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Monday, February 23, 2015

Private Equity: How Great Judgment Sets The Best Apart

A startup or young business is really dependent on the quality of its advisors.

Critical needs are having one or two good lawyers, accountants and other general "fixer" type advisors.

But what makes a really good advisor in this sense?

Technical knowledge, certainly. That goes to merit. However, knowledge is often a commodity. That means that ability is often taken for granted...and no longer becomes a difference-maker.

That's right, the real difference that adds value is not know-how. 

The true value-added component is great judgment.

This judgment metric is hard to define. However, it is best measured when dealing with the unexpected. That's where the skill set, the gravitas, the experience, all comes into play. And those are the attributes most often poorly measured by conventional, inside-the-box metrics like resumes, academic credentials and so on.

I cannot tell you how many people I've met who have graduated from top-twenty law schools who have absolutely no business being lawyers. Smart, they are, and accomplished they've been, but the judgment and often the basic emotional intelligence has been lacking. (Such people are good, though, at hiding their dysfunctions in large offices where they actually go largely unnoticed except in e-mail in-boxes.) 

This judgment value-add goes hand in hand with the other critical component of compatibility. In other words, your advisors and lawyers need to share your values.

This might be an argument against diversity. A business needs to have its people on the same page, and this is particularly critical the smaller, younger and more fragile the venture is.

Diversity doesn't necessarily mean that your advisor isn't "on the same page." However, when you're at that early stage, you need to have the great seamless fit. That is your first top priority.

Picking someone on whatever diversity metric is in vogue (and such metrics often result in the precise opposite!) means you aren't selecting a trusted advisor because you work well with them and think along the same lines. And many business owners and managers make huge mistakes, because they think diversity means they have to look for people who are the most obviously different from them. The result is that small businesses think they have to hire people who think the most differently.

Gee, do you think that is likely to bring people with shared values into the fold? Me neither.

But that's how many businesses, both large and small, end up picking on diversity grounds the very people who are the worst fits in the organization. Is it any surprise those newbies then end up being the most miserable and leaving the soonest?

Simply put, value your values, value compatibility, and choose accordingly. 

And if you look closely enough you'll realize you'll have more diversity in the room than you ever intended. 

Eric Dixon has been a New York corporate lawyer since graduating from Yale Law School in 1994. He runs his own legal and strategic advisory practice Eric Dixon LLC and is very active in blockchain technology development with Bitcoin clients. 

Saturday, February 21, 2015

American Exceptionalism: No Place in American History

This term -- American exceptionialism -- has become quite the rage in Republican circles the past few years. The context in which it has almost always been used, to exhort us to behave or assume responsibilities for others, just has never sounded quite right. It's often reminded me of the smug nags who profess to be morally superior and lord over their inferiors. There was just...something that didn't sound or feel right. (Update: An outlier arguing that exceptionalism means America is, well, exceptional, is the Kyle Smith op-ed, just published hours after my article.)

Now, growing up as a poor conservative, I never heard of the phrase "American exceptionalism."

I never heard Ronald Reagan use that phrase. Never. Not once.

Neither did a certain University of Virginia politics professor. Check out this passage from James W. Ceasar, writing in 2012:
Until recently—say the last 2 or 3 years—few outside of the academic world ever encountered the term "exceptionalism." It was reserved almost exclusively to scholarly discourse, used mostly by social scientists and occasionally by historians and students of American studies. Today, the word has become ubiquitous, appearing in political speeches, newspaper columns, and blogospheric rants. Exceptionalism has gone viral. It serves for the most part as a term of polarization that divides liberals from conservatives.
(Ceasar, at page 2. Emphasis is mine.)

There's more. Various sources across the Internet claim that Alexis de Tocqueville is the father of the concept. Typical Internet claim: nonsense. Certainly I haven't been able to find the phrase or concept in his writings. And neither could Professor Ceasar. See this:
Its frequent use in social science before it exploded onto the political scene might lead one to think that the term goes back far into American history. But this turns out not to be the case. Take John Winthrop, the person most often associated with originating the concept. Aboard the Arbella in 1630, Winthrop described the Puritan settlement to be built as "the city on the hill," a phrase usually recalled today, thanks to Ronald Reagan's embellishment, as "the shining city on the hill." And Winthrop went on to add the further exceptionalist theme that "the eyes of all people are upon us." But nowhere did he ever refer to his position as his doctrine of "exceptionalism." Nor for that matter did Alexis de Tocqueville. Tocqueville is widely credited with having developed the social scientific idea of exceptionalism, meaning uniqueness in relation to most other nations. America, as he showed, was distinct in its historical circumstance of having experienced no feudal past. But what of the term? Modern analysts have scoured Tocqueville's works in search of a mention, in the hope of receiving his benediction. All of their prodigious efforts have yielded no more than one oblique reference, which on examination has no relation to any plausible meaning of the concept. In explaining why Americans do so little to cultivate the arts and sciences, Tocqueville attributes the deficiency to the harsh physical conditions that originally deprived them of the time and leisure to develop a higher culture: "the situation of the Americans is therefore entirely exceptional, and it is to be believed that no other democratic people will ever be placed in it". (Ceaser at 5.)
And here is Professor Ceaser's best line, from the end of that paragraph:
If this is the meaning of exceptionalism, Americans who favor the term should probably consider fleeing to Great Britain. (Ceaser at 5.)
Yes, that Great Britain, the kingdom whose tyranny of taxation inspired the original Tea Party and this little insurgency called the American Revolution. Something which today might be considered some lunatic fringe extreme right-wing violent movement. 

And as for Reagan? Professor Ceaser wrote that Reagan never used the term, and perhaps at best, expressed a similar concept in his famous farewell address:
I've spoken of the shining city all my political life, but I don't know if I ever quite communicated what I saw when I said it. But in my mind it was a tall proud city built on rocks stronger than oceans, wind-swept, God-blessed, and teeming with people of all kinds living in harmony and peace, a city with free ports that hummed with commerce and creativity, and if there had to be city walls, the walls had doors and the doors were open to anyone with the will and the heart to get here. That's how I saw it, and see it still.
You can see that, as with any good speech -- or lawyerly rhetoric -- the words become the vessel into which others may read into it their desired meanings.

But that doesn't mean Reagan was ever a proponent of "American exceptionalism." Nor was any other American conservative who sort of knew what he or she was talking about. 

Ceaser concludes:
"Ronald Reagan, as far as I know, never used the term "exceptionalism." (Ceaser at 6.)
That phrase "American exceptionalism" is now quite the rage among Republican Party speakers and wannabes. Here is one recent example from former New York City Mayor Rudolph Giuliani, speaking on Friday. Giuliani is, as we all know, a legendary conservative philosopher. But all these current uses don't mean any of their speakers really know what it means.

In fact, the use of the term "American exceptionalism" might only signal what so often is signaled by those who use big words hoping to sound smart and only reveal their ignorance.

If American exceptionalism means this country has unique values, that's one thing.

But if American exceptionalism means we have a special duty or obligation to go fix things in the rest of the world, which are neither our doing nor our responsibility, and particularly when it's at the cost of our young men and women's lives and our national treasury, well, that is entirely something else and it doesn't sound very appealing.

In fact, it sounds like your abilities give rise to your duties.

That's not a reward in any rational sense. That's a punishment, if in fact you are exceptional. 

In fact, it sure sounds like this: 
From each according to his ability. to each according to his needs.
And that's from Karl Marx, writing in 1875. (I link to a nice website with plenty of Marxist rhetoric, and I recommend you spend a lot of time reading it.)

You don't have to be an Ayn Rand Objectivist to see -- or more accurately, feel -- that this principle feels more like a punishment, a strong disincentive, for doing well, for being good. This is the psychological basis for schadenfraude, for class envy, for the "Meann Girls" and frenemies who secretly hate the Homecoming Queen for being, well, "popular."

This is all the stuff that, if observed by a senseless space alien, would lead it to conclude that the objects of such demands were indeed being derided, despised and indeed punished -- for, naturally, being exceptional.

On the eve of next weekend's Conservative Political Action Conference, one may want to hold back on using "American exceptionalism" until one understands its place in the rhetorical pantheon of Marxist-style class envy and redistributionist ethics. 

Eric Dixon is a New York corporate lawyer who is active in Bitcoin and blockchain technology development and has represented several major political campaigns on opposition research and election law matters. 

Saturday, February 14, 2015

New York Real Estate: What the Future Holds

Effective immediately Eric Dixon is handling New York real estate as a broker, a lawyer and an industry analyst. Full-service one stop shopping.

This is another way you readers can leverage my economic and legal analyses and experience with your needs in the real estate sector.

In the past I have written extensively in criticism of foreclosure legislation that could hurt innocent, and paying-on-time homeowners. I will be continuing, and expanding, my focus.

But commercial real estate owners are a constant target.

They are targeted by lawmakers, by tenant "advocates" for shakedowns, and crooked personal injury claimants who are trying to make a quick buck.

So watch this space for increased coverage of the legal and economic issues in this sector.

Monday, February 9, 2015

The Zombie Jobs Recovery

Looking long term over a seven year period going back to Bush and pre-TARP:
  • Actual raw employment has barely increased, despite population growth – see the nearly 7% increase (about one percent annually) in the civilian noninstitutional population -- and significant immigration;
  • The civilian labor force has barely grown, despite population growth and significant immigration. The seven year increase since December 2007 is microscopic.
  • In fact, the seven-year civilian labor force increase has been less than the average annual increase in the civilian noninstitutional population.
  • In the same interval, there has been an approximate 501,000 loss in self-employment, a metric included in the “employed.” ENTREPRENEURS AND SOLE PROPRIETORS AND SOLO PRACTITIONERS HAVE DISAPPEARED AND HAVE NEVER COME BACK FROM 2008-09. 
  • Looking most optimistically at the reported data, at best, the raw numbers of TOTAL employed, NOT COUNTING the self-employed, have grown about one percent – over seven years.
  • Despite the foregoing, the number of those not in the workforce nor in prison has exploded by more than two percent annually, outpacing regular population growth and more than double the growth of the civilian noninstitutional population.
  • In fact, the seven-year growth of the “not in the labor force” category accounts for nearly the entire growth in the civilian noninstitutional population.
There's more in my new economic research report, published by the Financial Policy Council this morning.

Friday, February 6, 2015

Grading Bitlicense 2.0

The redraft of the dreaded New York State digital currency regulation is out. Most consumers will benefit from the progress towards a final regulation, as any completion of the regulation drafting process means consumers and merchants are one step closer towards increased ability to use and accept bitcoin for payment. In addition, Bitlicense 2.0 allows for real bitcoin "banking." However, the compliance costs remain formidable, and as such, the bitcoin technology community remains profoundly affected by the regulation. 

My initial concerns about the first draft of the regulation were geared towards the blockchain / bitcoin tech community, and I use those concerns to guide my analysis which now follows.

My first concern in July 2014 was that the regulation would pose a great burden on upstart industry participants without the great financial resources of major international financial institutions. That concern remains with Bitlicense 2.0. 

The redraft levies a $5,000 nonrefundable application fee on industry applicants, and the formidable application process asking for a wealth of information, and significant capital requirements for industry participants, still remain. In addition, a notable improvement is that bitcoin companies would be allowed under Bitlicense 2.0 to keep their required capital in a variety of instruments including virtual currencies as well as cash. Bitlicense 2.0 junks the absurd original proposal that mandated licensees be "permitted to reinvest its retained earnings and profits" in only short-term cash equivalents or United States government debt.  This allows bitcoin "banks" to use digital currency to meet part of their net capital requirements, and starts the move towards banking using digital currencies and the move away from vaults holding just the digital currency. It isn't perfect, it isn't true leverage, it doesn't allow an expansion of the money supply, but it is a start.  

There was and is still the concern that regulation, however well-intentioned, would lead to eventual domination of an emerging field by large multinationals (which as licensed banks are exempt from the regulations), who may eventually end up hiring the very same regulators in the symbiotic revolving door between big business and big government.  There were other concerns within the industry that the regulations are either designed to or likely will force smaller players out of the industry or at least out of the New York market in favor of established financial institutions, which not coincidentally are the same institutions most likely to be potential future employers of today's regulators, legislators, lobbyists and other "players" in the government. Those concerns were not necessarily misplaced, and those concerns are not entirely allayed. In fact, they may remain. Industry participants are now coming closer to the time when they must confront the reality of having to register or change how they do business to comply with the New York regulation. 

Bitlicense 2.0 also retains the problematic overreach from its expansive definition of "New York Person." The term is defined to cover anyone with any physical presence in the state. The revision further retains the burdensome reporting and recordkeeping provisions on cybersecurity, on the know your customer, anti-money laundering and suspicious activity reporting requirements and on any customer accounts for seven years.  

However, not all the news is bad. The revised regulation offers some important new exclusions. The redraft narrows the definition of virtual currency to exclude from regulation any payment system technologies. This appears to help existing payment processors by allowing them to use and accept bitcoin. It will also help the big financial institutions. This should help pave the way for bitcoin's wider acceptance, and for the average consumer who wants to use bitcoin as an alternative to cash, this is a win-win. 

The many uses of blockchain technology for non-currency, non-transactional functions are also excluded from registration. (Full disclosure: I work with several companies working on such technologies.) That is courtesy of an important and probably overlooked carve-out at the end of the definition of "Virtual Currency Business Activity," which reads in the revision as follows:

Virtual Currency Business Activity means the conduct of any one of the following types of activities involving New York or a New York Resident: (1) receiving Virtual Currency for Transmission or Transmitting Virtual Currency, except where the transaction is undertaken for non-financial purposes and does not involve the transfer of more than a nominal amount of Virtual Currency; (2) storing, holding, or maintaining custody or control of Virtual Currency on behalf of others; (3) buying and selling Virtual Currency as a customer business; (4) performing Exchange Services as a customer business; or (5) controlling, administering, or issuing a Virtual Currency. The development and dissemination of software in and of itself does not constitute Virtual Currency Business Activity. 

On the bright side, it is encouraging that regulators recognized the many non-currency uses for blockchain technology and that the original regulation threatened to stifle or squash altogether or drive out of state the innovators behind the "blockchain 2.0" tech movement. These concepts and innovations are apparently now safe from the Bitlicense registration requirement. The redraft of the business activity definition recognizing the concern that I and a few others expressed this past summer is a win-win for the blockchain community, even if most consumers thinking only about bitcoin-as-currency never notice.

However, for the wallets and other internet sellers of bitcoin, this still-expansively defined term will mean they need to get New York licenses or otherwise not do business with New York "Persons." The reporting requirements under the Bitlicense are formidable. The compliance costs, whether in-house or outside professionals are used, will be significant. Bitcoin companies must do a cost-benefit analysis and weigh the costs against the risk of permanently losing market share and business to conventional banks. In all likelihood this means the bitcoin-currency companies will lose, at least for now, a potentially lucrative market unless they go through the regulatory hoops for the Bitlicense.

Eric Dixon is a New York corporate and regulatory lawyer with several bitcoin and blockchain clients. 

Thursday, February 5, 2015

Valhalla Railroad Crossing Design May Be Cause Of Tragedy

The Valhalla, NY accident that killed seven and injured scores more when a Metro-North commuter train struck an SUV stuck on the tracks and inside the road crossing gates

But could the accident have been prevented with better road design and location of the railroad gates?

Look at the picture above, of a simple crossing. (This is NOT Valhalla, NY.) It is an old design for a rural road. Today's roads have much more traffic.

I suspect there is a design flaw that has its roots in our changing world, old infrastructure, and planning based on assumptions, behavior and conditions as they existed decades ago but which are no longer "safe" given all the changes since they were designed.

Just as old highways and bridges must be retrofitted or replaced to accommodate today's heavier trucks and higher traffic volume, railroad crossings and their feeder roads are no different. 

These crossings, particularly in today's suburbs, were designed decades ago when the crossings were in lightly-traveled and distinctly rural roads. Neither the crossings, meaning the gates, their location and even the design of the roads leading to the crossing, were designed for today's traffic volume and conditions. 

If today we had the vastly lower traffic volume of decades ago, we would likely see a vastly reduced if not totally removed temptation to "beat the light" or "beat the crossing." I would suspect that would result from there being simply less pent-up frustration over either previously encountered traffic or anticipated future traffic. If there is less traffic, one will generally feel much less of a need to "save time." So there is the residual effect on behavior. But I'm not even saying that is the cause, although it is the first thought on many people's minds.

The gates should be farther from the tracks. That is to account for drivers being on autopilot or otherwise very distracted by the many colored lights they see on the road. (Note that I am not attributing anything to distraction from cellphones or other gadgets which now proliferate in today's model vehicle.) It is actually easy to get confused by red lights for RR crossings and red lights for rear side car lights. You may say it never happens to you, or that this one driver was "stupid." But it only takes one incident, one distraction. Perfect drivers for decades get caught in split-section bad reactions all the time. A reaction is not conscious thought. It is a reaction, more like instinct. It can be wrong, but that is applying rationality to a quick, hair-trigger response. Do I stay or do I go, at a particular point in the road. It's not as easy as it sounds, even if you could view it as "contributory negligence" on the part of the driver. (Count on that theory being used in any defense.)

The railroad gates in use up there are like the railroad gates used on country roads 60-70 years ago, when there was far, far, far less traffic and thus far less distraction. The world has changed. The infrastructure has not. 

Very simply, today's transportation infrastructure was designed for a much different world. That infrastructure, those style of crossings, even the layout of the roads leading to the crossing, would not likely be employed if the road and crossings were being designed today with today's traffic demands and driver behavior in mind.

UPDATE Feb. 7th: It turns out the state DID have plans to install more warning lights but never got around to doing so. 

Tuesday, February 3, 2015

Women And Intimidation: Perception or Fact? Looking At The Numbers

Behind the provocative headline lie some interesting federal government statistics that might warrant a rethinking of long-held assumptions about the workplace.

Sometimes the product of my deep-dive investigative fishing expeditions is the revelation of a shocking item buried in a government report. This is one example. Federal government data compiled from the last United States decennial census reveals that the lowest ratio of men to women, among counties with a population of 100,000 and without being skewed by women's colleges, are in none other than Manhattan (New York County) and The Bronx. Each borough has 88.3 men to 100 women.

The national average, incidentally, is 96.7. 

The Census data also breaks down the sex ratio (defined as the number of men for every 100 women) by age. The Y chromosome is dominant in utero, resulting in more male live births, but maleness is also a mortality risk. No matter what the age, more men than women die. And after about age 70, there is a sharp decrease in the number of men relative to women.

The result is that the sex ratio goes from being skewed against men (it is about 105 for those under age 20 or so) to about even for the twenty-somethings, to crossing below 100 in the early 30s age range. (See Tables 2 and 3 of the linked report.) 

Therefore, if some women are wondering why it's so difficult to find a good man -- or whatever they're saying these days -- the scientific explanation may not lie in psychology or values or bad luck. 

It may lie in two factors.

The first is a pure numbers game. There is an oversupply of women relative to men. 

The second is the result of discomfort with correctly perceiving the shifting balance in the sex ratio, which is quite skewed against men up to the college-age years, then evens out, but then gradually and relentlessly tips against women after the early thirties.

In essence, women grow up thinking they are outnumbered -- well, because it's true -- and being outnumbered can lead (warranted or not) to feeling intimidated...but then the numbers do change,

The problem is that the perception, mostly by women, does not change.

When you realize that women's outnumberedness and being intimidated actually underlies a lot of current public policy manifested in our workplace laws, inheritance laws (side note: Go visit any Surrogate's Court in New York) and a myriad of our laws, you might start to understand that this discomfort, and not any actual numerical disadvantage, drives a lot of public policy.

This discomfort -- which I compare to a pitcher who suddenly loses five miles an hour on his fastball, usually around age 34 -- has important policy implications.

It has become an article of faith, not to even be questioned, that education is skewed against girls, and henceforth special efforts must be made to make girls feel more "comfortable." This perception may have its genesis, not necessarily in the myth of male behavioral dominance, but in their numerical superiority through the educational years up to college age. 

But upon entering the workplace, which most people do in their twenties, the numerical dominance (as measured by the Census data, and not in any one particular work environment) just disappears. It is not there. The data confirm this.  Men simply...disappear, it seems.

More men die.

Perhaps the assumption that women need extra legal protections because they are dominated by men in the workforce is not merely grounded in perceptions of behavioral differences by "alpha males," but also in the historical perception that since boys outnumbered girls in elementary school, the workplace is similarly populated. 

The sex ratio statistics do not bear this out. 

Women may not be happy, or fulfilled, or as dominant (that is a matter of perception) as they wish, but the growing female numerical dominance from the years approaching middle age and onward may suggest that male dominance is more myth than reality.