro quo basis. That is
incorrect. They have brought in a business man who is functioning in a CEO
role, (not being paid, but looking toward the future) named Stu Rubin who has
run a number of businesses in the past.

The unnamed angel investor is a retired man in manufacturing, who put in a
small sum. My guess would be somewhere in the $50K to $100K range, but that is
just a guess and Jim was not telling me, nor did I even ask — being the polite
man that I am. Jim said that he has an on-going and open first round. The
company, www.assistiveme.com, has been self funded until now and Jim did say
that friends and family money is pretty much tapped out.

They have just inked a partnership with a firm called COMPURAY which provides a
more holistic approach and provides evaluations and testing. Actually, they
appear to be a medical staffing firm so some synergies in the channels could be
developed. compuraymedical.net/

So, Jim’s product, EZRock (TM) which has been selling now since May of this
year, can be dovetailed into the sales efforts of COMPURAY.

Jim can be reached at 312-848-0198.

Now, here is the nugget and the “scoop” of the day. There is a space of 410,000
square feet at 2010 W. Fulton, at the corner of Fulton and Damen which is
called the Industrial Council of Nearwest Chicago, sometimes called ICNC.
www.industrialcouncil.com/Background.html
ICNC houses 90 firms and Jim’s is one of them with 1,000 square feet. Space
arrangements are flexible. Computer lines are good, but the main purpose of the
facility which is tied directly into the SBDC (Small Business Development
Center) is to help small start-up manufacturing firms.

Go ahead, take a guess. Jim pays between $6 and $7 per square foot for the
space.

Here is the ICNC building staff. Jim mentioned Andrew to me.
www.industrialcouncil.com/ICNC-STAFF.html

All ye great purveyors of information for entrepreneurs, shame on you. Shame on
you, Layton Olson. Shame on you, Chris Bloom and the Economic Development
Council and its Technology Commercialization Task Force (TCTF). Shame on you,
Bruce Montgomery. Shame on you, Jerry Mitchell. Shame on you, Jim Charney.
Shame on you, Jerry Field (is that the right name?) from UIC. How come I am
just finding out about this at 5pm on a beautiful Friday August afternoon for
the first time?? This is a hidden jewel in the crown.

Jim Orrico said he “heard about it from somebody.” Gee, ain’t that great?! We
are so feckless that we can’t even publicize our own resources to the
entrepreneurs who need them. Is it territoriality or fiefdoms that account for
this disconnect? What then?

Nik Rokop can come up with very liberal definitions of incubators and even
include Cleveland, but what about our own back yard? And Nik, while we’re
talking incubators where was Tim Lavengood at your event on the 28th of July?

Everyone knows my bias with respect to the so-called merger of the ITDA with
the ITA, so I was tepid in asking Jim about it. I told him he should be
completely honest with me and not slant what he says to please the interviewer
and he is too honest to have shaded it anyway.

Jim told me that he found the ITDA to be very helpful to him in putting
together a business plan and when I asked him whom specifically he was working
with it was LeAnne Tourtellotte (who is at the ITA) and Keith Brumbaugh (who
was not brought over when the merger took place).

Jim’s comment on the ITA was first that it is not clear to him where he stands
with the ITA, and he added that they seem to be more focused on the internet
world. He did say he still wants to attend their meetings to learn and interact
with entrepreneurs. To paraphrase the bard with a twist, he neither praised nor
buried the ITA. The jury would appear to be still out.

Jim has two sales guys on commission and they are focusing on nursing homes and
hospitals. In fact, they are meeting with the radiology department at St.
Alexis Hospital. That seems to be the right approach, start with small pilot
projects and work from there.

Three key takeaways here.

1. www.assistiveme.com is making slow but sure progress.

2. Founder Jim Orrico has stuck with it through thick and thin.

3. We have a new jewel in the crown: The Industrial Council of Nearwest Chicago.

Here are the people tied to Assistive Medical based on the website. Stu Rubin
has not been added yet.
+++++++++++++++++++++
www.assistiveme.com/our-people/

Our People
Assistive Medical Equipment has a talented team of professionals, passionate
about achieving our mission. In partnership with our suppliers, we are
dedicated to providing the highest quality solutions to major challenges facing
the elderly and disabled, and their caregivers.
Our Management Team
Jim Orrico
Jim earned his mechanical engineering degree from Marquette University and has
over ten years technology transfer and commercialization experience for medium
and large size companies. Responsibilities have included managing the product
development process, tracking profitability, developing manufacturing supply
chains in the U.S., Mexico and Asia, and leading core multinational program
development teams.
Mario Orrico
Mario has over thirty years of product development and commercialization
experience in the consumer electronics market and he has been awarded 51
patents in his career so far. Mario’s expanding list of new product ideas for
the durable medical equipment (DME) industry continues to feed the AME product
pipeline. Mario has a degree in mechanical engineering from the University of
Illinois at Chicago.
Coo Nguyen
Coo has over ten years of economic research, financial analysis, commercial
banking, and public accounting experience, and is a degreed accountant from
Tulane University. Coo was an analyst with BNP Paribas where he was responsible
for corporate lending relationships with several multinational medical
equipment companies.
Joel Byots
Joel has over twenty years of management and marketing experience. He has
developed market entry strategies for companies interested in entering the
medical device industry as well as the biologics industry.
Bill Bryce
Bill has over 30 years experience in the healthcare industry. At his recent
position as Vice President of Praxair Healthcare Services, Bill introduced
several new products nationally that are currently being used in the hospital,
long-term care, and homecare markets. Bill holds several medical device patents
and an award from the Medical Device Association for Innovation.
++++++++++++++++++++++++++++++++++++

* I notice that the ITA has a replacement on board for Margaret Plett, whom
Fred Hoch fired soon after the merger. Let’s not mince words here. Margaret
wasn’t happy with Fred, nor he with her. They papered it over, but she was
fired. Ask Tim Krauskopf. The new person’s name is Dorothy Radke, Marketing &
Communications
Direct: (312) 924-1044, dradke@illinoistech.org

I have noticed a pattern. The lawyer who runs Marcus Stephen Harris LLC
www.mshtechlaw.com/professionals.php told me that his small firm had
been an ITA member for a year but found “Fred to be non-responsive.” He
repeated that point several times, knowing full well that it was on the record,
stressing that they got little out of it. They’re a law firm and Terry Howerton
told me in our four hour sit down in June that they would have no interest in
cultivating relationships with law firms per se. Returning their calls would
not be on the top of the list. Terry told me that service providers are needed
but the ITA won’t go out of its way. Marcus Harris did not see the bang for the
buck and walked away after one year of membership, and besides, some other firm
had started a lawyer’s roundtable. Marcus Harris held an event at TechNexus and
advertised it in TMR which is how I happened to talk to them. That conversation
took place months ago.

One thing Marcus Harris said resonated with what so many others have said. “You
get out of it what you put into it.”

It is just one man’s opinion, but what LeAnne and Keith did for and with Jim
Orrico was not just a case of “you get out what you put in.”

They reached out to him and he to them.
________________________________________
Nik Rokop: Attendance at IIT July 29th

Subject: Attendance at IIT July 29th
Date: 8/5/2010 5:19:21 P.M. Central Daylight Time
From: nrokop@stuart.iit.edu
To: ronaldmay@aol.com, ron@themayreport.com

Hey Ron,

In your last newsletter you wrote:

5. At the Knapp Center last Thursday July 29th down at IIT, attendance was
sparse (under 30 people I hear) but my sources say there were some interesting
people in attendance.

Definitely some very interesting people in attendance – around120!! Check out
these pictures:
knappcenter.iit.edu/event-photos/?picasaViewAlbumId=MidVenturesIncubatorP
anel,0

…and check your sources !

Be well!

Nik

–
Nik Rokop
Managing Director
IIT Entrepreneurship Academy
IIT Knapp Entrepreneurship Center
Stuart School of Business
Illinois Institute of Technology
3424 S. State Street
Chicago, IL 60616
Phone: 312-567-3030
Cell: 312-404-4454
www.knappcenter.iit.edu
nrokop@iit.edu
___________________________________________
May here. I did get some clarifications from Nik. I don’t know how my numbers
were so far off — I could have misunderstood a source, or that source could
have been intermixing two separate events. Either way, I am usually not off by
a factor of four in counting heads — even when I’m not there.

The CEC was not there because they are not an incubator, Nik explained. Sandbox
is sort of an incubator. The place in Cleveland is an incubator. The tech park
in Evanston is somewhat of an incubator. TechNexus has some components that one
might call an incubator, although they shunned that term from the get-go (they
were a clubhouse). IMD is not an incubator, but it is a tech park. Rokop says
that Excelerate is also in some sense an incubator, really it is a mentorship
program. As you can see, the term is thrown around a lot with very liberal
definition parameters. It was out of fashion for a while and may be coming
back. But it has to be more than just space. There must be more of a full
service operation.

Nik says that Knapp has a tech park, but they are building out an incubator for
student firms, and other early start-ups. But he stressed that there are no
bright lines drawn between the incubator part and the tech park part.
______________________________________
Martin Glotzer in “real life”

From: MGlotz@aol.com
Subject: Re: The May Report: 8/5/2010: Eric Wasowicz’s deal of the day
UWantSavings.co…
Date: Thu, 5 Aug 2010 20:44:22 EDT
To: ron@themayreport.com

Martin Glotzer in “REAL LIFE” has been the President of the Cincinnati Union
Stock Yard Company since 1965 and has been a Director since 1960. He started as
a Director and Officer of Pahang Rubber Company Ltd Honolulu its only asset a
rubber estate in Malaya that he visited in 1960 in 1959 his group got control
of Selama-Dindings Plantations ltd. Honolulu he has been a Director and officer
of the Cleveland Union Stock Yard Co Cleveland Ohio from 1970 to 1990 he was a
Director of Metropolitan Brick Canton Ohio the bricks are in the Indianapolis
Speedway in the 1960s he was a Director of Vi Jon Labratories St. Loius and in
the 1980s and 90s President of PC Distributors Mt. Prospect Atlanta Kansas City
Toledo a Novell Distributor and Novell Training Schools did $60 million in
sales Ill Lic Real estate Broker for over 50 years so he thinks faster than he
writes. Have a GOOD DAY

In a message dated 8/5/2010 5:07:44 P.M. Central Daylight Time,
ron@themayreport.com writes:
____________________________________________
Information about Flyovergeeks from Ed Domain and the launch party on August
5th at Rebel

Subject: Re: Information about Flyovergeeks
Date: 8/6/2010 2:54:21 P.M. Central Daylight Time
From: edward.domain@gmail.com
To: melanie_adcock@msn.com
CC: ronaldmay@aol.com
Hi Ron,

I would love an opportunity to meet you- I have heard your name mentioned many
times as I have been re-integrating into Chicago and I think interviewing you
is a GREAT idea- if you are open to it. I’d also be happy to share what I am
doing with Flyover Geeks and its mission here in Chicago.

I am pretty booked through next week but could do an evening one one of the
nights from 15th – 17th. We could grab a bite, I could interview you and you
can share your insights with me.

Melanie, thank you for the introduction, I appreciate it- you are very generous
with your time.

best,
Edward

On Fri, Aug 6, 2010 at 2:47 PM, Melanie Adcock wrote:

Ron,

Here is what I have:

www.flyovergeeks.com/
www.facebook.com/pages/Flyover-Geeks/137898679572742?ref=ts&v=wall

Founder Ed Domain edward.domain@gmail.com
415-320-3932

I say give him a call and ask him all about what he’s up to. There is no doubt
that you can ask him some insightful questions about his endeavors.

Ed,

Any chance you could arrange a time to speak to Ron May about Flyovergeeks?
Take him out to eat or something. Someplace fun. Just watch out for the
restaurant in his neighborhood that issues parking tickets for wheelchairs,
LOL! Truly, it would give you a great opportunity to hear about all that he’s
seen in the tech world as it pertains to what you’re doing. Take some pictures
of Ron and put it on your web site, or do a YouTube video. It will be great.

Smiles,
Melanie

Melanie Adcock
iPHONE: 312-259-0610
DROID: 312-833-1825
E-Mail: melanie_adcock@msn.com
Facebook Fan Page: bit.ly/MelanieAdcockFacebookFanPage
Bio: bit.ly/MelanieAdcockARC
LinkedIn: www.linkedin.com/in/melanieadcock
Twitter: twitter.com/melanie_adcock
Facebook Profile: www.facebook.com/melanie.a.adcock
____________________________________
Who was at the TBIF summer party

Subject: Re: Jason, how many people were at the TBIF party and who were some of
them?
Date: 8/6/2010 11:32:10 A.M. Central Daylight Time
From: jason@jacobsohn.com
To: RONALDMAY@aol.com

We had about 20 people. Here are some of the attendees:

Jed Abernethy
Monica Metzler
Warrent Bent
Jason Jacobsohn
Nik Rokop
Mil Ovan
Peter Tapling
Dan Ehrmann
Brett Holland
Ted Greene
Jim Orrico
Bill McHenry, Entrepreneur Sales & Marketing
Dave Culver
Bob Frumkin, Cadreas

Jason Jacobsohn
773-368-0229
jason@jacobsohn.com
www.jacobsohn.com

Follow Me: LinkedIn | Twitter | Blog

——————————————————————————–
From: “RONALDMAY@aol.com”
To: jason@jacobsohn.com
Sent: Fri, August 6, 2010 10:23:12 AM
Subject: Jason, how many people were at the TBIF party and who were some of
them?
____________________________________________
Business Innovators Conference Announces World-Class Keynote Speakers Lineup

Top-tier Innovation Thought Leaders Come from Business, Government and Academe
to Address Attendees of October 4-6, 2010 Event

Lisle, IL August 6, 2010 – Praveen Gupta, Lead Organizer for the 3rd annual
Business Innovators Conference being held at Illinois Institute of Technology’s
Rice Campus in Wheaton, IL October 4-6, 2010, announced today the world-class
lineup of keynote speakers for this event:

· Hardik Bhatt, CIO, City of Chicago

· Chris Galvin, CEO, Harrison Street (former Chairman/CEO Motorola)

· Gerald “Solutionman” Haman, Founder, The Thinkubator Innovation Center

· Jean Holley, CIO, Tellabs

· Steve Shapiro, former Worldwide Partner for Accenture’s Global
Process Excellence Practice, and author of 24/7 Innovation: A Blueprint for
Surviving and Thriving in an Age of Change

The 3rd annual Business Innovation Conference is a premier educational and
networking event bringing together leading innovation experts and practitioners
from business, academe and government to exchange experiences and explore and
learn the science of innovation. The conference focuses on the tools we now
have to master innovation so that we become continual thinkers, capable of
innovating on demand, and managing innovation teams to predictable outcomes.

Attendees of the 3-day event will have the opportunity to attend 6 high-impact
workshops, 18 outstanding speaker presentations, and 5 compelling keynote
addresses from a diverse range of industries and domains – but all focused on
delivering practical tools and methods to dramatically enhance your ability to
generate and manage innovation. In addition, attendees will also make
invaluable new professional connections and have opportunities to share ideas
and experiences with other accomplished innovators from around the US and the
world.

For more information, including registration instructions and sponsorship
opportunities, please visit www.businessinnovationconference.com
________________________________________
Miscellaneous notes (5 messages)
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#1: From: “Sarah Evans”
Subject: Off to CNN and then NBC…
Date: 5 Aug 2010 15:01:28 -0700
To: “The May Report”

Thank you for your email. I am out of the office from Thursday, August 5
through Tuesday, August 10.

On Thursday I’ll be hanging out at CNN in Atlanta and on Monday I’ll be doing a
live web show at NBC’s “30 Rock.” You’re welcome to join in the fun via Twitter
with me @PRsarahevans.

If your request is urgent, please email amanda@sevansstrategy.com and she will
get back to you immediately. I will do my best to check email in the evenings.

I will return your email when I return.

Best,
Sarah
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#2: From: MGlotz@aol.com
Subject: Re: The May Report: 7/30/2010: Part TWO of three tonight: McCall and
New Worl…
Date: Tue, 3 Aug 2010 08:09:00 EDT
To: ron@themayreport.com

wonder have you heard of THE CITY OF HOPE???? Duarte Calif/ one of the top
cancer clinics in America I toured the place several years ago they have a fund
rasing office in Skokie look them up on google. Martin Glotzer

In a message dated 7/30/2010 9:38:32 P.M. Central Daylight Time,
ron@themayreport.com writes:
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#3: From: Mark Williams
Subject: question
Date: Wed, 04 Aug 2010 11:51:29 -0400
To: The May Report

Dear Ron,

How is the hemoglobin now and the lesion on the liver? Please provide an
update.

Best wishes,
Mark
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#4: Subject: RE: Bob, do you agree or disagree with this?
Date: 6/25/2010 5:06:38 P.M. Central Daylight Time
From: rdrefs@hotmail.com
To: ronaldmay@aol.com

Yes, it’s how things worked in this country until 80 years ago and the rate of
bank failures (ex the Great depression was lower). In much of the world similar
systems are in place. The change in the risk seeking behavior of the investment
banks is amazing. Twenty five years ago before they all went public the
partners were wary of any risk compared to today. When I (or most anyone else)
screw up I pay. I’m no fan of the asymmetry for Goldman et al where it’s heads
I win, tails you lose.

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From: RONALDMAY@aol.com
Date: Fri, 25 Jun 2010 11:23:48 -0400
Subject: Bob, do you agree or disagree with this?
To: rdrefs@hotmail.com

www.washingtonpost.com/wp-dyn/content/article/2010/04/22/AR2010042204208.
html

The best financial reform? Let the bankers fail

COMMENT
75 Comments | View All &raqou;

By James Grant
Friday, April 23, 2010

The trouble with Wall Street isn’t that too many bankers get rich in the booms.
The trouble, rather, is that too few get poor — really, suitably poor — in
the busts. To the titans of finance go the upside. To we, the people, nowadays,
goes the downside. How much better it would be if the bankers took the losses
just as they do the profits.
This Story

*
How Goldman fell to earth
*
Seize the yachts
*
SEC was split on Goldman evidence

Happily, there’s a ready-made and time-tested solution. Let the senior
financiers keep their salaries and bonuses, and let them do with their banks
what they will. If, however, their bank fails, let the bankers themselves fail.
Let the value of their houses, cars, yachts, paintings, etc. be assigned to the
firm’s creditors.

Of course, there are only so many mansions, Bugattis and Matisses to go around.
And many, many such treasures would be needed to make the taxpayers whole for
the serial failures of 2007-09. Then again, under my proposed reform not more
than a few high-end sheriff’s auctions would probably ever take place. The
plausible threat of personal bankruptcy would suffice to focus the minds of
American financiers on safety and soundness as they have not been focused for
years.
ad_icon

“The fear of God,” replied George Gilbert Williams, president of the Chemical
Bank of New York around the turn of the 20th century, when asked the secret of
his success. “Old Bullion,” they called Chemical for its ability to pay out
gold to its depositors even at the height of a financial panic. Safety was
Chemical’s stock in trade. Nowadays, safety is nobody’s franchise except
Washington’s. Gradually and by degree, starting in the 1930s — and then, in a
great rush, in 2008 — the government has nationalized it.

No surprise, then, the perversity of Wall Street’s incentives. For rolling the
dice, the payoff is potentially immense. For failure, the personal cost –
while regrettable — is manageable. Senior executives at Lehman Brothers, Citi,
AIG and Merrill Lynch, among other stricken institutions, did indeed lose their
savings. What they did not necessarily lose is the rest of their net worth. In
Brazil — which learned a thing or two about frenzied finance during its many
bouts with hyperinflation — bank directors, senior bank officers and
controlling bank stockholders know that they are personally responsible for the
solvency of the institution with which they are associated. Let it fail, and
their net worths are frozen for the duration of often-lengthy court
proceedings. If worse comes to worse, the responsible and accountable parties
can lose their all.

The substitution of collective responsibility for individual responsibility is the fatal story line of modern American finance. Bank shareholders used
to bear the cost of failure, even as they enjoyed the fruits of success. If the
bank in which shareholders invested went broke, a court-appointed receiver
dunned them for money with which to compensate the depositors, among other
creditors. This system was in place for 75 years, until the Federal Deposit
Insurance Corp. pushed it aside in the early 1930s. One can imagine just how
welcome was a receiver’s demand for a check from a shareholder who by then
ardently wished that he or she had never heard of the bank in which it was his
or her misfortune to invest.

Nevertheless, conclude a pair of academics who gave the “double liability
system” serious study (Jonathan R. Macey, now of Yale Law School and its School
of Management, and Geoffrey P. Miller, now of the New York University School of
Law), the system worked reasonably well. “The sums recovered from shareholders
under the double-liability system,” they wrote in a 1992 Wake Forest Law Review
essay, “significantly benefited depositors and other bank creditors, and
undoubtedly did much to enhance public confidence in the banking system despite
the fact that almost all bank deposits were uninsured.”

Like one of those notorious exploding collateralized debt obligations, the
American financial system is built as if to break down. The combination of
socialized risk and privatized profit all but guarantees it. And when the
inevitable happens? Congress and the regulators dream up yet more ways to try
to outsmart the people who have made it their business in life not to be
outsmarted. And so it is again in today’s debate over financial reform. From
the administration and from both sides of the congressional aisle come
proposals to micromanage the business of lending, borrowing and market-making:
new accounting rules (foolproof this time, they say), higher capital standards,
more onerous taxes. If piling on new federal rules was the answer, we’d long
ago have been in the promised land.

Until 1999, Goldman Sachs was a partnership, with the general partners bearing
general and unlimited liability for the firm’s debts. Today, Goldman — like
the vast majority of American financial institutions — is a corporation. Its
stockholders are liable only for what they invested, no more. And while there
are plenty of sleepless nights, the constructive fear of financial oblivion is,
for the senior executives, an all-too-distant nightmare.

The job before Congress is to bring the fear of God back to Wall Street. Not to
stifle enterprise but quite the opposite: to restore real capitalism. By all
means, let the bankers savor the sweets of their success. But let them, and
their stockholders, pay dearly for their failures. Fair’s fair.

James Grant is editor of Grant’s Interest Rate Observer.
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END OF REPORT