Milwaukee Biz Blog

Everyone is entitled to their own opinions, but not their own facts.

Too many political types bloviate about the Bush and Obama bailouts during the 2008 subprime crisis. They claim it failed, didn’t work and cost us taxpayers a lot.

I beg to differ.

In late 2008, people stopped spending...Restaurants were empty. Shopping malls were abandoned. Businesses froze. It felt like lemmings charging over a cliff.

Wall Street was in panic. Market makers were compromised because many were out of business or did not have the capital to buy and sell securities- essential to making markets. Wachovia, Merill Lynch, among others went into “arranged marriages” without a dowry. Washington Mutual went under as did Lehman Brothers. Banks refused to take each other’s credits.

The Great Depression of 1929 is in our DNA and seemed real.

There were runs on money markets. Liquidity disappeared. Hedge funds abandoned Morgan Stanley and Merrill Lynch because they didn’t want to have their funds tied up and lost. Goldman Saks was about to collapse, as were Citigroup and BankAmerica.

I lived through this and found that there were no safe places to hide.

While I had predicted the sub-prime crisis in 2006 (and had alerted the Federal Reserve, numerous elected officials and the Milwaukee Journal-Sentinel and New York Times), I had not anticipated AIG’s fall or that corporate bonds would be hit as hard as they were.

Mr. Paulson and Mr. Bernecke panicked like the rest of us. They reacted by throwing a lot of stuff against the wall to see what stuck. Finally some of what they did did stick, and the worst of the panic subsided. Obama and his crew continued with programs to stabilize the markets and the banks and to save the auto business and their suppliers.

I mention what happened because we have short memories and because I want to set the stage for my belief that what both the Bush and Obama governments avoided a 1929-like depression.

But don’t take my word; look at the July 25, 2011, article in Fortune Magazine titled “Surprise! The Big Bad Bailout is Paying Off.”

Fortune Magazine is not a tool of Occupy Wall Street or Liberals. Like most business people, they need to look at the world objectively. Their research showed that the
bailouts were a success.

The Fortune article considered the entire bailout, not just the 3 percent TARP (Troubled Asset Relief Program). TARP cost $19 billion, including a $13 billion restructuring cost for homeowners that stabilized neighborhoods. TARP was authorized to spend $700 billion but never spent more that $410 billion.

The Treasury guaranteed money market funds when the largest such fund, Reserve Prime Fund, fell to .97 cent. In plain parlance, Reserve broke the buck. The Treasury stopped a run on these funds when they guaranteed $3 trillion.

Hedge funds ran for the doors when Lehman Brothers - one of the top “Prime Brokers” - went under and their assets were frozen. There was a run on Goldman Saks and Morgan Stanley - also “Prime Brokers” that was stemmed when the government made them “banks” so the Federal Reserve could loan them money. 

Merrill Lynch joined Bank of America in a shot-gun marriage as did Countrywide.

GE Capital couldn’t rollover its borrowings, a problem other large companies faced. The government became the lender of last resort for these firms. 

AIG through a British subsidiary guaranteed a lot of AAA-rated bad CMOs and other mortgage backed bonds. As the country’s largest insurer, they needed time to unravel their assets. The Treasury got 563 million shares of AIG for making $85 billion in credit available. These shares are worth about $14 billion.

Was it smart to pay Goldman Saks, one of the worst offenders in the subprime crisis 100 percent on the dollar? Probably not, but to allow AIG to go belly up would have had a negative affect on the economy in part because other insurance companies would have had to take over their policies and annuities and they did not have the capital to do so..

The most critical and largest expense was for Fannie Mae/Freddie Mac. Shareholders were wiped out, but debt holders (many of which were banks) were saved. The cost as of last summer was $130 billion ($154 billion, less a $24 billion dividend). The Congressional Budget Office and the Treasury, according to Fortune, expect this number to shrink.

There were many problems with these two organizations. Fannie Mae was for the Democrats and Freddie Mac was for the Republicans. The original idea was that they would be a clearinghouse for mortgages on the secondary market (something I advocated for more than four decades ago).

These two organizations then became quasi government-private companies, combining the worst that public and private offers. Management was rewarded for short-term performance so they manipulated the system to ensure that their numbers looked good. Both Fannie Mae & Freddie Mac were generous in their political contributions and lobbying. The function of these two organizations should not be privatized.
Fortune believes that the negative part of the bailout was a ruling that AIG, Citigroup, GM and Ally Financial (formerly GMAC) could use their tax losses in full and could shelter $35 billion in income. Of course, they need to earn money to shelter them.

The current “losses” in Chrysler, GM and AIG are offset by gains from the banks (who were anxious to pay off their debt so that their top executives would not have a ceiling on their compensation). These bailouts fell from $$411 billion to $104 billion Final judgment is still out on Chrysler, GM & AIG.

Imagine for the moment the damage to our economy and society if GM, Chrysler and AIG failed. The actual cost to the government and taxpayers for unemployment and other expenses would have been higher than the bailout.

On the “Plus” side, Fortune included “bailout” profits from the Federal Reserve.

The Federal Reserve bought $1.25 trillion of mortgage backed securities in QE1 
(2008-9) and $600 billion in QE2 (2010-11). The Federal Reserve owns about $2 trillion for which they did not have to borrow. In 2007-8, the Fed returned to the Treasury $193 billion (which Fortune calculates as $102 billion in excess “profit”). The size of this portfolio is falling slowly. The Fed should generate at least $30 billion in excess profits in 2012.

Treasury received $15 billion in fees for insuring money market balances and the $150 billion in the mortgage backed bonds it owns. And the FDIC made $8 billion between the increased fees on insured deposits and what it has paid out.

Fortune said that it was not the bailout that was bad, but the excesses of the financial system. Looked at objectively, this is obvious.
 
One reason for this success is that government has only had to make good on a fraction of its guaranteed loans. The Treasury also had advantageous deals with the banks that were profitable.

In the end, the taxpayers will end up whole or ahead. But the success of the bailout is that it prevented a depression-like situation like we had in 1929. It rescued GM and Chrysler and allowed Ford to survive because it saved the suppliers of the auto companies. It set up a situation where confidence in the banking system and money markets came back and where we could address the problems of our economy.

These are the facts. The rest is propaganda. As Sun Tzu said in The Art of War: “He who does not understand himself or his enemy is doomed to fall.” To understand how to prevent these problems from occurring in the future, we need to know what has been successful. The fear is that politicians and others will believe the lies they are telling others. 

That is a roadmap to disaster. For if we do not see what causes problems and what works, what have we learned?

Bob Chernow is a Milwaukee businessman, a former River Hills Trustee and the former chair of the Regional Telecommunications Commission, the North Shore Cable Commission and the Milwaukee River South Rivershed Commission.

At the start of 2011, I returned to the great state of Wisconsin because of its people, their collective expertise, strong work ethic and ability to meet challenges head-on. For me, WHEDA was the place to be. WHEDA has worked for nearly 40 years to finance housing for lower income Wisconsin citizens and help them achieve fulfilled dreams.

Like the housing industry and Wisconsin’s economy, WHEDA was at a crossroads in 2011. Home ownership becomes meaningless and virtually unattainable without a good-paying job. So I enthusiastically accepted Governor Walker’s call to help in his goal of creating 250,000 private sector jobs by 2015.

The first step we must take is to reduce joblessness and increase household wealth across Wisconsin. How do we plan to do it? At WHEDA, we expanded the “ED” in our mission by leveraging our economic development programs with our housing finance knowledge. The beauty is that WHEDA maintained its long-standing housing commitment and strengthened its economic development mission to support Governor Walker’s goal. In addition, WHEDA works closely with our sister agency, the new Wisconsin Economic Development Corporation to further a team approach to business expansion and job creations.

We developed a bold strategic plan to deploy all of our products to create or retain 12,500 Wisconsin jobs. Important components of the plan include expanding economic development, strengthening multifamily housing resources and capabilities, reestablishing home ownership lending programs and strengthening Authority finances and operations.

In August 2011, the WHEDA Board approved the 2012 Dividends for Wisconsin plan that provides a stronger focus on allocating general reserves to job creation and economic development. The plan evolved following a series of public hearings around the state where the message was loud and clear: utilize our reserves to stimulate economic growth and financially support WHEDA’s current housing programs.

As a result, WHEDA will devote $12 million from Dividends to job creation and economic development.
The second priority of the plan is affordable single family and multifamily housing. In all, over $14 million in general reserves will be available for all housing and economic development purposes. The third priority is housing for persons in crisis. WHEDA will provide $500,000 to local organizations serving our most vulnerable citizens. We believe that’s our housing investments are a significant contribution to aiding Wisconsin’s economic and community recovery.
Economic development, the ED in WHEDA has always been a key component of our mission, and 2011 was no exception.

Back in April, Governor Walker and I made stops in Oshkosh and Milwaukee where the Governor awarded $17.1 million in Affordable Housing Tax Credits to fund affordable housing project developments all across the state of Wisconsin. Those credits that WHEDA distributes will create approximately 1,200 construction jobs, will move forward 29 developments that will create 1,400 units of affordable rental housing. This year’s Affordable Housing Tax Credits will generate an estimated $250 million in economic activity for Wisconsin.

Our application to the US Department of the Treasury for a State Small Business Credit Initiative (SSBCI) allocation totaling $22.4 million was accepted. WHEDA expects to leverage the funds 10:1 for a total of $224 million. The funding is expected to create or retain 11,625 jobs. That is phenomenal news for our entire state.

When you look at all of WHEDA’s economic development tools including New Markets Tax Credits, small business programs, the Neighborhood Revitalization Guarantee program, the Contractor’s Loan Guarantee program, all of our agricultural programs and add it all up, WHEDA’s historic commitment to economic development in Wisconsin is significant. To date, since WHEDA’s inception, WHEDA has provided $828.7 million in economic development lending.
Despite our historic success, this isn’t the WHEDA of 10, 20 or 40 years ago. The affordable housing tools to which we were accustomed have been affected significantly by the “Great Recession”, the housing market crisis, regulatory reforms and the market’s continued aversion to credit risk.

To be clear: The affordable housing loan market was not the cause of the housing market crisis. WHEDA’s portfolio of loans is experiencing a default rate of about 3.2 percent, well below the Wisconsin average for prime conventional mortgages. Even so, because investors and guarantors have tightened qualifying criteria, we cannot offer the same loan terms and credit parameters as we have in the past.

We can, we must and we will work to turn matters around. WHEDA has set critical priorities to create more jobs, focus on strengthening the economy and develop new sources of mortgage capital. 

I’ve told audiences that I love my job because it’s like doing God’s work with a balance sheet. WHEDA and its partners will strive throughout 2012 to expand both employment and affordable housing options for Wisconsin families. WHEDA employees and I are committed to this goal.

Wyman Winston is executive director of the Wisconsin Housing and Economic Development Authority (WHEDA).

VETransfer, a business incubator for veterans, hosted the final leg of the U.S. Small Business Administration’s Young Entrepreneurs Series Thursday.
Marie Johns, SBA deputy administrator, hosted a panel of young Milwaukee-area business owners on the sixth stop of the YES tour. The Milwaukee event focused on apprenticeship as a route to entrepreneurship.
The tour also stopped in New York, N.Y., San Diego, Calif., Ames, Iowa, Charlotte, N.C. and Tahlequah, Okla. Other themes included rural, technology, veteran and minority entrepreneurship.
The SBA included Milwaukee in the route because of its strong manufacturing and skilled trades background, which can lend themselves to new business start-ups, Johns said. The event was held at VETransfer to assure company leaders there knew the SBA was available to veteran entrepreneurs as well.
“We always stay focused on our veterans,” Johns said. “We have so many returning to the U.S. from active duty and we want to make sure we’re helping them in every possible way.”
The panelists at the event were Jessie Cannizzaro, owner of Milestone Plumbing Inc. in Wauwatosa, Daphne Wilson, owner of Zoe Engineering in Milwaukee, Lexy Frautschy, owner of Ian’s Pizza in Milwaukee, Kevin Autman, owner of Total Property Service Group in Milwaukee and Ugo Nwagbaraocha, owner of Diamond Discs International in West Aliis.
Each of them was able to start his or her business because of training and apprenticeship in the field.
Frautschy, for example, worked for Ian’s Pizza in Madison during college and then helped expand the business to Milwaukee, where he owns the independent Ian’s Pizza restaurant at 2035 E. North Ave.
Nwagbaraocha was also promoted from within at Diamond Discs, where he acquired the company from its original owners.
Johns also announced a collaboration with the Department of Labor to provide an entrepreneurship curriculum at Job Corps sites around the country.
The tour and related courses are meant to aid potential business owners and also let them know which resources are available to them through the SBA, she said.
“Small businesses are the job creators in our country,” Johns said. “We want to make sure the SBA is there and part of the story for the next stage of entrepreneurs.”

--Molly Newman is a reporter at BizTimes Milwaukee.

This week, our national debt hit $15 trillion. The urgency of our debt crisis demands that Congress pass true spending reform that will enforce fiscal discipline. This can only be accomplished with a balanced budget amendment.

If we want to give job creators certainty for the future, and encourage them to expand and grow, we must rein in out-of-control spending.

The House considered a balanced budget amendment to the Constitution, which requires a 2/3 vote in each chamber of Congress to pass. 

With opposition from the tax-and-spend left, the amendment did not pass.

This Balanced Budget Amendment closely mirrors the same one that passed the House in 1995 — with broad bipartisan support — and failed by only one vote in the Senate. Since then, our debt has nearly quadrupled.

My colleagues across the aisle who voted against this amendment are either burying their heads in the sand or trying to misrepresent this effort to score political points. But ignoring our debt crisis won’t make it go away.

In fact, a group of moderate Democrats openly supported this amendment and called opposition “unfortunate” because almost two-thirds of Americans support this measure. One Democratic member said, “This shouldn’t be a partisan issue. We should come together and take steps to get the country back on the appropriate path.” 

Under President Obama, this country has seen an explosion of Washington spending and unmatched trillion-dollar deficits. Since President Obama took office, our debt has increased by $3.7 trillion. The Democratic-controlled Senate has not passed a budget in more than 900 days.
 
Setting our federal budget is one of the most basic functions of government. Washington has been spending without any limits in place, and our President has failed to offer any leadership to address the debt crisis, and in fact has led us in the opposite direction.

But we did not get here over night. Under both Republican and Democratic Administrations, Washington has spent too much. It is too tempting for politicians to spend now, while passing the debt on to future generations.

A child born in 2011 carries $47,093 of our national debt. If we continue on this path, future generations will be left with an America where uncertainty and debt crowd out opportunity for prosperity and economic progress.

President Ronald Reagan said it well: "Only a constitutional amendment will do the job. We’ve tried the carrot, and it failed. With the stick of a Balanced Budget Amendment, we can stop government squandering, overtaxing ways, and save our economy."

I supported the Balanced Budget Amendment in 1995 and I supported it again in 2011. I will continue to fight for policies that pay down our debt and stop out-of-control spending.

Congressman F. James Sensenbrenner Jr. (R-Wis.) represents Wisconsin’s Fifth Congressional District.

Class is not a fixed designation in this country. We are an upwardly mobile society with a lot of movement between income groups.

The Treasury Department’s latest study on income mobility in America found that during the 10-year period starting in 1996, roughly half of the taxpayers who started in the bottom 20 percent had moved up to a higher income group by 2005.

Another recent survey of over 500 successful entrepreneurs found that 93 percent came from middle-class or lower-class backgrounds. Most were the first in their families to launch a business.

Their stories are the American story: Millions of immigrants fled from the closed societies of the Old World to the security of equal rights in this land of upward mobility.

Telling Americans they are stuck in their current station in life, that they are victims of circumstances beyond their control, and that government’s role is to help them cope with it -- well, that’s not who we are.
Our Founding Fathers rejected this mentality. In societies marked by class structure, an elite class made up of rich and powerful patrons supplies the needs of a large client underclass that toils, but cannot own. The unfairness of closed societies is the kindling for class warfare, where the interests of “capital” and “labor” are perpetually in conflict. What one class wins, the other loses.

The legacy of this tradition can still be seen in Europe today: Top-heavy welfare states have replaced the traditional aristocracies, and masses of the long-term unemployed are locked into the new lower class.
The United States was destined to break out of this bleak history. Our future would not be staked on class structures, but on civic solidarity. Gone would be the struggle of class against class.

Instead, Americans would work, compete and co-operate in an open market, climb the ladder of opportunity, and keep the fruits of their efforts.

Sowing social unrest and class resentment makes America weaker, not stronger. Pitting one group against another only distracts us from the true sources of inequity in this country.

Ironically, equality of outcome is a form of inequality - one that is based on political influence and bureaucratic favoritism.

That’s the real class warfare that threatens us: a class of bureaucrats and connected crony capitalists trying to rise above the rest of us, call the shots, rig the rules and preserve their place atop society. Their gains will come at the expense of working Americans, entrepreneurs and that small businesswoman who has the gall to take on the corporate chieftain.

It’s disappointing that this president’s actions have exacerbated this form of class warfare in so many ways.
These actions starkly highlight the difference between the two parties that lies at the heart of the matter: Whether we are a nation that still believes in equality of opportunity, or whether we are moving toward an insistence on equality of outcome.

If you believe in the former, you follow the American Idea that justice is done when we level the playing field at the starting line, and rewards are proportionate to merit and effort.

If you believe in the latter kind, you think most differences in wealth and rewards are matters of luck or exploitation, and that few really deserve what they have.

That’s the moral basis of class warfare -- a false morality that confuses fairness with redistribution, and promotes class envy instead of social mobility.

I’d like to introduce President Obama to the Ronald Reagan he isn’t so eager to quote - the man who said, “Since when do we in America believe that our society is made up of two diametrically opposed classes - one rich, one poor - both in a permanent state of conflict and neither able to get ahead except at the expense of the other? Since when do we in America accept this alien and discredited theory of social and class warfare? Since when do we in America endorse the politics of envy and division?”

President Reagan was absolutely right. Instead of policies that make it harder for Americans to rise, let’s lower the hurdles to upward mobility.

Paul Ryan (R-Janesville.) is chairman of the U.S. House Budget Committee. This blog was excerpted from a speech Ryan delivered Wednesday to the Heritage Foundation.

When large corporations have to make important announcements that may not cast them in the best of lights, they tend to issue a press release late on a Friday afternoon. That’s when companies announce mass layoffs, plant closings, lawsuits and the like.

The thinking behind the Friday afternoon shtick is that most people have checked out for the weekend and aren’t paying attention, thereby minimizing the public relations impact of the negative news.

The federal government also plays this game of PR timing. Since the Great Recession, the Federal Deposit Insurance Corp. (FDIC) issues its “Friday night massacre” announcements about troubled banks that will be closed on Friday evening after the stock market has closed.

The Federal Housing Finance Agency (FHFA) dropped the latest Friday bombshell on the afternoon of Friday, Sept. 2, when it announced it had filed federal lawsuits against 17 of the largest banks for their roles in the subprime mortgage crisis that led to the global economic collapse.

That’s quite an accusation to be made - on the Friday of the long Labor Day weekend, no less.
For the record, the 17 banks that are defendants in the suit are: Ally Financial Inc. f/k/a GMAC LLC; Bank of America Corp.; Barclays Bank PLC; Citigroup Inc.; Countrywide Financial Corp.; Credit Suisse Holdings (USA) Inc.; Deutsche Bank AG; First Horizon National Corp.; General Electric Company; Goldman Sachs & Co.; HSBC North America Holdings Inc.; JPMorgan Chase & Co.; Merrill Lynch & Co./First Franklin Financial Corp.; Morgan Stanley; Nomura Holding America Inc.; The Royal Bank of Scotland Group PLC; and Société Générale.

The complaints were filed in federal or state court in New York or the federal court in Connecticut. The complaints seek damages and civil penalties under the Securities Act of 1933.

In addition, each complaint seeks compensatory damages for negligent misrepresentation.

Some of the complaints also allege state securities law violations or common law fraud.

“As conservator of Fannie Mae and Freddie Mac, FHFA is charged with preserving and conserving these companies’ assets and does so on behalf of taxpayers. The complaints filed today reflect FHFA’s conclusion that some portion of the losses that Fannie Mae and Freddie Mac incurred on private-label mortgage-backed securities (PLS) are attributable to misrepresentations and other improper actions by the firms and individuals named in these filings,” the FHFA said in its Friday afternoon announcement. “Based on our review, FHFA alleges that the loans had different and more risky characteristics than the descriptions contained in the marketing and sales materials provided to the Enterprises for those securities.”

Some analysts have speculated that as much as $200 billion could be at stake in the lawsuits, though the agency says that figure is “excessive.”

The FHFA insists that the suits were not filed to merely make a vain political statement, but instead are intended to produce tangible financial recoveries for taxpayers.

“Some have claimed that these suits will disrupt economic recovery, or endanger the targeted banks, or increase their cost of capital. While everyone is concerned with these important issues, the long-term stability and resilience of the nation’s financial system depends on investors being able to trust that the securities sold in this country adhere to applicable laws. We cannot overlook compliance with such requirements during periods of economic difficulty as they form the foundation for our nation’s financial system. Therefore, through these lawsuits, FHFA turns to the courts to adjudicate the violations that it has alleged in its complaints,” the agency stated.

Bank of America issued the following statement in response to the filing of the lawsuit: Bank of America released the following statement in response to the lawsuits: “The GSEs (government sponsored enterprises) have in their past public statements acknowledged that their losses in the mortgaged-backed securities market were due to the unprecedented downturn in housing prices and other economic factors, including sustained high unemployment. Also, they claimed to understand the risks inherent in investing in subprime securities and, in fact, continued to invest heavily in those securities even after their regulator told them they did not have the risk management capabilities to do so. Despite this, the GSEs are now seeking to hold other market participants responsible for their losses.”

Financial journalist Felix Salmon at Reuters said of the lawsuits, “They’re strong, and aggressive, and exactly what I’ve been looking for for a while. These banks lied to investors when they put together mortgage securitizations. And one way or another, they’re about to start paying for that. About time too.”

Steve Jagler is executive editor of BizTimes Milwaukee.

Have you ever thought about the names of the marquee companies, headquartered in Wisconsin, that are our economic calling cards – Oshkosh Corp., S.C. Johnson, Johnson Controls, Manitowoc Company, Harley-Davidson, Briggs & Stratton, Johnsonville, Kohl’s, Kohler and Quad Graphics? These companies all have one thing in common: They were named after the Wisconsin municipality of their founding or the last name of their founders.

There is no truer evidence of entrepreneurial spark.

However, spark requires fuel to ignite and entrepreneurial spark requires capital.

That’s the problem. There is not enough venture capital in Wisconsin, a state that has all the other elements for success in today’s tech-based economy. The state’s assets include a strong tradition of entrepreneurship, above-average research and development investment, high production of patents and other intellectual property, and a skilled work force created, in large part, by the state’s education system. Wisconsin also has one of the strongest angel capital foundations in the country.

Why is this capital important? Venture-backed companies in the United States represent 21 percent of GDP – at an investment rate of about .2 percent. That’s a huge return. Those companies also represent 11 percent of the nation’s private employment. That’s 11.87 million jobs.

Wisconsin represents 1.84 percent of the nation’s population but only .55 percent of the venture capital investment. Worse yet, only .11 percent of the nation’s venture capital under management is by Wisconsin-based funds.

If Wisconsin received its proportional share of venture capital, that would mean 259,215 jobs today versus the 60,156 venture-rooted jobs created over time.

The Wisconsin Legislature has returned for a brief floor period this fall. Job creation and economic growth are likely to dominate the agenda. Lawmakers on both sides of the aisle and Gov. Scott Walker appear committed to getting something done.

One of the best ways lawmakers can help on both of these related fronts is to create a state-leveraged capital program for Wisconsin.

Thirty-five years ago, Connecticut launched the first state-leveraged venture capital program. Today, state-leveraged venture capital programs have been deployed in more than 30 states, including many of our neighbors and economic peers. 

The Wisconsin Growth Capital Coalition, a broad coalition of companies, organizations and angel networks and venture funds, examined Wisconsin’s standing versus peer states, neighboring states, U.S. population and other factors, and concluded Wisconsin could absorb nearly four times the investment dollars it receives today.

Last week, the 58-member coalition presented a comprehensive, 36-page white paper as a roadmap for the state on the best and most efficient way to leverage the state’s limited resources to catalyze these capital investments that will spur company formation, job growth and management talent in Wisconsin.

The report recommends the state:

* Create a state-leveraged “master” fund, called a fund-of-funds, that would invest in 14 to 20 venture capital funds over time. These recipient funds will raise an additional $350 million to $1.05 billion and commit to offices, staff and investments in Wisconsin.
* Catalyze the development of indigenous Wisconsin funds by committing a minimum of one-third ($117 million at the target of $350 million) to certified Wisconsin funds. These “home-grown” funds have existing structures, network connections and deal-flow pipelines, a portion of the money can be put to work quickly.
* Incent additional Wisconsin angel investment through the creation of accelerator funds. These smaller, targeted funds would co-investment with the angel networks and funds that are closest to the entrepreneurial action in Wisconsin. This would also enhance deal flow for venture funds later in the capital continuum.
* Invest across the full capital continuum, from seed stage to growth stages.
* Construct the program in a way that mitigates taxpayer risk and pays back the taxpayer’s investment.
* Competitively select professional fund management to bring experience, national perspective and existing co-investment relationships to Wisconsin’s table.
* Target industry clusters with high-growth, high-wage job creation potential.

Remember the program Connecticut launched 35 years ago? Today Connecticut receives roughly its population equivalent of venture capital investments and venture capitalists have since invested $6.6 billion in 502 Connecticut companies.

Over that same time period, 166 Wisconsin companies received $1.2 billion. More important, today 45 percent of the venture capital invested in Connecticut came from Connecticut-based funds; in Wisconsin it is 5 percent.

There is broad, bipartisan consensus that Wisconsin’s entrepreneurial ecosystem and overall economy need an accelerant. That accelerant is angel and venture capital.

The time is right for Wisconsin to get serious about developing sources of capital for high-growth, early and mid-stage companies.

Zach Brandon is the director of the Wisconsin Angel Network and a co-author the report. You can follow him on Twitter @z_2b. An online version of the report is available at: www.wisconsintechnologycouncil.com/publications/venture_capital.

Like many of our readers, I watched in horror Thursday as the stock market melted down, trimming the Dow Jones Industrial Average by more than 500 points, erasing all of the year’s gains.

The Dow and the S&P 500 are now both in negative territory for the year.

The stock market losses have been compiling since a national debt ceiling bill was approved in Washington, D.C., on Tuesday.

The conventional wisdom in the weeks leading up to the Congressional vote on the bill was that if the debt ceiling was not expanded, the nation would default on its debt and a national economic disaster would then follow.

So, why would the stock market collapse after a deal was struck?

For the answers, I turned the smartest economic expert I know, Dr. Michael Knetter, president of the University of Wisconsin Foundation. Knetter is sort of the BizTimes resident economist, as he provides a macroeconomic outlook every year at the Northern Trust Economic Outlook Breakfast presented by our company.

Knetter, who was a staff economist for President George H.W. Bush and President Bill Clinton, has a way of sifting through and around the partisan garbage and cutting to the economic truths of the matter.

So, in this hour of my darkest need for information and solace after the market collapse on Thursday, where was my economic guru?

The e-mail response came back a couple hours later: “Just back from a great dinner at the White Stag between Rhinelander and Eagle River.”

Knetter, you see, is a Hodag. The Rhinelander native was on vacation back in his homeland in northern Wisconsin, worried more about baiting his hook than the Wall Street drama of the day.

Still, he was kind enough to take time between casts to provide answers to some of my urgent questions. I share excerpts from our e-mail exchange with our readers:

BizTimes: Was extending the debt ceiling truly something that was needed to prevent default?
Knetter: “The ceiling needed to be lifted to prevent a ‘technical default’ in that absent lifting, the government would have been prohibited from borrowing funds needed to meet obligations. But it was hardly a ‘real’ default situation - the U.S. Government still borrows at very low rates, so lenders do not seem worried about ability to pay at this point.”

BizTimes: Does the bill tie America’s hands into not investing its future - i.e. infrastructure, education, technology, medical research, alternative energy exploration?
Knetter: “America needed to reduce the gap between spending and tax receipts. Whether this will reduce spending on infrastructure type investments depends on the specific choices we make. We will have to reduce some types of spending to eliminate the deficit. It will be up to politicians to decide which expenditures are most important- i.e., trade off entitlement programs with infrastructure investments. Infrastructure spending would in theory do more to raise future productivity. But alas, bridges, highways, and trains cannot vote!”

BizTimes: The stock market absolutely tanked after the debt deal was signed. Do you fear that this debt deal, with its triggers, cuts, etc. is too severe?
Knetter: “I think we've thrown all the fiscal stimulus we can at the problem. We need to move toward a more sustainable path. This deal may not be the best way, but putting it off would mean more serious consequences later. We stopped the chaos of late 2008 and early 2009 but we haven't dealt with the full range of underlying issues - especially entitlement commitments that look harder to fund. We gotta take our medicine at some point. The market may have thought we would kick the can again and keep things rolling ahead. This correction may not be so bad. Time will tell. But I know what you are worried about - did we just have a two-year dead cat bounce and now find ourselves sliding to depression? Possible, but I doubt it.”

BizTimes: Could the debt ceiling bill cause a double dip and derail the recovery?
Knetter: “That's possible. But not acting to reduce the deficit would have had adverse effects by keeping interest rates higher and postponing the adjustment in spending.”

BizTimes: Will the wealthy - the so-called “job creators” - and corporations that have received steep tax cuts now see fit to invest in their companies and create jobs, allowing the wealth to trickle on down to everyone else?
Knetter: “I think this decision on the debt ceiling will reduce uncertainty about the direction of policy. That should help long-term decision making on investment.”

BizTimes: Or was that an absolute fallacy?
Knetter: “Nope. I think since the onset of the financial crisis I have consistently said the policy challenge is to have some stimulative spending in the near term while also having a credible policy to gradually restore fiscal balance over the medium term. We haven't done very well on that last part! And that's where the tough choices live between entitlement programs that appear to have gotten too rich for our current ability to pay and needed infrastructure investments. Also, like you, I am worried about the road ahead. I concur with Ken Rogoff's recent column on the Project Syndicate web page. Well, I hope you enjoy your family vacation up here. I grew up in Rhinelander on the river so this has been a real treat for me. Fishing, boating, and golfing every day! Fishing has been great.”

The man has his priorities straight.

Steve Jagler is executive editor of BizTimes Milwaukee.

Regardless of the amount of hair on the subject’s arm, medical experiments on 65 college students published in the Medical Journal of Australia concluded that peeling off a Band-Aid slowly is far more painful than fast removal.

It is nice when science experiments reconfirm what you already knew, what your mother always told you or what you at least suspected.

But, there is an economic parallel to the question of whether to remove a Band-Aid quickly or slowly. The best way to solve most economic problems, so that it hurts the least, is to do what is needed and do it quickly. One sharp quick pain is better than prolonged years of suffering.

Alas, we all want a painless solution. We want to find a pill or Band-Aid that will provide immediate relief. But in the world of economic difficulties, economic potions needlessly prolong the ailment, often delay or prevent a cure, and habitually make the situation worse in the long run.

The housing slump provides the first example of taking the slow-peeling of the Band-Aid approach. Everyone wanted the government, banks or someone to fix it. The Federal Reserve kept interest rates very low to help homeowners refinance loans. First-time homebuyers were given $8,000 to buy houses. Banks were encouraged to modify delinquent loans rather than permit foreclosures.

Yet, we are still suffering a multiyear decline in housing prices accompanied by steadily rising numbers of foreclosures. The actions to try to keep prices of houses up and to avert foreclosures have only delayed the solution to the housing problem. We have suffered a slow-motion painful decline in housing prices that would have occurred faster without the several monetary and fiscal interventions.

We didn’t avoid pain; we just stretched the pain out over more than a few years. The delays have led to a staggering number of empty houses in Nevada, Arizona, Florida and elsewhere. They hang about for years in foreclosure limbo extending the housing problem.

The second example looks at the recession that began in December 2007. While that recession is officially over, most of us feel like it isn’t. A recession is painful. We want it fixed. We want it fixed now!

The government has used almost all of its usual tools of monetary easing and fiscal stimulus, in particular, the $787 billion stimulus package. Since a large portion of the stimulus package went to repair State’s budgets, much of the stimulus went to pay for already planned capital projects or for already budgeted items.

If a project was already being worked on, and the fresh money from the federal government comes in to pay for it, there is no net stimulus that increases job creation. It is hard to find jobs created in a stimulus when the total number of unemployed workers has increased.

Now with the stimulus money gone, state and local projects are being scaled back to reflect lower state and local income in a weak economy. Accordingly, the stimulus merely delayed the impact of the economic slump on public employment rather than solving the recession problem. Public employees will see the largest percentage increase in unemployment of any group in 2011.

The recent decision to release millions of gallons of oil from our Strategic Oil Reserves is yet another short-term economic palliative. It will lead to lower prices for gasoline for a week or two, but this policy is not a long run solution to unemployment, slow GDP growth, or our energy dependence on oil. It is just another economic band-aid that will only lead to higher prices in the months when the oil reserves are replenished.

There are many other examples of economic policies that started out with good intentions, yet ended up hurting those it was designed to help as the program expanded. Surely, 13 weeks of unemployment compensation is helpful to someone who is unexpectedly fired; however, extending unemployment payments to 99 weeks increased the average duration of unemployment. The unintended consequence is that the incentive to find a job immediately is reduced, so we find people stay unemployed longer. By lengthening the time in unemployment, we sabotage the unemployed workers’ marketability for the next job.

Similarly, many agricultural subsidies began with righteous goals of raising farm income for small farmers; inevitably large firms garner the lion’s share of the benefits thereby unintentionally subsidizing them to buy out the small farmers, who we wanted to help.

We stand at a time of high unemployment and GDP growth just below 2 percent. We want to “fix” the problem with more monetary and fiscal stimulus. The desire for a Band-Aid or palliative is growing. Yet¸ further monetary stimuli could lead to inflation injuring all who are hoping their retirement savings will outlast them. Or we might try further fiscal stimulus packages through more capital projects or more grants to states, but these have not proved to be effective in reducing the unemployment rate. They have only worsened a growing budget deficit.

The Hippocratic Oath says never to do harm. We are seeing that much of our economic palliatives and potions are ones that do not heal, do not alleviate pain, and cause lasting harm. A Band-Aid pasted over a bleeding wound is typically ineffective and merely cosmetic. We need to clean the wound, stitch it up, and get on to real business of healing.

We must avoid short-term Band-Aids. We must face up to the intense, short-term adjustment pains as we get our federal and state budgets back in balance. Longer run healing will only begin when we act decisively to address the problem and not to rely on Band-Aids.

Richard  Marcus is an associate professor of business at the Sheldon B. Lubar School of Business of the University of Wisconsin-Milwaukee.

Editor’s note: Thomas Hefty, a former chief executive officer of Cobalt Corp. who has served on economic development commissions for both Republican and Democratic governors in Wisconsin, recently submitted the following analysis of Gov. Scott Walker’s Jobs Now Fund, a proposal for a new “CAPCO” program, to the state Legislature. Hefty is opposed to Assembly Bill 129 and Senate Bill 94.

The Jobs Now Fund proposal is the largest special interest Wisconsin tax cut in history masquerading as an economic development initiative. It is a $200 million tax cut at a time when the Wisconsin budget requires cuts in many important programs. It worsens the structural deficit that the governor and legislature have been seeking to eliminate.
The Jobs Now Fund is a cute name for a CAPCO fund, most frequently described by independent national experts as a “scam.” CAPCO’s are not cost effective for job creation or for leveraging venture capital dollars. A CAPCO was tried and failed in Wisconsin in 1998 and similar proposals have been rejected in neighboring states. The proposal discriminates in favor of large corporate investors at the expense of entrepreneurs and angel investors. The legislation also disadvantages the largest jobs sector in the Wisconsin insurance industry, while favoring a handful of life insurers and out-of state insurance companies.

CAPCO’s were tried and failed in Wisconsin.
In 1998 the Wisconsin legislature adopted a $50 million CAPCO, one of the first in the country. It was intended to stimulate venture capital and job growth. Although there were a few individual investments which were successful, which the proponents talk about repeatedly, the overall program was a failure. A simple review of Wisconsin’s ranking on venture capital shows that the $50 million 1998 CAPCO tax cut was wasted. There was no long term change in the national rankings following the CAPCO tax cut. The Wisconsin Legislative Audit Bureau reviewed and criticized the program. The extension of the CAPCO program in 2004 was blocked by Governor Doyle and a bi-partisan group of legislators.
In 2010, the Minnesota legislature conducted a comprehensive study, “Tax Incentives and Venture Capital.” The study concluded, “The Wisconsin CAPCO credit had little or no effect, likely displacing venture capital financing that would otherwise have occurred.” Even the CAPCO industry’s own self-promoting study found that CAPCO’s were not cost effective for job creation — costing $40,000 in lost taxes for each job created after ten years. That study looked at data on only two of the three Wisconsin’s CAPCO’s. The third failed Wisconsin CAPCO manager refused to provide data for the study.
Studies of CAPCO’s in other states, using comprehensive data measured on the standard three to five year time horizon for job creation, continue to find CAPCO costs to the taxpayer of $100,000 to $200,000 per job created. That is far more costly than traditional successful economic development strategies.
The best thing that has been said about CAPCO’s was reported by the State Science and Technology Institute. It called CAPCO’s “a complicated and controversial tool.” Despite the complexity and controversy, this legislature is proposing to rush the legislation thru quickly.

CAPCO’S have been rejected by the LAB, neighboring states, and bi-partisan Wisconsin legislators.
The same companies and lobbyists advocating for 2011 CAPCO’s have a track record which deserves careful examination. They pushed for the 1998 $50 million CAPCO tax cut. That program was correctly criticized by the Legislative Audit Bureau report in 2006 — eight years after the original CAPCO plan. CAPCO proponents now say that the new complex proposal cures the original failures. Those same CAPCO’s have never disclosed the identity of the companies which were the ultimate beneficiaries of the 1998 $50 million tax cut, nor have they disclosed the fees charged for administering the multi-layered CAPCO program.
CAPCO’s have consistently been rejected in neighboring states. Recognizing the CAPCO failures, the Iowa governor vetoed a similar CAPCO program which was lobbied thru the Iowa legislature. The Minnesota legislature rejected a CAPCO program in 2010 following a comprehensive study. Both Iowa and Minnesota are recognized as having strong economic development programs, and both states without CAPCO’s achieved higher job growth and better per capita income growth than Wisconsin.
There is an old management saying, “The wise learn from the mistakes of others, fools learn from their own.” Iowa and Minnesota learned from the CAPCO mistake of Wisconsin. Both states rejected CAPCO’s. With the pending CAPCO legislation, it appears that Wisconsin has failed to learn even from its own mistakes.
The CAPCO legislation discriminates against entrepreneurs and angel investors
Under the proposed bill, a small group of favored corporate investors receive an 80 percent tax credit for CAPCO’s. In comparison, entrepreneurs and angel investors receive only a 25 percent tax credit for their efforts. Entrepreneurs and angel investors make high risk early stage investments. According to the 2010 Minnesota study, Wisconsin CAPCO’s make later stage, and safer investments.
What is the rationale for discriminating against entrepreneurs and angel investors? The 25 percent angel tax credit is widely described as a success. Minnesota copied the Wisconsin angel tax credit. Minnesota rejected the CAPCO idea.

The CAPCO legislation damages employment opportunities in the Wisconsin insurance industry.
Insurance by its nature is complex. Insurance taxes are even more complex. For details on insurance taxation, see the annual Revenue Department summary of tax exemption devices or see “Interstate Variations in Effective Tax Rates for Insurance Premium Taxes “in the papers of the 6th Annual Insurance Tax Conference (p143). The dual Wisconsin insurance tax structure is unique among the 50 states. As a result, CAPCO’s in Wisconsin uniquely jeopardize Wisconsin insurance jobs.
For decades, the Wisconsin insurance tax code was a successful balance of raising revenue and creating Wisconsin jobs. Life insurers and all out of state companies pay a premium tax, the tax which is cut by the CAPCO legislation. Wisconsin auto, homeowners, workers compensation, and health insurers pay a franchise tax — a corporate income tax. That tax structure admittedly provided a small advantage to Wisconsin based insurers and stimulated Wisconsin job growth in the insurance industry for forty years.
Instead of favoring Wisconsin insurers and Wisconsin jobs, the CAPCO legislation benefits a handful of Wisconsin life insurers and all out of state companies. The CAPCO legislation now creates a competitive disadvantage for most Wisconsin based insurers.
The 2010 Deloitte Be Bold study of Wisconsin competitiveness looked in depth at the Wisconsin insurance industry. The Wisconsin industry has declined since 1998, partly due to the growing tax inequity. Since 1998, the year of CAPCO’s adoption, Wisconsin has lost one-half of the major Wisconsin headquartered insurers. Over 5,000 jobs have been lost---all in the portion of the industry disadvantaged by CAPCO’s. There were other regulatory changes which contributed to that job loss, but the CAPCO impact cannot be discounted. Again, by comparison, Iowa, which did not adopt CAPCO tax cuts, gained insurance employment at a time when Wisconsin was losing insurance jobs.
The 1998 CAPCO legislation was a $50 million tax cut. The proposed 2011 tax cut is four times that amount, $200 million. The property and casualty and health insurance companies in Green Bay, Sheboygan, Fond du Lac, Neenah, Appleton, New Berlin, Madison and Stevens Point will receive no benefit from this legislation. Who will receive the CAPCO tax cut - a select number of life insurance companies and all out of state insurance companies. Rather than creating “jobs now,” this legislation will drive additional insurance jobs to other states.

CAPCO’s have been rejected by all independent economic development studies
There is great irony in the naming of the CAPCO legislation as “the jobs now fund.” The legislature in 2009 conducted a number listening sessions on economic development and a comprehensive report was prepared. That 2009 Wisconsin legislative study was called the “jobs now task force report.” The Jobs Now Task Force did not even mention a CAPCO proposal, nor according to the record were CAPCO’s recommended at any of the listening sessions. Similarly, CAPCO’s were not recommended by the Deloitte Be Bold 2010 study or the Wisconsin Prosperity Strategy report.
In comparison to the CAPCO proposal, the bonding proposal in the Badger Jobs Fund received more serious study. The best model for the Badger Jobs Fund is the Ohio Third Frontier Fund. The Ohio model fund has been well studied by independent academic researchers. The voters of Ohio approved the original Third Frontier Fund and in 2010 more than 60% of the Ohio voters approved an expansion of bonding for Ohio economic development.
In 2010 representatives of the Ohio Third Frontier Fund made presentations to the Greater Milwaukee Committee, the UW sponsored 2010 Economic Summits, and to the Milwaukee 7 regional economic development group. The Third Frontier Fund representatives also appeared before the editorial board of the Milwaukee Journal Sentinel. The CAPCO proponents failed to offer any similar public debate or present any data to support the $200 million tax cut. CAPCO’s have never been subject to voter approval in any state. The CAPCO proponents prefer back room lobbying; quick public hearings; and a rushed legislative agenda to careful public analysis and debate.
Despite the lack of serious study, the legislative sponsors introduced CAPCO legislation and hurriedly scheduled a hearing on the proposal. This is a classic
sign of poor public policy - a hastily scheduled hearing; a cute fancy name for the legislation; and tying the CAPCO scam to the stronger proposal for bonding for economic development — as if the two were an integrated package...
The proposed legislation creates an unneeded fourth economic development agency.
The one consistent conclusion from all of the economic development studies has been the need to simplify and streamline the economic development efforts and the tax code. The Legislative Audit Bureau recommended consolidating and focusing the 154 different economic development programs administered by 23 different agencies and commissions. The Jobs Now Legislative Task Force said “simplify and streamline the tax code.” The Be Bold Wisconsin Prosperity Strategy report called for the creation of a streamlined Economic Development Corporation, which was authorized in the special session on jobs called by Governor Walker.
Wisconsin already has two economic development authorities with the power to do bonding. The Wisconsin Housing and Economic Development Authority was created first. In 2010 the legislature created another economic development authority, named the Public Finance Authority. Now in 2011 these bills propose to create a fourth economic development agency. This is contrary to common sense; to the recommendation of every economic development study; and to the very purpose of the Wisconsin Economic Development Corporation, created only three months ago.

There are many other cost effective ways to create venture capital.
Bonding for economic development is a cost effective way to enhance venture capital and create jobs. The 25% angel tax credit is three times as cost effective as the proposed 80% tax credit for corporate CAPCO sponsors.
There are other cost effective alternatives. The Wisconsin Strategic Development Commission Report recommended one simple solution — a targeted tax credit for the State of Wisconsin Investment Board (SWIB). The SWIB pension fund is one of the largest in America with over $80 billion in assets. Yet its allocation to venture capital investing is among the lowest in America among public pension funds. The reason given is the potential risk in venture capital investing. Rather than give a corporate tax cut of $200 million – calculated as an 80% credit, why not consider a much smaller credit for SWIB. That would cost the taxpayers far less; create the same venture capital; and provide added security for the public pension program. It should be noted that CAPCO’s are supported by well financed lobbying. There is, unfortunately, no similar lobbying for cost effective SWIB programs — or apparently for saving vital public programs which will be jeopardized by the $200 million CAPCO tax cut.

Conclusion
The CAPCO proposal contained in recently published AB 129 and SB 94 is the largest special purpose corporate tax cut in Wisconsin history. It is a tax cut benefiting only a few companies, but it is camouflaged as an economic development program.
A 2009 article, which I co-authored, was titled “Wisconsin Flunks Its Economic Test.” That conclusion reflected Wisconsin’s bottom quartile ranking in job growth and personal income growth during the past decade. This bill not only flunks an economic development test, it reflects a legislature which has not even bothered to do its homework.
In commenting on the 2009 economic development article, then candidate Scott Walker made an important statement, “Voters know that Wisconsin is going in the wrong direction…..They want a government that puts the needs of citizens first and places public safety and the education of its children above the needs of special interests.”
The failed economic policy of the past decade included CAPCO’s. Now CAPCO’s are back, pushed again by special interests. Wisconsin doesn’t need a $200 million CAPCO corporate tax cuts intended for only a few companies at a time when vital public programs are being cut.
The two bills, AB 129 and SB 94, should be rejected.