Milwaukee Biz Blog

We need real reform in the financial markets. This reform should include how we regulate and how we audit and enforce these regulations.

Reform will not prevent another crisis that we have just witnessed or the S&L/Mutual Savings Bank crisis some three plus decades ago or frauds such as Madoff's. But reform can catch these problems before they get out of hand, which will reduce the impact on our economy.

• First, we must restore confidence to the secondary mortgage market. Liquidity in mortgages provided by the secondary market is essential to our economy. Banks and S&Ls should not be holding mortgages for long periods of time and should have a market to which they can sell.
  Require escrow for real estate taxes and homeowners insurance for all homes where the home buyer does not have a 20-percent down payment.
• Require that the buyer have a 20-percentcash down payment or that another entity, such as a mortgage insurer, the VA, FHA or Farmers Home Loan Agency, is covering the 20-percent difference between appraisal and mortgage.
• Forbid financial institutions from lending borrowers their 20-percent down payments.
• Ensure that income and assets listed are verified.
• Ensure that appraisals are realistic
• License all appraisers and mortgage brokers nationally, or at the very least, create a standardized system for appraisers and mortgage brokers, including the personnel of any firm issuing paper to be sold on the secondary market.
• Strictly regulate mortgage insurance companies. There have been too many incidents where these firms have had conflicts of interest (using subsidiaries as collateral) or have made risky business decisions that affect their contingent liability funds.
• Require that all use the standardized underwriting and forms issued by Fannie Mae and Freddie Mac.
  Make full disclosure and other paperwork simple to understand. Reduce this paperwork to one or two pages that are understandable.
• Where possible, require that homeowners with less than a 20-percent down payment receive counseling so that they have a budget and so the mortgages they receive are fair, that charges required of them are reasonable and that the property they are buying is worth what they are paying.
• Restrict such practices as "interest only mortgages," balloon mortgages or variable mortgages with teaser rates.

In regards to regulation of the financial industry, it is important to separate the audit and enforcement functions from the influence of politics and business as much as is possible. Politics influences enforcement.

 

A recent example was the firing of Gary Aguirre, an Securities & Exchange Commission (SEC) attorney lauded for his excellent work. He was fired because he wanted to interview John Mack for allegedly giving inside information to Pequot, a hedge fund. (I could have used examples from both Democratic and Republican administrations).

The New York Stock Exchange, the Nasdaq, the Federal Reserve Bank and the SEC did little to go after abuses on Wall Street. For years, Eliot Spitzer was a lonely crusader against Wall Street abuses.

"Self-regulation" by the industries themselves has been not been successful. The Federal Reserve failed to stop abuses in the banking industry through its audits. Their "objective" is to protect banking, but too often this means avoiding confrontation by the few banks that control most of the country's assets.

My suggestion is to create an independent agency that has many features of an inspector general or the General Accounting Office. Fund their budget for seven years at a time. Give a single 10 or 12-year year term to its leadership. Forbid its civil servants from becoming lobbyists or working in the industries they have regulated for five years.

This will not be perfect, but it will go a long way in isolating political influence on the agency.

Furthermore, I suggest that we separate regulation and oversight by an industry's function. Credit, life, health and property-casualty insurance companies manage risk; banks, S&Ls and mutual savings banks lend money. Mutual funds and annuities deal in collective investments. Money managers, hedge funds, financial advisors and stock brokers manage money or offer advice.

Multiple and contradictory regulations need to be reduced, but there should continue to be competition in enforcement. National tests, continuing education and licensing should be national. Licensing by states based on the national model should continue.

 

Bob Chernow is a futurist who predicted the S&L/mutual savings bank crisis, the future of mortgage backed bonds and the recent sub-prime crisis. He works in the financial industry. His opinions are his own.

Has America lost its confidence? Are we in a losing streak? If so, can we turn it around?

I take my lead from Rosabeth Moss Kanter's book, "Confidence." Kanter is a Harvard professor who has studied long-term winning and losing streaks in business and sports. She is to the point and practical. I have taken her observation to their logical larger conclusion that America has a losing streak.

Kanter says that "confidence is a sweet spot between arrogance and despair. Overconfidence leads people to overshoot, to overbuild, to become unnaturally exuberant or delusionally optimistic and to assume they are invulnerable. That is what induces people to become complacent, leaders to neglect fundamental disciplines, investors to turn into gamblers. But under-confidence is just as bad, and perhaps worse. It leads people to underinvest, to under innovate and to assume that everything is stacked against them, so there is no point in trying."

Certainly this is where America stands now.

Retail spending stopped late in September, not just for large purchases, but for modest ones.  I have a friend who owns three dry cleaner stores.  He tells me that October - usually his best month - was down dramatically. My barber, Tom, said that his business in mid-October was cut by 70 percent. Usually I need to wait 35 minutes for a haircut. When I saw him in mid-October at 11 a.m., I was his third customer for the day.

My point is that Americans have pulled back. We feel rudderless. Recently the Obama appointments - all experienced and competent - have triggered a Wall Street rally, in part because it fills a void of a leaderless country and economy. But our problems are deeper.

For example, we are into the "blame game." My friend Congressmen Jim Sensenbrenner believes that the subprime crisis was caused because the poor were "given" mortgages.  Support for the auto industry is equated with helping the unions.  Others want to punish the "evil-doers" who were responsible for the failure of our banking system.

The "blame game" turns winners into losers, in part because the attitude is revenge, not problem solving. Indeed when we let our ideology shape the facts, like Mr. Sensenbrenner, we cannot solve our problems. For my part, I want the economy to recover. I seek financial health more than punishment.

As professor Kanter says, "If losses mount, pressure goes up - or the perception of pressure. Stress makes it easier to panic. Panic makes it easier to lose. Losing increases neglect. Signs of failure cause people to dislike or avoid one another, hide information, and disclaim responsibility - key elements in denial."

As to the reason behind the sudden stopping of shopping, it is fear and anxiety. "People can become paralyzed by anxiety - the learned helplessness."

Warren Buffet likes to say that "It's only when the tide goes out that you know who has been swimming naked." So, we look at the Chrysler, GM & Ford executives who flew down to Washington to beg for money in their Lear jets and think silently that "these guys are out of touch." We see Treasury Secretary Henry Paulson and the now irrelevant Federal Reserve Chairman Ben Bernacke fumble with their plans to shore up the system. They are merely throwing mud against the wall to see what sticks!

These folks are easy targets. But attacking them does not help us solve our problems.

"Of all the pathologies that accumulate in a losing streak, one of the most damaging to individuals, and eventually to the places they work and live, is passivity and learned helplessness. When people become resigned to their fate, nothing ever changes."

So, have we lost faith in our financial system, our economy, our government and ourselves?  Perhaps! But we Americans are an optimistic people. We see adversity as opportunity. We shine when adversity hits us. We get up when we stumble.

Kanter suggests that we get "people to engage in positive ways"” and to "find reasons to identify with everyone's fate." I'd second that suggestion.

Business and government needs to again "walk the factory floors." They need to understand their customers and get useful feedback from their employees. Some winners do that now. I made a suggestion to Costco and received a call from their CEO, who questioned me about one of their stores. He picked up on a problem about checkout lines and corrected it. On the other hand, I wrote Bernacke just after he was appointed in 2006. I was predicting the subprime crisis and made specific suggestions on reducing its impact. I was answered by a P.R. flack who had not read my comments. I responded to her, asking her to pass on my letter to Bernacke. This was not done. He and others remain isolated from the problems we are having.

What can we as citizens do? First, be positive. Do something positive, even if it is a small gesture. For example, I bring up the newspapers for the office and make the coffee when I come in early. This starts me off positively for the day. Volunteer to help those less fortunate.

Try to look at the glass half full, not half empty. Will lowered gas prices stimulate the economy by putting more money in people's pockets? Some conservative estimates say that most American will "save" $1,250 a year. Are there opportunities in the bond and stock markets? Is government helping to stabilize financial institutions and will that lead to the freeing up of loans? Will layoffs mean that businesses will be more efficient? Are the Obama appointments men and women who are competent and experienced?

You get the idea. Emblazon as your motto, "Don't address blame - solve the problem."

Do what you can do yourself to have people look at the world in a less defensive manner and remind others that we have the power to change direction, through our own efforts, through elections and with a plan. What was it that Horace said? "Many shall be restored that now are fallen and many shall fall that are now in honor"

 

Bob Chernow is a local businessman and a futurist.

Be not afraid. This line is from an old gospel hymn. I thought of it after talking with several conservative business friends. They have a fear of a Barack Obama election. Part is based on the politics of fear that the McCain campaign has fostered. But I suspect it is more than this, or even the discomfort of a Democrat winning the presidency.

None of these men think that Bush has operated the government well over the past eight years, and most do not believe that McCain has given them (or others) a reason to vote for him.

Besides the fact that I like these folks, I respect them for their intellect and hard work. All of them have been active in the community and are tolerant of others.

But they are genuinely afraid of an Obama future, especially one where the Senate and House will be controlled by Democrats. The do not think that Obama has executive experience. They are uncomfortable with him.

I thought about this and decided to look at Obama as if I was going to hire him.

He has operated a political campaign that is business-like, is focused and has a long-term strategy. His message is simple and consistent. He understands his weaknesses (lack of experience) and has changed the discussion to an argument on judgment. When he appeared before the American people in September during our financial meltdown, he was cool and collected in his remarks. He had Summers, Volker, Buffet, Rubin and other well-respected greybeards with him. He called McCain to offer to work with him.

He has raised massive amounts of money, mostly through small contributors. He has set up offices in red and blue states designed to register voters and get them to turn out to vote. He hired a chief financial officer to control expenses. He has used a mostly positive message, but has not flinched from aggressively fighting back when slandered.

In short, he has chosen his staff and approach with care. As businessmen, we would welcome his leadership in operating a company.

In addition, Obama's experience as a community organizer permeates his approach to politics.

This tradition is a simple one. First, you build up a coalition of organizations, mostly religious. Catholics, Jews, Muslims, and Protestants from all parts of the spectrum join.  Some are conservative; some liberal. What they share is the common ground of social justice and the belief that united they can influence government. The line from James I, 2:1 illustrates this: "Show me your faith apart from your works, and I by my works will show you my faith."

Part of  Obama's organizing efforts includes numerous listening sessions where members get to know other members. The emphasis here is on building relationships through listening and understanding. He is a trained listener.

Lastly, Obama has learned to define a problem and its causes and then to seek solutions from all quarters. This is a very practical approach to problem solving and one that businessmen use all the time.

Does Obama think government has all the answers? I do not think so. Look at Obama's ad stressing educational reform. In the same ad, he places great importance on parent involvement and responsibility. His own experience with his mother's emphasis on education showed him how important this is.

My guess is that he shares Bill Gates' belief that "we need new ways to bring far more people into the system – capitalism - that has done so much good in the world." In essence, you do not have to bring people down to help people rise up.

Rosabeth Moss Kantes' book, "Confidence: How Winning Streaks & Losing Streaks Begin & End," pointed out that "confidence is a self-fulfilling prophecy, consisting of positive expectations for favorable outcomes."
FDR and Ronald Ragan preached this, as has Obama. It is not merely the words, but the spirit of the words and the policies behind those words that work.

Bob Chernow is a Milwaukee businessman, a futurist, a former Village of River Hills trustee and a supporter of Barack Obama for president.

There is a third way to government success that needs to be addressed. Some say that we need to reduce the government's size (and thus taxes), while others declare that more money is needed to accomplish goals.

But there is the "third way," where government works more efficiently and effectively.

I have proposed to business organizations that I belong that a three- to five-person committee be created to help government improve services, to define the goal(s) for these services and to create a plan to execute their ideas.

Here is a sampling of ideas.

When we transport people, what are we trying to accomplish? It is not merely moving people from one point to another, is it? We want to transport young children to school. We want to provide workers with transportation to their jobs (or to where jobs are). We want to reduce the stress on limited parking needs. We want to move people quickly to Racine, Kenosha and Chicago. We want to reduce pollution in our communities.

You will note that I have not mentioned the "how" of buses, light rail, airports, or trains. They may be part of a solution, but what is needed is   a plan for our region. Do we have such an integrated plan? No.

For example, our bus schedules are based on political pressure, old routes and the desire to load as many passengers that we can on one bus, rather than good, fast and affordable service. Can schedules for large users such as hospital, schools or businesses be adjusted? Can routes be changed to meet needs? Can we do more with less?

How do we control the cost of operating government? A good example is Milwaukee Public Schools, which controls costs by locking in its fuel expenses once a year. But when was the last time that we took an energy survey of our buildings and invested in zoning sections, lighting that uses half the energy of the current system or simple insulation to reduce heating and cooling cost? The pay-back could be immediate and long-lasting.

In regards to health care, why can't our local providers work together? I recall sitting in former Mayor John Norquist's Healthcare Cost Containment project and hearing - in horror - the terrible waste that came from creating duplicate computer systems. The goal and purpose of these systems were the same, but each health care group was reinventing the wheel. I calculated from the numbers given at one meeting that we wasted $350 million in duplicate spending. Of course, we, the users of these services, eventually pay. The reasons for this duplication can be attributed to distrust and ego. Why did business not pressure the providers to cooperate?

I did a little project that was inspired by the Norquist project. I wondered what one intelligent business person could do if he looked at one area of health care. I selected nurse retention. As a futurist, I have seen the projection of a 1 million nurse shortage by 2010. I spoke with many nurses, read several studies and came up with several ideas that would help solve this problem with little or no money.
Waste in Wisconsin road building could be reduced by adopting best methods. The Marquette Interchange, for example, is on schedule and on budget. One reason for this success is the use of weekly audits, allowing adjustments immediately.  

I had occasion to visit with Department of Transportation staff in Madison on a matter for the Regional Telecommunications Commission that I chaired. I asked the DOT staff if they had considered using this audit system on their own projects, since their own projects rarely come in on time or on budget. I also suggested that mandated environmental studies be done in a coordinated manner at one time, rather than over several years.

This would require upfront funding to the Department of Natural Resources, but would save (I estimated) three years. The staff was actually offended that I would make such suggestions.
There are many other ways that the "Third Way" could make governmental operations run more effectively and efficiently. We need only have the will to take the first step.

Bob Chernow is a Milwaukee businessman who has long been active in local government.

Editor's note: The following letter was written by Robert Chernow, chairman of the Regional Telecommunications Commission, which represents 35 cities, towns and villages in Wisconsin. The letter was written to Scott VanderSander, president of AT&T Wisconsin, after reports that batteries in cabinets housing equipment for the AT&T U-Verse service were exploding in public areas.

Dear Mr. Vander Sander:
AT&T's cabinets that are placed in the rights of way of the community members of the Regional Telecommunication Commission present a significant danger to our citizens.
The safety issue relates to explosions and fires in at least four cabinets that are being caused by defective batteries manufactured by a now bankrupt company. On Dec. 24, 2007, one of your cabinets exploded in Wauwatosa. If the cabinet had been next to a wooden building, not a brick building, there would have been a major fire.
There may be many more incidents than the one in Wauwatosa, two in Houston and one in Cleveland. This is because you have not been transparent regarding this safety issue.
AT&T has been lucky that no one has been killed or injured in the residential areas where you have located these cabinets.
This issue is not a new. As Chair of the 35-member Regional Telecommunications Commission, I have tried to get responses from AT&T-Wisconsin regarding these explosions for over 1-1/2 years. Except for a vague letter last summer, we have been met with silence.
In January 2007, I visited Madison to ask the Department of Transportation to give us the rights of way locations that the DOT gave AT&T.
Your lawyers forced the DOT to stall by several months our ability to obtain this public information. Finally after a threat of a lawsuit, we obtained the locations so that we could alert local fire and police departments to possible problems.
The Department of Financial Institutions wrote us that they do not have jurisdiction over AT&T-Wisconsin per recent legislation since you have not applied for a franchise. Therefore, we have asked the Public Service Commission to assist us. Additionally, we are writing you directly.
We want to insure that AT&T-Wisconsin removes this known and dangerous hazard to our communities.
We want to avoid the deaths or serious injury of our citizens and their families.
We request that you do the following:
Place warning signs on each affected cabinet that will alert residents that these cabinets might explode and cause a fire.
Replace all defective batteries within three weeks.
Remove all defective batteries within four weeks, even if replacements have not been found.
Make public the outside engineering report you have kept secret. 
The Regional Telecommunications Commission has 35 members and has been in existence for over 20 years. A list of our member communities is attached.

Sincerely,

Bob Chernow
Chair,
Regional Telecommunications Commission

Dear Wisconsin Legislators:
The 35 cities, towns and villages of the Regional Telecommunications Commission oppose the Plale-Montgomery bill. Here are some of the problems we see. 

The justification for this bill is to generate competition among cable and video providers. This is a goal that our organization has fought to achieve for years.
For example, before the high-tech bust we fast tracked Digital Access, a new cable-Internet-phone provider. In six months we had an agreement that was fair for our communities and our cable provider, Time Warner.

In late 2005, we contacted AT&T Wisconsin and began a year’s negotiations for a model agreement that we thought all of Wisconsin’s communities could adopt. AT&T stopped negotiations when they thought they could get a "better" deal from you in Madison. The Pale-Montgomery bill obstructed our negotiations.

Indeed, AT&T could have had a model agreement by mid-2006. Today we would happily agree to the Milwaukee-AT&T agreement. AT&T refuses to talk.
Let us make clear that we want competition to improve service and lower costs for our consumers. We just do not think that this bill accomplishes this goal.

 

Let us look at why:
Many of our communities use PEG for governmental and educational purposes, servicing those who live in our cities, villages and towns. PEG operates on a shoestring but produces value. PEG is supported by volunteers. Yet the bill forces PEG to "raise" its own funding after three years, according to Senator Plale. This will kill PEG.

The elimination of PEG does not help competition. The modest pass-through costs are by paid by subscriber. What it does is to allow the provider to raise its own rate. This is exactly what Time Warner did when it won concessions from Milwaukee for PEG.

On a different issue, we think that it is fair for new providers to carry PEG once they have reached a certain thresh hold of subscribers and to connect PEG to their system. This is what current providers do.

We want our citizens to receive service on a neutral basis and not based on race or wealth. While the bill makes accommodations, enforcement is inadequate. A weak department, with no consumer experience, has purposely been assigned this task. But to insure non-enforcement, its "budget" was cut to less than $70,000. 

The RTC just finished an audit of one of our providers. We are claiming fees that were not paid. Other communities have had success with their audits. The Plale-Montgomery bill restricts our audits. What does this have to do with competition?

The answer is nothing.

The Plale- Montgomery bill is about power in an industry to control and dominate the market. This is bad business and bad government.

The argument also has been made that AT&T will not invest capital or manpower if this bill fails. But reality shows that they are competing now. Moreover, AT&T has no other choice. They have lost 1/3 of their telephone market to cable and VOIP providers. They have no other choice!

On the other hand, Time Warner is investing $20 million in a new building in Appleton and will hire 300 workers over the next five years.

We are also concerned that we have been systematically excluded from this process.  Representative Montgomery made clear that the RTC and other municipalities would "not have a seat at the table."  As they say, "When you don’t have a seat at the table, you are liable to be part of the meal."

AT&T likes this bill. Our communities oppose it. AT&T- Wisconsin lobbyists helped write this bill. They have hired a battalion of lobbyists, set up a phony advertising campaign and contributed over $100,000 to members of the Senate and Assembly. The members of our organization, the RTC, are all volunteers and local officials. We are not sophisticated lobbyists, nor do we have funds to contribute to your campaigns. We are just trying to keep our rights of way and represent the best interests of our citizens.

These citizens believe that their rates will go down. They are wrong.  AT&T has been up front that their current rates are only for promotional purposes. They originally project a 20 percent increase to $120. Now they are projecting an increase of 45 percent to $145. 

We ask that you either reject this bill or change it to be in accord with the Milwaukee-AT&T agreement.

 

Sincerely,

Bob Chernow
Chairman of the Regional Telecommunication Commission

Editor's note: The author, Bob Chernow, prefers to speak his mind on the condition that he be referred to as a Milwaukee businessman, because he is speaking strictly from his own perspective, and his viewpoints do not represent those of his company. He has more than 30 years of experience as a stock broker and is a noted futurist. The following are excerpts from a speech Chernow gave at the World Future Society in Toronto, Canada, in July 2006. Many of his forecasts about a pending crisis in the subprime lending market and a credit crunch, are coming to pass.

In the early 1970's, the Hunt Commission deregulated the S&L and Mutual Savings industries. Deregulation gave them freedom, but there was little oversight regulation over them.

The S&L and Mutual Savings industry borrowed their money short-term, but made long- term loans. This strategy was doomed in an inflationary economy.
Deregulation and the lack of oversight led me to predict the collapse of the industry - something that I tried to prevent in a series of speeches and articles to the industry and letters to my senator, Bill Proxmire (then Chair of the Senate Banking Committee) and the Federal Home Loan Bank, now part of the Federal Reserve.

In addition, the "guns and butter" policies of President Lyndon Johnson and President Richard Nixon's imposition of price controls (without making changes in the economy) made inflation inevitable.
The lack of any response made me understand what it means to be a "Cassandra." You can see the future, but you are cursed that no one believes you!
Now I have another dire prediction. This one concerns trends in mortgage finance. Mortgage lending is based on the premise that the homebuyer or lender has a stake in a property. Federal regulations require a 20-percent down payment if no mortgage credit insurance is involved. Mortgage insurance from private industry covers either the top 20 percent of a loan or the entire mortgage. This tactic is designed to ensure that appraisals are not inflated and that the lender has a vested interest in being "honest." FHA and VA credit insurance also has controls to ensure that appraisals and credits are in line with reality.

Yet in "hot" real estate markets, many buyers avoid mortgage insurance because lenders encourage them to take out second mortgages as down payments. These second loans have higher interest rates and are often adjustable to variable interest rates. These types of loans encourage speculation by artificially allowing buyers to stretch what they have to buy homes they normally could not afford.

According to the Federal Reserve, 35 to 40 percent of all recent mortgages were "interest only" variable loans. This type of mortgage allows buyers to buy homes when prices are inflated. It is interesting that the last time interest only and balloon mortgages were popular was during the 1920's. This was a major reason that banks became insolvent during the depression and was a reason why amortized mortgages were created, as these types of mortgages let buyers pay down principal.

What is wrong with "interest only" mortgages? Well, for one, the homeowner has no economic stake in the property. He can walk away if he cannot pay. He is, in essence, "leasing" the home in the hope that property values will increase. This is the "greater fool" theory of investing. What's that joke? "If you don't see a greater fool, look in the mirror!"

Fourteen percent more homes were lost to creditors in 2005 than in 2004. Realtytrac.com says that 33 percent more people are in some state of foreclosure than in 2005. What is interesting is the number of the affluent that these numbers represent.

Regardless of what the "new" bankruptcy law dictates, banks will be hard-pressed to collect on much of this debt.

Note as well that $2 trillion of variable loans are due to have their interest rates reset shortly. What we have seen so far may only be the tip of the iceberg.

Another concern is appraisals that are made to fit purchase prices. "Incomes" adjust to meet mortgage payments. Today's bankers and mortgage lenders often view their world as short-term. Since most loans are sold off, this is no surprise. The problem becomes someone else's! The irony here is that the secondary market in home loans is being perverted by the system rather than generating liquidity for home buyers.

Thus I see a major problem for banks, the mortgage industry and housing. Will the banking industry collapse? I do not think so, but I do see significant strains and the loss of billions of dollars of inflated real estate. Since loss reserves have been reduced for the banking industry by new accounting rules, the situation will not be pretty.

What is needed is federal regulation of the mortgage industry, the outlawing of 100-percent second mortgages for down payments and the monitoring of appraisals and credit practices.

Control and regulation of predatory lending practices should be implemented, especially when regulated banks buy these loans. Importantly, prepayment "penalties" should be forbidden for predatory loans.

The sub-prime market is about 19 percent of all loans originated, according to the Christian Science Monitor, a ten-fold increase since 1994. This industry has ethical challenges. Household International paid a $500 million settlement for charging higher rates than disclosed. And Ameriquest agreed to a $325 million settlement to 725,000 borrowers for similar abuses, such as concealing high interest rates.

This is chump change to these folks, and they are not the worst offenders in this market that serves the most vulnerable of our population.

The Federal Reserve Bank could dampen overheated real estate markets by restricting interest only loans, by forbidding "second mortgages” for down payments and by closely monitoring appraisals and credits. Will Federal Reserve Chairman Ben Bernaeke take these steps rather than use interest rates as a blunt instrument? It is doubtful. His interest lies with his banker friends, not the long-term health of the economy. The Fed is currently devising regulations to curtail interest only options and other "exotics." There is no sign that these regulations will be created soon.
Now let us look at what the investment world will look like in 10 to 15 years?

First of all I see a divide between the rich and the rest, and a battle for cost efficiencies vs. performance.

But what is little understood by pundits and public administrators is the battle for talent. Talent is rare and is becoming rarer as the bad and mediocre crowd out the competent, say, most currently, in the hedge fund arena.

Talent is needed to create and preserve wealth. The market will pay for talent. Boutiques and giant firms will dominate and the small independent or financial planner will become a "consultant" for clearinghouses, or disappear.

I see, therefore, an industry where most people will use packaged products and index funds and will purchase these products at a fixed fee or price. Brokerage firms will dominate, but banks and insurance companies will take an increasing piece of the pie.  Discount houses will maintain their share of "do it yourselfers," but many will "move up the chain" to become more full-service.

People will continue to pay for wisdom, not merely information or "smarts." They will pay for human contact, a give-and-take, and, importantly, courage.
People might also deal with financial experts who are not local. Inexpensive telephone calls have allowed brokers and other financial types to deal with clients who live outside their territories. Geographic expansion will expand, and if regulatory licensing eases, non-US based brokers might serve clients in America. 

Computers will some day be developed so that there will be "virtual relations," but I am guessing that this will not take place within the next 15 years. In this scenario, you interact with a robot. But these robots will need to be creative, thinking out of the box.

The crowding out theory is also at work here. When too many people jump on the same wagon, few succeed. The convertible market once had many bargains; it was an exotic. Over the last decade, institutions and mutual funds have entered this market, and few "bargains" exist, in my opinion.

Many economists predict that the baby boomers will convert all or part of their assets into fixed income when they reach retirement age. Others- a minority, like me - see baby boomers changing careers, but still working. My guess is that the segment of the baby boom population that has money will be bored in retirement and will continue to be productive.
Financial planners may still see 65 as the retirement age, but my guess is that it will be closer to 75 or 80. Even Social Security recognizes this!

What kind of investment world will we have? Health care and education will be fields to watch for increased productivity and efficiency. In health care, nurses, not doctors, will use diagnostic machines; biotech will allow us to prevent as well as correct disease. We will have fewer hospitals. Medicine may stabilize Parkinson's and Alzheimer's (and certainly we will be able to identify these and other diseases earlier.)

For education, the computer, the Internet and telecommunications will allow us to design individual programs. Distance learning, especially in business, will continue to dominate. Lectures will be transmitted to individuals. Grading and student notes may be complied through voice recognition.

Certain industries, such as the telephone industry, will probably be obsolete.

New investment categories, such as the purchase of toll bridges and roads, municipal water and power systems, will be sold by municipalities and packaged by Wall Street.

New industries will grow, and old industries will be reborn.  Nanotechnology, nuclear, wind and solar energy, new types of materials (such as titanium) are examples. Emerging markets like India and China will continue to grow. Other countries such as Brazil and Indonesia will surprise.

What could go wrong with this scenario?  We could have a SARS epidemic, global warming, an energy crisis and weapons of mass destruction. Personally I have long thought that oil and gas would be in surplus because of a dramatic increase in energy efficiency.

A major area of concern is how we regulate. In the United States, regulation comes after a scandal that is after the "barn door" has been opened. The S&L/Mutual Saving bank crisis is an example. The unregulated hedge funds industry is another. The reason for this is self-interest. Unregulated hedge funds make up 30 percent of the volume of U.S. stocks traded. The derivative market - also unregulated - personified the "crowding out" theory discussed earlier. Self- dealing in the mutual fund industry also arose from greed.

In truth, managers in the financial industry (banking, brokerage, and insurance) have but a glimmer of how business is obtained and retained, and whose personalities are best suited to do this work. Regulators don't have a clue.

Whether my observations and opinions are valid, only time will tell. Or as Warren Buffet once quipped: "It's only when the tide goes out that you know who has been swimming naked."