Young surfers catch a wave


The Parable of Dot, Com and Uncle Sam. Where exactly is Uncle Sam’s money going?

Once upon a time, Uncle Sam had a good idea. Or, to be more accurate, his niece and nephew, Dot and Com, had a good idea. Dot and Com lived in California and spent most of the day surfing. Uncle Sam found it difficult to understand exactly what the good idea was: but he knew that Dot and Com were very clever, he admired Dot’s long legs and Com’s tan and their enthusiasm convinced him that their good idea would succeed.

So Uncle Sam went to see his banker, Mr M. Old Mr M had seen many enterprises come, and almost as many go. That had made him cynical, but also rich. Uncle Sam knew that Mr M would back the venture, because of his long and profitable relationship with Uncle Sam. In turn, Mr M would expect Dot and Com to live frugally and work every hour of the day for several years, until the business turned into profit, and perhaps even until it started to generate cash.

But old Mr M was buried beneath his last tombstone, and young Mr M had taken his place. Uncle Sam knew immediately that young Mr M was very different. Old Mr M had never been known to remove his jacket (even, Uncle Sam suspected, when he went to bed.) Young Mr M’s red braces were visible for all to see.

Banking was not as it had been, young Mr M explained. In the old days, new industries had needed large capital investments. The patriarchs whose portraits were on the wall of Mr M’s office had raised money for railroads and electric utilities.. They had built automobile plants and funded oil wells and airlines.

But today, Mr M explained, we live in a weightless economy. Knowledge based businesses don’t require large capital investments. They need money to pay salaries and consultancy fees while the good ideas fructify. They also need to cover their large advertising and public relations expenses. Everyone could see what railroads and automobiles were for, but good ideas today seem to require a lot more explanation. Still, these expenditures hardly compare with the costs of a steelworks or a gas pipeline.

Uncle Sam sympathised with young Mr M. He had been made redundant once or twice himself, and he knew what it felt like. What was Mr M planning to do, Uncle Sam asked, now that fledgling companies didn’t need bankers any more.

Young Mr M laughed. Although there was no paper on his desk, there were many paperweights. He explained that his firm had raised more money for new businesses in the last year than in the whole of old Mr M’s lifetime. Uncle Sam was puzzled. If these knowledge businesses didn’t need large scale investment, why was Mr M raising capital for them, and where was the money going.

Mr M laughed again. Poor old Uncle Sam just didn’t get it. Modern investment banking wasn’t about funding capital projects. It was about spotting entrepreneurship. Bright young people like Dot and Com deserved to be rewarded for their good ideas. Their friends should be rewarded for knowing them, and for introducing them to Mr M. And their advisers, like Mr M’s private equity division and Mr M himself, should also have a share of the action.

Mr M tapped a few numbers into his computer If Dot and Com’s idea was as good as Uncle Sam said, then it was worth…. he named a figure that took Uncle Sam’s breath away.

By now, Uncle Sam was beginning to understand. He was just very old-fashioned in thinking that banks and stock exchanges were there to finance investment. The purpose of modern capital markets was to give young people immediate access to the money their good ideas would produce in future. He started to think of the things that Dot and Com would be able to buy. Nice houses, celebrations on the beach. He hoped he could join some of them. Uncle Sam had thought he would give Dot and Com a helping hand. But now he realised that they would soon be helping him.

The values of the new economy were very different from those Uncle Sam remembered sharing with old Mr M. Fine residences and grand parties used to be things that came after your business had succeeded, not before. Another of old Mr M’s maxims was that a bird in the hand was worth two in the bush. Young Mr M calculated the net present value of the flock before the egg had hatched.

Times had indeed changed, Uncle Sam reflected, as he took the subway home. But one of Mr M’s answers still troubled him. Uncle Sam now understood where the capital being raised went to. But where had it come from?

Mr M had explained that there were two parts to the answer. Some of the money was derived from Uncle Sam’s pension fund. Uncle Sam’s trustees were putting his annual contributions into these start-ups, and even ditching shares in old Mr M’s businesses to find more cash for talented girls and boys like Dot and Com. Uncle Sam had always thought that pension funds were there to help old people supplement their incomes at the end of their working lives, not to help young people supplement their incomes at the beginning of their working lives, but he supposed that just showed how out of date his thinking was.

And net investment in the US stock market had been stimulated by a fall in savings and an increase in borrowings, largely from abroad. After all, since these good ideas were going to make everyone much richer in future, there was no need to put money aside for the future in the time-honoured way.

What would happen, Uncle Sam wondered, if Dot and Com’s good idea wasn’t as good as he and Mr M both thought it was? Who would pay his pension, and repay the foreign borrowings? Not to worry, he reflected. Dot and Com were good kids and he had a lot of confidence in them. A tear ran down his cheek. Uncle Sam had finally got it.

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