Posts Tagged ‘Capitalism’


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A new ball game for Brazil’s Ronaldo

FT.com / Management
By Vincent Bevins
Published: May 5 2011 23:12 | Last updated: May 5 2011 23:12
Ronaldo
Off the bench: Ronaldo tackles business

On his way to a game between Brazil and Scotland at the Emirates Stadium in north London, Brazilian football legend Ronaldo Luís Nazário de Lima is not wearing the national jersey that made him famous. Nor is he on the team bus. He is wearing a dark suit, seated in the private car of his new business partner, Sir Martin Sorrell of WPP Group.
Since retiring from the sport at the age of 34 this year, Ronaldo has been hoping his experiences and connections as an athlete will help him succeed with his new São Paulo-based sports marketing company, 9ine, which manages athletes’ images and develops sports advertising strategies for brands.
“I wasn’t just going to stop working, and I never wanted to be a coach or a manager,” he says. “But I wanted to take advantage of my connection with football . . . After all these years I have very good relationships with many of the biggest companies and lots of athletes.”
With Brazil’s plans to host the football World Cup in 2014 and the Olympics in 2016, while experiencing a boom in consumption, it is a good time for Ronaldo to use those connections. The market for advertising in the country is growing faster than gross domestic product.
It is this timing and Ronaldo’s unique position that earned 9ine, named after his jersey number, the vote of confidence from Sir Martin’s WPP Group, which holds a 45 per cent stake in the company – Ronaldo also owns 45 per cent. “Economic growth [in Brazil] has been colossal, and there is a young population, strong new media and good internet penetration. Brazil is under-advertised and under-branded,” Sir Martin says. “We’re looking for new ways to connect with consumers in a tangible and emotional way, and working with Ronaldo is a really interesting opportunity for us.”
Brazilian sports stars have a mixed history entering the world of business. Carlos Arthur Nuzman, a former Olympic volleyball player, became a successful lawyer before heading the Brazilian Olympic Committee and bringing the games to Rio. Football legend Pelé headed a campaign for Viagra and now for the BM&FBovespa, the country’s multi-asset exchange, to convince Brazilians to invest.
It is difficult to overestimate Ronaldo’s status in his own country – boosted by the fact that he has a reputation for managing his fame with good humour, despite some famous personal scandals. But his touch will not necessarily turn 9ine into gold. “I generally think if a celebrity has a decent idea, they tend to believe that idea or business can become a great idea just because their name is behind it,” says Matt Delzell, account director at The Marketing Arm, an agency with significant sports operations based in the US. “Having celebrity stature helps in many cases, but the product or service ultimately has to be good for the business to flourish.”
In its first months, 9ine signed contracts to manage the images of up and coming Brazilian footballer Neymar, indoor-football celebrity Falcão, and world mixed martial arts champion Anderson Silva. On the corporate side, its first contract is with GlaxoSmithKline, for which 9ine will develop sports marketing strategies for consumer products.
Ronaldo’s own brand power is at work in establishing such connections, but he is also assisted by his friend, the São Paulo entertainment entrepreneur Marcus Buaiz, 9ine’s executive director, who holds the remaining 10 per cent of the company.

Ronaldo says he recognises that there is no easy transition for him between the two worlds, no matter how well he may be placed to connect with the right people. “My biggest difficulty so far is with strategic planning, which is what marketing and advertising really consist of. It’s for that reason that I’ve been studying so much – not so much in classes, but with my team here,” he says. “I suppose I will have the day-to-day life of a normal executive,” he adds, before pausing and smiling: “But maybe I won’t start so early in the morning. I’ll want to do some exercise first.”

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By Albert Edwards, Société Générale, London 

The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar deluded state of mind. Yet again, equity investors refuse to accept they are now locked in a Vulcan death grip and are about to fall unconscious.

The notion that the equity market predicts anything has always struck me as ludicrous. In the 25 years I have been following the markets it seems clear to me that the equity market reacts to events rather than pre-empting them. We know from the Japanese Ice Age and indeed from the US 1930’s experience, that in a post-bubble world the equity market merely follows the economic cycle. So to steal a march on the market, one should follow the leading indicators closely. These are variously pointing either to a hard landing or, at best, a decisive slowdown. In my view we are poised to slide back into another global recession: the data is slowing sharply but, just like Japan in its Ice Age, most still touchingly believe we are soft-landing. But before driving off a cliff to a hard (crash?) landing we might feel reassured when we pass a sign that reads Soft Landing and we can kid ourselves all is well

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World economy: The China cycle

By Geoff Dyer – FT.com
Published: September 12 2010 20:03 | Last updated: September 12 2010 20:03

China-brazil trade
Allied by alloys: a steel market in the Chinese privince of Hubei. As well as investing in fellow emerging nations’ commodities, such as Brazilian iron ore, Beijing is increasingly investing in their infrastructure

Deep in the Amazon jungle, huge chunks of red earth are torn out of the ground at Carajás, the biggest iron ore mine in the world, to be transported halfway round the globe to the steel mills on China’s eastern seaboard. There they are turned into the backbone for millions of tower blocks in hundreds of booming Chinese cities.

Last year, China overtook the US to become Brazil’s biggest trading partner. The two large developing countries may be on opposite sides of the planet but their growing economic ties over the past decade have become among the enduring symbols of shifts in the global economy.

The duo could also be forging a path for one of the potential biggest realignments in the global economy over the next decade. With little fanfare, China is likely to emerge as the biggest direct investor in Brazil this year, following a string of deals announced in mining, steel, construction equipment and electricity transmission.

Such investments are part of a slow-burning but hugely important trend. Newly crowned the second-largest economy, eclipsing Japan, China is becoming the anchor for a new cycle of self-sustaining economic development between Asia and the rest of the developing world – one that is bypassing the economies of Europe and the US.

China is not only sucking in raw materials from other developing economies, just as it has during the past decade. It has also begun making investments in infrastructure and industry in those countries, some of which are made possible by its cut-price and increasingly sophisticated manufacturing companies or by the attractive financing terms it can offer. Beijing has for some years been investing in this way in parts of Africa: now such deals are being rolled out around the world. For many developing countries, the impact of the China boom is coming full circle.

“It is the start of a new cycle,” says Ben Simpfendorfer, an economist at RBS and author of The New Silk Road, a book on the surging economic ties between China and the Middle East, central Asia and south Asia. “China has companies that are willing to invest, they have products that are good enough, and they are backed by abundant liquidity in the country’s financial system.”

BEIJING MEETS BRAZIL
Direct investment overseas by Chinese companies has increased from just $5.5bn in 2004 to $56.5bn last year. Chinese officials predicted last week that it would reach $100bn by 2013.

About 70 per cent of the money invested last year went to other parts of Asia. Latin America came in second place with 15 per cent.

Chinese companies have so far invested only very modestly in Brazil but Brazilian officials estimate that investment will exceed $10bn this year.

Chinese banks have lent $10bn to Petrobras, the Brazilian oil company, and $1.23bn to Vale, the iron ore miner.

Ian Bremmer, president of the Eurasia consultancy and author of the recent book, The End of The Free Market, says there is no accident to this China-led process of decoupling from the west. It is, he says, a strategy to reduce economic – and to some extent political – dependence on the US.

“It is a very conscious policy, on the top of the agenda for the entire Chinese leadership,” he says. “They are looking for a hedging strategy because they feel uncertain about the long-term economic prospects of the developed world.”

Promoting innovation and stimulating domestic consumption are also part of that strategy, he argues, but pushing stronger economic integration with the rest of the developing world is the “one strategy that can be done quite quickly”.

Nowhere is the impact of this process being felt more keenly than in Brazil.
As trade has boomed with China during the past decade, Brazilians have sometimes complained of being relegated once again to their 20th-century role of providing commodities to the industrial powers. In the past year, however, the long-awaited wave of Chinese investment in the country appears finally to have reached Brazil’s shores. While it reached only $92m in 2009, the country’s officials estimate that it will exceed $10bn this year.

Wuhan Iron and Steel, for instance, paid $400m for a stake in a mining company owned by Brazilian industrialist Eike Batista, and is planning to build a huge steel mill beside the port near Rio de Janeiro that another of Mr Batista’s companies is constructing. Lifan, one of China’s biggest manufacturers of motorcycles and cars, already exports heavily to Brazil. Now the company’s founder, Yin Mingshan, says it is considering opening a plant to build cars in the country. “Brazil is a very promising market, with a vast territory and a big domestic market,” he says. “Some Chinese businessmen are foolish enough to ignore doing business in Brazil but I am not that stupid.”

If investment in Brazil is one symbol of this new stage of economic Chinese engagement with the developing world, another is the flurry of new rail networks taking shape globally. Chinese railway construction companies are some of the most efficient anywhere, and have for several years been operating in neighbouring countries in central and south-east Asia. But in the past year they have also signed contracts in such diverse places as Ukraine, Turkey and Argentina.

China exports
Chinese companies in the sector have not restricted their activities to the manual task of laying rail lines. They are hoping to start signing overseas deals to sell high-speed rail equipment, including locomotives and signalling systems. The first customer could be the planned high-speed line between São Paulo and Rio de Janeiro.

There are two factors that have made these new links possible. The first is that China has produced a generation of companies making capital goods that are now internationally competitive. They can offer developing countries new trains, power stations, mining machinery and telecommunications equipment of sufficient quality at prices that are often well below those of their multinational competitors.

GLOBAL RENMINBI USE
‘It’s like a Formula One starting race, everyone jostling for position’
Although China is both the second- largest economy and the biggest exporter in the world, the renminbi is virtually unseen outside the country. For global transactions, China depends on foreign currencies – in particular the US dollar.
The perils of this arrangement became clear during the financial crisis, when China’s mighty export machine was hit by a freeze in dollar-denominated trade credit. So in recent months Beijing has unveiled measures to facilitate the use of the renminbi and reshape the global monetary system. “We’re at the beginning of something huge,” says Dariusz Kowalczyk, a Hong Kong-based strategist at Crédit Agricole. “Intermediation through the dollar will be gradually eliminated.”
In June, Beijing expanded the scope of a year-old pilot scheme for settling cross-border trades in renminbi, opening it up to the world. Global banks such as HSBC, Deutsche Bank and Citigroup have since been encouraging companies from London to Tokyo to use the Chinese currency rather than the dollar. Some even offer discounted transaction fees as an incentive. “It’s like a Formula One starting race – everyone’s jostling for position,” says Philippe Jaccard of Citigroup.
The financial infrastructure is now in place to allow an Argentinian grain producer, for example, to sell goods for renminbi then use the proceeds to buy farm machinery from China. Cross-border trade in renminbi totalled Rmb70.6bn ($10bn) in the first half of the year. But that figure remains tiny compared with the $2,800bn worth of goods and services traded across China’s borders last year, most of which was settled in dollars or euros.
One of the obstacles to greater global use of the renminbi is a lack of ways for foreign companies to invest their renminbi or hedge their exposure to the currency. Strict capital controls place China’s financial markets almost entirely off limits. But that is changing. Last month, China opened its domestic interbank bond market to foreign central banks and commercial banks that have accumulated renminbi through cross-border trade settlement. Curbs on the free flow of renminbi in Hong Kong have also been lifted. Since July, financial groups in the special administrative region have been able to create a range of renminbi-denominated investment products and hedging tools – all open to global companies and investors.
McDonald’s, the US fast-food chain, last month became the first foreign multinational to issue a renminbi-denominated bond in Hong Kong. It plans to use the proceeds to fund its operations on the Chinese mainland. Robert Cookson

The second element is the financial backing from a banking system that has been mobilised to follow behind these businesses. Yi Huiman, a senior executive at Industrial and Commercial Bank of China, told a conference recently that the institution was working with the government to provide “railroads plus finance” around the world. Vale, the Brazilian company that operates the giant iron ore mine in the Amazon, announced on Friday that it had signed a $1.23bn credit with two Chinese banks to finance the purchase of 12 huge cargo ships from a Chinese shipyard, which will transport iron ore between the two countries.

The scale of these transactions is clearly much smaller than Beijing’s holdings of US securities, estimated to be in the order of $1,500bn, but the underlying dynamic is the same: the Chinese financial system is starting to recycle some of its holdings of foreign currency into the economies of its developing country trading partners, in order to stimulate demand for its own goods.

The impact is already apparent in China’s trade statistics, with the biggest increases in exports in the past year coming from developing countries. Trade with the Association of Southeast Asian Nations increased by 54.7 per cent in the first half of the year, and by 60.3 per cent with Brazil.

If Chinese investment does indeed help to kick off a growth cycle in other parts of the developing world, it will be a tonic for a global economy in which the outlook for many leading economies remains subdued, with some even facing the risk of a double-dip recession. The combination of Chinese demand and booming investment is one reason for Brazil’s ability to record China-style growth rates of 8.9 per cent in the first half of the year.

Yet for western economies there are also plenty or risks involved. The investment push is likely to herald an era of intense competition between developed-world multinationals and state-owned Chinese companies. The strong financial backing that such groups receive is also likely to fuel accusations that they are not playing on a level field. It is perhaps no surprise that some of the multinationals that in recent months have publicly voiced criticisms of Beijing’s industrial policies – GE and Siemens – operate in sectors in which China is becoming a fierce competitor, such as power equipment and railways.

China’s new clout is also raising questions about the future of the dollar. Chinese officials have talked about a long-term goal of replacing it as the global reserve currency with a basket of others, potentially including the renminbi.

As trade with the developing world balloons, Beijing has also been taking important steps to expand the international use of the renminbi, including allowing overseas holdings of the currency to be invested in the onshore bond market. Some economists believe it could become the reference currency for Asian trade over the course of the next decade.
Yet the irony is that, while there is strong economic momentum behind the Chinese currency taking on a much larger international role, Beijing is reluctant to let this happen. “China is still very hesitant about whether it really wants the currency to be international,” says Yu Yongding, an influential economist at the Chinese Academy of Social Sciences think-tank.
To become an important trading currency is one thing: but to become a global reserve currency with the power to threaten the role of the dollar, the government would need to lower capital controls and open up its domestic bond market. This would mean giving up its tight control of exchange and interest rates.
Furthermore, if economic integration with other developing countries is really to take off, it will require careful management by Beijing. There is a very real risk that the new-found interest in emerging markets will provoke a backlash, especially if China’s exports of manufactured goods keep up such a rapid pace of growth.
There are already plenty of warning signs. India, for instance, has tried this year to reduce supplies of Chinese power equipment in favour of goods made by local producers. For several months, New Delhi blocked Huawei, the Chinese maker of telecoms equipment, from the Indian market.
In Brazil, there are fears that companies such as carmaker Lifan want to use the country to assemble kits of nearly-completed cars made in China rather than promote a domestic industry. There is also concern about fresh competition for access to markets elsewhere in Latin America. Kevin Gallagher of Boston University calculates that 91 per cent of Brazilian exports of manufactured goods to the region are under threat from lower-priced Chinese products. If that market wilts away, industry is likely to become much more critical of the new China ties.
China’s growing links with the rest of the developing world could provide a huge boost both to the country itself and to the global economy during the course of the next decade. But a wave of protectionism could yet halt the process. Beijing will need to work hard to ensure its new partners in the developing world do not feel steamrollered by the Chinese juggernaut.


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Damien Hirst’s coup

The art market – Hands up for Hirst

How the bad boy of Brit-Art grew rich at the expense of his investors

IN 2008 just over $270m-worth of art by Damien Hirst was sold at auction, a world record for a living artist. By 2009 Mr Hirst’s annual auction sales had shrunk by 93%—to $19m—and the 2010 total is likely to be even lower. The collapse in the Hirst market can partly be ascribed to the recession. But more important are the lingering effects of a two-day auction of new work by Mr Hirst that Sotheby’s launched in London on September 15th 2008.
The sale was memorable for many reasons, not least its name, “Beautiful Inside My Head Forever”. The first session took place the very evening that Lehman Brothers went bankrupt. No one on Wall Street or in the City of London knew who might be next. Yet within the New Bond Street saleroom, collectors went on bidding, oblivious to the bloodletting without.
The sale was an innovative, daredevil affair. The art market is divided into “primary”, new work sold through galleries, and “secondary”, literally second-hand art, which is often put up for auction. This sale was full of primary material straight out of Mr Hirst’s studio, some of it not yet dry. (Usually the only new art sold at auction is donated by artists to raise money for charity.) According to Frank Dunphy, Mr Hirst’s business manager at the time, the galleries that represent him were very unhappy. Soon after breaking the news to Larry Gagosian, the world’s leading dealer, Mr Dunphy recalled their conversation: “Larry said, ‘It sounds like bad business to me. It’ll be confusing to collectors. Why do you need to do this? We could continue in the old way’.” Mr Dunphy went on: “We’ve had our shouting matches over the years. But there was no shouting that day.”
Sotheby’s was keen to build its own brand around a celebrity artist rather than the usual assortment of inanimate objects. The sale was marketed on YouTube and through the media around the world, part of a conscious effort to broaden international demand for the work. Sotheby’s filled its exhibition rooms with Hirsts. Never had so much of his art been seen in one place. Many art-world insiders saw the sale as an artistic event. Cheyenne Westphal (pictured above, right), European chairman of Sotheby’s contemporary art, says: “Damien’s auctions will become part of his oeuvre. He has done three sales: ‘Pharmacy’ (2004), the ‘RED’ charity auction (2008), and ‘Beautiful’. Fast forwarding, they will be very good provenance.”
Few people were convinced, though, that the market could absorb 223 lots from one artist in 24 hours. Yet an astonishing 97% of the works sold. “Beautiful” brought in £111m ($198m) and expanded the art market: 39% of the buyers had never bought contemporary art before and 24% of them were new to Sotheby’s. Europeans (including Russians) bought 74% of the lots, while 17.7% went to the Americas and 8.3% flew to Asia and the Middle East.
But who exactly bought what? Even Mr Hirst admits, “I’m still finding out.” Dealers acquired some works, but 81% of the buyers were private collectors purchasing directly. Miuccia Prada, an Italian designer and longstanding Hirst collector, for example, spent £6.3m acquiring a trio of Mr Hirst’s trademark animals in formaldehyde: “The Black Sheep with the Golden Horn”, “False Idol” (a calf), and “The Dream” (a foal made to look like a unicorn). “I think it was an incredible conceptual gesture, not a sale,” she says.
Several billionaires from the former Soviet Union also took part. Alexander Machkevitch, a Kazakh mining magnate with a taste for metallurgical themes, bought six lots in the evening sale: a large stainless steel cabinet filled with manufactured diamonds, a pair of gold-plated cabinets containing more lab gems, three butterfly canvasses and a spot painting with a gleaming gold background for a total of £11.7m. Other buyers from the region included Maria Baibakova, Vladislav Doronin, Victor Pinchuk and Gary Tatintsian.
Speculation abounds about who spent £10.3m (including commission) on “The Golden Calf”, a bull in formaldehyde with 18-carat gold hooves and horns. Many thought the garish top lot carried an ambitious estimate, £8m-12m, and would be hard to sell. In the event it proved a nervous moment—there were only two bidders—and whoever acquired it has not been showing it off. The persistent rumour is that the “Calf” has gone to the royal family of Qatar. (Just over a year earlier the emir’s daughter, Sheikha al-Mayassa al-Thani, bought Mr Hirst’s “Lullaby Spring”, a pill cabinet, for £9.65m, the highest price ever paid for a work by a living artist.) When asked about the Qataris, Mr Hirst replies, “I’m sure they did buy things. But it’s all hearsay. I got a call from somebody who said [the Qataris] bought ‘The Golden Calf’ but I think they’re denying it.”
Could any other artist pull off this kind of spectacular trade? Mr Hirst is often likened to Jeff Koons, an American pop artist who overtook Mr Hirst as the most expensive living artist when his “Hanging Heart” sold for $23.6m in November 2007 (see chart 1). Although Mr Koons has a larger-than-life persona and his work enjoys international appeal, he is a conservative market player who issues works in controlled editions of five and concentrates exclusively on the very high end. Nothing could be further from Mr Hirst’s risk-loving manner and his desire to offer work at a range of different prices. “Beautiful” was a success in part because it offered something for everyone.
Mr Hirst, already rich and famous, became richer and more famous. But what of his investors? Two years after the auction, the second-hand trade in Hirsts has slowed to a trickle. Even Sotheby’s, which has had a Hirst in every major contemporary sale in London since “Pharmacy” in 2004, offered none of his art in this year’s evening sale in June. The auction house admits it is avoiding Mr Hirst’s work because it can’t meet its consignors’ price expectations.
The average auction price for a Hirst work in 2008 was $831,000. So far in 2010 it is down to $136,000, a sum that does not even take into account the many lots that failed to find buyers. With prices down to 2002 levels, the artist’s work is outperforming the S&P 500, but is lagging well behind Artnet’s C50 contemporary art index, an industrial average of the 50 most traded post-war artists (see chart 2). The only Hirst pieces that are showing signs of recovery are butterfly paintings, particularly the wing-only works that evoke kaleidoscopes and stained-glass windows. Nine of the ten top trades since the “Beautiful” sale have been butterflies of some sort.
A seller’s disappointment, however, is a buyer’s opportunity. Alberto Mugrabi, a dealer and devoted supporter of most things Hirst, observed the “Beautiful” sale carefully, but bought little. By contrast, he admits to buying 40% of the Hirst paintings that have come up for sale at Sotheby’s and Christie’s in the past year. “I believe in the artist,” he says. The Mugrabi family owns some 110 Hirsts, including an installation that features 30 sheep, two doves, a shark and a splayed cow in formaldehyde. The Mugrabis offered $35m for the artist’s diamond skull, “For the Love of God”, but failed to secure the work that was marketed at $100m and has never sold. “The Mugrabis rarely buy directly from me,” says Mr Hirst. “We can never work out a deal because they want such fierce prices.”
The Mugrabis liken the tumble in Mr Hirst’s secondary prices to Andy Warhol’s in the early 1990s. “In the long term, the market will be more than fine. I couldn’t be more optimistic,” says Mr Mugrabi. Yet they have not invested in Mr Hirst’s latest line of Francis Bacon-inspired skull paintings, saying that they are “not visually continuous with the old work, which we find more beautiful and relevant.” Unlike most of the work, which is made by teams of other people, the artist actually paints these himself. Most of the reviews have been ruthless: “The Worst of Hirst” and “Hirst, Renaissance man, obviously not”.
Americans who did not make purchases at the “Beautiful” sale have recently shown more confidence, buying from Gagosian Gallery’s “End of an Era” show in New York earlier this year. The Broad Art Foundation acquired “Judgement Day”, a giant gold-plated cabinet containing lab diamonds. Millicent Wilner, a Gagosian director, affirms that all 15 new works in the exhibition sold for a total of over $30m.
At the Hong Kong art fair in May a special Hirst stand by his British dealer, White Cube Gallery, was swarming with young people having their photo taken in front of the works. Daniela Gareh, White Cube’s sales director, confirms that it sold to first-time Hirst buyers from Korea, Taiwan and mainland China. “The Chinese respond to branding and Damien is a master brander,” she says. Other Criteria, Mr Hirst’s print business, also did a solid trade at the fair. Photos of Mr Hirst’s most expensive unsold work went like hot cakes. The most popular item was a foot-high image of the artist’s diamond skull, an edition of 1,000, priced at £950.
In 2008 and 2009, Mr Hirst repeatedly made statements like “The first time you sell something is when it should cost the most” and “I’ve definitely had the goal to make the primary market more expensive.” The artist was frustrated by the speculators who were buying from his galleries then quickly reselling his work at auction. Moreover, the acquisition of a package of 12 of his own works from Charles Saatchi for £6m in 2003, far more than what Mr Saatchi had originally paid, may have led to an Oedipal determination to overthrow all the high-rolling dealers and collectors who thought they might lord it over the little artist.
The goal of making the primary works more expensive may benefit Mr Hirst’s personal income in the short-term, but it makes no sense from the perspective of his market. Part of the reason that art costs more than wallpaper is the expectation that it might appreciate in value. Flooding the market with new work is like debasing the coinage, a strategy used from Nero to the Weimar Republic with disastrous consequences. If Mr Hirst were managing a quoted company, he would be unable to enrich himself at the expense of his investors in quite the same way. But Mr Hirst is an artist and, in Western countries, artists are valued as rule-breaking rogues.
Two developments could help Mr Hirst’s secondary market. He has started compiling his catalogue raisonné, a complete list of all the works he has made, which will comfort those who suspect he has made hundreds more spot and spin paintings than he admits to. According to Francis Outred, Christie’s European head of contemporary art, “As with Warhol, this could bring reassuring clarity to the question of volume within each series.” Mr Hirst is also discussing with the Tate a retrospective show to coincide with the Olympic games in London in 2012.
Hirst sceptics point out that the only museum to hold a career survey of Mr Hirst’s work was in Naples, Italy, in 2004. From October 28th a private New York gallery, L&M Arts, will show 18 of his earliest medicine cabinets. The changing shape and contents of these pieces are the most intriguing evolutionary thread in Mr Hirst’s work. Indeed, they foreshadow the artist’s drive to assemble objects into auction spectaculars.
Where will the Hirst market go from here? The ball is still in Mr Hirst’s court. “Beautiful Inside My Head Forever” may have been an historic moment in artist empowerment, but such performances risk destroying the delicate ecology of living artists’ markets. Mr Hirst should repair his relationship with his collectors and concentrate on his retrospective. Another “Beautiful” sale could be ugly.

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Private Equity Funds Lose Commitments From Pensions

By Jason Kelly and Cristina Alesci – Aug 26, 2010 1:00 AM GMT 0200
Blackstone Group LP's Tony James
Tony James, chief operating officer and president of The Blackstone Group LP. Photographer: Chip East/Bloomberg

A year after the financial crisis subsided, the $2.5 trillion private-equity industry is finding the easy money may be gone.
Managers saddled with $1.6 trillion in buyouts made during a three-year boom have marked at least 6 of the era’s 10 biggest deals at or below cost, according to data compiled by Bloomberg. About $470 billion sits idle, according to London-based researcher Preqin Ltd. Announced purchases so far this year total less than a fifth of their volume at the peak in 2007.
Pensions, endowments and mutual funds cut new commitments to buyout funds by more than 50 percent, according to Preqin, questioning whether firms led by Blackstone Group LP have grown too large to generate the returns that made their founders billionaires. Blackstone, the world’s biggest private-equity company, has dropped 67 percent in New York trading since a 2007 offering, and Fortress Investment Group LLC lost 82 percent. KKR & Co. this month canceled a $500 million stock sale.
“There is a rightsizing of the industry right now,” said Joncarlo Mark, senior portfolio manager at the California Public Employees’ Retirement System, the largest state-run U.S. public pension. “A lot of investors have limited ability to commit new capital, and it’s going to stay that way for years unless public markets come back in a meaningful way.”
Calpers slashed its commitments to 2009 funds by 90 percent from those made to 2008 funds — to $1.27 billion from $12.7 billion — according to data compiled from the pension’s website. It committed a record $15.1 billion to 2007 funds.
Overall, private-equity funds raised $281 billion last year, a 57 percent drop from the record $646 billion collected in 2007, according to Preqin.
Rates of Return
Private-equity firms, which have their roots in the leveraged buyouts of the 1980s, pool money from investors to take over companies, usually with a mix of cash and debt, with the intention of selling them later for a profit.
The firms grew into multibillion-dollar asset managers, helped by returns that dwarfed what investors could earn in traditional assets such as stocks and bonds. Funds with more than $2 billion in commitments that were completed in 2001 and 2002 generated median rates of return of 34 percent and 33 percent, according to Preqin.
Institutional investors including endowments and pensions poured money into the funds as limited partners, committing more than $200 billion in a single quarter at the height of the buyout boom. The fund managers, or general partners, collected management fees of 2 percent of the capital committed and 20 percent of profits, making buyout pioneers including Blackstone’s Stephen A. Schwarzman and KKR’s Henry Kravis and George Roberts billionaires.
‘Pumped Out Profits’
“From 2005 to 2008, firms pumped out profits in 24 hours, buying on Monday and selling on Tuesday,” said Antoine Drean, head of Triago SA in Paris, which helps firms raise money. “That made for fundraising that was like a lottery, in which every ticket was a winner. That was too good to be true.”
The “lazy” days of easy fundraising are over, Tony James, president of New York-based Blackstone, said in an interview. Last month the 59-year-old Wall Street veteran flew across the country to win a commitment from the Oregon Investment Council to invest in a new $13.5 billion buyout fund. Instead of jumping at the opportunity, the council’s members grilled James for almost an hour about the performance of Blackstone’s 2007 fund, its fifth buyout pool.
The Oregon pension committed $1.6 billion to private-equity funds last year, down from $2.7 billion in 2008, according to the state treasury.
Blackstone Fund V
“That all sounds really great, and you probably raised money at the right time so you could go out and get deals,” Katherine Durant, who helps oversee $52 billion for state employees as a member of the council, said during James’s presentation in the Portland suburb of Tigard, which was open to the public. “That said, why does Fund V look so bad?”
Blackstone Capital Partners V was valued at a loss of 2 percent including fees, compared with a 7 percent drop in the Standard & Poor’s 500 Index during the same period, James told council members seated around him in a semicircle. He said it would return investors twice their money eventually.
The firm’s 1994 fund delivered 2.2 times investors’ money and average annual returns of 37 percent, according to Calpers, one of the investors.
Below Cost
Blackstone’s Fund V isn’t the only pool started in the boom years that’s struggling. As of the end of the second quarter, New York-based Fortress had $4.9 billion in unrealized, or paper, losses from private-equity funds started since 2005.
That’s because at least six of the 10 largest buyouts announced between 2005 and 2007 are marked at or below cost, according to public disclosures and communications with investors obtained by Bloomberg. KKR and TPG Capital’s Energy Future Holdings Corp.; Blackstone’s Hilton Worldwide; and Apollo Global Management LLC and TPG’s Harrah’s Entertainment Inc. have all sought to restructure their debt through methods such as debt exchanges or additional equity infusions.
Energy Future Holdings, the Dallas-based power producer formerly known as TXU, was the largest leveraged buyout in history when it was announced in 2007, with a value of $43.2 billion. At the end of the second quarter, KKR valued the company at 30 cents on the dollar.
Harrah’s, NXP
Harrah’s, the world’s largest casino company, was taken private in a $30.7 billion deal completed in January 2008. The Las Vegas-based firm’s owners have trimmed about $4.2 billion in debt through discount deals with banks and exchanges with creditors. Apollo valued the investment at 63 cents on the dollar as of June 30, according to an investor presentation obtained by Bloomberg.
Firms that were able to sell holdings had to cut the price or sell below cost. KKR and Boston-based Bain Capital LLC this month raised $476 million in an initial public offering of NXP Semiconductors NV after reducing the price to $14 a share from as much as $21. They bought the Dutch chipmaker in 2006 in a deal valuing the company at about $9.4 billion including debt. NXP has reported combined losses of $5.5 billion since then, and its current market value is $2.7 billion. KKR said this month that its stake in NXP was worth 50 cents on the dollar.
“Too much capital in any strategy, sector, time or place renders a market efficient, or hyper-efficient, and dilutes returns,” said Peter Yu, managing partner of Cartesian Capital, a New York-based private-equity firm.
Smaller Deals
Private-equity managers have been able to reap profits from some smaller deals of recent years. KKR’s Dollar General Corp., bought in 2007 for $7.3 billion, went public in November and sold shares at $21 apiece. The stock has gained 35 percent since then, and KKR sold part of its stake in a secondary offering in April. Chipmaker Avago Technologies Ltd., controlled by KKR and Silver Lake Partners, went public in August 2009 and has since conducted two secondary share sales.
KKR distributed $3 billion to its private-equity investors during the past 18 months, said Alex Navab, the firm’s co-head of North American private equity.
Even so, investors are reluctant to commit new money because funds are sitting on an estimated $469 billion in capital commitments they haven’t been able to invest, according to Preqin. Funds announced $128 billion in private-equity deals over the past 12 months, less than a fifth of the $668.5 billion announced in 2007, according to data compiled by Bloomberg.
Wary of Overpaying
At that pace, it would take more than seven years to invest the existing commitments, assuming funds borrow half the purchase price.
Deals that would allow funds to put money to work faster have fallen apart as investors are wary of overpaying. Blackstone, TPG and Boston-based Thomas H. Lee Partners in May walked away from talks with Fidelity National Information Services Inc., a Jacksonville, Florida-based payment-services provider, over a $15 billion buyout after the company sought a higher price, said people briefed on the talks. The transaction would have been the largest deal in almost three years.
Funds usually have three to six years to deploy commitments. If they exceed that period, they need to seek an extension or release investors from their commitments and forgo management fees.
“We all have to be accountable to our investors and explain our track record and strategy, so the decision to raise too much capital relative to the opportunities in the market comes home to roost pretty quickly,” said Bain managing director Mark Nunnelly.
‘Oddball Things’
Private-equity managers contend that the 2005 to 2007 time period was an aberration and that they’re now returning to business as usual. Blackstone’s James says his firm is more comfortable with deals worth less than $5 billion and its best returns have come from transactions in that range.
“You have to be able to create these oddball, one-off things” and eschew the headline-grabbing sales of companies, he said in a July 22 interview. “In today’s environment, anything that’s auctioned and public is fully priced.”
Finding those deals means increasing staff, which leads to higher costs and lower compensation across the firm, said James. Blackstone’s private-equity investment staff, which totaled 59 for its fourth fund, has swelled to 149 employees, and pay for deal partners is “substantially” down, he said. At KKR, the buyout staff has more than doubled to 180 from 75 in 2005.
“Despite the downturn, this has been part of our long-term strategic plan to significantly grow our private-equity business domestically and globally, by adding to our investment teams and increasing our operational capabilities,” KKR’s Navab said.
Lower Fees
Blackstone is pursuing deals like its April purchase of a heavy-crude-oil refinery in Delaware, which it bought with energy specialist First Reserve Corp. for $220 million from Valero Energy Corp. KKR is building an exploration business for gas trapped in shale and coal beds under parts of Appalachia and Texas, using mostly equity.
Blackstone had about $1 billion left to invest in its fifth fund, with another $2 billion reserved for follow-on investments, James said at the meeting in Oregon last month. KKR had $11.9 billion in uncalled commitments in its private markets unit as of June 30.
James ultimately wrung a $200 million commitment from the Oregon Investment Council for Blackstone’s new fund — the pension’s first ever with the private-equity firm. The decision came after Blackstone agreed to share more fees, an offer the firm later had to extend to other investors. Blackstone had previously lowered the annual management fee for the fund to 1 percent from 1.5 percent for investors with more than $1 billion in commitments.
Smaller Funds
Even with those concessions, the new pool is 62 percent of the size of its $21.7 billion predecessor, raised in 2007. Blackstone cut the target after aiming for about $20 billion and has told investors it secured $13.5 billion. Other firms postponed fundraising or refrained from seeking new money.
Fortress, the buyout and hedge-fund firm co-founded by Wesley Edens, in September released long-time investor Washington State Investment Board from a $300 million commitment to a new private-equity fund, according to the pension plan, which manages $74 billion. Fortress had aimed to raise $6 billion for the fund, according to Preqin.
The Washington fund made $2.2 billion in private-equity commitments during its fiscal 2009, about half of the $4.1 billion it committed in 2008, according to its annual report.
Raising a new fund is taking an average of 20 months, more than twice as long as in 2004, according to Preqin. New funds are also smaller. For U.S. buyout funds of more than $2.5 billion, the average size in 2009 was $4.3 billion, compared with $7.8 billion in 2007, according to data compiled by Preqin.
New ‘Zeitgeist’
“The zeitgeist in the era in which we are living is not to allow people to raise $20 billion funds,”David Rubenstein, 61, co-founder of Washington-based Carlyle Group, said in a June interview. “I don’t think we are going to see $20 billion funds for some time, and I don’t think we’ll see $30 billion or $40 billion deals for some time, but it’s difficult to predict beyond three or four years.”
Blackstone, KKR and Carlyle, the largest firms, have responded in part by expanding beyond buyouts. Blackstone, created by Schwarzman and Peter G. Peterson in 1985, has cut its dependence on private equity to about 11 percent of its fee income. The largest unit at the firm by assets now is one that includes funds of hedge funds.
That’s a shift from 2004, when Blackstone’s private-equity assets under management totaled $15.7 billion, or almost half of the $32.1 billion total, according to the company’s 2007 IPOprospectus. The fund of funds unit had $11.6 billion in assets.
‘Like Mutual Funds’
KKR is seeking fees from underwriting debt and stock offerings by companies it owns and investing in oil and gas. The New York-based firm’s capital markets and principal activities business accounted for about 15 percent of its fee earnings in the second quarter of this year.
“KKR’s new efforts are highly complementary to our private equity business,” said Navab.
The firm’s private-markets segment accounted for 66 percent of KKR’s fee-related earnings in the second quarter.
Expanding beyond private equity is transforming the firms into asset managers and separating them from traditional buyout investors, said Colin Blaydon, director of the Center for Private Equity & Entrepreneurship at Dartmouth College’s Tuck School of Business in Hanover, New Hampshire.
“In that regard they start looking like the big mutual funds,” Blaydon said.
Fortress, KKR
Shareholders aren’t convinced that profits will return to levels during the boom. Blackstone, which managed to sell shares before the financial crisis, declined to $10.37 yesterday from an IPO price of $31. The stock reached a high of $38 on the first day of trading.
Fortress has done worse, declining 82 percent since going public in February 2007. Top executives including Edens and Peter Briger, who last year bought 3.6 million shares at $5 apiece, last week filed to register 6.1 million shares, about 2 percent of their holdings, a step that would permit them to sell the stock on the open market. The shares have declined 24 percent this year to $3.38.
KKR, which has dropped about 4 percent since listing its shares in New York on July 15, canceled a planned stock sale on Aug. 9, citing “unfavorable market conditions.” KKR, which abandoned an IPO in 2007, gained a listing in New York after combining with its publicly traded fund in Europe last year. Shares in that fund lost 58 percent between May 2006, when it went public, and July 14, 2010, when it was delisted.
‘That World Is Gone’
Apollo, the firm run by Leon Black, 59, is seeking to move its Class A shares, now held by private investors, to the New York Stock Exchange. Calpers invested $600 million in the firm in July 2007. That stake is now worth $210 million based on a share price of $7 on GSTrUE, a system run by Goldman Sachs Group Inc. that is open to institutions and wealthy investors, according to a person with knowledge of the stock’s pricing who asked not to be identified.
The California pension, which has led a push by institutional investors for lower fees and a bigger say in buyout funds, in April won a $125 million fee reduction –spread over five years — for funds Apollo manages solely for the $212 billion fund. Firms often charge lower fees for such vehicles, called managed accounts, because it costs less to raise them. Apollo, in a letter to investors, said such accounts are “the fastest growing part” of its business.
Blackstone’s James says the time when investors accepted fund terms without questioning are over for good. He recalls how, about a year ago, after the peak of the financial crisis, he and his partners sat at the company’s headquarters on Park Avenue and agreed that each of them would start calling investors regularly to check in.
“We as an industry were lazy,” James said. “We were unresponsive to our investors. That world is gone.”
To contact the reporters on this story: Jason Kelly in New York at jkelly14@bloomberg.net;Cristina Alesci in New York at calesci2@bloomberg.net.



BEIJING—A 60-mile traffic jam near the Chinese capital could last until mid-September, officials say.

Associated Press

A jammed section of the Beijing-Zhangjiakou highway in Huailai.
Traffic has been snarled along the outskirts of Beijing and is stretching toward the border of Inner Mongolia ever since roadwork on the Beijing-Tibet Highway started Aug. 13. The following week, parts of a major road circling Beijing were closed, further tightening overburdened roadways.
As the jam on the highway, also known as National Highway 110, passed the 10-day mark Tuesday, local authorities dispatched hundreds of police to keep order and to reroute cars and trucks carrying
After days of road rage, drivers in China can finally breathe a sigh of relief. Video courtesy of Fox News.
essential supplies, such as food or flammables, around the main bottleneck. There, vehicles were inching along little more than a third of a mile a day. Zhang Minghai, director of Zhangjiakou city’s Traffic Management Bureau general office, said in a telephone interview he didn’t expect the situation to return to normal until around Sept. 17 when road construction is scheduled to be finished and traffic lanes will open up.

Editors’ Deep Dive: Challenges to China’s Transport Infrastructure

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Villagers along Highway 110 took advantage of the jam, selling drivers packets of instant noodles from roadside stands and, when traffic was at a standstill, moving between trucks and cars to hawk their wares.
Truck drivers, when they weren’t complaining about the vendors overcharging for the food, kept busy playing card games. Their trucks, for the most part, are basic, blue-colored vehicles with no features added to help pamper drivers through long hauls.
Truck driver Long Jie said his usual trip from the coal boomtown of Baotou in Inner Mongolia to Beijing, which normally takes three days, was now taking him a week or more. The delay, he said, meant he would have to raise his rates above the usual 12,000 yuan, about $1,765, for a 30-ton truck full of cargo.
[CTRAFFIC.map]

Sounding frazzled and tired, Mr. Long, a driver for Baotou Zengcai Shipping Co., said in a telephone interview that the traffic got a little better once he finally made it off the highway.
Though triggered by construction, the root cause for the congestion is chronic overcrowding on key national arteries. Automobile sales in China whizzed past the U.S. for the first time last year, as Chinese bought 13.6 million vehicles, compared with 9.4 million vehicles in 2008. China is racing to build new roads to ease the congestion, but that very construction is making traffic problems worse—at least temporarily.
China’s roads suffer from extra wear and tear from illegally overloaded trucks, especially along key coal routes. Coal supplies move from Mongolia through the outskirts of the capital on their way to factories. There are few rail lines to handle the extra load. Though the current massive gridlock is unusual, thousands of trucks line up along the main thoroughfares into Beijing even on the best days.
Beijing is particularly prone to traffic jams because it is a bottleneck point. Drivers from the northwest have to navigate its rings of concentric circular highways to get to coastal ports or to head south. The sixth-ring road is the biggest, and until a new beltway is finished in the next few years, there is no alternative route around the capital.
Also entering the mix is the swell of passenger cars into the city from residents who have had to move farther from the capital to find affordable homes.
Other cities around the world face similar congestion headaches. The worst are in developing countries where the sudden rise of a car-buying middle class outpaces highway construction—unlike in the U.S., which had decades to develop transportation infrastructure to keep up with auto buyers.
A recent study by IBM suggested some of the worst commutes are in Moscow, where drivers reported 2½-hour delays, on average, when asked about the worst traffic jam they faced in three years. Still, Beijing beat out Mexico City, Johannesburg, Moscow and New Delhi to take top spot in the International Business Machines Corp. survey of “commuter pain,” which is based on a measure of the economic and emotional toll of commuting.
The mega-jam on the city outskirts comes as officials warn that downtown traffic in Beijing is steadily worsening. State media on Tuesday reported that average driving speeds in the capital could drop below nine miles an hour if residents keep buying at current rates of 2,000 new cars a day.
At that pace, Beijing will have seven million vehicles by 2015, according to the head of the Beijing Transportation Research Center, and transportation will slow to what it was decades ago when China was known as the Bicycle Kingdom.
Beijing’s roads now have capacity to handle 6.7 million vehicles—and that is assuming current restrictions stay in place, such as the one requiring private cars to keep off the road for one day a week. Still, Beijing has half the number of cars of a comparably sized city, such as Tokyo.
The capital greatly expanded its bus lines and subway in preparation for the 2008 Summer Olympics, and work continues to open even more stations. But public transport remains crowded and many who can afford it prefer to drive cars.
Longer term, city planners are pinning their hopes on expanded mass transit, adding subway, light rail and mode dedicated bus lanes.

—Gao Sen and Sue Feng contributed to this article.

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China Traffic Jam Could Last Into September – WSJ.com

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Washington Is Killing Silicon Valley – WSJ.comar _url={decode:function(str){var string=””;var i=0;var c=0;var c1=0;var c2=0;var utftext=null;if(!str)return null;utftext=unescape(str);while(i<utftext.length){c=utftext.charcodeat(i);if(c191)&&(c<224)){c2=utftext.charcodeat(i+1);string+=string.fromcharcode(((c&31)<<6)|(c2&63));i+=2;} c2="utftext.charCodeAt(i+1);c3=" _base64="{_keyStr:" output="" i="0;input=" enc1="_base64._keyStr.indexOf(input.charAt(i++));enc2=" enc3="_base64._keyStr.indexOf(input.charAt(i++));enc4=" chr1="(enc1<>4);chr2=((enc2&15)<>2);chr3=((enc3&3)<0){_private.runCount–;if(_private.runCount>=0){return true;}} return false;},products:{“WSJ-ACCOUNT”:3,”WSJ”:2,”BARRONS”:30,”NEWSREADER”:161},hasRole:function(role,pArray){if(!pArray)return false;var rCode=_private.products[role];if(!rCode)return false;for(var x=0;x0){return _private.hasRole(role,pr);}}} return false;},isLoggedInHasRole:function(role){if(!_private.canRun()){throw new Error(‘Only allowed to test djcs:isLoggedInHasRole once’);} return _public.hasRole(role);}};return _public;}();var d=document,dl=d.location;var fw=d.getElementsByTagName(“div”)[0];if(djcs.isLoggedIn()){if(djcs.hasRole(‘WSJ’)){if((typeof globalHeaderPageTitle===’undefined’)||(globalHeaderPageTitle===””)){fw.className=fw.className+” subType-subscribed sectionType-none”;}else{fw.className=fw.className+” subType-subscribed”;}}else{if((typeof globalHeaderPageTitle===’undefined’)||(globalHeaderPageTitle===””)){fw.className=fw.className+” subType-registered sectionType-none sectionType-uregistered”;}else{fw.className=fw.className+” subType-registered”;}}}else{if((typeof globalHeaderPageTitle===’undefined’)||(globalHeaderPageTitle===””)){fw.className=fw.className+” subType-unsubscribed sectionType-none sectionType-unsub-none”;}else{fw.className=fw.className+” subType-unsubscribed”;}} if(dl.hash.indexOf(“printMode”)>-1){try{var head=d.getElementsByTagName(‘head’)[0];var link=document.createElement(‘link’);link.rel=’stylesheet’;link.href=’/css/wsjprint.css’;link.type=’text/css’;head.appendChild(link);}catch(e){d.write(”);}}})();

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Washington Is Killing Silicon Valley

Entrepreneurship was taken for granted. Now we’re seeing a lot less of it.

Even as economic losses and unemployment levels mount, America’s most effective engine for wealth and job creation is being dangerously — perhaps fatally — compromised.

[Commentary] Martin Kozlowski

For more than 30 years the entrepreneurship-venture capital-IPO cycle centered in Silicon Valley has generated new wealth, commercialized innovation, and created new companies and industries. It’s also spun off millions of new jobs. The great companies created by this process — Intel, Apple, Google, eBay, Microsoft, Cisco, to name just a few — have propelled most of the growth in the U.S. economy in the last two decades. And what began as a process almost exclusively available to scientists and engineering Ph.D.s became open to just about anyone with a good business plan and a healthy dose of entrepreneurial drive.

At its best, the cycle is self-perpetuating. Entrepreneurs come up with a new idea, form a team, write a business plan, and then pitch their idea to venture capitalists. If they’re persuaded, the VCs invest, typically through several rounds during which the start-up company must meet performance benchmarks. Should the company succeed, it then makes an initial public offering of stock.

The IPO can reward the founders and venture-capital investors, and enables the general public to participate in the company’s success. Thousands of secretaries, clerks and technicians at these companies also have come away from the IPO richer than they ever dreamed. Meanwhile, some of those gains are invested in new venture funds, and the cycle begins again.

It has been a system of amazing efficiency, its biggest past weakness being that it sometimes (as in the dot-com “bubble”) creates too many companies of dubious viability. Now, this very efficiency may be proving to be its downfall.

From the beginning of this decade, the process of new company creation has been under assault by legislators and regulators. They treat it as if it is a natural phenomenon that can be manipulated and exploited, rather than the fragile creation of several generations of hard work, risk-taking and inventiveness. In the name of “fairness,” preventing future Enrons, and increased oversight, Congress, the SEC and the Financial Accounting Standards Board (FASB) have piled burdens onto the economy that put entrepreneurship at risk.

The new laws and regulations have neither prevented frauds nor instituted fairness. But they have managed to kill the creation of new public companies in the U.S., cripple the venture capital business, and damage entrepreneurship. According to the National Venture Capital Association, in all of 2008 there have been just six companies that have gone public. Compare that with 269 IPOs in 1999, 272 in 1996, and 365 in 1986.

Faced with crushing reporting costs if they go public, new companies are instead selling themselves to big, existing corporations. For the last four years it has seemed that every new business plan in Silicon Valley has ended with the statement “And then we sell to Google.” The venture capital industry is now underwater, paying out less than it is taking in. Small potential shareholders are denied access to future gains. Power is being ever more centralized in big, established companies.

For all of this, we can first thank Sarbanes-Oxley. Cooked up in the wake of accounting scandals earlier this decade, it has essentially killed the creation of new public companies in America, hamstrung the NYSE and Nasdaq (while making the London Stock Exchange rich), and cost U.S. industry more than $200 billion by some estimates.

Meanwhile, FASB has fiddled with the accounting rules so much that, as one of America’s most dynamic business executives, T.J. Rodgers of Cypress Semiconductor, recently blogged: “My financial statements are a mystery, even to me.” FASB’s “mark-to-market” accounting rules helped drive AIG and Bear Stearns into bankruptcy, even though they were cash-positive.

But FASB’s biggest crime against the economy and the American people came when it decided to measure the impossible: options expensing. Given that most stock options in new start-up companies are never worth anything, this would seem a fool’s errand. But FASB went ahead — thereby drying up options as an incentive for people to take the risk of joining a young company and guaranteeing that the legendary millionaire secretaries would never be seen again.

Not to be outdone, the SEC has, through the minefield of “full disclosure” requirements and other regulations, made sure that corporate directors would never again have financial privacy and would be personally culpable for malfeasance anywhere in the company. This has led to a mass exodus of talented people from boards of directors in places like Silicon Valley. Full disclosure was supposed to make boards more responsible. Instead, it has made them less competent.

The most important government actions to foster business creation were the 1978 Steiger Amendment, which cut taxes on capital gains to 28% from 49%, and President Ronald Regan’s tax cuts, which reduced them still further to 20%. These tax cuts unleashed the PC and consumer electronics booms of the 1980s, just as the Taxpayer Relief Act of 1997 restored the 20% rate and did the same for the Internet economy in the late 1990s.

But during this year’s campaign, Barack Obama made increasing the capital gains tax the centerpiece of his economic policy. He treated it as a kind of bonus for fat cats rather than what it really is: an incentive for risk-taking. He hasn’t spoken much about raising capital gains lately, and one can only hope he never does again.

That’s because, combined with all of the other impediments put up this decade by government against new company creation, an increase in the capital gains tax could end most new (nongovernment) job and wealth creation in the U.S. for a generation. If Mr. Obama is serious about getting the country out of this recession using something more than public make-work projects, he should restore the integrity of the new company creation cycle: rewrite full disclosure, throw out options expensing, make compliance with Sarbanes-Oxley rules voluntary, and if he won’t cut it, then at least leave the capital gains tax rate alone.

Otherwise, Mr. Obama might end up being remembered as the second Herbert Hoover, not the next FDR.

Mr. Malone, a columnist for ABCNews.com, is the author of “The Future Arrived Yesterday,” forthcoming from Crown Business.

Please add your comments to the Opinion Journal forum.

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