Sponsors

Moderator:
Michael Milken, Chairman, Milken Institute; Chairman, FasterCures / The Center for Accelerating Medical Solutions

Moderator Michael Milken launched the 2008 Global Conference by diving into the topic at the top of everyone's mind today. He posed a series of expansive questions to the panelists: What causes credit risk today? How does the current situation differ from previous crises? And what's the current trend for credit?

Milken started with a wide-ranging review of credit history stretching back to the 1600s, elaborating on different forms of credit risk, including real estate and interest rate risk. All the panelists agreed that today's credit situation has a markedly different character from the crises of the 1980s and the 1990s.

Wesley Edens of Fortress Investment Group noted that this credit cycle is more severe than other recent downturns. Investment-grade bonds are trading at remarkable spreads over Treasuries. "The bulk of it has been due to a tremendous liquidity crisis," he said. "It's what happens when the buyers of the assets all become sellers."

To expand on the impact of the credit crisis on the international market, Rajeev Misra of Deutsche Bank discussed his recent visit to Asia. He cited the fact that almost 80 percent of Indian companies have relatively little debt on their balance sheets. He also stated that the emerging markets have not developed complex financial tools and still lack the qualified human resources to manage these tools — and the lack of leverage in this asset class may have saved them. "The lack of these two things helped the emerging market avoid the pain of the credit crisis," he noted.

Misra went on to note that there is currently an unusually large spread between cash bonds and credit-default swaps in the investment-grade space. It is a sign of strange times indeed when such a huge spread with little default risk does not have immediate takers. He observed that it's a relatively small slice of highly risky subprime loans bundled into CDOs, but they were structured in such a way that they undermined vast sums of solid debt.

Noel Kirnon of Moody's Investors Service expressed his concern that financial tools have become so complicated that the market sometimes could not evaluate their risks. But he also noted that today's structured finance is still less volatile than corporate debt in the mid-1980s.

Analyzing the situation from the perspective of credit cycles and market efficiency, Steven Tananbaum of GoldenTree Asset Management predicted that we might see improved returns within a two-year period. Logic says that most credits are not going to default, so if investors can identify those opportunities, there are excellent yields to be had.

Richard Sandor of the Chicago Climate Exchange posited that the talent in major financial markets was now smarter than before and could handle the financial tools better. But Milken interjected that this new talent has a short memory.

Regulation of the new financial tools can be a mitigating factor in responding to concerns about a lack of transparency. "Regulation is a good thing," insisted Sandor. "The tools are helpful but should not be misused."

Referring to Charles Dickens's famous line that "It was the best of times, it was the worst of times," Milken argued that these might actually be good times. He cited the fact that market capitalizations in the United States and Japan accounted for 68 percent of world totals in 1950s, while by 2007, that proportion had declined to only to 37 percent. Economies in the rest of the world are not as vulnerable to downturns in the United States as before.

The session ended with Milken asking each panelist for their outlook on future opportunities and risks. Kirnon responded that high-yield volatility was still the major risk and that tightening regulation will create new opportunities with the start of a new cycle.

Moderator:
Lewis Feldman, Partner, Goodwin Procter LLP

If the audience anticipated blunt discussion, this panel did not disappoint. Moderator Lewis Feldman opened with a discussion of current real estate market dislocation, fueled as it has been by a combination of low prices, easy credit and a resulting high demand. Lending standards retreated as Wall Street's use of collateralized debt obligations (CDOs), with highly profitable transaction fees and potential returns, had "investors consuming them like sumo wrestlers at a Las Vegas buffet line." Problems began to emerge by 2006, and now the losses are piling up. "So where, asked Feldman, is the bottom?"

All eyes turned to iconic Sam Zell of Equity Group Investments, who stressed how crucial it is to recognize that the real estate market is "heterogeneous," with impacts varying by market sector. "The single-family residential (SFR) market is dead," he said, noting that the cause of death can be traced to failed federal policy. "For forty years, every single time the federal government has tried to increase home ownership above 62 percent — and it went up to 69 percent this decade," he added, "the policy fails, and home ownership retreats and a recession ensues.

"Buy all the SFR you can at 40 cents on the dollar," he added, "because there is a huge oversupply."

In the commercial real estate (CRE) market, strong demand exceeds supply for assets like Class "A" office buildings. This market is in relatively good shape, Zell said, adding, "I have seen the numbers on losses and they are overstated in this area." Still, he warned, construction could effectively stop by the end of this year. Why? Because a loss of confidence has frozen lending since July 2007, and it takes about nine months for CRE work to start drying up due to a lack of capital.

Brian Fabbri of BNP Paribas noted that banks are tight, but with reason: "Builders are still building more SFR than people are buying," he said. "We should be concerned because all the losses to date incurred at full employment absent a recession. If we lose 1.5 million jobs in a recession, it is going to get worse." He predicted that the SFR market won't bottom out until well into 2009.

Current federal programs support a bunch of people who never should've bought houses,"interjected Zell. "They should not be getting our sympathy because they have no equity invested in the property and got loans without financial means tests. They must be cleared from the SFR market for it to return to good health. They can liquidate their asset or choose the foreclosure process." The federal government, he said, "is hurting the SFR market by helping those who never should've got their house in the first place."

"This housing bubble fed itself through borrowing from the pool of future homeowners for the next 10 years," noted Bobby Turner. "The market incentives encouraged overbuilding in suburbs in outlying areas, where land was cheap and transportation costs were 9 to 14 percent of disposable income." Now that transportation costs are hitting 25 percent of disposable income, he said, people can't afford to live in outlying areas and commute to work, and this is making urban areas more attractive.

Michael Van Konynenburg of Eastdil Secured spoke of the great run CRE investors and bankers did enjoy from 2002 to 2007. Throughout this period, he said, commercial lending didn't loosen its standards, as the SFR market did. But the SFR impact on the CRE market, along with the declining dollar, a recession and not much CRE to sell, has a chilling effect on CRE lending: down 80 percent from 2007 to the first quarter of 2008. If the CRE investment market doesn't recover, he predicted, there could be material stress in CRE by late 2010. "We have a recession, and investors are waiting for the federal government to show its hand," he explained. "Does the government take steps now to make matters worse? Or does the federal government give clear signals that enable the markets to unfreeze themselves?"

The panel was pessimistic that foreign investors will "save" the real estate market. "There are always opportunities," said Zell, "but there isn't always scale. While there's a demand for high-quality office buildings, there is excess supply in houses. There simply is no scale to buying up SFR. This is compounded by the fact the U.S. liquidity problem is not a worldwide problem. There is plenty of investment going on external to the U.S."

Investors in the Middle East would be the most capable investors, said Fabbri, noting that they are savvy and invest wisely. While they have invested big in the past, they like to visit to see what they bought. U.S. politics (visa and security challenges) make it much more difficult to come to the country relative to travel ease in EU countries. The U.S. tax regime is also somewhat unfriendly, he continued.

"The domestic challenge," said Bobby Turner of Canyon Capital Advisors, "is getting current investors, most notably pension funds, to focus on opportunities and not on current problems."

The panel's discussion was specific to asset prices, not rents, and their shared belief that the country is in recession. Feldman asked each to pick one opportunity for investing, and Fabbri picked international investments for the best returns. Turner opted for domestic urban rental housing that benefits from immigration trends. Van Konynenburg said he likes major hotels in urban infill, while Sam Zell stated that he's bullish on Brazil, suggesting it may exceed China as an economic power in 30 years.

Moderator:
Mischa Zabotin, Managing Director, Head of Financial Sponsors Group, Calyon Securities (USA) Inc.

According to panelists Ted Virtue, John Mapes, Ellis Jones and Richard Cashin — all of whom represent mid-cap private equity funds — the answer to the title question is a resounding yes: The sourcing, operating, and exiting practices of mid-cap private equity funds give them distinct advantages over large-cap funds in today′s markets.

Although Ellis Jones of Wasserstein & Co. was quick to admit that the "large-cap guys don't have a monopoly on overpaying or stupidity," the panelists noted that because mid-cap funds are targeting firms with a market cap of $150 million to $1 billion, they can often fly under the radar to identify emerging trends and can pursue the purchase of strategic firms before the rest of market sees what's coming.

Opinions differed slightly on deal timing. Ted Virtue's firm, MidOcean Partners, tries to tie up firms before they're publicly for sale, while Jones's firm buys some of its highest-performing companies at auction. Richard Cashin of One Equity Partners added that mid-cap managers can make more deliberate, more focused investments because the best investors in large-cap funds are often too busy raising money to spend sufficient time deciding where the money should be invested.

Although the panelists generally felt they had good access to potential investments, there was some concern about large-cap funds moving into the mid-cap space as capital markets continue to tighten.

The panelists conceded that large-cap funds often have big-name, "icon CEOs" who run their portfolio companies, but they argued that mid-cap fund strategy is not necessarily dependent on iconic management expertise. John Mapes of Aurora Capital Group noted that Lawrence Larry Bossidy (the former CEO of both Honeywell International and AlliedSignal, as well as chairman of General Electric) runs one of its firms, but that Aurora Capital's turnaround strategies are based more on using price, volume and productivity than on Bossidy's reputation.

Virtue also added that large-cap funds deal with portfolio companies that have been fine-tuned by professional management and consultants for decades; on the other hand, mid-cap portfolio companies tend to be less efficient and require a different type of management team, one that can move in and quickly improve inefficiencies. Cashin noted that the real value in mid-cap funds is the ability to strategically combine firms rather than focus on incremental operational improvements. Since their target firms are smaller, mid-cap funds have more leeway in ""mixing and matching" firms to maximize returns for their limited partners.

In addition to the sourcing and operating advantages of mid-caps, the panelists cited another advantage in the smaller size of their fund portfolio firms. One Equity Partners buys companies that other companies will in turn want to buy from it. Large-cap funds are buying large, publicly traded firms, and their only feasible exit is in the public market. Cashin called this kind of exit a reliance on "the kindness of strangers" by banking on exits in the public markets. Meanwhile, mid-cap funds can exit their firms through public IPOs or through mergers and acquisitions in the private markets.

The panelists noted that mid-cap funds sell well to foreign investors, who tend to avoid buying large-cap firms due to political interference. This appears to be an increasingly important issue since the majority of the exits mentioned on the panel were to foreign firms buying mid-cap U.S. firms in order to access the American market.

Moderator:
Larry Carroll, News Anchor, KFWB News 980

The buzzer sounded (literally) and the panel got underway. How can athletes transition from sport to business? Where should this transition begin? How does urban culture change the perception of athletes?

The spectator sports industry has grown twice as fast as the U.S. economy as a whole. Television has created an immediate medium connecting fans to athletes. Employment growth in the industry has shot past average U.S. growth even as it has shifted to specialized channels. "Imagine if there were an A-Rod Network," mused moderator Larry Carroll of KFWB.

But he went on to note that many athletes have trouble moving from their "lavish" system of sports to the reality of building their own wealth. That has not been the case for these panelists, all of whom have found business success off the playing field and all of whom make it a point to invest their time and resources back into their communities.

For athletes who are not superstars, prospects are bleak after their sports career ends. Many face tremendous physical problems and find themselves with no financial support down the road. Donald Latson of World Entertainment & Technologies, a former NBA player, noted that athletes have a divorce rate of 73 percent and a shortened life expectancy of only 62 years. Many athletes, he said, also spend time in prison or face bankruptcy. But Leonard Wheeler of Wheeler Enterprises, a retired NFL player, pointed out that a fraternity exists between professional athletes, enabling them to speak to one another as brothers. How, then, can retired athletes help current athletes built a successful life after they hang up their shoes?

Latson felt that much of the problem lies with perception. "Everyone looks at the pretty pictures that are painted of professional athletes; however, the hardships are not projected as highly after their career."

Panelists noted that there are gaps in the social development of many athletes and a sense of entitlement. Tate George of The George Group, a former NBA player, commented that many 30-year-old athletes act with the social capacity of 16-year-olds. This creates hardships for them in pursuing other avenues of wealth to make a living after they retire. Tate felt that professional sports thrusts a system upon its players, allowing them luxuries while they play the game but tossing them to the curb after their services are no longer needed.

Dale Davis, a member of the Detroit Pistons and founder of Pro Player Holdings, felt that former athletes should mentor those currently playing professional sports, helping them to understand insurance, mortgages and other realities of life. "It's tough for an athlete to be connected to the financial world."

The panelists are utilizing their past experience to help athletes transition from sports to business. Latson said that one of the biggest fears for athletes "is not knowing what to do." He felt that parents should offer their children a wider range of choices. "The biggest blessing was being reared in a loving environment. My parents prepared me for life after sports." The panelists all agreed that many athletes never have the options available to make the right decision. George mentioned a study showing that professional athletes are less equipped to develop a successful strategy for a sustainable life than athletes who stop playing in college.

These panelists focus on empowering their fellow athletes and pursuing business and philanthropy ventures that give back to inner cities. George noted that urban communities can adapt to offer children better choices in life, and these neighborhoods can offer athletes the ability to go home and reestablish their life when their playing days are over.

Finally, Latson noted that, "Oftentimes people in our position don't make ourselves accessible or available." Davis offers mentoring to athletes, teaching them how to build character and prepare for success in life after sports. "The hardest thing for some athletes is to transition to being successful off-field. We help them do that."

Moderator:
Glenn Yago, Director of Capital Studies, Milken Institute

Panelists discussed Israel's potential as a financial powerhouse and global destination for entrepreneurial startups and capital investment. But to be a key player in world financial markets, Israel needs massive growth in investment capital, explained moderator Glenn Yago of the Milken Institute. "And to fund R&D projects and infrastructure," he said, "Israel must establish itself as a world-class destination for international corporations."

Yossi Hollander of the Israeli Institute for Economic Planning addressed some of Israel's challenges, noting, for example, that it is "unique among all western nations … (because) it will have the highest rate of (projected) population increase in the world — from 7.5 million today to nearly 9.5 million in the year 2025." To serve its citizens, he said, there must be a 50 percent increase in available jobs, from 2.6 million to nearly 4 million in the next three to five years. GDP must increase 4.5 percent annually each year, compared to 1.2 percent each year for the past 30 years. Israel must also maintain an 8 percent annual growth in high-tech exports, from $71 billion to $230 billion in the next five years. He summed up the challenges, warning that "Israel must learn how to turn into a global financial center and international headquarters for the developing world in order promote social cohesion and avoid poverty gaps and unemployment within the state."

Guy Ben-Ishai of LECG and Tal Keinan of KCPS & Co. highlighted the Bachar Reforms, improving credit allocation and the birth of Israel′s bond market. "In the last four years," said Ben-Ishai, "Israel has been increasing economic growth by 5 percent each year, and has moved from an A to an A+ by Moody's."

"From the land of milk and honey, Israel became the land of milk and financial startups," said Ben-Ishai, "and is now becoming the land of milk, financial startups, and finance." As the audience chuckled, Keinan quipped, "It's a double mitzvah! To make aliyah (as a Jew, to immigrate to Israel) and help the economy of Israel at the same time." Israel is closer to emerging market partners in Eastern Europe than is London, and its less expensive resources are a boon to new opportunities in finance and investment.

The country is fast becoming a global center for investment, Keinan added. In 1990 the nation had no tech industry, but it took just a decade for the industry to blossom. ""What Israel has on its side," he explained, "is an impressive human resource allocation, a solid higher education system, expertise and experience gained internationally and concentrated locally, and an amazing and resilient entrepreneurial spirit — not to mention western legal and accounting procedures."

Neri Bukspan noted that government support is crucial to the success of a country's advancement and financial growth, and that Israel has that support. He offered his recipe for a "stew of success," which includes solid regulatory infrastructure, skilled personnel, open access to consumers and clients, good corporate governance, efficiency of markets, tax incentives, infrastructure and government support. Not to be excluded from the list are quality of life, Zionism, language and culture, he said, adding that "Israel has the right ingredients. Now it just needs to keep it cooking."

Israel is a land of creativity, innovation and idealistic thinking, the panelists agreed, and these characteristics have helped to create the progress we see now and will propel Israel into the future.

Moderator:
John Gapper, Associate Editor and Chief Business Commentator, Financial Times

Moderator John Gapper of the Financial Times began the discussion by pointing to Michael Milken as a prime example of the globalization of capital markets. He noted that Milken was one of the first major financial figures to operate on the West Coast, realizing early on that you don't have to be in New York to plug into global markets.

Gapper asked the panelists what has been the catalyst for the rapid rise in of capital and influence in the Middle East and Asia. David Knott of the Dubai Financial Services Authority replied that Dubai has created a financial market that has become a stabilizing force in the emerging world. "Dubai is the [financial] gateway to the Middle East," he stated, noting that it is a safe haven for investment and its economy has shifted away from oil dependency. Knott felt that Dubai's success stems from the fact that it is the most liberal, tolerant and hospitable location in the Middle East for Westerners.

Magnus Böcker of NASDAQ OMX Group looked to another part of the world, noting that Scandinavia has developed financial markets that create stable investing options. He felt that a key to this stability is the standardization of all financial markets within those countries.

Guy Saxton of First London Securities PLC rejected the notion of comparing different markets at all. "I don't buy into the notion of separate markets. They are quite simply the same participants, just different locations."

That observation begged the question: What makes a financial center? Craig Donohue of CME Group said that it's important to consider how the financial service sector has changed. The number of employees in the sector has doubled in the last 10 years, and this growth is a phenomena because the sector is regularly taxed twice as much as other sectors for its employees. Donohue felt that what defines a financial center is its "intellectual capital, financial capital and infrastructure."

Can emerging markets handle these needs to develop and sustain a truly global system? Knott said that in most cases these issues mark the next stage of development for emerging markets.

Using the Middle East as an example, Knott stated that that there is "only room for one financial center in most geographic segments." He felt that success depends on who creates the best and builds the most global links. Donohue responded, "People don't literally care about where the contracts are traded. It's about technology and infrastructure. We live in a global world."

The strategy at CME, for instance, is to partner and establish joint ventures, so the exchange can figure out global markets and find the most profitable growth opportunities. Yet Donohue acknowledged that there is still concern about the globalization of capital exchanges.

Böcker said that for NASDAQ's most recent merger, the two exchanges "dated for 10 months before successfully marrying. We tested the marriage before actually getting married, which actually help build a relationship." He believes that mergers are more successful when relationships are nurtured and developed, and he predicted that NASDAQ will see the benefit of going global, rather than being U.S.-centric.

Gapper continued the discussion by asking the panel of their thoughts on regulation. Knott said that because Dubai is a newer market, it could observe different regulation policies and choose to develop the best options; Dubai "doesn't have a legacy problem." Many countries, he says, have an over-inflated bureaucracy, creating regulation that is not needed. Donohue said that too much as been made of U.S. regulations, yet the most important concern is security and the SEC's inflexibility.

Gapper asked the panel if they believed U.S. Treasury Secretary Paulson's initiative to create streamlined regulation would work. Donohue said the U.S. system is too complex, and he would like to see a move toward principles-based regulation. Saxton noted that the United Kingdom is flourishing because it uses such a system. He pointed out that going rules-based is very expensive; principles-based regulation codifies everything into a manageable set of guidelines. He used the U.K. firm Evolution as an example, noting that when Evolution conducted illegal business, the market — rather than regulators — responded, and the company lost 83% of its business. "How much can the government actually control participants?"

Saxton noted that he would like to see a global regulator streamline global markets, allowing exchanges to enter many countries without the burden of navigating differing regulatory policies.

"The greatest message of hope of global markets is happening in the Middle East," Knott concluded. Gapper concurred, pointing that this phenomenon is a great realization of the global world.

Moderator:
Betsy Zeidman, Research Fellow and Director of the Center for Emerging Domestic Markets, Milken Institute

Traditionally, governments and nonprofits have worked to solve the world's problems, while businesses concentrated on making money. But new waves of compassionate capitalists are beginning to take on society's challenges. They measure progress by the social goals they achieve, as well as the profits they generate.

But Muhammad Yunus, winner of the Nobel Peace Prize in 2006 and Managing Director of Grameen Bank, turned that notion on its head with a simple question: "Why can't we accept that we can create business without any interest in making money out of it?"

In this session, tension arose between the majority of panelists who accepted the idea that social entrepreneurs can do good for the world and profit at the same time, and Yunus, an economist by training, who argued that we use the "wrong lens" to view the social problems of the world.

"These are not opportunities for profit," he said. "Rather, they present opportunities to fix what is wrong with the human condition." In his view, "the social business is a non-loss, non-dividend company with a social goal. The bottom line for the social firm is, 'How much benefit did you bring to your people?' This is a new class of business."

There are many issues not being addressed in the mainstream markets. "If you look at serious diseases, some of these have very good vaccines," said Yunus. "But no one produces them because these are diseases of the poor and there no market. These are the 'orphan diseases' that never get addressed. This is a place to create a business! "Now, you ask, why should anyone want to do that?" he continued. "They do it when they feel that people deserve to be vaccinated! We (humans) are not money-making machines ... but we see the world through the money-making lens. With a social business lens, the world looks very different. We can produce these vaccines through social business so that people don't die, and we don't need to make a profit. This is something we wanted to do."

The argument garnered applause and presented a thought-provoking contrast to the positions of the other panelists.

Among the remaining panelists, there was consensus that social entrepreneurship could grow, but the problems it faces are more complex than simply raising more capital. The panelists offered opinions about what it takes to make social entrepreneurship sustainable, and they tended to agree that large-scale, systemic social change occurs best through institutions, rather than the individual. It's difficult for small-scale or individual investors to conduct sufficient due diligence, for example. Kevin Jones of Good Capital explained that his firm has formed a market collective to reduce the costs of conducting due diligence on potential projects. There is also a need, he said, for market intermediaries to address the lending risks resulting from basic lack of information.

Foundations and NGOs have developed numerous methods to support social entrepreneurship and tolerate different levels of risk in these endeavors. According to Debra Schwartz of the John D. and Catherine T. MacArthur Foundation, her organization targets early-stage social entrepreneurship ventures through a grant-making program, with the expectation that the grant will be repaid after 10 years at an interest rate of 1 percent to 3 percent per year. Chicago;s community development bank Shorebank was funded this way, she said. On the other hand, Shari Berenbach of the Calvert Social Investment Foundation said that she targets social entrepreneurship models with moderate to conservative levels of risk through an investment tool called a community investment note. The note allows everyday people to provide micro-loans to social entrepreneurs around the world.

Good Capital requires a return on capital, said Jones, but also a high social impact. The firm targets businesses that would traditionally be of interest to venture capitalists, but have a social capital focus. This "new asset class" attracts investors who want not only a return, but a higher social return, he said, who "look at their money in a more holistic way — more risk, lower return."

In the end, panelists concurred that while "there is no hierarchy of virtue," there are clear market failures that social entrepreneurship can address. Indeed, the market is not the solution for everything, they said. To make social entrepreneurship grow, a spectrum of approaches is needed. The common thread is meaningful commitment to social change.

"The value of traditional grants and the value of government dollars should not be lost," said Schwartz of the MacArthur Foundation. "These other sources are important, as are government regulations and incentives." Smart policies, smart subsidies and smart grant-making remain real challenges. "Sometimes," she added, "the problem is not capital, but institution building, and the ability to absorb capital."

Moderator:
John Morton, Managing Director, Program Planning and Economic Policy, The Pew Charitable Trusts

The panel opened by agreeing that the American dream is the ability to move up in the world through hard work and expertise, without having to rely on family privilege and mere luck for individual success. But even though they agreed on the basis of the American dream, the panelists diverged on the extent to which economic mobility is still possible in the United States.

John Morton of The Pew Charitable Trusts noted that current research has exposed provocative new data. He noted that the American dream depends on both absolute mobility and relative mobility, or inter-generational shifts in economic status.

Isabel Sawhill of the Brookings Institution explained that what is distinctive about American society is that "we believe that we are the land of opportunity." She drew on the results of research comparing beliefs about economic mobility in the United States and 27 other industrialized countries, noting that more Americans believe that hard work and intelligence are more likely to cause economic mobility than economic background and sheer luck.

The research also noted that fewer Americans believe that the government should work to reduce the gaps between the poor and the rich. Germany, France and Canada have more relative mobility than the United States; research shows that middle-class families in those societies have good chances to move up or down the income quintiles. Yet the research also points out that an African-American child is less likely to move up and more likely to move down the income quintiles than a middle-class white child. Sawhill pointed out that current rates of inequality mirror the 1920s. She concluded that the government is not doing enough to decrease inequality and promote opportunity for all.

Eugene Steuerle of the Tax Policy Center has researched federal spending on Social Security and Medicare projects. He noted that too little of the federal budget is allocated for programs that would enhance upward mobility for children. Steuerle began by explaining the difficulties of researching federal spending on mobility, given the controversies about which programs are actually regarded as mobility projects. For example, subsidy programs are not considered mobility-enhancing, as "these programs transfer acquisition of private goods towards public services." Most mobility spending operates through the tax system, and thus is not even available to the lowest quartile that does not pay taxes. Moreover, sometimes the programs actually restrict mobility, because even though income redistribution benefits low-income households, it does not promote participation in the workforce or private investment in education. Steuerle concluded by saying that the future growth of the budget is not concentrated on educational projects, and he called for strong legislation that would reprioritize spending.

Paul Gigot of The Wall Street Journal maintained that "America is by in large dynamic, and has mostly upward and inward mobility." Gigot claimed that over the past decade the income mobility statistics have remained similar, and an upward and downward inter-generational economic mobility shift is evident. When referring to U.S. Treasury research, he noted that between 1996 and 2006, the upper half of all taxpayers moved up to a higher income quartile, yet among only 25 percent of the people in the highest income quartile remained there in 2006, while 75 percent moved down the economic ladder. Gigot also noted that today, there are higher returns for technology and education, so the most important goal should be improving education.

Eugene Robinson of The Washington Post said that he is intrigued by "the disconnect between the degree of mobility in society as compared with other industrial countries and what Americans believe." Noting that issues of race influence inequality in America, he drew on figures Sawhill mentioned earlier showing that middle-class African Americans are less likely to stay in the middle quintile than white families. This is a result of cultural factors, racism and structural barriers in society, all of which are obstacles in the road toward fulfilling the American dream.

All panelists agreed that over time, the returns for economic success have tremendously increased while the penalties for failures have become much more severe. Increased spending on initiatives such as education and child care will level the playing field and enhance opportunity for every American.

Moderator:
Steve Forbes, Chairman and CEO, Forbes Inc.; Editor-in-Chief, Forbes

The moderator of Monday's general session, Steve Forbes of Forbes Inc., started the panel discussion by bluntly asking the speakers about the status of the American economy: "How bad is it?"

In response, Nobel laureate Gary Becker stated that although America's economic problems are worsening, he does not expect a major depression. He said that one must distinguish between the real sector of the U.S. economy and the financial sector, where the problem is contained. Becker argued that the United States has faced a variety of major crises and survived, and it can similarly overcome the current credit crunch.

Jean-Paul Betbèze of Crédit Agricole addressed what he called a "global cooling" in the economy. He observed that Europe is managing to benefit from the U.S. slowdown and inflation in other countries.

The panelists argued that European policy-makers must face the challenges of reducing expenditures and enacting tax reforms. Becker argued that European political leaders needed to cut taxes first to place pressure on the tax system.

Michael Neal of GE noted that he was surrounded by pessimism, but he offered an optimistic view. He cited the success of exporting firms and agricultural machinery manufacturers in the United States, arguing that the economy would likely turn around for the better by the first quarter of 2009.

Ruben Vardanian discussed the Russia's successful growth and new opportunities. He cited the burgeoning Russian middle class who are "going abroad buying" and "want goods and services."

Becker discussed the issue of inequality within societies versus the inequality between countries. He argued that globalization is leveling the playing field between rich and poor countries, but increasing the gap between skilled and unskilled workers within individual societies. He summed up by saying that world inequality is declining.

On this same note, Vardanian argued that Russia needs to compete on the global scene by developing more human capital and better managerial skills. He even argued that corruption in Russia is less of a threat to economic prosperity than is a lack of managerial skills.

The panel addressed the issue of rising prices for commodities, including biofuels, oil and natural gas, and the impact of this spike on the price of food worldwide. The panelists agreed that unlike the commodities boom of 30 years ago, the current rise is driven and sustained by increased demand.

Betbèze offered a final tongue-in-cheek comment: To avoid economic crises in the future, people must "solemnly promise that they will never do this again."

Moderator:
Scott Minerd, CEO and Chief Investment Officer, Guggenheim Partners Asset Management Inc.

Globally, institutional investors have more than $53 trillion in assets under management. In the United States, these investors (pension funds, investment companies, insurance companies, banks, endowments and foundations) own nearly 60 percent of the public equity market, giving them enormous influence. In this panel, decision-makers at leading institutional investors discussed some of the most important issues of their industry.

Scott Minerd of Guggenheim Partners Asset Management, the moderator of the panel, launched the discussion by referring to the topic du jour, the subprime-mortgage-driven credit crunch. Participants by and large agreed that the crisis is not over yet. Robert Kleine of the State of Michigan specifically remarked that we are not near the end. Joseph Dear of the Washington State Investment Board added that the ripple effects of the crisis had yet to hit regional banks. William Lee of Kaiser Permanente commented that going forward, there should be a lot of opportunities due to large volatility.

Christopher Ailman of the California State Teachers' Retirement System (CalSTRS) noted that depending on their positions, market participants tend to have diverging views on the state of the crisis: Investors specializing in public markets are more optimistic, while those focusing on private equity and real estate are less so.

The ensuing discussion centered on increasing complexity in the investment world and its effects on strategies and governance. Minerd commented that intersections among asset classes are growing, with distinctions blurring. Ailman argued that this amounts to increased pressure across the board, for trustees, investment managers and analysts. As a result of the complexity, investors need to be more nimble in defining and reacting to opportunities. This especially has implications for pension plan boards, which try to manage the portfolios themselves. "Looking forward, this is no longer a part-time job," quipped Ailman.

Dear remarked that complexity is a huge issue in terms of the implications for governance structures: "It's about trust; it's about sharing power." Governance models developed in the 1970s and 1980s are no longer adequate. More complexity also translates to an urgent need for installing sound risk-management systems, and there are no shortcuts or recipes for this.

The issue of alternatives as an asset class garnered considerable attention from the panelists. Dear noted that the allocation the plan can provide to alternatives depends on the liquidity requirements; if the manager can accommodate restricted liquidity, alternatives promise high returns otherwise not achievable. "Unconstrained investments have better prospects, but the trick is to build a risk-management program," he remarked. Dear's plan has been investing up to 25 percent of its total portfolio in private equity since 1981, while Kleine's plan invests up to 15 percent in private equity. However, the plans don't invest in hedge funds generally due to limited transparence. Minerd presented the findings of academic studies showing that the average mutual fund underperforms the market, and the average hedge fund underperforms mutual funds after fees.

The moderator challenged the panel with the following intriguing question: "Do you believe in alpha?" Lee confirmed that he believes in alpha but added that in the future, we need to emphasize beta at least as much as alpha. Kleine was also an alpha-believer, but he argued that the investment climate from returns to taxes would be less favorable in the future compared with the past decade or so. Dear remarked that institutional investors need alpha and need the managers who will produce it. Ailman noted that getting alpha was becoming more expensive, coupled with a difficulty of making it consistent.

Another important topic for state pension funds might be potential obligations for investing within their home state, not least due to political concerns. Dear was adamant that the pension plan's fiduciary duty is only to its participants: "There is this single criterion, and we're not going to make exceptions based on zip codes." He acknowledged that political pressure naturally comes with the job.

Ailman noted that the job does involve a lot of pressure and pointed out some potential inefficiencies associated with political investing. For instance, investing in and operating a toll road in the home state might actually result in the pension fund working against the welfare of its constituents by keeping tolls high. He emphasized that pension plans cannot have multiple goals.

Kleine, on the other hand, acknowledged that his state is just about to launch a $300 million fund to be invested in local firms, which is just a drop in the bucket considering total investment size of $30 billion. According to Kleine, if done right, it can work out for both plan constituents and the local economy.

Moderator:
Stéphane Voisin, Head of Sustainable and Responsible Investment, Crédit Agricole Cheuvreux

There are two periods of the European Climate Exchange, or ECX, so far: the pilot phase, which began with the birth of the exchange in 2005 ran through 2007, and the Kyoto phase, which began this year and continues through 2012. Now over the rough patches in Phase 1 and solidly into the second phase, the ECX offers the world and the United States, in particular, one clear lesson from its experience: carbon trading does work.

The ECX currently provides cap-and-trade for 11,000 industrial plants, representing approximately half of all carbon emissions from the entire EU. There has been free banking and borrowing during each period, but not from one period to the next (which turned out to be problematic as prices dropped at the end of the first phase in anticipation of the transition). This has produced six preliminary results according to Christian de Perthuis of Caisse des Dépôts and the University Paris-Dauphine.

1. First, in less than three years, the ECX has become the largest carbon market in the world, expanding from 7.9 billion euros in 2005 to 38.3 billion in 2007.

2. Europe now has a real carbon market price.

3. Europe has seen between 5 megatons and100 megatons of carbon abatement per year from 2005 through 2007.

4. There has been limited impact on electricity prices, despite previous fears.

5. As an open market with an established carbon price, the ETX has driven the creation of new environmental projects elsewhere around the world.

6. Any link between future U.S. carbon abatement programs and the EU would exponentially bring opportunities on all sides, the United States still being potentially the largest carbon market on earth.

Neal Eckert of Climate Exchange PLC noted that $600 million a day is currently traded on the ECX. The total should increase further, thanks to recent incursions of big investment firms that offer structured plans to consumers. Eckert explained that "fuel switch" is the big driver in energy trading, and that "thanks to the ECX, if you trade energy today, you need a carbon desk." The ECX has two separate programs, one domestic, and one international, and Eckert said it was his one big wish that the United States would become involved in the international program.

According to Tim Yeo, Chairman of the Environmental Audit Select Committee of the U.K. House of Commons, if one is to fully understand the trajectory of policy regarding carbon trading, one must understand it within the context of the urgency of global warming, which every day appears to be happening at a much faster rate than previously understood. If we continue "business as usual," he said, the planet could hit its tipping point within 50 years. Yeo maintained that limits far in excess of Kyoto will be necessary to avert calamity. What the past two-plus years of ECX activity have shown is that market incentives coupled with government regulation (i.e., cap-and-trade) are the best way for this to occur. The ECX includes 27 countries, and that given the scope and size of the players in the market Yeo said, the first lesson to be learned is that caps have to be tight enough to force reductions in the face of enormous lobby pressure to the contrary.

The second lesson, according to Yeo, is that the auction of allowances is the most effective way to incentivize trade. By comparison, the existence of heavy taxation on engines in Germany, and the total failure of the same to effect production of cars, are perfect examples of why a carbon tax will not work.

The third lesson, said Yeo, is that the market must include as many industries as possible, and as quickly as possible. Lastly, low carbon industries will show the fastest growth under the market conditions established by the ECX. Yeo beseeched the Americans in the audience to get the United States on board with a cap-and-trade program ASAP.

Electricity is responsible for 40 percent of carbon emissions in the EU, but it is important to recognize the role of electricity in reducing carbon emissions in other sectors via clean-tech electricity generation, such as solar power, and in turn fuel switching from different sectors, e.g., coal. In contrast to Yeo′s assertion that market forces are the fastest way to achieve carbon abatement (and while agreeing that more auctioning would be the best way to facilitate growth), Jean-Yves Caneill of EDF Group asserted that specific policies will be necessary to allocate money from auctioning into R&D for clean tech.

Returning to the theme of electricity as part of the solution, Erich Merkle of Solar*Tec AG cited solar-generated electricity as a zero-emissions source. With a one-time investment, solar panels will yield a fixed income for 20 years, he said. The total cost of production will be levied on consumers at the rate of only 2 euros per month on average. More than 50 percent of all photovoltaic (PV) installations are currently in Germany and have gone up in only the past few years, prompting other nations, most notably Spain and Portugal, to join in. In 2006, he said, more than 214,000 jobs were created in PV, with a 23 billion euro turnover per year, representing 100 million tons of carbon reduction. PV now represents an investment opportunity in its own right, he said, adding that power generation occurs during daylight hours, the hours of peak usage.

In response to a question from the audience about the potential for carbon asset trading to bolster pollution rather than alleviate it, by allowing the bigger polluters to buy their way out of abatement, all panelists asserted that market forces will bring about greener technologies on their own and that policy-driven reduction on caps is essential to the entire experiment. Personal or individual trading will incentivize the greening of the housing and transportation infrastructures, said Yeo, but he conceded that this too must ultimately be policy-driven.

How exactly this fits into any dogmatic attachment to a free and unregulated market is unclear. What is clear, however, is what is getting results in Europe — and in turn what must be done in the United States, regardless of whether it upholds the popular economic model of the hour.

Moderator:
James Barth, Lowder Eminent Scholar in Finance, Auburn University; Senior Finance Fellow, Milken Institute

The subprime meltdown began with product failures in one section of the mortgage market. But it quickly spread, hitting mortgage-backed securities, asset-backed securities and asset-backed commercial paper, and sending ripples of anxiety through broader financial markets.

"What went wrong with securitization?" asked moderator James Barth of the Milken Institute. The spectrum of answers from the panelists, as well as their prescriptions for federal intervention (or not), reflected the uncertainty associated with the U.S. mortgage market.

Lewis Ranieri, founder of Hyperion Private Equity Funds and one of the pioneers of securitization, took the first stab at answering Barth's question, articulating three problems with securitization. First, he said, the structure of securitization bonds has a built-in tendency to collapse if the financial environment turns unfavorable. Second, "at some point we started to confuse complexity with innovation," he added, arguing that many of the securitization funds became so byzantine that rating agencies had a hard time keeping up and scrutinizing them sufficiently. Third, the lack of transparency in the way securities were packaged and resold left investors at a disadvantage.

Offering a different viewpoint, Ethan Penner of CB Richard Ellis argued that securitization funds were the victims of their own success. "The delegation of underwriting worked," he said, but that was when securitization funds held assets of $1 trillion or $2 trillion, not $12 trillion. "The huge explosion in the market exposed the cracks in the system." The goal of policy-makers, he stated, should now be to examine the system and modify it to mend these cracks.

Ellen Seidman of the New America Foundation attributed the current crisis to a "giant hole in regulation" that regulates brokers, at best, "on a complaint basis." She argued that mortgage brokers were not inadequately educated or intentionally deceitful, but they nonetheless placed many homebuyers in unfavorable mortgages they could not afford.

The current crisis is the result of many factors, said Tad Rivelle of Metropolitan West Asset Management, but he maintained that these factors were driven by misplaced assumption that "trees can grow to the sky." He described how people blindly assumed that real estate values would continue to rise and relied on rating agencies to assess the value of securitization bonds without examining the models on which these organizations based their assessments. Scott Minerd of Guggenheim Partners Asset Management shared Rivelle's assessment that investor naivete about bond ratings produced serious consequences.

Stuart Gabriel of UCLA's Anderson School agreed that there is enough culpability to go around for the current crisis and described it as a negative feedback loop resulting from the simultaneous deterioration in capital and housing markets.

When the panel turned its attention to policy prescriptions that could help spur a market recovery, opinions again varied. Ranieri said it is economically preferable to promote policies that allow people who in foreclosure to remain in their homes, but he also cautioned against policies that promote a moral hazard that "entices people who could pay to not pay in order to get on the gravy train."

Moderator:
Andrew Rosenfield, Managing Partner, Guggenheim Partners LLC; Chairman, Guggenheim Investment Advisors

The session opened with the moderator, Andrew Rosenfield of Guggenheim Partners, showing a recent advertisement featuring Gorbachev with a Louis Vuitton handbag in a car parked in front of the Berlin Wall. Rosenfield pointed out that this photo captured the major changes in the world economy in recent years. He also pointed out that discussions about market volatility generally take place during periods of economic downturn and crisis, not in times of prosperity and growth.

When addressing the volatility in financial markets, it is important to recognize that the fluctuations in stock markets do not necessarily reflect a proportionate change in individual companies within the market.

Richard d'Albert of Deutsche Bank stated that risk measurement has become critical. This has caused the proliferation of indices that have been "helpful in defining prices of otherwise unobservable assets."

Discussion of volatility yielded to discussion of the growth in BRIC countries and throughout Asia. James McCaughan, having just returned from Asia, described the economic optimism in China as "tangible."

Mitchell Julis of Canyon Partners compared the market to a pendulum, adding that at the bottom of the pendulum, we have leverage that exacerbates the market's volatility. He described the model of neoclassical finance, which assumes that men are rational beings, and contrasted that against behavioral finance, which acknowledges men as irrational actors. Ultimately, he argued that people are determined organizationally, meaning that "where you stand depends on where you sit."

Liquidity is the primary cause of today's market volatility, noted Max Darnell of First Quadrant. He contended that what is currently happening in markets is a direct result of the dramatic growth in liquidity during recent years. He cited the fact that emerging countries are growing their savings, a trend that can be seen in the growth of central bank reserves (currently valued at more than $6 trillion globally). Additionally, sovereign wealth funds stand at more than $2.25 trillion. Combined, these two actors account for between 6 percent and 8 percent of global publicly traded assets. Darnell lamented that the solution adopted by many in the United States is to control volatility by adding even more liquidity, a move he compared to throwing gas on a fire. He continued to discuss significant housing booms in places like southern China, India, Australia and Spain.

Julis commented that the fight for resources may become a geopolitical issue as opposed to a function of capitalism, creating a concern for many in the financial markets.

Overall, the panel agreed that market volatility is an issue that we rarely bother to explore during periods of economic growth. But the swings are manageable if companies and investors prepare sufficiently.

Moderator:
Chris Osborne, CEO, Troika Dialog USA

Chris Osborne of the Trioka Dialog USA began the session by asking how many audience members had been to Russia in the last two years. Surprised by the show of hands, he began discussing the rapid growth of Russia's GDP, its rising middle class and the recent flood of foreign direct investment. However, Osborne noted that most observers are aware that investing in oil and natural gas is not sustainable. He added that the incoming Russian president Dmitri Medvedev has stated his priorities for investment in the three I's: infrastructure, innovation and institutions.

Most of the panelists agreed that now is a good time to invest in Russia. Asadov emphasized opportunities outside the oil and gas sector, noting that other industries are ripe for innovation and have little competition.

Gregory Karpovsky of Eurokommerz, the largest factoring company in Russia, used his own story to illustrate the degree of opportunity that is available. A young, self-made entrepreneur in an industry outside of the oil and gas sector, he started a company at age 22 and is now a CEO at 28.

Dmitry Mosin of Sochi 2014 described the upcoming Winter Olympics and Paralympics as an opportunity to showcase a new country to the world, attracting investment and commerce. Mosin cited the Olympic Games as a priority for the prime minister; as a result, all investments will be guaranteed by the government. Private funding will drive construction of the needed infrastructure and hotels.

Vadim Asadov described his experience in Russia's technology sector. A physicist turned investment banker, he established NeurOK in 1998 as an angel incubator for technology financing and commercialization. To nurture the human capital necessary for innovation, he has also founded advanced institutes for physics and mathematics.

Evgeny Zaytsev of Asset Management Company affirmed that there is a great deal of potential in Russia's life sciences sector. Consumer demand is rising, especially in health care. The problem, he says, is the shortage of managers in Russia.

That issue is being addressed by Wilfried Vanhonacker, Dean of the Moscow School of Management. The Russian government has made it a priority to stimulate entrepreneurial talent and leaders who can manage a fast-moving economy. Although Russia's president-elect, Dmitry Medvedev, is chairman of the school's advisory board, the school is entirely privately financed.

When asked about Russia′s negative image abroad, Asadov said that he is surprised at how inaccurately the Western media portrays Russia. "This contradiction of reality is bad for Russia but even worse for America," he said, noting that it leads U.S. investors to shy away from investment opportunities. "Russia is a best-kept secret."

"Russia has been doing a pretty poor job of managing its PR as a country," said Zaytzev. He discussed the lack of awareness by Westerners of all the positive developments in business, education and the arts.

Vanhonacker noted that the problem of Russia's image has some cultural origins, observing that Russians are very direct and don't always consider the audience they are speaking to. He has found this issue a challenge in building the business school. "I have no problem selling the projects to get faculty. The problem is selling Russia."

"Communication is everything. It's all about how you are going to communicate your country," said Moisin. He cited his experience with winning the Olympic bid for Sochi, calling it in effect a global election. "Intense, targeted, and motivational communication is key is in how you want to present your story. It can be done."

Despite the challenges, Vanhonacker reaffirmed that Russia is where the opportunities lie. "Russians are proud and highly educated, with a maturity and understanding of what goes on the world." The country only lacks soft skills such as management. "But these are the challenges that come when faced with high growth and different talents," he said.

Moderator:
Dean Rotbart, Journalist, Consultant

"We have a lot of big mouths here!" announced journalist and consultant Dean Rotbart, the moderator of a lively panel about how bloggers are changing public perceptions of the news we get from the mainstream media.

After his surprising opening (which was fully intended as a compliment), Rotbart asked how many audience members read blogs at least once per week. The answer was an impressive 75 percent. Of those that did, 50 percent read blogs once per day, and 15 percent were bloggers themselves. And that percentage is anticipated to grow substantially while the popularity of print media continues to decrease.

"Bloggers are informed and opinionated," stated Paul Kedrosky, who writes the "Infectious Greed" blog. "I needed more awareness politically. It makes me feel like I am contributing to society by enlightening the public to what is really going on with the economy. Not whatever they see in print media ... I combine both old and new developments in economics, things I couldn't say in a classroom. It lets me vent, primarily. And there are, in fact, many institutional investors that read it, believe it or not."

Yves Smith, who writes the "Naked Capitalism" blog, had ample experience on Wall Street with Goldman Sachs. She felt that there was a "real disconnect between what was being reported in the press with common sense." She stated that there "was a lot of frothiness in the market ... and the way the dots were connected were incomplete — the mortgage crisis, for example, was very 'snarkly.' In blogger language, that means unclear."

Felix Salmon of Portfolio.com felt that media needs to make things more fun to read in order to captivate and sustain an audience's attention. "Stuff bugged me," he said. "It is my own therapy. My wife told me to 'put it somewhere else, and find someone who cares.' My readership grew organically and developed into a quarter of a million readers per month."

Mark Thoma, author of the "Economist's View" blog, agreed with Smith. He felt that there "was a tremendous amount of information not getting put into print, due to source conflicts, space constraints, etc., and blogs allow for the total picture. This makes a story much (easier) to be whole and complete."

Rotbart posed another interesting question to the panelists: "Who holds bloggers accountable for what they put up?"

Most all the panelists agreed that credibility was extremely important for them, as well as integrity in what they wrote. "I put up articles that link to factual info to support where my opinions are based from," commented Thoma. Smith added that bloggers earn their respect by what they write, noting that even The Wall Street Journal relies on statements by trusted sources. Smith felt that "a blogger should be able to strip the arguer from the argument, and both should be able to stand on their own." Kedrosky believed that some blogs are purely for entertainment, while other may be "factual, impressionistic, etc., and that's okay." He added that blogs are complements to print, not substitutes.

When the subject of blogging for money came up, the crowd became a little rowdy. Salmon announced, "Blogging should come from the heart and mouth, not out of a lust for money. Bloggonomics 101: Never do it for the money." Rotbart noted that traffic is the monetary sum of blogging through ads.

Whether it's for the money or not, the panelists all had a lot to say about what was not being said before.

Moderator:
Alfred King, Vice Chairman and Senior Technical Director, National Financial Valuation and Consulting Practice, Marshall & Stevens Inc.

The globalization of capital markets and the increase in cross-border investing have led to the goal of establishing a single set of accounting standards. This historic convergence requires agreement about disclosure requirements, regulatory, enforcement, and auditing standards and practices. But differences in convergence must be resolved before U.S. public companies and the world's largest capital market can fully transition to international standards.

Alfred King of Marshall & Stephens moderated the panel, which addressed the need for convergence, the various paths toward convergence and the challenges involved. The session began with a detailed presentation by Robert Herz of the Financial Accounting Standards Board on the need for convergence and the possible use of International Financial Reporting Standards (IFRS) in the United States. The need, he said, is market-driven -- companies are going global, capital flows are global, and therefore a single global standard not only makes sense but also reduces costs and complexity.

To achieve this goal, he presented three possible paths: by mandate; through a structured convergence process; or through competition among standard-setters. He cited Europe's lead on adapting IFRS, and the memorandum of understandings signed and updated between the U.S. Federal Accounting standards Board (FASB) and International Accounting Standards Board (IASB), which has adopted the IFRS. At present, he added, more than 100 nations require or permit IFRS, with many others planning to follow suit. However, in the United States, more work is needed.

Some of the challenges, he said, stem from too much available literature and the different starting points of FASB and IASB. Differences in regulatory, business and cultural environments have to be overcome. In addition, one has to deal with the politics, lack of funding, staffing and governing resources at IASB.

Herz said he doesn't think there will be a mandate for all companies to make the transition simultaneously, but that those with a majority of operations outside the United States or with many subsidiaries of foreign parent firms will lead the transition.

When asked if it is true that the IFRS is principles-based, whereas the U.S. GAAP (Generally Accepted Accounting Principles) is rules-based, D.J. Gannon of Deloitte & Touche pointed out that a numerous exceptions are hidden behind the principles. The major difference, he said, is that IFRS has fewer details (2,000 pages versus 25,000 pages for US GAAP). The IFRS has chosen to take a minimalistic approach. The question, said Gannon, then becomes, "What happens to the material contained in the other 23,000 pages?"

Neri Bukspan of Standard & Poor's pointed out that the transition to the leaner IFRS benefits some nations immediately because their own standards were poor to begin with. By omitting 23,000 pages, he said, it is important for the standards committee to ensure that users will not get less than they started with. He also stressed the importance of disclosure, an integral part of any accounting procedure.

Jerry de St. Paer of the Group of North American Insurance Enterprises agreed with Bukspan on disclosure, adding, "Disclosure is the heart of what this (the push for convergence) is about." He also included other areas that pose significant challenges, such as developing standards for financial statement presenting, revenue recognition and insurance.

Moderator King seized the moment to ask if disclosure is a substitute for accounting, to which Herz replied that recent executive stock options scandals have demonstrated that important details can be buried in disclosure statements. Bukspan said he doesn't see many analysts trying to reconcile disclosure statements; instead, they take financial statements for what they're worth and make their calls. To him, reconciliation is valuable more from an academic perspective.

In closing, the panelists agreed that the international convergence of accounting standards will be monumental task involving many stakeholders rather than a few arbiters behind closed doors. They added that the transition itself must be undertaken in a fully transparent manner.

Speaker:
Muhammad Yunus, Nobel Peace Prize Laureate, 2006; Managing Director, Grameen Bank

Moderator:
Nicholas Sandler, Senior Vice President, Crestwood Pacific Group; Head of Business Development, Crestwood China Hydro LLC

China's ever-increasing financial growth presents a host of opportunities, but realizing that potential is often harder than it looks. Moderator Nicholas Sandler of Crestwood Pacific led a panel devoted to spelling out the realities of China's current business environment and the challenges for foreign investment.

"In China, there are cultural and regulatory barriers to entry, with cultural being the easier to penetrate," explained Jim Lavelle of Houlihan Lokey. "To do business in China, there are several hoops to jump through." For example, some sectors of the economy (such as transportation, defense and media) are closed to foreign investment, withstanding China's political shift from communism to socialism. Real estate investment is restricted as well.

"So where do you start?" asked one attendee. "Good question! And I have an answer for you," replied David Tang of Kirkpatrick & Lockhart Preston Gates Ellis. "It all starts with a catalog ... available to the public that lists out and divides industry groups available for foreign investment." Some examples of encouraged sectors for investment include high tech, new tech and some legal opportunities. There are substantial R&D incentives backed by China's government to help facilitate growth and expansion.

"There are ways to work around the loopholes," insisted Mitchell Nussbaum of Loeb & Loeb. "The Chinese are very warm and helpful people. It is the government officials that are a bit harder to work with unless (you) have a financial services license." He continued: "There are three ways to facilitate foreign investment in China and maintain a long-term presence there. First, have a representative's office there. Second, do a joint venture with a Chinese company already established there. And third, create a 'WOFE,' or wholly owned financial enterprise."

It is civil law that one must have a license to entity in order to open up a bank account. "No license, no account, no business," Tang explained. He continued to explain how joint ventures can be equity 90/10 partnerships, or flipped to be 10/90 in certain cases (50/50 is deemed undesirable due to potential deadlock). Access to local market expertise and good relations with local officials can translate into new funding for projects by government, expanded manufacturing capacity and assistance in exit opportunities and domestic listings.

"Relationships with government and local officials really help speed through the red tape always present in a growing economy," Nussbaum explained. "There is a lot of capital floating around, and China is always looking for ways to expand its economy. With half a trillion in reserves, there is always room for Western assistance."

Growing issues in China's economy led to the 2007 anti-monopoly laws. On January 1 of this year, new labor laws have gone into effect, governing severance, pay, rights and benefits. "The market's flexibility has waned a bit," commented Sandler. "The government is involved in the front side as well as the operating side." The best strategy for investors always involves cooperation, planning and foresight.

Moderator:
Paul Gigot, Editorial Page Editor, The Wall Street Journal

Panelists addressed the current economic climate in the United States, the housing market and the expected effects of government policy on the future of the economy.

Moderator Paul Gigot of The Wall Street Journal began the discussion by commenting on the sharp increase in commodity prices since August 2007, the record low value of the dollar and the risk aversion exhibited by investors. When asked whether the United States is in a recession, Peter Orszag of the Congressional Budget Office replied that we are experiencing negative growth, but the potential impact of the tax rebates that are being issued over the next quarter should not be overlooked. The stimulus totals more than 1 percent of annual GDP, but the rebates will have the effect of 4 percent of GDP since they are being administered in a single quarter. Regarding the housing market, Orszag said, "There was the potential for a 30 to 40 percent decline in housing prices, and we haven't come anywhere near that." He does expect another 10 to 15 percent decline in housing prices before values begin to recover.

Commenting on the likelihood of further write-downs by major banks, Suzanne Nora Johnson, formerly of Goldman Sachs, explained that mark-to-market accounting practices will result in additional write-downs as underlying assets (such as mortgages) continue to decline in value. "I think we are at the end of the beginning," she said. "We had a snakebite called leverage and are now starting to find the antidote."

Felicia Thornton of Knowledge Universe Education U.S. said that while middle-class residents of California, Arizona and Florida are experiencing noticeable effects from the economic downturn, "nobody is panicking." Thornton has seen a slowdown in turnover among the 50,000 employees in her organization due to an increased desire for job security.

Allan Hubbard of E&A Industries interjected that "it's very unclear that we're actually in a decline." He highlighted the Federal Reserve's aggressive action to cut interest rates in recent months, saying, "You can't criticize them for being inactive or inattentive." He also pointed out the role of allowing temporary, faster write-offs for business investments as part of President Bush's stimulus package.

Some panelists questioned the actions that Congress is taking to address the mortgage meltdown. Under legislation currently being considered, Hubbard expects that banks would keep the soundest mortgages and turn only the most risky loans over to the Federal Housing Administration. Johnson added, "The challenge is that Congress is in a very tough spot to show households that they are doing something to achieve parity."

Gigot turned the discussion to the long-term issues that the United States needs to address to sustain growth. Thomas Donohue of the U.S. Chamber of Commerce explained that "America is its own worst enemy." Education, immigration, energy, infrastructure and trade are all issues "that America can take care of itself." Hubbard called for the renewal of President Bush's tax cuts, while Orszag pressed the need to eliminate unproductive health-care spending. Thornton called for improving the quality of America's teachers, especially in the earliest grades. Johnson spoke of the need to invest in infrastructure — in the nation's physical as well as its human capital — to ensure that opportunity is available to all Americans and is not stifled by ineffective policies.

Moderator:
Maria Bartiromo, Anchor, CNBC's "Closing Bell with Maria Bartiromo"; Host and Managing Editor, "Wall Street Journal Report with Maria Bartiromo"

Last year, the Global Conference held a panel called "The Year of Private Equity." Just 12 months ago, mega-deals were being announced on an almost weekly basis, credit was ample and cheap, and private-equity firm managers had the allure of medieval kings. But what a difference a year makes. The IPO of private-equity blue chip Blackstone was disappointing, the credit crunch has taken a toll on the private equity market and investors are uncertain. Against this backdrop, moderator Maria Bartiromo of CNBC launched the discussion by culling the panelists' opinions on where the industry stands.

Leon Black of Apollo Advisors was quick to quip: "I'd have preferred if the title had been 'before the year of private equity' because that would imply a hope that things will be better next year." To be sure, there was a quantum jump leading up to 2006 driven by several factors: Sarbanes-Oxley motivated firms to go private, CEOs did not want to stay public with their compensation packages, and the aggressive credit market lead to bigger and bigger buyouts. Now the first two of these effects still hold, but the credit market is broken. Black emphasized that that this is not the first time such a crunch has happened. When Apollo started operations, it was a pretty similar environment. According to Black, there will always be good opportunities for private equity. Right now there are moves to be made, particularly in the distressed buyout market. There are also regular private equity opportunities depending on when banks go back to business.

David Jackson of Istithmar World Capital remarked that "2006 and 2007 were bizarro world." He did not think that credit markets are broken and felt that deals that make sense are still going through. The only issue is that "jumbo" deals are not happening. He also drew attention to the globalization of the leveraged buyout business. "There's life outside the U.S.," he noted, mentioned the rising importance of Asia, the Middle East and Turkey.

According to Thomas Lee of Thomas H. Lee Capital, the downturn in the private equity business was by and large a securitization issue. From 2001 to early 2007, the share of CLOs grew from 10 percent to 70 percent of total loans, which in effect created $10 trillion of liquidity that was in turn pumped into areas like private equity, boosting deal volumes. These days, banks are busy clearing the credit backlog instead of offering new liquidity. He also noted that in terms of availability of financing, there was no longer much difference between investment banks and commercial banks. There might be some re-regulation in the direction of Glass-Steagall. Elaborating on the extent of current deals in the market, Lee remarked: "What I'm doing now is mid-cap deals, and I call that back to the future." In fact, that's what the industry used to do in the regular past.

Jackson seconded Lee, stating that mid-cap is really the typical private equity deal. He referred to data indicating that average deal sizes have fluctuated around $100 million over the last decade. Most notably, even in the boom year of 2006, deals averaged $240 million. These days, the nature of some of the relationships in the industry has changed; now the PE shops are trying to sell the banks the deals, instead of the other way around.

David Solomon of Goldman Sachs noted that capital has started to form in order to take over bad assets, and he gave as an example some very recent deals happening with large commercial banks. With this capital recycling process, assets can now be better marked to market. He also made a distinction between access to capital and the state of the economy, and argued that going forward, the bigger issue will be how consumers behave.

Another interesting topic revolved around high returns usually associated with private equity. What should investors expect in the current environment and in the near future?

Leon Black conceded that closing deals of the conventional type will be more difficult, but then again, "there are many roads to Rome." For instance, Apollo has invested $4 billion since last October, and some of these don't require any leverage at all. Black noted that the distressed buyout market provides many opportunities, which is actually a de-levering process that has happened many times before, as in the early 1980s and near the end of the 1990s. Not surprisingly, some distressed-private-equity funds had their best performance in times like this. He argued that for better private equity returns, equity prices needed to come down and we might have to wait six to eight months for that.

Thomas Lee referred to a chart displaying annual average private equity returns. While such returns were around 20 percent during most of the 1990s, they dropped to zero later on and came back to the 20 percent level in the mid-2000s before nose-diving to the negative area last year.

Black also elaborated about the Blackstone event. He argued that Schwarzman had built an excellent firm and what went wrong was that people had just invested in the IPO at the top of the cycle. According to Black, the market is still confused about what private equity does, putting too much value in quarterly reports. Over time, distinctions will be made between short-term issues and the long-term performance that private equity can deliver. Most limited partners in PE funds come in for a period of 10 years, in stark contrast with quarterly earnings expectations in public markets.

In closing, Bartiromo asked panelists about what opportunities to chase and what to avoid in private equity. The panelists had pretty convergent opinions on this topic. One common thread was increasing geographical spread, with special emphasis on Brazil, Asia and Eastern Europe. According to Solomon, "The world just feels better as you get away from Manhattan." Jones enthusiastically remarked that Brazil has become a net creditor country for the first time.

The globalization of PE is driven not only by availability of local funding, such as from sovereign wealth funds, but also by the increased sophistication of local institutions which have succeeded in adopting the financial toolkit to their circumstances. "U.S. institutional involvement is no longer required for deals," noted Jackson.

According to Leon Black, the crucial issue is how good the investee company is. The math of deals is not complicated, but finding a good company is. At a market-wide level, Black's view was memorable: "Volatility is not one's enemy as an investor." The remaining panelist sounded along the same lines with Black: they do not specify a particular sector or geographic region. The opportunity always depends on the specific investee company, and sectorwide considerations are typically limited to the timing of the investment.

Moderator:
Abraham Lowenthal, President Emeritus, Pacific Council on International Policy; Professor of International Relations, University of Southern California; Senior Fellow, Brookings Institution

Does little news mean good news? Abraham Lowenthal of the University of Southern California argued that in the case of Latin America, this is true. Given the extensive challenges in other parts of the world, there has been little coverage of the region in the U.S. media.

The positive news is that there is a general move toward democracy and stability. But Lowenthal urged outside observers not to believe that Latin America is becoming homogeneous. He offered five "dimensions" in which Latin American countries differ from one another:

1. The nature and degree of economic and demographic interdependence with the United States (Mexico, the Caribbean and Central America have the highest, while the southern cone region has the lowest).
2. The extent to which countries have geared their economies to international competition (Chile has strongly pursued this).
3. The development of democratic governance, including accountability and rule of law (strongest in Chile and Brazil, and on the increase in Mexico).
4. The relative effectiveness of political and civic organizations besides the state (strongest in Chile, while deteriorating in Venezuela).
5. The integration of the region's more than 30 million disadvantaged indigenous peoples, who are becoming more self-aware and mobilized.

Carlos Bremer of Value Grupo Financiero argued that although there are some major challenges in the region, there are also many opportunities and reasons for optimism. He addressed the need for improving and expanding education to increase social equality and prosperity. Bremer criticized the leftist populism that is gaining traction in Mexico and throughout Latin America, and offered suggestions for the business community in Latin America. He argued that corporations must be concerned with socially responsible practices and economic openness to offer a better standard of living across the board. This would result in improved conditions for everyone in the region and the United States.

Pompeo Andreucci Neto of the Brazilian Embassy portrayed a rosy picture of Brazilian growth and stability. He stated that Brazil is interested in strengthening ties with other Latin American countries by supporting Mercosul, a regional trade agreement. Although there is concern about an economic slowdown in the United States, Brazil is optimistic about foreign direct investment, which increased dramatically in recent years. Inflation is under control, and a greater availability of credit has become very important, helping to fuel a sales boom in the country's housing market. He suggested that his country needs to reform its tax system and encourage innovation to solve its challenges.

Viviana Araneda, a trade commissioner for the Chilean government, gave the audience an overview of the successful economic growth and openness of her country. Chile has relatively low tariffs overall, while it grants most favored nation status to all. It has been ranked the eighth freest economy in the world, and number one in Latin America, with more than 50 free-trade agreements in force with countries around the world.

Finally, Ambassador John Veroneau argued that the U.S. Congress should pass the Colombia Free Trade Agreement. He criticized Congress and U.S. labor unions for their opposition to free trade, arguing that it contributes to economic growth and prosperity far more effectively than other options.

Moderator:
Joel Kurtzman, Senior Fellow, Milken Institute; Executive Director, SAVE; Publisher, The Milken Institute Review

SAVE, the Strategic Action Volunteer Effort, was launched by Mike Milken in 2006 with the goal of seeking market-based solutions to pressing issues. Its first initiative is "Achieving Energy Independence" and addresses the issue of U.S. dependence on oil and other greenhouse-gas-emitting fuels. The goal of this session was to track the progress and highlight the breakthroughs that have been made over the past year.

Moderating the session was Joel Kurtzman, SAVE's executive director, who was joined by SAVE co-chair G. Chris Andersen of G.C. Andersen Partners, along with Richard Kauffman of Good Energies, Jonathan Malkin of ATP Capital, Joseph Pettus of Safeway Inc., Richard Pietrafesa Jr. of Destiny USA and Thomas Urban of CellFor. Inc.

Kurtzman explained to the audience the basic principle behind SAVE: that capital markets are better equipped than government mandates to help achieve energy independence. "Organizing the private sector and educating it about the advantages of disconnecting from fossil fuels is the goal of this initiative," said Kurtzman, who then highlighted some facts in support of this view, such as the rising rates of investment in clean technologies, the relentless rise in oil prices and the volatility of many oil-rich nations.

It is especially crucial now to advance alternative energy sources, said Anderson, adding that the private sector can take charge in making a difference as the country moves energy independence to the front burner. The private sector is the springboard for creativity, ingenuity and innovation, he added, pointing out that while his own company is investing in alternative energy technologies, alternative energy companies and ideas established just a few years ago haven't revisited their pricing strategies in light of rising oil prices and other current economic signals. The scale of involvement must increase dramatically, he said, and it is equally important to educate the public about the urgency of the issue.

Kauffman of Good Energies, one of the largest independent investors in renewable energy, spoke in defense of solar energy and explained some of the latest technology developments in that field. Good Energies has invested $500 million in solar energy over the past year and now possesses the largest solar portfolio in the market, he said.

Malkin addressed how ATP Capital's investments in new gene technologies would result in more productive and faster-growing crops and trees, which would lead to a "new era in forest sustainability and productivity" and improve carbon sequestration potential. He went on to describe the two projects on successful agriculture genetics, which he views as only the beginning of agriculture's contribution to the energy solution.

Urban explained how CellFor, the world's leading independent supplier of high-technology seeds to the global forest industry, uses genetic technology to provide higher yields in corn, improving productivity. At the core of the business, he explained, is the transformation of gene types for crop development that provide superior products with tangible value that is attractive to investors. This attraction has been validated by the millions of improved seedlings that have already been planted.

Introducing innovations in construction, Richard Pietrafesa described the creation of Destiny USA, a multibillion-dollar theme park and resort destination under construction on a 150-acre reclaimed brownfield in Syracuse, N.Y., which "traditional" developers would shy away from, given the higher costs of improving the land quality. Where others saw increased costs, business should see a unique market opportunity, he said. Destiny USA is being built and operated completely free of fossil fuels through the use of biodiesel. He pointed out how business can take a liability, such as a nearby sewage plant, and turn it into an asset by converting the outgoing waste into energy.

Safeway grocery stores have also taken drastic steps toward going green, said Joseph Pettus, who added that his company has signed a contract with Chicago Climate Exchange with the goal of decreasing carbon emissions completely. Safeway has already decreased 1.5 percent of its carbon emissions per year. The store used biodiesel for all its fuel purposes, and all of the electricity is converted via gasoline. Safeway has clearly set goals to take initiatives to promote better livelihood and has created not just brand, but an example for the complete industry to follow. "All this stuff is easy," he said. "Taking initiative and having the determination to execute it will show the rewarding results. And each of these results make companies proud ... because they are developing a greater future for the rest of the world."

Moderator:
Duncan Goldie-Morrison, CEO, Calyon Americas

As sovereign wealth funds buy up pieces of American companies in a battered stock market, policy-makers are struggling to deal with these new financial behemoths. As profits from high oil prices pour into sovereign wealth funds, do these vehicles represent a new threat to an already fragile international financial architecture? Or are sovereign wealth funds unfairly singled out by protectionists worried about a falling dollar in an election year? Is regulation needed? And most important, can sovereign wealth funds move capital markets, or are they merely a part of the shift toward emerging-market investment? This panel addressed the issues swirling around the least-understood investment vehicles in the global marketplace.

Moderator:
Amy Liu, Deputy Director, Metropolitan Policy Program, Brookings Institution

The United States is struggling to finance and modernize its transportation infrastructure at a moment when globalization and technological innovation have led to massive increases in trade, shipping and transport, and as concerns about climate change intensify. Many metropolitan areas lack transit options, while freight and port hubs remain congested.

Thus, it should come as no surprise that what reverberated throughout this session was "integrate, integrate, integrate" when it comes to national transportation policy. "The biggest need is a holistic approach," said Douglas Duncan of FedEx Freight Corp. Addressing roads, railways, ports and airports independently is no longer affordable, he warned, nor will it produce the national transportation system Americans need.

Moderator Amy Liu of the Brookings Institution burst that bubble quickly. A holistic approach would be difficult to achieve when national legislation is absent a meaningful purpose or mission statement, as is the case at present. She outlined the major challenges facing the nation through six issues that foster imperatives for reform: (1) infrastructure age (2) traffic congestion (3) growing freight traffic (4) energy consumption/emissions/climate change (5) rising fuel costs and (6) a lack of financing. Studies calling for support of the "Rebuild America" initiative of California Gov. Arnold Schwarzenegger, Pennsylvania Gov. Edward Rendell and New York Mayor Michael Bloomberg are positive, but much more is needed and the danger of waiting is real.

"Over the past two decades," said Liu, "transportation has pulled inventory out of the supply system and into the supply chain, creating significant cost savings. Those savings have flattened out the past few years and are in danger of reversing themselves through increased congestion and higher costs if we continue with 'business as usual.' If we allow that to happen, it will make America less competitive and doom us to smaller markets because we simply won't be able to move domestic product to major markets as competitively as foreign suppliers will."

"In the last 20 years we consumed the infrastructure windfall that Eisenhower created in the 1950s and '60s," said Steven Koch of Credit Suisse. "Not only do we need new infrastructure, but we need to recapitalize the existing infrastructure" if this nation is to remain competitive.

Funding new infrastructure and recapitalization is difficult, said Koch. For the past 30 to 40 years, infrastructure hasn't been a significant political issue. Today, incidents like the recent Minneapolis bridge collapse may temporarily draw the public's attention to our aging or inadequate infrastructure, but other political issues overshadow them. In addition, the public has a solid mistrust of politicians who come asking for infrastructure funding but who then divert the funds for other purposes.

In addition, the public has great difficulty visualizing the interrelated nature of facilities, said Kevin Klowden of the Milken Institute, especially the relation of infrastructure to their personal life. "They understand rush-hour traffic congestion, but not the impact Katrina had on the New Orleans area ports and movement of goods throughout the region and up and down the Mississippi that have a tangible impact on their personal economic well-being."

Better use of local public-private partnerships (PPPs) as delivery mechanisms can help, said Steve Allen of Macquarie Capital Group. "There are plenty of private investment funds available, and pension funds love infrastructure because it provides a stable return that meets or exceeds their target rates on contracts running 25 to 99 years." There are thousands of miles of roads that private capital does not care to invest in, he said, because the economic returns are lacking, but an economic return exists when PPPs can free up municipal funds for the construction and maintenance of those roads. PPPs can also be more efficient managers of roads for private equity worries. Roads are very expensive to build or rebuild, but maintenance is inexpensive. Private equity ensures appropriate construction and maintenance to minimize life cycle costs; municipalities that suffer from competing priorities and erratic funding over time would find these projects more difficult to complete.

"Look north to Canada and the Asia-Pacific Gateway and Corridor Initiative as an example of a successful PPP that emphasized local and national collaboration," said John Higginbotham of Transport Canada and an adviser to the initiative. By establishing a purpose-specific fund and signaling its commitment with $1 billion upfront funding, the Canadian government combined private and public resources to create the integrated system that now serves Canada and Midwest United States down to New Orleans. The initiative enabled selecting projects based on merit and innovation, with particular focus on security and environmental issues that sometimes proved challenging.

The panelists agreed that the United States must change its approach to planning, legislating and funding infrastructure projects if it is to achieve anything that approaches Canada's success and meet its pressing and readily observable future needs.

Moderator:
Glenn Yago, Director of Capital Studies, Milken Institute

While microfinance approaches historic highs, small and medium-size enterprises (SMEs) in emerging regions remain severely underserved by financial markets. A robust SME sector can contribute significantly to the growth and stabilization of a developing economy. In high-income countries, these enterprises typically account for two-thirds of employment and half of GDP, but in poor nations, the SME sector may contribute as little as 10 percent of GDP.

Invoking a classic irony of the developing world, Thomas Gibson of the Institute for SME Finance noted that "SMEs can address one problem of developing countries: that the local grocery shelves stock imported mango juice in a country that is covered with mango trees."

Anecdotally, he said, we know that a local entrepreneur can create a palm-processing plant and effectively capture the domestic cooking oil market in Sierra Leone with a simple import substitution business plan and $500,000 of his own money. But when thinking about how to grow SMEs, Gibson asked, "Why did he have to use his own money?" and concluded that "getting that half million would have been impossible through the financial sector."

Asymmetry plagues the market, added Pierre Jacquet of Agence Francaise de Developpement, noting that the economies of much of developing nations are informal. "How do we engage the informal sector into these formal activities?" he asked, especially when many entrepreneurs don't know how to put together a business plan, which alone makes it difficult for institutions to assess their credit risk.

From the perspective of the lenders, this introduces the paradox of access to finance, he said. "We have liquid financial markets, but there is no access for SMEs to that market."

This prompted John Wasielewski, a nine-year veteran of USAID, to quip that "none of us are taking enough risk when were making loans to the developing world. We need private banks in the room!"

Indeed, when it came to discussion about funding SMEs, the panelists agreed that most of the problems are on the supply side. Pressing this point further, Matt Gamser of the International Finance Corporation noted that "there are two different situations and two different problems." Problem No. 2 has to do with the capacity of the financial institutions. "The vast majority of these (SMEs) can take capital and use it productively," he said. "The bankers are the ones who don't get it. They don't know how to look at them (i.e., evaluate the risk-return profile of the SMEs)."

Problem No. 1, Gamser said, is that there are small firms that could grow rapidly, but they need more than what a banker is able to do. Also, these firms are small and dispersed. He maintained that "we can't find the financial institutions to support these businesses and help them move forward. We have a lot more to learn."

Krishnan Sharma of the U.N.'s Department of Economic and Social Affairs discussed the correlation between the movement of people and capital. As for innovative mechanisms for financing SMEs, he highlighted the idea of focusing on linkages of interest, for example, linkages between larger companies and SMEs. A large firm could help its domestic suppliers upgrade their skills and products. Other linkages of interest include tapping the network power of diasporas, which bring both financial and non-financial benefits. The power of diasporas has increased as a result of globalization, and remittances have been an important source of capital to the developing world. The non-financial contributions can be just as important — skills and knowledge transfer. "We're looking at underlying conditions that have allowed diasporas to succeed where others have failed," said Sharma, "home- and host-country conditions, the nature of the diaspora and their linkages." Although linkages are important, he added, linkage policies must be done in conjunction with other policies to improve funding to SMEs.

Finally, Sucharita Mukherjee of the IFMR Trust Guarantee Company described the situation in India. "What we have in India is a story of massive growth that hasn't touched rural India at all," she said. "There are two parallel economies operating. When we became independent in 1947, the idea was to focus on subsistence. What we are trying to do now is bring investment in rural areas and bring supply chain linkages."

Using an example from Andhra Pradesh, she described a dairy micro-loan program supporting women. After two to three lending cycles, people stopped taking loans. Why? The limit to growth was the inability to access larger markets, a lack of linkage to a larger market.

With time running low, moderator Glenn Yago of the Milken Institute turned to the audience for questions. Most focused on how private-sector investors can engage banks and other large funders on funding developing world SMEs. From the panel, the response came that venture capital firms need to ask their investors what kinds of returns they can tolerate and what kinds of returns they need. It is crucial to find people who are willing to invest not simply for returns, but for social returns.

Moderator:
Michael Milken, Chairman, Milken Institute; Chairman, FasterCures / The Center for Accelerating Medical Solutions

Tuesday's lunch panel featured a panel of Nobel laureates: Gary Becker, A. Michael Spence, Edmund Phelps and Myron Scholes. Moderator Michael Milken started the session by asking these distinguished economists to analyze the world economy, specifically focusing on whether there has been a "decoupling" between the United States and the rest of the world.

Overwhelmingly, the group believed that while the United States has a smaller numerical impact on the world's economy than in the past, interdependence has actually grown. "In the high-growth, developing countries, growth is export-led," observed Spence, "so they are not going to decouple at all."

Becker took this idea a step further and broke decoupling down into two parts: the effect of the United States on the rest of the world and the rest of the world's effect on the United States. He also believes that we are all still very much linked.

The panel was asked to react to a recent quote by fellow Nobel laureate Joseph Stiglitz: "This (current recession) is going to be one of the worst economic downturns since the Great Depression." To a one, the panelists disagreed, citing unemployment figures that are much lower than anything experienced during the Great Depression. "This barely qualifies as an official Bureau of Economic Research recession," said Phelps.

Scholes was a bit more cautious. "We will continue the feel the effects of this downturn on the housing market. It's going to take some time before this comes to an end," he predicted. "Housing prices might have to fall as much as 40 percent down from the peak to clear the markets."

Milken then introduced the concept of "If you knew the future, you'd be wrong," citing how countries with some of the greatest strife and turmoil in recent years have also given investors the greatest returns. In thinking about how that idea might come into play in the United States, especially as it relates to the current turmoil in our financial and housing markets, the panelists had mixed reactions.

"We have a very flexible economy," said Becker. "I think it will be hard to be pessimistic about our ability to absorb this shock."

Phelps's response focused on the issues in the domestic banking system: "I think the financial engineering methodology lulled the banking system into practices that were not suitable to the times that we live in," he said. "[There was] a tendency to read more into numbers than should have been and too many moral hazards [were] not recognized or guarded against in the financial sector."

In looking at the reasons behind the high prices of commodities, the panel focused on simple supply and demand. "[Past runs on commodities] were demand driven — as are the current pressures on oil and gas," remarked Becker. "But with food products, the issues are with supply."

The panel agreed that food prices have increased in part because farmers are growing corn for bio-fuel use, which has led to a chain reaction of supply issues with other products. But over time, through increased supply, productivity, and urbanization, food prices should come down. "Technology will help, but so will urbanization. The more people that move to the city, the more farm land can be consolidated and productivity can be improved," commented Spence.

Becker argued the reverse: "High food prices will slow down urbanization and increase pressure to raise productivity."

Since developing nations are placing a high priority on education, Milken asked the panel if we are on the verge of fundamental change in human capital. While they all agreed that many major developing and developed economies have placed a greater emphasis on education, none of the panelists believed that the United States is falling behind.

Becker asserted that the emphasis on education is now driven by the fact that the income disparity is growing between the educated and uneducated all over the world. Those comments were buttressed by Scholes, who also added that immigration is holding the United States back more than its education system: "Our immigration policy is just nonsense in terms of allowing us to be innovative and productive in the world."

On the question of infrastructure and its relationship to economic and societal development, all of the Nobel laureates agreed that a well-developed infrastructure is of utmost importance. They also agreed that public-private partnerships are the preferable approach, especially in developing nations where, in many cases, government funds are already stretched thin.

Finally, Milken asked each panelist what he thought the two top priorities should be for the incoming U.S. president. The responses were all over the map, ranging from reducing the deficit and regaining leadership in the world economy (Spence) to reforming health care and immigration policy (Becker) to shoring up foreign policy and improving education (Scholes).

But Phelps presented a list that seemed to echo some of the larger themes discussed throughout the session: "The next president needs to start thinking about the problem of inclusion in the American economy [by more citizens] and also about how to protect this country's economic dynamism — and that starts with fixing the financial sector."

Moderator:
Martin Guyot, Senior Portfolio Manager, Stark Investments

This panel discussed the shifting framework of the investment world, analyzing whether strategies that worked in the past can be relevant in the relatively uncharted territory that characterizes today's markets.

Moderator Martin Guyot of Stark Investments started off the session by referring to the "new norm," and questioning whether recent market volatility has presented the opportunity to buy the debt of good companies and restructure it using tools and techniques that promote sustainability. He further noted that non-traditional private equity was being encouraged in the market.

"Some risks you take unfortunately bite you," cautioned Leon Black of Apollo Advisors, who spoke about how investment corporations have to manage changing trends and find the right pool of people with the insight to select investments at the right moment, recognizing and grabbing opportunities as they are presented. To capitalize during the credit crunch, Apollo has been buying bank debt and looking for opportunities with distressed firms ("good companies with bad balance sheets").

Raising the issue of credit and raising capital in the current environment, Todd Boehly of Guggenheim Partners spoke about stress-based funds and how current liquidity demands are hindering the profits and management of finance. He described the strategies Guggenheim has adopted to navigate the recent turbulence, touching on the firm's focus on energy (specifically oil and gas), regular hedging, refinancing and structured finance.

Claude Lamoureux drew on his years of experience at the Ontario Teachers' Pension Plan to observe that pension plans have not taken a serious hit from the recent financial crisis, since they are largely geared for the long haul. He noted that portfolio managers with pension funds must make asset-allocation decisions based on current liabilities and the decreasing probability of future contributions. "Asset allocation is much more driven by that rather than the efficient frontier that consultants try to sell you," he said. Lamoureaux also observed that after a freewheeling period of loose credit, some normalcy is returning. "Now there is more sanity in the system."

Jonathan Steinberg of WisdomTree Investments discussed the critical role of commodities for today's investors. He also noted the explosive growth in ETFs, including new innovations like inverse ETFs and actively managed ETFs.

The last few quarters have been a tough battle, according to John Stevens of General Motors Asset Management, but one that could be won with a diversified portfolio and adequate risk management. He noted that hedge funds that are well-structured and well-managed have been delivering promising returns. Even though hedge funds have been increasingly getting into the private-equity business, Stevens does not believe this is a trend that will stick.

The panel discussed the scope of the recent financial crisis, but noted that volatility does not have be a disadvantage for investors who are prepared. Careful asset management and and hedging can manage volatility. Managers have to deliver their side-pocket investments at this time to make up for the losses or deliver better returns. Buying credit is a new and profitable strategy that was noted by all the panelists. "In this market, effort, energy and capital are the drivers of stability, sustainability and profits," concluded John Stevens.

Moderator:
Shelly Singhal, CEO and Chief Investment Officer, Crestwood Pacific Group

Foreign investors looking for opportunities in China must navigate a complicated process. Jim Lavelle of Houlihan Lokey set the tone and defined the theme of the discussion by noting that when thinking about investing in China, investors need to pay particular attention to their exit strategy. Consideration should be given to the "how," as in through a merger or acquisition, an IPO or some other means.

Additionally, Lavelle described the changing nature of the Chinese economy and the transformation from "catch-up" development to the growth of highly innovative, R&D-intensive firms producing high-quality products and services that will be sold all over the world. What can we expect from China? "Don't be surprised when firms headquartered in China look to expand their operations globally, including making acquisition of U.S. firms and firms in other highly developed markets."

Panelist Charles Liu of Hao Capital discussed his experience doing business deals in China since 1975. First he noted that China's growth is phenomenal, but he warned Western investors that "you have to realize this is the first generation of entrepreneurs in China." Chinese businessmen and -women who grew small businesses into larger, more successful firms leveraged their personal, family and political capital to do so. Because of these ties and the dependence upon social capital, "if you try to buy out a firm like this, you may not be able to replicate the business success that the entrepreneur created."

Another challenge for Westerners interested in investing in, growing and scaling small Chinese enterprises is overcoming the social trust hurdle, said Liu. "It is very difficult for Chinese businesses to accept guidance or support from foreign investors," and in general, local venture capitalists do better in growing the Chinese SMEs.

In response to a question about the difficulty of contract enforcement, panelist Gary Locke of Davis Wright Tremaine LLP and a former governor of Washington State, said that that Western investors should be aware that Chinese corporate accounting practices are not necessarily aligned with international standards. Moreover, court systems are developing, but they're not yet mature — and in many instances are still corruptible. Additionally, the "last thing that Chinese leaders want is disruption of the people's "inner peace" — any kind of social disruption is bad. Therefore, Chinese leaders will avoid making policy changes that are likely to cause severe economic disruption leading to significant job loss, violence or protests.

According to David Tang of the Federal Reserve Bank of San Francisco and Kirkpatrick & Lockhart Preston Gates Ellis LLP, dispute resolution in China is to be avoided at all costs by Western investors, in particular because the government ownership of firms creates perverse incentives for party leaders.

Liu's multilevel friendships with the firms he partners with and invests with reduce his risk and uncertainty. Because firm governance is not particularly transparent and does not rely on the rule of law, investors must rely on social mechanisms to attain information parity about what is happening within the organization. This is the advantage of having a local partner.

Each panelist was asked how to advise Westerners interested in investing in Chinese SMEs. Lavelle said investors must do local due diligence, while Liu added that decision-makers must understand the whole investment picture from a strategic perspective. "Ditto, ditto," said Locke, "and I'd add that you have to be patient. Things are constantly changing in China." From Tang came this advice: "Adjust your timeframe for dealing with officials, business leaders, lenders and other market intermediaries."

Moderator:
A. Michael Spence, Nobel Laureate, 2001; Philip H. Knight Professor, Emeritus, and former Dean of the Graduate School of Business, Stanford University

Moderator and Nobel laureate A. Michael Spence launched the discussion with an overview of macroeconomic theory pertinent to successful and sustained growth in the developing world. As system interdependence has become larger than the capacity to coordinate policy responses to the challenges faced in the developing world, inbound knowledge transfer and global demand have become the driving forces behind sustained high growth in the economic development of any nation.

Panelist Ricardo Hausmann of Harvard's Kennedy School of Government opened his presentation with a startling fact: 58 percent of developing nations surveyed experienced a peak in per capita income before the year 2000. A humorous and effective use of monkeys and trees aided Hausmann as he explained why so many nations are worse off now than they were 30 years ago. With trees representing products and monkeys serving as proxy for firms, he illustrated that the trees of industrialized nations are bunched closely together, making it easier for the monkeys to move from tree to tree. In the weakest of economies, the isolation of trees makes the movement of monkeys much more difficult. Using his research to illustrate that "it matters what you make," Hausmann explained the positive correlation between the increasing sophistication of the export package and the increasing speed of future growth.

Maria Eitel of the Nike Foundation turned the attention from the trees to programmatic investment in adolescent girls as one of the most effective ways to fight poverty. As the Nike Corporation has played a pivotal role in the growth of the manufacturing sector in several developing nations, the Nike Foundation has recently turned its efforts to reinvesting in the communities in which it operates. A decision to focus on well-being of adolescent girls stemmed from the economic rationale that this population segment provides the "most inclusive, long-term, high-return investment in fighting poverty," creating a wide ripple effect.

Myron Scholes of Platinum Grove Asset Management, also a Nobel laureate, returned the conversation to growth at the national level with a presentation that focused on the other side of investment and growth: risk management. The ability to plan for the absorption of risk and "understanding susceptibility to shocks" are critical components to successful economic development. Explaining that "correct capital structure for financing is crucial" and capital allocation is "one of the most important decisions you can make," Scholes stated that many developing nations are not and cannot be diversified. Closing his presentation was an explanation of the three tools of successful risk mitigation: diversification, reserves and insurance. Although these strategies are expensive and present opportunity costs of their own, he maintained that they are essential, because "when shocks occur, decision time stops." In order for an economy to survive, there has to be a ready path for reinvestment and redirection of activities to occur.

Moderator:
Betsy Zeidman, Research Fellow and Director of the Center for Emerging Domestic Markets, Milken Institute

This panel started off with an unusual definition of investor activism by the moderator, Betsy Zeidman of the Milken Institute, which included not only involvement in the investee company's business (the usual definition) but also environmentally and socially conscious approaches to investing. Panelists differed widely in their understanding of investor activism and their willingness to accommodate multiple investment objectives.

Christopher Ailman of the California State Teachers' Retirement System (CalSTRS) started off by emphasizing that his singular focus was on getting returns: "Other, ancillary things are just ancillary." Ailman recalled Milton Friedman's famous words — the business of business is business, and anything else is a violation of fiduciary standards. Boards should act in the sole benefit of plan participants. As public pension plan trustees come from diverse organizations, when they enter the boardroom, they need to leave their other hats off. Ailman did acknowledge that his organization just adopted, after a long internal debate, an environmental-social-geographic (ESG) policy. He stressed that they are viewing most screens as tools for either reducing risk or increasing value. Moreover, he referred to research indicating that alpha can be generated via ESG investing, and seemed to lament that Wall Street, in the grip of short-termism, was showing little concern for ESG. He noted that Europe was more sensitive in these matters, and argued that ESG is an approach to evaluating the management of a company.

Regarding the effectiveness of screens, Ailman commented that no screen will catch fraud: "If you can't get inside the boardroom, you cannot understand what's going on." In terms of executive pay, he argued that boards typically bow to compensation consultants or fear confronting the CEO. He recounted a brief story on how CalSTRS, as a large shareholder, intervened in the issue of executive pay at Morgan Stanley and ensured at least better disclosure of pay arrangements when the firm was in CEO transition. Ailman emphasized that CalSTRS challenges not the level of compensation but the alignment of pay with shareholder interests.

James Katzman of Goldman Sachs concentrated on shareholders. He elaborated on the different time horizons of different investors and the implications this creates for asset managers. He noted that it might be hard to balance sometimes competing interests of short-term and long-term shareholders. In reaction to some of the comments from other panelists, Katzman remarked: "It's a little shortsighted to say that Wall Street is ignoring these things." He added that sometimes research can find that higher returns might be associated with social or environmental screens, but this does not necessarily mean causation — it might be just simple correlation. Katzman also noted that it's not yet clear what metrics should be used in assessing activist investing. In the realm of corporate governance, he emphasized that the real question is how to get corporate performance targets to happen. He mentioned that, for instance, he was not aware of any research concluding that a dual CEO-chairman role is worse for shareholders.

Robin Wiessmann, Pennsylvania's state treasurer, seemed to hold a position similar to Ailman with more sympathy toward ESG principles and Wall Street. She did note that one should never be expected to give up yield for other considerations, but announced that Pennsylvania has adopted investment principles that deliberately embrace non-financial criteria: "You need to recognize what's wrong with a business you′re investing in." She acknowledged that the nature of fiduciary responsibility on the part of plan managers assumes different statutory definitions depending on the state. In her current state, the definition includes the "prudent person standard." But she also recognized that one cannot legislate every detail and things need to be principles-based. As for the stance of markets on ESG investing, she expressed confidence that Wall Street would sort things out.

In terms of the practicalities of ESG-conscious investing, Wiessmann noted the emergence of a cottage industry taking care of the screening business for institutional investors. This is bound to happen as public pension plans typically don't have the resources to screen in house. She argued that the concepts of transparency and governance, perhaps better packaged together as "accountability," make a big difference, and lauded Sarbanes-Oxley for driving that process. However, she also said that a lot of investors felt cheated by what happened in markets recently.

Coming from the non-profit world with no shareholders hungry for high financial return, Christa Velasquez of the Annie E. Casey Foundation presented the most positive view of socially or environmentally conscious investing. Her foundation, which by law and regulation is not prohibited from ESG investing, has set aside $100 million for such purposes. She noted that the mission of the portfolio is the key, in line with Casey's being a mission-driven organization. Velasquez lamented that less than 0.1% of foundations report making socially responsible investments. She also drew attention to possible lack of patience on the part of donors regarding investment returns. For instance, some donors might express dissatisfaction with short-term results of a foundation-financed project to enhance job creation.

An intriguing comment/question from the audience was well positioned for concluding the session. The participant, who happened to be the chairman of a state's pension plan, brought to the panel's attention a CalPERS study finding that divesting South African investments for ESG concerns had cost the organization in the order of billion dollars. He went on to argue that divesting from Petrochina helps people in Sudan but not the beneficiaries of the pension plan. Ailman's response was brief yet to the point: "Divestment is just a sell decision; it does not change anything in the company."

Moderator:
Paul Calello, CEO, Investment Bank, Credit Suisse

Ever since the onset of the mortgage meltdown last summer, dramatic developments have dominated the headlines. Everyone is watching closely to see how Wall Street fares, and how its performance will affect the global economy. The recent market dislocation has resonated through every corner of the Street, from full-service institutional bastions to niche players focused on specific services or sectors.

But it isn't all bad news: Innovation often emerges from market turbulence. This panel featured speakers from the leading edge of the finance industry, who shared their viewpoints on how such large losses blindsided Wall Street and how to convert chaos into investment opportunity and competitive advantage.

Moderator Paul Calello of Credit Suisse opened the session by noting that uncertainty in the market has affected everyone in the financial services industry. "Hardly a week goes by that you don't read of more staggering losses by the universal banks," he observed. "But in these markets, the brightest of the bright have found new opportunities."

He threw the discussion to Kenneth Griffin of Citadel Investment Group, asking whether the financial community should have been able to foresee the current turbulence. "It's very obvious that a number of firms were not dotting the i's and crossing the t's when it comes to risk management," Griffin replied. "We have had a very mild economic downturn in this country but near-catastrophic losses within a number of our largest banks and investment banks. Could we have foreseen? Not necessarily. Should we have been better prepared? Absolutely."

Kenneth Moelis of Moelis & Company recalled that for much of his career, personal relationships were key. "I do think that what Wall Street forgot in a very deep sense is that behind a lot of these transactions were people. There were relationships, and there were decisions made around furthering a relationship, depending on people to do the right thing. I think when you look back at a lot of the mistakes here, you see the reliance on piles of paper and statistical arbitrages in the market that ultimately didn't pan out . . . In the old world of these investment banks, the life cycle of a relationship was years, decades, lifetimes. And we're on one-year bonus cycles now."

Calello turned to Charles Ward of Lazard for his views on new financial regulation that might be crafted to deal with the aftermath. "I do think you're going to see changes in the regulatory regime," he predicted. "When something like this happens, the American people are not going to stand still for business as usual. I think it's up to the investment community to be actively involved in trying to shape the regulation to be sensible, but it's going to change . . . it's going to be a political fact of life and we'd better get used to it."

Addressing "the elephant in the room" fell to Peter Weinberg of Perella Weinberg Partners. "Regulation will evolve . . . but the financial markets need to figure out a way to keep the fluidity of capital around the world very liquid. We desperately need sovereign capital to come in to bolster the financial system. We cannot tolerate the protectionist kind of instincts that are, in my view, wrong."

Charles Ward agreed that sovereign wealth funds have been instrumental, but he did not feel they will be the answer moving forward. "They have a part to play, but it's largely been played. From here on, the capital's basically going to have to come from the market. We need to see attractive prices to tempt the market. It's going to come from private equity. It's going to come from a lot of sources that are going to be looking for very good bargains — and I suspect that they'll get them."

Bennett Goodman of GSO Capital Partners agreed that "the banks were very fortunate they had access to these sovereign wealth funds who were willing to write big checks in a very quick period of time. But I think these investors are upset that they're out of the money on a lot of these investments."

Looking ahead to the next year, Goodman predicted, "I think other private equity firms are going to go public. I think other hedge funds will go public. It might take another 12 months before we see that happen. But there are a lot of advantages for firms that are able to access permanent capital. There's a lot to be said for having the currency to grow a firm and retain talent."

"The asset management businesses have really been the shining star of the last 12 months," observed Griffin. "They've been rock-solid. Investors are going to be very attracted to that quality looking forward." One of the factors underlying that quality, Griffin insisted, is a fundamentally new approach. "A handful of firms are truly interested in being partners, and they know how to leverage partnerships wisely and create a lot of value for everyone at the table."

Bigger isn't always better, Moelis agreed. "Go back 10 years, and you had real investment banks out there. But everybody followed into a financial conglomerate model, and I think you're seeing the outcome. The result is, the larger the institution, the worse the disaster on the balance sheet. There is no place for a conglomerate in a world of expertise. I'm sure Tiffany's runs a great business and Wal-Mart runs a great business, but they probably shouldn't merge."

When asked about international prospects for M&A deals, Ward noted the huge contrast between the prevailing mood on Wall Street and the outlook around the world. Even though volume will be down, he predicted more M&A activity by U.S. corporations now that prices are reasonable, including restructuring deals in financial services.

Griffin felt it was important to understand the root of the current crisis in order to move forward. "With little exception, our largest banks and investment banks — they blew it. We've lost a substantial amount of respect because of our failure to engage in basic risk management." Why did the system break down? "Walk across any of the trading floors. They're full of 29-year-old kids. The capital markets of America are controlled by a bunch of right-out-of-business school young guys who really haven't seen very much. They don't understand what tough times can look like."

That inexperience was a toxic cocktail when combined with the tremendous pressure to accumulate assets during the recent global run-up, according to Griffin, leading to uncontrolled growth. "You had institutions under leadership that only understood a small part of the business, financial conglomerates that really only have true capability in one or two fields, yet deploying tens of billions in esoteric products that the people at the top truly did not understand. It was a recipe for disaster, and we had a disaster. I think what we'll see over the next two to four years are the large universal and investment banks rethinking their business models."

When will we start to see a recovery? Weinberg predicted that we're in for a few sucker rallies in the equity markets, but he envisioned the crisis working itself out toward the end of the year. According to Moelis, "I don't think we'll have a deep Main Street recession. But it'll be years before Wall Street puts on the party hats and starts dancing again."

Ward also saw a mild recession looming. "But on Wall Street, it's going to go on for a while. In the meantime, there's going to be a lot of opportunity for firms and investors to make money in this environment. It sounds like doom and gloom, but a lot of people will find a way to make money."

Moderator:
Marc Gunther, Senior Writer, Fortune

If Frito-Lay and Wal-Mart have found ways to make it profitable, then it's probably a good idea. Sustainable business practices are not just about saving the planet; firms from every sector of the economy are now interested in sustainability. Green practices can save money and make money — that was the conclusive of a very interactive and congenial panel discussion frequently punctuated by laughter from both the audience and the panelists.

Moderator Marc Gunther of Fortune asked the panelists just how sustainable the U.S. economy is. None of them rated it very highly, but they were more optimistic when prompted about the potential for progress. As David Haft of Frito-Lay put it, the current macroeconomic forces in our country will bring about change. With diesel costing $5 a gallon, businesses will have to adapt or fail. Regardless of how it comes about, the end result will still be a more sustainable economy. Large firms have a lot to lose if they do not adapt, and numerous smaller firms are poised to seize the opportunity to benefit from those who fail.

Haft commented that Frito-Lay wants to be recognized as a leader in sustainable business practices. The company set very specific and demanding goals in 2000: reduce water use by 50 percent; reduce natural gas use by 30 percent; and reduce electrical use by 25 percent. Not only have they almost exceeded these goals, but now they intend to get all 35 plants of their U.S. plants off the grid by using net-zero technologies. A net-zero plant would be completely self-contained by recycling water, collecting solar energy and using waste to create bio-mass energy. All of these goals are based on production efficiency, but as Gunther noted, "Polar bears don't care about efficiency. They care about reductions in absolute levels."

Eli Halliwell of Jurlique expanded on this point, noting that his firm produces beauty products designed to incorporate "low-tech" sustainability. He has tapped into the idea that "healthy is beautiful." Halliwell uses natural products as a strategy to compete with other major firms in his industry, in what he calls a war of "bio versus chemo." The essentially unregulated beauty product industry relies on chemicals, but Halliwell points out that many of these chemicals are harmful.

Deborah La Franchi of Strategic Development Solutions invests in green development, using a screen she calls the "triple bottom line." An investment must produce financial returns, have a positive social impact and be environmentally sustainable. Contrary to conventional wisdom, there are plenty of opportunities to simultaneously accomplish all three things. She talked about how green buildings are not only less wasteful but actually cheaper to operate than traditional structures. When Gunther asked if the market was willing to pay more up front for green buildings, she responded by saying that they often cost the same or less than other developments. The notion that green structures cost more to build was based on early attempts to adopt new technology, when developers were using unfamiliar materials and practices. Now that builders have learned how to do it, there are no higher costs associated with green buildings.

Rand Waddoups of Wal-Mart acknowledged frankly that Wal-Mart is far from being a sustainable firm, but he expressed excitement about the opportunities for improvement. For example, he shared that Wal-Mart had changed its line item for waste management from a cost into a credit in less than two years simply by recycling. Wal-Mart now produces its own plastic goods, like clothes hangars, by recycling plastic that it used to have to pay to dispose of. In another example, Wal-Mart now shreds its used tires and sells them as mulch — at a profit. Disposing of the tires had previously generated a waste-management cost to the firm. Now customers pay to buy Wal-Mart's trash when they see the "green" labels. There is also a perception of quality attached to green products, he noted, and many consumers are willing to pay more for them. Wal-Mart is attempting to make environmentalism more accessible to its customers, in what Waddoups characterized as the "democratization of sustainability."

Kevin Wall of Live Earth was inspired by Al Gore's An Inconvenient Truth to pull out all the stops to raise awareness of climate change. Last summer his organization brought together 150 musicians on every continent for 24 solid hours of edutainment, meant to evangelize environmentalism. Sixty short educational films and celebrity public service announcements incorporated into the event. Wall noted that several environmental organizations associated with the event criticized its large carbon footprint, but he responded by saying that right now we need to promote awareness and create a rallying cry for change. Wall underwrote Live Earth himself, based on his experience working with Bono for Live AID in 1985. He is currently planning Live Earth Campus for fall 2008.

Moderator:
Jonathan Fried, Executive Director, Canada, Ireland and the Caribbean, International Monetary Fund

Since World War II, the United States has been a champion of free and open trade. The North American Free Trade Agreement (NAFTA) was negotiated under two U.S. presidents, representing both parties, and it enjoyed the support of all living former presidents when it passed. Yet in the Democratic primary campaign, both candidates are battling over who will be tougher in renegotiating NAFTA labor and environmental standards. The agreement was heralded as a way to more closely integrate the Canadian, U.S. and Mexican economies. By lowering quotas and tariffs on a wide variety of goods, it aimed to expand cross-border trade and investment. Canadian and Mexican officials both feel the agreement has been successful and are dismayed by calls to reopen discussions. From the U.S. perspective, what is the hard evidence regarding NAFTA's overall impact on the economy? Have job losses been heavily concentrated in just a few regions and industries, while the gains are more dispersed? What points might Canada and Mexico want to discuss if NAFTA is reopened? This panel of experts offered a frank evalution of how NAFTA has transformed the economy.

Moderator:
Martha Amram, CEO, GreenNow USA; Senior Fellow, Milken Institute

Funding for biomedical research and development has fallen off in recent years. Large pharmaceutical companies have watched their stock values drop and their business models crumble, and they're shying away from risky early-stage drug discovery and development. Research and development output, as measured by FDA applications for approval to initiate clinical trials and market new drugs, has plummeted. The shortage of investment capital remains acute; it's being felt from drug and device discovery all the way through clinical trials. Can financial technology help? How can we bridge the gap in medical innovation funding? Which partnerships can be crafted quickly to weave together incentives, ideas and financing to drive the next generation of health-care breakthroughs?

Moderator:
Laurance Allen, Editor and Publisher, ValueNewsNetwork.com

International investors and development agencies alike have recently taken notice of Africa's unprecedented economic growth. With democracy taking root in many countries, some observers believe that the continent has turned the corner. Bankers from New York to London to Nairobi have launched new funds that invest in sub-Saharan Africa. This panel, moderated by Laurance Allen of ValueNewsNetwork.com, sought to analyze the risks and rewards from both the African and foreign investor perspective.

Blen Mekuria of Blenum Global Ventures cited the rise of Africa as a hotspot for foreign direct investment. She referred to China and India's increasingly important role in phasing out Africa's dependence on the West, along with high returns in the service sector as a result of a rising middle class. "Africa is the best source of aid to Africa," said Mekuria, referring to the high remittance rate to Africa from Africans living abroad. She also noted the intellectual capital being brought back to Africa by Africans who complete higher degrees of education in the United States and then return home.

Jonathan Stichbury of AIG Investments, Nairobi, cited some of the common perceptions of Africa: war, famine, disease, high HIV/AIDS prevalence and a low GDP. While acknowledging the seriousness of these problems, he contrasted that with other lesser-known realities of Africa, including the rise of democratically elected leaders; great strides made in AIDS reduction in Kenya, Uganda and Zambia; African growth exceeding the global average; an increase in liquidity; and fifteen functioning stock markets. "Africa is not without its challenges, but it is coming at a very low base," said Stichbury, highlighting the opportunities for investors. "Don't be distracted by the noise. There are a lot of good things going on."

"Today, Africa has clear frontier status," said Thomas Gibian of Emerging Capital Partners. Africa, which was once seen as exotic and forbidden, now presents a great opportunity for investors. "Africa has seen the demise of socialism. The Cold War is over. Capitalism and market-driven economies have won by a landslide." He added that there is a rising desire for foreign direct investment and an increase in the private sector. He cited the need for greater transparency in African countries and pointed to private-sector investment as a potential catalyst for better governance, decreased corruption and better political processes.

That view was disputed by economist George Ayittey of American University: "Those changes are baby steps." He affirmed that foreign investors are welcome in Nigeria, for example, but asked, "If Nigerians aren't investing in Nigeria, why should foreigners?" He said that most of the remittances are going to consumption and that every educated person who wants to make money goes to the government. "The informal and rural sector is neglected by the elite, which is why Africa can't feed itself." Ayittey discussed the importance of empowering farmers by finding markets for them. "It's like taking Africa back one village at a time."

Sivendran Vettivetpillai of Aureos Advisers said that as a fund manager, Africa is the strongest foothold for his business. He has seen an increase of inflow back into Africa and positive changes in infrastructure. He recommended growing small and medium-sized enterprises quickly in order to turn the greatest profit.

When asked about the drivers for growth, Mekuria noted that "the key is improved access to credit." She noted that Chinese companies undercut local companies for contracting bids, but in doing so they increase competition and quality while driving down prices. Gibian agreed, saying that Chinese investment is good for growing markets in Africa because "no market functions without participants." Ayittey disagreed, citing the lack of incentives for African political leaders to practice good governance when Chinese investments are not tied to reforms, as are IMF and World Bank investments.

Mekuria ended the discussion by saying, "The informal sector is vibrant, entrepreneurial and wants to work. A little help and a little credit will get them moving."

Moderator:
Maria Bartiromo, Anchor, CNBC's "Closing Bell with Maria Bartiromo"; Host and Managing Editor, "Wall Street Journal Report with Maria Bartiromo"

"Are we in a recession? Or is the worst over?" challenged Maria Bartiromo of CNBC during a session focused on global markets.

For the next hour and a half, Todd Boehly of Guggenheim Partners, Kirk Hartman of Wells Capital Management, Pascal Poupelle of Calyon and Komal Sri-Kumar of TCW Group debated questions such as these, agreeing that the worst is indeed over but predicting that we could very well be headed for a recession as the slowdown in the U.S. economy affects the rest of the world and the credit crunch plays out.

Boehly, who invests in credit and fixed income, stated his belief that the technicals have cleared and the Fed's efforts to infuse capital into the market are paying off. "Credit," he said, "is about avoiding losses."

The bottom is near, agreed Sri-Komar. He described three signals that will indicate a turnaround is coming, predicting: 1) the ten-year Treasury hitting 4 percent; 2) credit spreads will narrow, easing tension so banks will start to lend to each other; and 3) better management of the dollar. However, Poupelle warned that it is difficult to call a bottom, especially with the banking industry still in turmoil.

On the impact of the U.S. slowdown on the rest of the world, Boehly pointed out the inefficiencies in European markets, where the bid-ask spreads are extremely wide. Sri-Kumar added China and India to the list of nations feeling the ripple effects and experiencing a significant cutback in growth. Hartman indicated that we should be prepared for lower returns, around 10 percent, in a deleveraging environment. Citing Japan as an example, he pointed out that there are still opportunities in small-cap companies.

When asked to comment on the consequences of a tight credit market, Boehly admitted that there is sluggish investment activity due to the slowdown in financing. Poupelle stressed the importance of disclosure. He admired the actions of UBS, which was one of the first banks to admit to shareholders and the public that there was a "lack of reaction to a changing market" at the firm, triggering excesses.

Changing the course of the discussion, Bartiromo asked the group if there was a bubble in commodity prices. Hartman acknowledged sharply rising demand from developing economies such as China and India, but he nevertheless anticipates a price drop. On oil prices, Hartman expects volatility to continue, commenting from a social standpoint how politics and protectionism — viewing energy as security, fear of sovereign wealth funds — have hurt the economy as a whole. Bartiromo agreed: "No one is talking about war in Dubai," she said. "They are talking about economic expansion." Boehly contended that as oil prices rise and reserves shrink, more companies will find it cheaper to do M&A deals than to find new reserves. Sri-Kumar recommended increasing exposure to energy commodities and staying away from risky assets such as real estate.

Turning the conversation to favorable sectors in the current financial environment, Boehly said he preferred bank debt, where he expects returns in the mid-teens with modest risk; he also sees opportunities in education, health care and consumer staples. Health care and information technology were Sri-Kumar's picks, given his expectation that the trend will shift from commodities to knowledge firms. Poupelle believes that the financial sector is best to invest between now and end of the year. Hartman's pick was also education, with the panelists agreeing that the best thing the United States can offer is education, especially as other countries are inviting Americans in to understand how to think about the world from our perspective.

The session wrapped up with some real-world investment advice. Hartman warned the audience to stay away from long-term bonds. Sri-Kumar did not favor emerging markets for the next several months, as he views commodities and energy to be overvalued and predicts that interest rates will rise again in early 2009. But perhaps the key piece of wisdom came from Boehly: "There are none so blind as those who will not see. There are lessons from the past."

Moderator:
Glenn Yago, Director of Capital Studies, Milken Institute

Catastrophe bonds first appeared on the radar screens in the early 1990s, after Hurricane Andrew left insurers footing a bill for more than $23 billion in damages. A number of insurers went bankrupt, and alarms sounded across the industry worldwide. The accelerating pace of climate change may trigger weather systems that strike more frequently and with greater intensity, and explosive population growth in coastal areas spells greater exposure to natural disaster. The current market volume of catastrophe bonds exceeds $15 billion, but more issuance is needed to protect individuals, communities and companies from disaster.

Moderator Glenn Yago of the Milken Institute invited the panel to demystify the structure and workings of catastrophe bonds. Beat Holliger of Munich American Capital Markets explained that the basic catastrophe bond structure is borrowed from the asset-based securities world. Risk is packaged into securities that are sold to investors at the beginning of the risk period, which effectively forms a kind of collateralized protection. Before rating agencies will rate the securities, the risk involved must be modeled by a third party, and Holliger mentioned some names active in the risk-modeling business. Depending on the structure of the particular bond, trigger for payment can be proof of loss or only the event. Availability of funds can also vary from immediate to a few years down the road.

Dan Ozizmir of Swiss Re Financial Products gave further details on the structure, such as setting up a special-purpose vehicle such as GlobeCat Ltd., whose notes are sold to investors. He also elaborated on the role charities can play in risk diversification. While charities can keep a pool of funds available to be spent in case of a catastrophe, they can alternatively provide much smaller funds to finance interest payments on catastrophe bonds — in a spirit similar to paying premiums to cover potential losses.

José Siberón of Merrill Lynch noted that many different types of risks are being securitized, including mortality, longevity (pensions), morbidity, automobile, hurricane, earthquake, flood, fire and terrorism. He drew attention to the fact that market capitalizations of insurance and reinsurance companies are small compared with the amount of risk underwritten, which implies that risks must be diversified by securitization. Siberón added that some man-made risks are very hard to model, such as that of terrorism, which renders securitization more difficult. Derivative instruments linked to insurance-linked securities are yet absent in the markets, and if available, would entice additional investors to participate in secondary markets in catastrophe bonds.

John Brynjolfsson of PIMCO noted that there basically are two ways of managing risk for insurers: re-insurance or diversification. In turn, diversification can be done on a geographic basis or by integrating insurance with the capital market in the form of securitization. Geography is an important factor: California and the Gulf make up 50 percent of insured risk in the world. While the total size of capital markets globally is $100 trillion, the insurance-linked part is accounts for only $4 trillion, including all securities issued by insurance and reinsurance entities. Brynjolfsson remarked that insurance risk is a useful element for the asset manager at the other end of the table since it helps diversify portfolio risk. "Financial crises do not create earthquakes." According to PIMCO research, natural catastrophes have no statistically significant effect on financial markets, either. In fact, since destroyed tangible assets must usually be replaced, catastrophes eventually contribute to GDP growth.

Another discussion topic motivated by Yago focused on key issues in catastrophe-insurance and catastrophe-bond markets. Jeffrey Cooper of Allstate drew attention to the high concentration of risk and losses in limited geographic areas. The western and central United States contains earthquake epicenters. Hurricanes concentrate in Gulf and Atlantic states. Making things worse, people migrate to high-risk areas: Florida's population grew by 75 percent from 1980 to 2003, for instance. Cooper also noted relatively high concentration in the insurance industry, especially in homeowners insurance, where the leading company controls 22 percent of the market and the top five companies combined have 49 percent market share. In re-insurance, the usual route of risk diversification, $150 billion contract limits have already been purchased, and that market is also concentrated. This long chain of concentrations obviously implies tremendous demand and opportunities for catastrophe bonds.

Ozizmir provided some figures casting useful light on the extent of risk securitization. Throughout the last decade, such securitizations totaled $47 billion, with $15.4 billion of the risk currently outstanding. Hedge funds dedicated to insurance-linked securities comprise the key client group with 44 percent share of outstanding bonds. Core money managers account for the second-largest tranche at 22 percent, followed by multi-strategy hedge funds at 14 percent.

After displaying a sobering chart on global warming, Brynjolfsson remarked: "We are not concerned about the routine hurricane; we're concerned about a one-in-a-hundred-years hurricane." Demand for catastrophe bonds is driven by such events. Sometimes hurricanes hit areas with uninsured properties such as large swaths of Latin America. While such events do not necessarily create distress for insurers, they certainly are humanitarian disasters.

Moderator Yago concluded the discussion by naming some of the ways the catastrophe bonds market can further develop and help the insurance industry diversify its risks. These included legitimizing catastrophe bonds as an asset class, increasing the liquidity and transparency in the secondary market, securing more participation from rating agencies, standardizing transactions and establishing shelf programs.

Moderator:
Rod Davidson, Global Head of Fixed Income, Scottish Widows Investment Partnership

Moderator Ron Davidson of the Scottish Widows Investment Partnership walked the panelists and the audience through a discussion about the prospects for the U.S. dollar in the current global economic environment. The three economists on the panel were broadly bearish on the dollar, while Jens Nordvig-Rasmussen, representing the banking sector, expected range trading over the near term.

Davidson asked each panelist for an opinion about the sources of current dollar weakness against major currencies such as the euro, yen and British sterling. Nordvig-Rasmussen highlighted the fast pace of dollar depreciation in recent months, attributing the rapid decline to dramatic easing by the Fed while the European Central Bank and Bank of Japan held rates constant.

Bluford Putnam of EQA Partners agreed that interest rates were key in the recent dollar decline. He noted that central banks have to choose between managing inflation, managing the currency and protecting the banking system, and that the Fed has been focused — rightly — on banks at the expense of the currency. Barry Eichengreen of the University of California, Berkeley, was more concise and attributed the recent decline simply to recession and the credit crisis.

Conversation turned to expectations for the dollar and the importance of incorporating capital flows into those forecasts. Putnam argued initially that capital flows were important considerations, but only in so much as they are indicators of underlying fundamentals. Specifically, he said, flows occur because of "large relative differences in growth rates or large relative differences in interest rates," and that he preferred to drill down to look at those metrics rather than assess the flows themselves.

Nordvig-Rasmussen noted that foreign purchases of U.S. bonds had dropped during the past 12 months and, and attributed recent dollar weakness to this trend. Putnam, however, pointed out that this outflow was offset in part by sovereign wealth fund purchases of U.S. bank equity. He argued that the dollar depreciation would have been "catastrophic" if the falling demand for bonds had been its only driver. He then reiterated his belief that capital flows are difficult to use as a forecasting tool because of the challenge of measuring the entire picture of movements.

The final topic covered was the accumulation of foreign exchange reserves by foreign central banks. Panelists were asked whether they anticipated institutions like the Bank of China slowing their purchases of U.S. government bonds and what consequence these changes might have for dollar strength.

Reserve accumulation is not necessarily a "zero-sum game," as has been the case in recent years, said Eichengreen. Historically, the number of currencies used for official reserve accumulation was equal to the number of liquid financial centers. As other countries join the United States in offering liquid high-quality debt securities, central banks may allocate some of their holdings to these new issuers, but this does not mean the dollar will cease to be an important currency.

Putnam referred again to the challenges central banks face in executing their policy mission. He noted that China has the option of continuing to buy dollars or allowing its currency to appreciate rapidly. Given the stage of China′s economic development, he maintained that political considerations will prevent China from meaningfully slowing its purchase of U.S. bonds in the next decade. Instead, protecting the currency, and therefore its growing export-driven industries, will be the Bank of China's main priority.

Keeping with this topic, moderator Davidson asked whether the Plaza Accord, whereby Japan allowed its currency to appreciate against the dollar, was a meaningful precedent for the current situation characterized by the U.S. current account deficit, and specifically its trade deficit with China. Most panelists agreed that the political alignment of interests that supported the Plaza Accords does not exist now, and that the Chinese would be unwilling to risk the recessionary consequences experienced by the Chinese in decade following Plaza.

Moderator:
Brian Walls, Global Head of Alternative Investments Group, Newedge Financial Inc.

Even as global stock markets struggle, commodity prices have charged to new highs. Commodities have long been viewed as a safe haven and a smart way to diversify any portfolio, but the current bull market is a different animal, driven by a seemingly insatiable demand from emerging economies for building materials, metals, oil and agricultural products. This panel considered the market for commodities and explored the various approaches for investors. How will the growth of China, India and other emerging markets continue to impact this sector? How will the increased competition for resources effect industrialized nations? Which materials will be most in demand over the next decade? Expert panelists explored varying commodity investment strategies, including broad commodity indices, commodity-linked equities, commodity trading and infrastructure.

Introduction By:
Luiz Henrique da Silveira, Governor, State of Santa Catarina, Brazil

Moderator:
Brian Sullivan, Anchor, Fox Business Network

It's a whole new world in Brazil. Long gone are the days of hyper-inflation and economic instability. Today the most populous nation in South America is an economic dynamo, fueled by a new entrepreneurial spirit and strong demand from a burgeoning middle class. With vast natural resources, Brazil has achieved energy independence. On almost all global surveys, it is ranked as a high-opportunity country, sometimes on a par with China. In this panel, policy-makers, entrepreneurs and businesses leaders discussed the challenges and opportunities of investing in Brazil.

Luiz Henrique da Silveira, the governor of the State of Santa Catarina, began with a brief talk that heralded Brazil's successes of recent years, including its political reforms, higher quality of life, abundant natural resources and high human capital. "Brazil today is one of the most attractive countries for tourism and business," said the governor. Speaking specifically of Santa Catarina, he said that economic growth rates are higher than the national average, 50 ports are currently under construction, and the state open to new partnerships. "You are welcome in Santa Catarina," he told the audience. "I repeat, you are welcome."

Ana Vigon of AIG Capital Partners in São Paulo reiterated Brazil's positive attributes, citing controlled inflation, sustained external debt and higher consumption as a consequence of those political reforms and better management. There is a booming middle class, she said, as well as increased credit consumption and low unemployment. Sustainable growth is a result of not only commodities but also from domestic consumption, she said.

Vinicius Lummertz da Silva, the secretary of foreign affairs of Santa Catarina, said that as a consolidated democracy with a multiparty system, Brazil is situated for sustained growth. Brazil is much richer that China and India, he asserted, and has a growing internal market. He added that although government expenditures are high, at 30 percent, this spending has helped stabilize the economy and move people into the market.

"I am an unabashed supporter of Brazil," said Arthur Byrnes, of Deltec Asset Management. "But they have been lucky." Offshore oil discoveries, hydroelectric capabilities and vast resources have been economic drivers. Da Silva agreed, adding that that Brazil continues to be politically stabile, compared to some of its neighbors, and citing its lack of racial, religious and urban tensions.

When asked about the risks of investing in Brazil, Byrnes said politics do remain a concern for him. "The country's institutions aren't strong enough yet to stand a bad president," he said. Also mentioned were high taxes, corruption, poor infrastructure and red tape. Vigon cited the large number of ministries, higher government spending and the recent increase to 70,000 public servants.

"I think people start to differentiate countries now," she added, noting that the Brazil has not suffered from the negative perceptions associated with its neighbors. Despite this, she said, it is still a challenge to persuade American investors to enter Brazilian markets. "We have to explain how things are different in Brazil," she said. Da Silva added, "We can't expect (Venezuelan President Hugo)Chavez to exist in Brazil. The preconditions for someone like Chavez were gone a long time ago."

Byrnes also cautioned that contract laws are weak, but improving. "Brazilians are good at getting things done," he explained. "The free market has overhauled some of the old practices in a good way." He stressed the importance of investing in the middle class, and Vigon added that many opportunities exist in education because the president is supporting postgraduate education and people are looking to invest in that sector. She also added that the best-performing stocks last year were banking stocks.

"Brazil has the second-largest development bank in the world," said da Silva. "If we improve the regulatory system and bring in private equity, I think we are going to have large and sustainable growth."

Moderator:
Jeffrey Lipton, Managing Director and Head of CleanTech Practice, Jefferies & Company

The world is crying out for solutions that will bring us clean air and secure energy supplies. The financial markets can play a part in accelerating the transition, but investment still lags in the technologies we need. Guided by moderator Jeffrey Lipton of Jefferies & Company, this panel attempted to answer ambitious questions of how markets can serve the needs of the planet and where we will find the capital.

The broad definition of clean technology refers to a vast set of technologies in the sectors of bio-fuels, renewable energy, energy storage, and water and air quality. Daniel Weiss of the Angeleno Group suggested that "the numbers say it all," with $200-$300 million invested in clean energy seven or eight years ago vs. $3 billion dollars invested in 2007.

This growing sector is of special interest to policy makers, investors and companies -— but could the hot pursuit of solutions lead to a bubble? Margot Wirth of CalSTRS observed that we may be seeing a bubble on a sub-sector level, especially with ethanol. Jonathan Bloch of GKM Ventures argued that the clean tech sector is moving in the right direction but cautioned that peaks and valleys are still to come.

How is the current credit crunch affecting the clean-tech sector? Joanne Yoo of NY State Common Retirement Fund stated that no sector is completely immune from the crisis, and that this could affect important issues of exit opportunities. But she also noted the opportunity to recruit high-profile executives in such times. Wirth agreed with Yoo, but felt that this sector is less affected by the current crisis than most. Frances Arnold of Cal Tech observed that she sees enough capital available to start with, but she questioned who will take the risk and invest in taking things to a truly large scale when the time comes.

The panelists turned their attention to the role of major players such as GE and Honeywell, which are strategically investing in clean technologies. Weiss believes the decision is made on a case-by-case basis. "Strategic partners are looking for value," he said; if there are profitable opportunities, they will consider investing. It is critical for the clean-tech sector to have large, established corporations willing to commit capital. Bloch added that collaborating with the major players and understanding how the market operates is vital to ensure successful exits in the future. Yoo warned that strategic partners sometimes don't share their entire plan, and "strategic priorities sometimes turn out to be strategic public relations."

The involvement of strategic partners is related to the fact the sector requires massive capital investment to achieve large-scale implementation. Bloch offered a point of comparison: software companies need $40 to $50 million these days in order to sustain their future and become profitable, while clean-tech companies need $75 to $100 million just for proof of concept. He added that only solid returns will generate interest with investors. Yoo agreed, emphasizing that "this is not a social exercise" and these firms are subject to the same investment criteria as any other sector.

The panelists predicted that we will see strong growth not only in alternative energy but also in water, green materials, agriculture, health care, remediation, solid waste, carbon sequestration, transmission and distribution infrastructure, batteries, lighting, bio-fuels and other alternative liquid fuels. Public policy can help foster opportunities. For example, the spread of renewable portfolios at the state level is a powerful tool.

Another key factor will be the future price of carbon. According to Yoo, making carbon a financial issue is critical when looking from cost perspective. It is currently not incorporated into baseline calculations and will not be among the considered factors until legislation is in place, according to Weiss. Companies cannot count on profits from carbon reduction at this point.

The panel agreed that the clean-tech sector must be global in nature, especially when competing against more traditional investments. The track record of a management team, the regulatory environment, the path to commercialization and scalability are all important issue to combine with proven technology.

In conclusion, the panelists were asked for their personal outlooks on the near-term future of clean tech. Bloch emphasized his belief that all of the components for long-term success are at hand; he hopes to see growth without the sector becoming overheated. But speaking for everyone, Yoo expressed her hopes that we will see science move from the lab to the market quickly to serve our future needs.

Moderator:
Peter Passell, Editor, The Milken Institute Review

After decades of denial and delay, the combination of an aging population and rapidly escalating health-care costs will soon force Washington to confront the issue of cutting the pension and medical benefits promised to retirees or finding new sources of revenue to pay for them. Moderator Peter Passell of the Milken Institute opened the discussion with a discussion of the growing burdens of social security, Medicare and Medicaid. What would it take today to make it right, he asked? The fiscal imbalance for the federal government is almost $74 trillion dollars and the United States is already paying 8 percent of its GDP for entitlement programs. Does a crisis loom?

Robert Litan of the Ewing Marion Kauffman Foundation warned that much of the public is not even aware of the entitlement crunch problem. It′s a political hot potato, which explains why both parties are silent on the issue. "Democrats don't want to talk about it because they don't want to concede that there will have to be cuts in their favorite programs and that they'll have to raise taxes," he explained, adding that Washington knows the Medicare trust fund is going to run out of money. Litan predicted a crisis in Washington and urged for entrepreneurs to look for market solutions. With two-thirds of expected cost increases driven by inflation, and health-care costs rising 4 percent faster than the Consumer Price Index, why aren't there the equivalents of big-box retailers or airlines in the health-cares sector?

The reason? Insurance. As long as people are paying the low co-pays or deductibles, there is no incentive to cut costs, he said. The solution may be a progressive deductible. Incentives matter, said Litan, and there won′t be entrepreneurial responses if there are no incentives. Harness the power of the free market, he urged.

Peter Orszag of the Congressional Budget Office discussed how the American political system doesn′t deal well with creeping long-term problems. He offered four possible options: One is to "beat the drum louder." Second would be to change the political system. Third, try to create a false sense of crisis with social security reform. And, finally, try to approach the problem in different ways that are salient today. "Since the bulk of our problem is health care, let's try to grab that," he said. He also noted that the growing gap in life expectancy between higher-income, better-educated people and those of lower income. When looking at the problem as a whole, means and averages are fine for study, but it's important, he said, to look deeper within those statistics. Essentially, Orszag concluded, there are only two solutions: more revenues or fewer benefits. It should also be easier to help people lead healthier lives — little things like moving fruit displays to the front of the cafeteria line. "There needs to be more psychology in public policy," he said.

One-third of the American population is currently in retirement and enjoying the productivity of the rest, said Sylvester Schieber of the Social Security Advisory Board. The problem today is to ensure that the entitlement programs won't disappear for the younger generations who are contributing and paying for the benefits — a "grossly unfair" situation, he added.

Eugene Steuerle of the Urban Institute compared the current entitlement problem and the tax reform of the 1980s. Tax reform occurred was because there was a "vacuum" of need and major efforts coming in to fill that vacuum, he said, adding that "each incoming president gets one big package he wants," and with the right president, this could happen. Overall, the panel agreed that there will be continued debate as to what health care will look like in the future, but that some means exist now to help constrain the costs.

Moderator:
Betsy Zeidman, Research Fellow and Director of the Center for Emerging Domestic Markets, Milken Institute

Ethnic groups now represent the fastest-growing segment of the U.S. population, and "minorities" may become a majority by mid-century. Likewise, ethnic-owned businesses are multiplying far faster than the national average, and investors are finding overlooked opportunities in densely populated inner cities. These emerging domestic markets include the people, places or enterprises with growth potential that face capital constraints due to systematic undervaluation as a result of imperfect market information.

"We're investing in places, people and things that no one else is," said Tyson Pratcher of New York State Office of the Comptroller. "We think that we're getting access to a great talent pool in terms of where the nation will be in the future."

Building on this point, Luther Ragin of The F.B. Heron Foundation said that although there are challenges, the field has grown tremendously compared with five years ago. "We've established a track record of success," he said, "and there's now greater awareness on the part of institutions and foundations about the ability to get great returns and do social good."

Although the investors and funders seek a double bottom line (both social and economic return), they all agreed that their strategic objectives are to deliver market-rate returns. A variety of asset classes can be used, including public equities, fixed income, real estate, private equity and cash. The panelists are involved in a variety of double bottom line activities.

The Bay Area Equity Fund is a $75 million fund started five years ago. "We focus on emerging growth companies in or near low-income neighborhoods, to create jobs and engage in the public sphere," said Nancy Pfund of DBL Investors LLC. "We're currently invested in 18 companies, and we′ve created 1,300 jobs, 700 of which are for entry-level, low-income people. In terms of performance, we're in the top quartile of funds in our 2004 class."

Phoenix Realty Group is a real estate concern investing in mostly residential and some commercial projects. Managing director Jay Stark explained that its projects include transit-oriented developments and brownfield conversions geared toward moderate-income and entry-level home buyers.

David Sand, who operates the Community Investment Fund founded in.1998), said it uses fixed-income assets to make market-rate returns in specific geographic areas of interest to the investor, such as located in their home state, region, city or community.

The Heron Foundation diversifies asset classes under management in order to achieve market-rate returns, said Ragin. With $300 million in assets, his foundation has outperformed most of the U.S. foundations that would consider this way of investing too risky.

Pratcher′s New York Common Fund, with $160 billion in assets, diversifies both who makes investment decisions and where investments are made in order to achieve better alignment with the beneficiaries and targets of such investments (e.g., more inclusive of women and immigrants).

Pfund and Ragin both described returns in the 12 percent to 30 percent. Other panelists declined to state their returns but indicated they and their investors are happy with the results in the face of challenging market conditions.

Turning to those challenges, Pfund noted that "there's a silver lining to the crisis … some benefits to small companies in this environment." She cited Solar City, a community-oriented and innovative solar installation firm that has done $29 million in sales. To overcome upfront capital costs, which are the largest barrier to residential social installation, Solar City worked with Morgan Stanley to develop a new financial instrument to help buyers.

Stark discussed Puerta Del Sol, a $6 million transit-oriented brownfield conversion development done in partnership with a community-based affordable housing group. This best-selling community had financial returns that were off the charts, he said. His firm has also partnered with a church to build an apartment building in Harlem. The church occupies the first five floors of the building, and residences are built on top.

"That sounds too good to be true," said moderator Betsy Zeidman of the Milken Institute. "Why isn't more of this going on?"

"It's hard," replied Stark. "It takes elbow grease. On the real estate side, you have to go through many regulations. In low- and moderate-income neighborhoods, projects take longer, and the externalities are different from doing traditional greenfield development."

"It takes work, but it's very satisfying" says Pfund. "Private equity investors need a nontraditional lens to see opportunities. The connections that must be developed take place not at the national or state level, but at the city, community and mayor's office level. This is not the domain where traditional venture capitalists have connections."

"We've all agreed that there is a tremendous opportunity here," cautioned Ragin, "but investors need to look closely at not just the financial returns, but the social returns. What is being offered and delivered? While projects sound good at the outset, they can have some misleading vocabulary and marketing along with them. Due diligence applies not just to the financial side, but to the social equity side as well."

Moderator:
Andrew Rosenfield, Managing Partner, Guggenheim Partners LLC; Chairman, Guggenheim Investment Advisors

Myron Scholes, a Nobel laureate now with Platinum Grove Asset Management, began by discussing four areas for future financial innovation: 1) separating the risk-taking of financial institutions from their customers, both retail and institutional; 2) moving from the idea of tactical use of financial instruments to a system that evaluates risk and how it should be transferred to the marketplace; 3) modifying current accounting rules to reflect the complex structures of modern corporations; and 4) improving risk-evaluation efforts. As Scholes put it, "Each of our financial entities thinks that they are handling risk correctly, but does not know how others are dealing with risk and what is the aggregate risk in society."

"The root causes of this crisis are only peripherally related to innovation," maintained Lewis Ranieri of Hyperion Private Equity Funds, "and it is financial innovation that will help us get out of it."

Michael Milken introduced the topic of financial literacy and how it relates to our current financial crisis. He felt that the main issue has been the incorrect evaluation of risk and company valuations. Regarding the subprime mortgage crisis, he commented: "The money was lost the day the loan was made." Milken emphasized throughout the panel that the ultimate goal of financial innovation is to provide tools to address health care and social issues, and ultimately to relieve worldwide poverty.

Andrew Rosenfield of Guggenheim Partners asked the panel to address the current financial crisis and their relative outlook. While Ranieri was optimistic about the use of financial innovation to find our way forward, Scholes disagreed, expressing his concern that Federal Reserve measures are insufficient. He mentioned that the current financial turmoil can be mostly attributed to a combination of the de-leveraging of financial instruments and the credit crisis. He added that a change in the perception of risk in real estate investments is needed. "The public and the financial community will need to accept the move to a new state where housing prices will not always necessarily go up."

Milken followed with five key points on the current state of financial innovation and the economy:

1. Homeowners are ultimately concerned with their monthly mortgage payments more than their home's overall price. Therefore low interest rates will help the housing market.
2. Adjustments in the markets have already been made. To create protection against a crisis, American consumers have to become more liquid, not less.
3. The current depreciation of certain asset classes implies that financial institution have chance to buy assets at favorable prices.
4. There is excess liquidity in the world, especially in Asia.
5. The world is NOT leveraged, and history does not correlate rating and default very well, so it is expected more money will be lost on AAA securities.

Scholes insisted that "[there is] not a lot of liquidity because people are not selling their houses," and "institutions will not take much risk until they understand more about it." Milken added that in our current financial system, "70 to 80 percent of bank loans are not owned by the banks themselves." Ranieri reiterated that financial derivatives are a good thing because they allow risk to be spread around the world. However, they were abused in the current housing crisis. Consumers similarly got carried away: "We turned the house into an ATM."

Sandor of the Chicago Climate Exchange praised financial innovation, adding that "There are 1.3 billion people in China that want to imitate the financial systems in the United States."

Despite the current crisis, the panelists unanimously supported financial innovation as the key to global growth. Milken emphasized that we need to understand complex financial innovations and use them properly, as they will be the best tool for lifting populations out of poverty in the developing world.

Moderator:
Steven Green, Former U.S. Ambassador to the Republic of Singapore; Managing Director, Greenstreet Partners

A decade after the devastating Asian Financial Crisis, the region's economy has staged a strong comeback. Despite a fast-cooling global economy, developing Asia projects 8.6 percent growth this year. Some observers believe the "miracle" of the 1970s and 1980s has returned. Emerging Asian economies have become vital components of the global market, accounting for more than a third of world trade flows. But unlike the 1970s and 1980s, this growth period is largely the result of increased regional trade integration, with China serving as the hub for manufactured goods. While the Association of Southeast Asian Nations (ASEAN) aspires to create the level of economic cooperation achieved by the European Union, many issues remain unresolved, including shipping security, terrorism and border disputes. Can the 10 members of ASEAN work with China and India, the region's emerging growth engines, to establish a stability that will promote prosperity and political reform throughout Asia? This panel provided an overview of the challenges and opportunities.

Moderator:
Thomas Carlson, Managing Director, Recapitalization and Restructuring Group, Jefferies & Company Inc.

Corporate restructuring is an indispensable tool for re-engineering companies to better compete on a global playing field. It's a notoriously complex field, employing a variety of recombinant techniques, including mergers and acquisitions, leveraged buyouts, divestitures and spin-offs, all of which can impact the financial markets far beyond the individual companies they involve. This panel focused on how to identify and respond to potential restructuring opportunities, including those that call for nonstandard corporate finance solutions. How can companies decide which financial restructuring program will best address the issues they confront? What are the newest investment banking strategies available? What roles do hedge funds play? How can distressed companies restructure their balance sheets by accessing the capital markets rather than resorting to insolvency proceedings? What are the latest developments in regulation and corporate governance? How does restructuring affect efficiency and shareholder wealth in the long term? How can investors benefit?

Moderator:
Linda Assante, Partner, Oak Hill Investment Management LP

Based on their experience investing billions throughout all four BRIC markets (Brazil, Russia, India and China), the five panelists provided a relatively objective breakdown of their rationale for investing in each country, along with some of the risks their firms are actively managing.

Linda Assante of Oak Hill Investment Management kicked off the panel by reminding the audience that although the Russian population is shrinking, China, India and Brazil will combine to add 360 million people to the global population within the next ten years. This statistic, combined with significant economic growth, will drive sustainable large-scale demand for all types of real estate in the BRIC markets.

At a macro level, Michael Golubic of the Townsend Group stated that the exploding demand for commercial and residential space has created an urgent, opportunistic investment atmosphere and returns between 20 and 30 percent. Golubic also mentioned that, in general, real estate makes a good inflation hedge due to the ability to pass on price increases through increased rents or CPI-adjusting contracts. However, Peter Madden of APG Investments US reminded the audience that the real estate boom has led to a significant shortage of human capital in all markets, and that no investor should move forward without qualified local personnel on the front lines.

As the discussion moved to India, Katherine Farley of Tishman Speyer and Rajesh Agarwal of AIG Investments described the factors currently attracting investment capital. Due to the fact that the Indian market only opened up to foreign direct investment in 2004, there are currently more hotel rooms in Orlando than there are on the entire Indian subcontinent. Similarly, India has only 1 square foot of retail real estate per capita, as compared to 20 square feet per capita in the United States. India is currently about 4 million housing units short, and demographic trends are exacerbating the problem, with a young population and increasing numbers of women choosing to live alone rather than with their parents. The government is trying to encourage development with tax incentives, but with India on track to have 70 cities of more than 1 million people each by 2020, the bureaucracy may not be moving fast enough.

India is not without its challenges. Many investors have been frustrated by the desperate lack of infrastructure; the slow, wasteful bureaucracy; the minimal access to local financing; and the recent poor performance of the Indian stock market.

The population growth issues in China are very similar to India, but the key difference is the role of government. Farley stated that if an investor's goals align with the goals of the Chinese government, things can happen very quickly. She argued that her firm looks for investments with strong fundamentals that have the potential for a "pop" from market developments such as high-speed rail and "green" incentives. Farley also stated that although China is full of flashy office buildings, once you peel back the exterior and look inside, many of them don't have the internal office layout to fit the needs of multinationals looking for true class-A commercial space.

Many investors are scared off by the fact that the Chinese government owns all the land in China, only providing 50-year commercial leases and 70-year residential leases to developers. Farley acknowledged this risk, but emphasized that working with the U.S. government can actually be more risky due to the higher potential for litigation.

As the conversation moved on to the Brazilian market, João Teixeira of GoldenTree InSite Partners provided some excellent insight into the root causes behind Brazil's real estate boom. The Brazilian government provided additional mortgage protection to the banking industry several years ago. Since 2005, mortgage interest rates have dropped from 14 to 10 percent, loan durations have grown from 15 years to 30 years, and loan volume has grown from $3 billion to more than $15 billion. This has increased the market for a $150,000 condo from 2.5 million potential buyers to 5.5 million potential buyers just based on affordability metrics. These banking changes, combined with more than 8 billion gallons of oil reserves found off the coast of Rio, controlled inflation for the last 15 years. An 18 million-unit housing shortage makes Brazil one of the hottest real estate markets in the world.

The challenge for this kind of market is rapid price appreciation for investors who aren't in the market yet. Urban property values are skyrocketing, cap rates have dropped from 13 to 9 percent, and the lack of consistent institutional control outside of the major urban centers all combine to increase risk.

Although all the panelists acknowledged the incredible potential of the Russian market, many of them were still in the "wait and see" mode when it came to capital allocation. Michael Golubic's clients had enjoyed some success partnering with the World Bank, but outside of international institutions, working with the oligarchy could produce results, but also plenty of negative media attention. The combination of language barriers, lack of transparency, corruption and a general lack of faith that investors would be able to get their money out of Russia has kept a lot of international capital on the sidelines.

When asked about what countries might appear on the global real estate radar screen next, Turkey and Vietnam topped the list, followed closely by Mexico, Colombia and Argentina.

As the conversation wrapped up, the panelists all emphasized the importance of having a qualified local team on the ground prior to investing and general optimism about the future of the BRIC markets.

Speaker:
Arnold Schwarzenegger, Governor, State of California

Moderator:
Michael Milken, Chairman, Milken Institute; Chairman, FasterCures / The Center for Accelerating Medical Solutions

Michael Milken introduced him as "governor of the planet" because of his dedication to green technology and infrastructure. Gov. Arnold Schwarzenegger explained that California, the world's sixth-largest economy, has fallen behind the rest of the world in terms of infrastructure. No building has taken place in the state during the last four years, while the state's population has continued to grow. "We need $500 billion to rebuild California in the next 20 years," said Schwarzenegger, adding that this cannot be done solely with the use of bonds. He stressed the importance of expanding public-private partnerships throughout the panel.

When asked whether a committee similar to the United Kingdom's newly created Infrastructure Planning Committee can be instituted in California, Schwarzenegger replied that it would be very difficult to accomplish because of bureaucratic and ideological obstacles that exist in California and throughout the United States. For instance, legislators in Sacramento would fight against it, believing that it would harm unions. Schwarzenegger wants to take the legislators to British Columbia, where such an entity has been successfully established.

The governor also spoke about his partnership with Gov. Ed Rendell of Pennsylvania, a Democrat, and Mayor Michael Bloomberg of New York City, an Independent.

Recalling recent catastrophes in the United States that have resulted from a lack of maintenance, Schwarzenegger warned that there may be future tragedies unless something is done to improve our country's infrastructure. Milken then discussed America's lack of investment in infrastructure as compared to other countries, especially emerging nations like China. When asked whether California can lead other states on this issue, the governor replied that the state has had a great deal of influence nationally and even internationally, and it can wield influence in the area of infrastructure as well.

Schwarzenegger stressed the importance of speaking to the public in terms that they will understand when encouraging them to vote on propositions. For instance, instead of using the term "infrastructure," politicians should talk about roads, traffic, and the benefits of their improvement on people's day-to-day lives. Concepts like "public-private partnerships" should be explained in comprehensible ways as well.

Milken brought up the speed of building, which is slower in California than in other countries. For instance, it took 15 years to construct the Getty Center in Los Angeles. When asked if it would be possible to reduce the time it takes to build in California, Schwarzenegger replied that because of over-regulation, we have become less competitive in this respect. He recommended streamlining regulations, while reiterating that he favors the use of bonds for financing rather than raising taxes. The governor also called for Republicans and Democrats to work together toward the goal of enhancing business growth, which is hampered by an aging and insufficient infrastructure. He believes that building infrastructure will directly improve the economy.

The governor is also an advocate of environmentally friendly technologies, such as solar and geothermal energy. He believes they are a natural fit in California, mentioning that The Wall Street Journal called green, clean technology "the new Gold Rush in California" When considering nuclear plants, he said that we must ask whether they are financially sound investments, and whether renewable energy may be the better way to go. He reiterated his commitment to expanding the role of green energy and eliminating coal plants. "Technology will save us all," Schwarzenegger said. While touting the potential of the electric car, he also expressed worry about Detroit falling behind in the automotive industry. And he praised all three presidential candidates as being "good on the environment," while he personally endorses John McCain.

Milken mentioned the fact that much of the American public — and even many in Congress — do not own passports and do not travel abroad. Schwarzenegger talked about the importance of global travel. "The world is my classroom," he said. Seeing high-speed trains in France traveling at 350 km/hour or a new airport erected in Shanghai in record time motivates the governor when he returns to California. "We can copy," he said, because there is so much innovation going on the world that California should learn from and replicate. He encouraged legislators in Sacramento to travel globally as well.

In terms of higher education in California, Schwarzenegger stated that we should "change the visa system to keep international students here, especially in the high-tech and biotech industries." Likewise, he emphasized that the U.S. immigration system must be reformed once and for all, so that necessary work force can enter this country legally and formally.

Moderator:
Rafael Pastor, Chairman and CEO, Vistage International

Advertise and market your firm well. Get out and visit your clients. Build relationships. That sounds like basic advice for any serious businessman. However, these were also the major lessons from a session organized to advise smaller firms on how to do well during a sluggish economy. The exact tactics and techniques might differ, but the fundamental principles remain the same.

An economic downturn does not need to be disastrous for small or medium-sized firms. Moderator Rafael Pastor of Vistage International set the tone by sharing some statistics collected by his firm about CEO attitudes regarding the economy. Among CEOs from small and medium-sized firms, confidence is at its lowest point in five years, he said, and the level of investments has been declining along with this confidence.

However, these very same CEOs also report that they expect their own firms to do as well as, or better, than they have been, in spite of the overall strength of the economy. Furthermore, many are not planning to downsize or curtail any aspect of their businesses. Recessions come and go, he said, and capital expenditures can be turned on or off like faucets.

All the panelists expressed the need to look at overseas markets during a downturn in the domestic market. Erik Zuziak of JZMK Partners shared how his architecture firm has expanded overseas. The first key was using the Internet. His firm decided to put its entire portfolio onto the web site rather than teasing potential clients with glimpses of their work for fear that intellectual property might be stolen. The subject of protecting intellectual property was addressed by all panelists. James McGregor of JL McGregor & Company has lived in China for 20 years and said that having your intellectual property stolen was a forgone conclusion in China; the best defense was constant innovation. Keep making more new stuff faster than it can be pirated. Verne Harnish of Gazelles, Inc. works with India and he said that he chose India rather than China specifically because it has better intellectual property protections.

Having a strong web presence involves more than just a web site; it′s about "controlling the ink" in your market. Harnish advocated creating blogs and wikis to promote your firm. The panel also talked about search engine optimization. Zuziak and McGregor talked about good old frequent-flyer miles, extolling the virtues of face-to-face contact with clients. Zuziak also shared how the success of his firm′s first overseas project led to subsequent opportunities; success begets success. The bottom line? Overseas markets are a lifeline to smaller firms during a recession. Harnish also advised writing a book about your field to get your name out there: "it doesn′t even have to be a good book," he said. Getting and advertising third-party validation is also important for foreign clients; post awards and reviews online.

Ted Virtue, the CEO of middle-market private equity firm, said that there was no shortage of capital available for small to mid-sized companies, even during the recession. His firm specializes in revitalizing "orphaned" brands that have been under-managed by larger firms. He discussed the importance of strong branding and said that reinvigorating these underperforming brands was a way to make significant money. On the downside, he acknowledged that financial markets were much scarier today than during earlier slowdowns. However, many of the foreign markets to which U.S. firms have been expanding are no longer considered to be "emerging." He said that one benefit was that these foreign markets were now fully emerged and robust.

Many large firms can afford to fail at first when trying to move into foreign markets, said McGregor. However, smaller firms do not have the capital to absorb these costly mistakes. Smaller firms are often more adaptable than the larger ones, though. He cited the example of eBay′s utter and complete failure to enter China.

Harnish and Zuziak also discussed the importance of outsourcing for smaller firms. Zuziak outsources as much as he possibly can, especially when he can get local firms to handle work for his foreign projects. He also said that he now goes out of his way to hire new employees who can wear more than one hat. For example, he can't afford someone who is either a salesman or a designer. He needs someone who can do both. Harnish talked several times about his "wicked smart" assistant in India. He sends an e-mail to his assistant at 10:00 p.m., before going to bed, outlining a series of tasks. When he wakes up, all of the completed analyses and products are waiting in his inbox.

Still, firms should not turn their backs on local clients, the panelists agreed. When the recession ends, they need to be in position to jump back into the local market. That means maintaining current relationships and positioning their firms as experts within their various fields. However, Harnish was moving his entire family to India for nine months to let his children have the experience of living there. "The future is not here (in America)," he said. "It's over there. We need to get out of Dodge." McGregor and Virtue were less enthusiastic about giving up on the United States because they expect its economy to recover. However, all of the panelists maintained that going international had enriched both their lives and their businesses.