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Moderator:
Shawn Baldwin, Chairman, Capital Management Group

The Middle East and the larger Islamic world are fast becoming a focal point for financial developments, in part because of the region's oil wealth.

With "net capital exportation at par with China," the Gulf Cooperation Council (GCC) states have seen strong growth in Shariah-compliant financing, or Islamic financing, according to panel moderator Shawn Baldwin. As structural elements and best practices have begun to formalize, and as the GCC continues to acquire more than $1 trillion of foreign capital over the next decade, the focus on Shariah financing will continue to increase.

Umar Moghul stressed that Shariah financing "is a startup industry, not just a startup venture," and it will take time for the legal, ethical, and financial institutions of the industry to mature.

According to Aamir Rehman, some asset classes, particularly equity and real estate assets, are more easily entered into by Islamic investors than fixed-income equivalents, known as "sukuk," and private equity investments. Part of the difference stems from the specific role of interest, or "riba," in fixed income. Interest is generally impermissible under Shariah. This aspect of Islamic financing creates a need for Shariah review boards composed of Islamic scholars and experts.

Taha Abdul-Basser said these Islamic scholars are essentially counterparts to lawyers, collaborating during the documentation period to ensure that the investment is Shariah-compliant. The review board verifies that what appears to be a conventional transaction (i.e., to be interest bearing) is structured in a compliant way.

Other roles of the review board include looking at the practical limitations on traditionally impermissible activities, like sales of tobacco and alcohol. For instance, a real estate asset with a few tenants engaged in some "impermissible" activities might still be deemed a Shariah-compliant investment by the scholar review board. In other instances, practical solutions may take the form of donating revenue from the impermissible activities to charity.

Another crucial role of the Shariah experts, Moghul said, is to work with lawyers to create specialized investment structures that allow for fixed-income sukuk transactions to take place. Typically, this is accomplished by adding a special purpose vehicle (SPV) to the overall transaction structure that is able to operate on a basis other than an Islamic one. Because a sukuk holder must take an ownership interest in the underlying asset for compliance purposes, the SPV acts to take on loans and set up leases, calls and puts that mirror prepay agreements and other structuring needs for the Islamic investor.

As the structures of Islamic financing have become more formalized, the demand for Shariah-compliant financing has increased. Historically, most sovereign investment funds in the Islamic world have not been Shariah-compliant, but Rehman said these investors, as well as insurance institutions, increasingly are looking at meeting the demand for Islamic financing. "Customers in the Islamic world prefer Shariah-compliant structures if they perform exactly like a conventional product," he said.

There also has been a growing movement among pensioners for Shariah-compliant pensions. Additionally, there is a need for private equity investments to bring capital back into the GCC to support job growth in a region where 40 percent of the population is younger than 15.

The panel closed by noting that Shariah-compliant investing bears similarities to socially responsible investing in that ethical concerns drive Shariah investing.

Moderator:
Lorraine Spurge, Managing Director, Guggenheim Partners

This private session brought together a select group of women — all recognized as leaders in government, business and finance — to launch a new network that will seek to tackle today's most pressing economic challenges. In this initial roundtable meeting, they exchanged ideas and proposed new strategies for broadening access to capital. The discussion touched on such timely issues as small-business assistance, access to credit for middle-market companies, creating pathways to higher education and ensuring that the educational pipeline connects to jobs. This session provided a unique forum for a group of accomplished and innovative women to build new partnerships and opportunities.

Moderator:
Michael Klowden, President and CEO, Milken Institute

When is economic recovery coming? That's "a bogus question," declared Mohamed El-Erian of PIMCO, who insisted that we should instead focus on what the new normal will be once we emerge from the crisis.

"The one thing that would speed up the recovery is the mindset that you don't kill the innovation but you update the infrastructure to allow the innovation to get going," said El-Erian, echoing the view of the other panelists that entrepreneurial innovation is the key to a rebound.

The U.S. government's involvement in the insurance, auto and banking industries was more of a concern than the country's ability to recover for Kenneth Griffin of Citadel Investment Group. Steve Forbes of Forbes Inc. agreed that more government involvement in the private sector would be detrimental, causing recovery to take years rather than months.

El-Erian insisted that recovery will not be a simultaneous process, since initial conditions in various industries and nations were very different to begin with. He projects a sequential recovery in the coming quarters, during which some sectors and countries will resume growth, but fears that protectionism may help some groups at the cost of others.

While he agreed that more government ownership and regulation are not part of a long-term solution, John Micklethwait of The Economist pointed out the political reality that the public is demanding these actions. The panelists agreed that the U.S. government needs an overarching framework and direction for regulation and other actions rather than applying ad-hoc fixes.

"We've spent 200 years developing good law. This is not the time to rewrite it," stated Griffin. Rather, he suggested that regulators should recommit to adequately enforcing current rules. He pointed out that although Fannie Mae and Freddie Mac were heavily regulated agencies, regulation did not prevent them from incurring catastrophic losses.

While the panelists disagreed on whether to eliminate mark-to-market accounting and specific exchange-rate policies, they all agreed that the free market will ultimately provide the most desired long-term outcome. "We want to move the government out of the role of picking winners and losers and return that to private markets as fast as prudently possible," concluded Griffin.

When polled, more than 50 percent of the audience at this session stated that they believe the United States will emerge from the current recession by the first half of 2010.

Moderator:
Lewis Feldman, Partner, Goodwin Procter LLP

The overall economic slump has hit the commercial real estate market hard, but with the help of government programs and investors abroad, opportunities exist for growth in the sector.

While much of the commercial real estate market has avoided a downturn as steep as that in other sectors, there is cause for concern. Sam Zell said too much leveraging between the booms of 2003 and 2007 is largely to blame for today's slump.

"We all drank too much Kool-Aid," Zell said. Between 2003 and 2007, 50 percent of institutional real estate was traded but was overly leveraged, he observed. The result is that today there are few of those financings that are above water.

Randy Mundt of Principal Real Estate Investors said the overall economic downturn has led to a severe decline in demand for office space. "Layoffs mean a lot of office properties are unoccupied; these properties may end up losing about 40 to 45 percent of their value," he said.

Despite the downturn, the panel discussed the possibility of investments in commercial real estate coming from abroad. "We will see more money coming from outside the U.S. to buy real estate here," Frits van Paasschen predicted. "As prices continue to come down over time, we will continue to see more of that."

All the news is not bad. "The good news is the government is extremely focused on commercial real estate; they realize it could be the next shoe to drop if something isn′t done," David Simon said. But the help of the government — especially the Federal Reserve and the Treasury Department — in shoring up the commercial real estate market may not be a long-term boost. "With all of this government intervention, we will have to see if it is a short-term fix or a long-term shift in ideology that will help the commercial real estate market down the road," Mundt said.

Van Paasschen views the intervention as a not-so-perfect solution that is having at least some effect. "As flawed as the programs may be, they have taken the panic out of the market," he said.

In the end, the panelists seemed to agree that times are tough for the commercial real estate market but possibilities for a rebound exist. "We′ve got losses as an industry that we need to take, and we′re going to have to deal with it," Simon said. With the help of the federal government and overseas investors, the outlook is not completely dire. But the need for investors of commercial real estate within the U.S. remains.

"There was something elegant about President Bush′s 'go out and shop' statement to American consumers in response to 9/11," Simon said. "If we could just get people to do that now, things could get better much sooner."

Moderator:
Komal Sri-Kumar, Managing Director and Chief Global Strategist, TCW Group Inc.; Senior Fellow, Milken Institute

Many emerging markets are better-positioned to weather the economic downturn than their well-developed counterparts, according to a panel of experts.

Jean-Louis Scandella drew a distinction between "old" emerging countries and "new" emerging countries, noting that the latter were staying afloat in the current environment. Scandella characterized the old countries —South Korea, Mexico and Taiwan, for example — as having mercantilist business models dedicated to producing goods for the U.S. and Europe. Such countries are highly dependent on world growth and external capital and are therefore doing poorly in the current environment.

In contrast, new emerging countries such as India and China are characterized by liberalizing reforms leading to the emergence of a rising middle class. Scandella noted that these countries are less dependent on demand from the developed world and have large capital reserves of their own that makes them less dependent on external capital flows. In other words, these countries have both the domestic demand and the capital to see them through the downturn.

This theme of many emerging markets being well-positioned to weather the downturn was echoed by many panelists. Hüseyin Erkan noted that Turkey's economy has tripled over the past seven to eight years while diversifying its exports to non-EU countries by, for example, implementing bilateral tax treaties with 80 countries. Erkan also noted that Turkey′s capital markets are large and liquid.

Vasant Prabhu provided some anecdotal evidence from patrons and management at Starwood Hotels′ 5-star establishments in emerging markets. He hears long-term bullishness on the emerging world and even some talk of a power shift from traditional superpowers to the developing world as a result of the downturn. Prabhu reported that "you don′t see fear in people′s eyes (in the emerging world)" as he has when talking to managers in developed markets such as the U.S.

Vikas Kapoor pointed to a recent Business Week article — "Call center? That′s so 2004"— to show that the era of emerging markets 1.0 in which labor arbitrage was the primary driver has essentially been replaced by a model in which emerging markets actually add value rather than just perform basic tasks.

Kapoor said value-added outsourcing will essentially serve two functions, both of which will lead to growth in emerging markets: creating local demand by increasing local wealth and providing a strong conduit for emerging countries to access greater demand from the U.S. and Europe.

George Hoguet highlighted deflation as a potential concern, particularly for countries such as Japan, and noted a recent International Monetary Fund finding that approximately $4 trillion in potential write-downs have yet to be realized by banks, most notably in Europe.

Overall, the panel struck a hopeful note that at least the new emerging markets are in better shape than many think. These countries may emerge stronger from the current downturn and continue to ride upward trajectories founded on their new stimulus-driven infrastructure and value-added business models. That said, the emerging markets will probably not achieve these heady results absent strong recoveries in the developed world.

Moderator:
Doug Teitelbaum, Managing Partner, Bay Harbour Management

One of the realities of the current recession is that hundreds of companies are expected to go through bankruptcy and emerge under new ownership. With credit markets in turmoil, it is critical to reduce a company's debt burden and make significant operational changes to maximize its chances of success when it emerges. This arduous task is expected to generate significant returns over the next cycle. This panel brought together a group of experts with extensive experience in managing these troubled and complex situations to talk about the current environment for investing, the types of companies they are focused on — and the types they are avoiding. Why is restructuring and buying companies through the bankruptcy process expected to generate the most compelling returns of any asset class? What does it take to control a reorganization process and lead a successful turnaround? How do you identify the companies that are worth saving? What does it take to drive the process to a successful ultimate sale?

Moderator:
James M. Williams, Vice President, Chief Investment Officer and Treasurer, The J. Paul Getty Trust

Safe, effective investing must make room for low-risk, high-return funds and include highly talented asset managers and creative talent to drive it, a panel of experts said.

"What has repeatedly made money when we needed it the most?" Tom O'Donnell asked. "Diversification is the answer. Safe but effective. We need to take advantage of all possibilities for growth. Create value over time. Access the very best investments."

O'Donnell said trustees carry a large burden for the success of an endowment and investment.

"Trustees have asymetrical risk," he said. "They are roundly criticized when things go sour but usually unrecognized when all goes soundly. We need to recognize that most trustees are wealthy people who have built their wealth by taking risks, not taking the safe route. They earned their way to wealth. The entrepreneurial spirit is alive and well."

Regarding what's ahead for philanthropic endowments, Mark Yusko said: "In '92, Harry Dent wrote about 'The Great Boom Ahead,' and now he's writing about 'The Great Depression Ahead.' Why? The demographic of 40- to 60-year-olds don't spend much afterwards. Even Warren Buffett knew that those stock market valuations were bogus and that it would turn into a vicious cycle. Lather, rinse, repeat. Lather, rinse, repeat. The cycle continues. Equity gets crunked by credit; then we buy unsecured debt. It's the law of returns."

William Lee agreed. "Unsecured bonds are yielding almost 18 percent right now! It just ain't gonna work like this," he said. "And deleveraging will only create more bankruptcies while equities will continue their downslide. Look at Citigroup. For the next eight years, banks will be in the hole. … Deutsche Bank in Germany is over 100 times leveraged, as are Japan's banks. We need to learn from this. Only in the developing world, as in India, is there existing opportunities for growth. If not for the widespread corruption and greed, there could be a chance."

Moderator James Williams said investment managers must align their goals with their actions. Yusko added that gifts are down but endowments are stable because they are multi-year commitments.

Williams said investors must be discerning. "There will most definitely be a shakeout of mass proportions. Institutions must do their due diligence more than ever before."

Moderator:
Robert Matza, Partner and President, GoldenTree Asset Management LP

With the dramatically increased volatility in equity markets over the past year and a half, pressure has increased to evolve business relationships with and improve due diligence regarding hedge funds and funds of funds. Nevertheless, the panelists in this session felt there are great investment opportunities with hedge funds, assuming transaction participants are able to negotiate favorable terms. The speakers noted that calls for due diligence standardization and financial protection ought to be tempered by the fact that the hedge fund industry is and will likely remain reliant on human elements and relationships.

One of the drivers of the proposed changes has been that investors are reexamining their portfolios. Timothy Barrett of the San Bernardino County Employees' Retirement Association stated that in a traditional 60/40 portfolio, more than 90 percent of the risk comes from equity. Based on that evaluation, Barrett's investment group has been shifting assets since 2002, and now allocates only 20 percent to equity. That trend is expected to continue, as is the wave of clients shifting to macros and CTAs for investment guidance.

The panel also discussed recent pressure for hedge funds to provide separate accounts for larger institutions. According the Barrett, the need for liquidity is driving pensions to call for separate accounts. Arthur Tully of Ernst & Young's Global Hedge Fund Practice emphasized that this provided an important opportunity for investors to talk to fund managers and restructure fund terms, while Simon Ruddick of Albourne Partners countered that the costs of operating segregated assets would render the idea more talk than action.

The pressure to have discussions with fund managers also spills over into due diligence. Fund managers are dealing with "tons of requests for due diligence," according to Tully. The managers have been trying to create as much investor confidence in their numbers as possible, including more information around risk and risk aggregation and counterparty assessments.

However, it is difficult to streamline the due diligence process for the simple fact that the best information results from the human review process. Although the recently released FAS 157 provides guidelines for valuing level 2 and level 3 assets, the valuations still rely on the quantitative knowledge of the fund managers. Increased documentation under the FAS rule will be more extensive, but the role of human relationships in the due diligence process and subsequent reviews cannot be replaced.

The panel also discussed the structure of hedge fund management fees. Managers have come under increasing pressure to justify their fees. In today's environment, hedge funds are open to the concept of other fee structures, like hurdle rates or third-party administrators. However, the industry may not be so quick to move away from fee structures. Ruddick points out the "inconvenient truth" that the fund managers' performance over time actually justifies their fees. However, Tully pointed out that numerous surveys have shown fees to be less important considerations than the more salient issues of performance and investment philosophy.

Another area of pressure on hedge funds, according to Anthony Scaramucci of Skybridge Capital is investors looking to empower limited partners by offering direct seeding to the funds in order to obtain similar transaction terms as general partners. Barrett countered that his experience had not produced any successful seeding yet due to the costs involved in vetting such transaction terms. Ruddick agreed, offering that while it is a great investment opportunity, it will not be easy for incubators to raise capital in the near future.

Despite all of the pressure on the hedge fund market, Scaramucci emphasized the opportunities in the market. He sees particular promise with small funds, which studies have shown to perform better in their early years than larger funds that tend to hug the major indices.

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

Moderator Jim Barth of the Milken Institute kicked off the session by noting the media's increasing use of the phrase "too big to fail." Meantime, the number of global financial institutions that might plausibly meet this definition has risen right along with that usage.

Robert Kelly of The Bank of New York Mellon emphasized a theme, echoed by the panel, that the U.S. regulatory regime is structurally challenged. In particular, panelists concurred that it is very difficult to navigate or understand the complex, bureaucratic U.S. regulatory structure. A single systemic regulator would, at least in theory, fix this problem by placing a single office in charge of (systemic) risk management. While panelists generally expressed confidence that the concept will be developed, they agreed that it is not clear who will have the authority to implement it (whether the Federal Reserve or a team of regulators).

Alan Boyce of Absalon and Adecoagro suggested that the current crisis stemmed from the complex, opaque way in which the U.S. banking system securitizes cash flows. He called for a new system, arguing that the current structure is designed primarily to benefit the middleman and not market participants.

Bo Lundgren of the Swedish National Debt Office and Robert Litan of the Kauffman Foundation emphasized the potential benefits that could be realized from carefully analyzing the best practices employed by other nations (e.g., Denmark and Canada). Litan stated his belief that the current economic climate facing banks should not be blamed on the 1999 repeal, by then-President Clinton, of the Glass-Steagall Act, but rather on poor management as it relates to the mortgage market. He suggested that the subprime market was merely a match in the current conflagration; the real fuel was the relatively high degree of leverage employed in the system.

Alan Boyce and Robert Litan noted that the first step in overseeing the banking system will be to determine who makes the list — which institutions will be designated "too large to fail"? Such institutions would then likely be required to maintain higher levels of capital. They also suggest that a primary objective of this new system would be to protect short-term creditors, decreasing the potential ripple effect caused when a key financial institution stumbles or fails.

Kelly also discussed the various financial measures used to analyze the health of financial institutions. Barth, Boyce and Litan emphasized that some banks are relatively strong in terms of select indicators but not in others, and expressed mild disagreement regarding the relative merits of each indicator.

Panelists also discussed the recent stress tests administered by the Federal Reserve for 19 U.S. banks to determine capital adequacy. Kelly expressed serious concerns that if the government were to divulge the firm-level results of these tests, a serious crisis could result. He suggested that short sellers might use this information to engage in further speculation, adding to the problems experienced by already distressed banks. In a brief exchange with Bo Lundgren, Kelly conveyed some optimism about the U.S. banking system. While he agreed that not every bank is in exemplary condition, he believes the system as a whole to be in much better health than it was just last September.

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

A staggering 15 percent of housing units in America are vacant, and that number will likely grow as the recession deepens and housing markets remain frozen. Moderator Betsy Zeidman of the Milken Institute stated her belief that financial innovations can solve the problem — but only if used responsibly. She argued that we need to "acquire and dispose of foreclosed properties in a responsible manner that also benefits the community."

Special emphasis was placed on REOs (real estate-owned properties), which tend to be concentrated in blighted neighborhoods where housing markets are stagnant and local residents are increasingly unable to afford moving into refurbished homes. "We have a unique opportunity to control both the [property] assets and the funding at the same time. We need to approach this strategically…there is a whole lot of money flowing out there. Let's not waste it," Zeidman urged.

Mary Tingerthal of the Housing Market Network discussed the Housing and Economic Recovery Act (2008), which is delivering $3.92 billion to all 50 states and 259 communities to acquire, rehabilitate, demolish and dispose of foreclosed and vacant residential properties. This money, administered by the Department of Housing and Urban Development, is allocated on a formula-basis according to need. The stimulus package adds $2 billion that will be available to both local governments and nonprofits based on program effectiveness. Tingerthal noted the need to structure community development agencies to ensure that the money is well spent.

Nearly all speakers concurred that the best way to solve this problem is to keep homeowners in their homes. Because there is no "velocity" in the market, as Debra Schwartz of the MacArthur Foundation put it, any REO homes that get rehabilitated with government money will remain vacant. Her foundation has a program that focuses on providing financing for 2,000 of Chicago's 25,000 REO properties. To her, the problem with velocity is largely due to the complicated mechanism for delivering the federal money to where is needed.

George McCarthy of the Ford Foundation noted that the situation is made worse because it's very difficult to accurately appraise the values of homes in the current market. We can't fix the problem until the pricing structure is resolved, so we find ourselves in a peculiar chicken-egg conundrum. Furthermore, McCarthy believes that the federal money dedicated to this issue will only handle less than 10 percent of the problem. He argues for an upstream fix that will solve the broader problem of home loans rather than simply focusing on REOs.

Thomas Humphreys of Morrison & Foerster believes that the solution will require a public and regulated vehicle that will raise capital and redevelop communities rather than just homes. Otherwise, we will continue to be beset by "vulture-type" funders who are looking for ways to make money rather than to redevelop communities. Rick Jacobus of NCB Capital Impact's Shared Equity Homeownership Initiative called for a system of shared equity homeownership between the homeowner and some sort of "stewardship entity. McCarthy reinforced this idea: "We need a backstop for these homeowners." Shant Hovnanian of iHopeUSA discussed his new firm, an initiative for the preservation of homeownership, which would do just that.

Joe Kanter of the Kanter Family Foundation argued that our perception of the problem and its solution is upside down. This is fundamentally an issue about homeowners and the local governments who benefit need property tax revenue. Kanter says that we have to work with the homeowners and keep them in their homes through a system of "sweat equity." If we waste time and money rehabilitating REO homes in frozen real estate markets, then we are throwing money away. By solving this from the bottom rather than from the top, he feels the REO problem will solve itself.

Welcoming Remarks:
Antonio Villaraigosa, Mayor of Los Angeles

Introduction By:
Michael Klowden, President and CEO, Milken Institute

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

While there may be signs of recovery and stabilization, the U.S. economy will not reach full output for the next few years, panelists agreed.

Douglas Elmendorf admitted that even his predictions that unemployment will continue to rise, the economy will continue to contract until the second half of 2010, and growth for 2010-11 will reach 4 percent is considered optimistic in comparison to others′ views.

Panelists said the question is whether the $783 billion stimulus package will be enough to bring the country back to full output. Michael Boskin said the stimulus would best serve the economy through targeted efforts. Additional stimulus aid in 2010 should be viewed critically, and current allocations of the package should be analyzed for impact. It′s important to juxtapose long-run costs with short-term benefits, he said. Ultimately, the short-term effects of the stimulus are needed but the long-term impact of higher taxes will be felt by future generations if spending isn′t curbed.

Universal health care, carbon-emission caps and unionization all stirred debates on detrimental vs. beneficial effects. However, the panelists agreed that the crisis itself has exposed gaps in the current system of regulation. While the need for systematic risk regulation and market ratings were generally viewed as necessary, it is evident that regulation must be flexible enough to adapt to variety of industries and firm sizes that exist, they said.

Michael Miles said the nation survived the "perfect storm" and that things are "looking better," at least in retail. Though small businesses were hit the hardest during this crisis, these businesses will also lead the nation out of the downturn, he said.

Jim Goodnight said this is the ideal time for businesses, large or small, to look inward and begin to optimize their processes, minimize their inventories and truly maximize revenue. It′s through innovation, investment and cost-cutting that the nation can remain competitive on a global scale.

Moderator:
Michael Milken, Chairman, Milken Institute

"Most professors and university classes would tell us that capital structure doesn't matter," said moderator Michael Milken, alluding to Merton Miller's assertion that firm value is not affected by the way it is financed. With that provocative statement, he launched an indepth discussion of the many considerations that management teams face in an era when capital structure will increasingly be scrutinized.

Scott Sperling of THL Partners gave a brief overview of recent economic developments and how we arrived at where we stand today. Specifically, he noted that the ratio of total debt to long-term EBITDA increased from 4.2x in 2000 to 6.2x in 2007, driven primarily by senior debt offerings. U.S. household debt today stands at its highest levels, even as income is being crimped and consumers are really feeling the pain. Like companies, households now face the need to deleverage.

Each panelist stressed that it is imperative to understand a company's capital structure and use that knowledge to make more informed decisions. Randall Wooster of Imperial Capital described why capital structure is hugely important for traders and noted that if people cannot be certain about the structure of a given company's debt, people will not trade that debt. The legal and regulatory complexities of capital, such as equitable subordination, must be fully comprehended, and only when these complexities can be navigated can a trader reduce his risk and improve his profits.

Marc Rowan of Apollo highlighted the "ability to make a decision in the context of uncertainty" and remarked that he has been very surprised with the speed at which several large U.S. companies have unraveled. Echoing these sentiments, Sperling described how his company has formed a team that works with the senior management of its portfolio companies to bring in key personnel with new perspectives from other industries to help improve cash flow and top-line growth. With the aid of this strategic resource group, management has been able to come up with creative ideas that can help a company manage its cost structure.

Dan Hesse, CEO of Sprint-Nextel, described some reasons why it is important for a large corporation to improve its capital structure. He claims that it is extremely important for companies operating in capital-intensive industries to paint a good financial picture so that they can improve their credit ratings and piggyback this with a "free" marketing tool and increased positive advertising. Hesse also noted the importance of an off-balance-sheet company for Sprint, which will be cash-flow negative for the next few years, but will ultimately position the company well in the future.

Going forward, there will be continued tightening in the credit markets, despite the recent positive tone in the stock market. The reality of an overburdened consumer is going to be problematic for the economy. To restore their balance sheets, companies will utilize debt-for-asset swaps and should also look to sell equity and push out their maturities. With the right understanding of current capital structures, the capital markets can be used advantageously.

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

With 100 million more people below the poverty line, this is not the time for donors and private capital to back away from health needs of the developing world, according to Alice Albright. Rather, they should think of how different types of capital and donors can work together and leverage their services.

Moderator Betsy Zeidman noted how the unpredictable patterns of aid leave developing countries wondering if and when it will arrive. Jan Walliser noted the difficulty African nations face working with several hundred donors who are not coordinated and have not leveraged their services. Albright added that the donor environment does not help health care because each donor has its own reporting and monitoring requirements, further complicating aid delivery.

Dambisa Moyo, author of Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa said a fundamental problem with the aid culture in that donors don′t involve African governments. This removes incentives for the African government to participate in a meaningful way. The aid conversation should really focus on donor exit strategies and not short-term solutions that ultimately do not spur long-term development, she said.

In terms of long-term solutions for health-care needs, Gargee Ghosh said drugs and vaccines tend to be neglected with investment. She said grants are more effective in delivering health services to developing nations. About 50 percent of those providing health care are private entities, and there is a great opportunity for aid organizations to work with the private sector, Ghosh said.

Albright offered other solutions to access funding for health care. One is the International Finance Facility for Immunizations. The GAVI Alliance has used IFFIm to access the capital market for additional funding for government immunization pledges. These binding promises allow for long-term, predictable, funding commitments. Another solution is advance market commitments, which use up-front payments to encourage pharmaceutical companies to create vaccines more rapidly. In return, the pharmaceutical companies sell the vaccines at a lower price. However, Ghosh asserted, IFFIm is not an endless source of money.

Moyo said the solutions Albright mentioned do not address the fundamental problem that African governments need incentives to invest and underwrite such programs. Moyo said that unlike the Western view that African nations can access capital markets, other nations — particularly China — have a different attitude toward Africa that the West has failed to consider. Walliser disagreed, saying that African governments will not have easy access to capital markets and that most investors are looking to invest in Africa.

While the panelists had different perspectives on the best approaches to international development, they agreed that international aid requires a multi-faceted approach that considers donors, local governments, the private sector and civil society.

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

The relationship between preserving archaeological artifacts and helping poor communities in developing nations may not be obvious. But the speakers at this fascinating roundtable argued for several different policies that could leverage priceless antiquities to spur economic development in their source countries while simultaneously ensuring the conservation of these cultural treasures.

Glen Yago of the Milken Institute gave an overview of the current problems with antiquities. He described how the destruction and looting of archaeological artifacts is stripping the world of its cultural heritage, while at the same time denying any economic return or benefit to the local communities where such antiquities originate. Larry Coben of the University of Pennsylvania agreed: "The rate of destruction is extraordinary." They both introduced the notion that market and financial innovations may be able to solve both problems at once, perhaps through smart and innovative archaeological financing structures.

Jerry Podany of the J. Paul Getty Museum pointed to the partnerships the Getty has already undertaken as a potential model. The Getty has begun to lend its expertise to help source countries preserve their antiquities; in turn, the museum receives pieces on loan for display. The exhibition of these pieces also provides opportunities to excite museum-goers about visiting the country of origin, providing that country with further financial benefit.

Tourism could in fact be the key to solving this quandry, argued Charles Stanish of the Cotsen Institute. He provided two examples in Argentina and Peru of recent archaeological discoveries that have led to the creation of small, local museums for their display. This ensures preservation of the artifacts while simultaneously creating wealth for the surrounding communities.

Some differences of opinion on the appropriate use of money became clear near the conclusion of the panel. Brent Lane of the Kenen-Flagler Business School argued strongly for venture capital-type investment in archaeological financing. "Unless you create a local economic benefit, you don't have shared communal interest in the conservation process itself," he stated.

Hakan Tekin, Consul General of Turkey, countered that the perception from his country is that Lane and others are simply trying to create a market for antiquities. "Sale of cultural property has been banned in Turkey for over 100 years," he noted, urging the panelists to seek nonmonetary ways of exploring the problem.

Author Sharon Waxman emphasized the validity of Tekin's viewpoint, and said that multiple models might be worth exploring in different areas. Every culture is unique, she noted, and we may have to tailor our solutions in recognition of that reality.

Moderator:
Michael Henkin, Managing Director, Co-Head of Recapitalization & Restructuring, Jefferies & Company Inc.

Firms of every stripe are encountering significant financial problems today, declared moderator Michael Henkin of Jefferies & Company, recalling that in past recessions, financial distress was not as widespread across sectors. He also noted that global hedge fund assets, which quadrupled in size between 1999 and 2007, decreased in 2008, and will likely do so again this year.

David Hollander of Tennenbaum Capital emphasized several troubling characteristics of the current market. For instance, leveraged loan spreads are at historic highs, while firms are now demanding to be paid at rates that borrowers cannot afford. Hollander also noted that the interest expense is often prohibitive to the borrower, while the price of debtor-in-possession (DIP) lending has risen to unprecedented levels. In his experience, lenders are able to successfully demand a much quicker reorganization process today than ever before; they now want to be taken out as soon as possible. Hollander said he considers predicting the future of industries and of firm profits to be more difficult today than ever before.

Doug Teitelbaum of Bay Harbour Management noted that current recessionary conditions often hide poor management practices. He suggests that secured bank loans should no longer be viewed as an instrument that pays par. Teitelbaum also joked — with a touch of seriousness — that today's bankruptcy court is like Sotheby's, an auction house of many fine valuables.

First- and second-line tranches are increasingly taking more defensive positions, noted Paul Aronzon of Millbank, Tweed, Hadley & McCloy, exacerbating an already difficult market situation. Furthermore, he shared that there is little to no financing available for exits. Aronzon and other panelists agreed that lenders today commonly consider themselves to be secured creditors, although many second-lien lenders may be worse off today than are unsecured lenders.

John Castellano of AlixPartners noted that the bankruptcy process is very expensive, which motivates fire sales or liquidations. This problem is compounded by the general lack of funding, such that firms today seek to exit reorganization as quickly as possible.

Carl Goldsmith of Beach Point Capital Management discussed the traditional debt model in which investors seek to double their money in a reasonable period of time. However, he stated that leverage is currently at historic highs, while economic prospects are bleak, resulting in earnings that are falling or even negative. Consequently, he believes this is the toughest restructuring cycle in U.S. history.

Goldsmith further suggested that there has been a total void for the last eight or nine months in regards to first-lien capital, while the secured loan and DIP-financing process has grown adversarial for firms. As a result, new debt arrangements have developed, which potentially harm existing bondholders. However, he noted that firms are so desperate for financing that they will now accept covenants that previously would have been considered objectionable. The situation is pitting the interests of different classes of bondholders against one another.

Panelist generally concurred that investors typically fail to comprehend the intricacies of either the current market conditions or their full legal rights. In part this is because rules vary widely according to investor class, are extremely complex and differ measurably from the high-yield markets.

Moderator:
Timothy Lappen, Founder and Chairman, Family Office Group, Jeffer, Mangels, Butler & Marmaro LLP

The recent turmoil in financial markets has significantly reduced funds available for donation, but the troubled economy will focus people on what's important to them rather than causing the demise of philanthropy, panelists said.

Jamie McCourt and Deborah Doyle McWhinney predict paradigm shifts in philanthropy driven by the economic realities and changes in the distribution of wealth and the demographics of potential donors. Gone is the era of simply writing a check, they said. Panelists expect a shift from program-based giving to an operations focus for sustainability.

Donors want more accountability for how their donation will be used; they want a connection with the cause; and they want to know the tangible outcome of their gift. Charities should be prepared for cautious donors who will ask more questions not only about the cause but also about their money management.

McCourt urged potential donors to perform their due diligence, investigating not only the heart of the charity but also their money management and track record. McWhinney encouraged donors to consider making a pledge rather than a one-time donation if there are concerns about a foundation's money management.

Panelists warned charities and recruiters about donor fatigue and encouraged fundraisers to know their audience and target their activities. McWhinney and McCourt advised potential donors to identify their passions and focus their giving. Otherwise, McWhinney said, "philanthropy is a labor not a labor of love."

McWhinney suggested that each person has a role to play and a way to contribute, that philanthropy is not restricted to the top few percent of the population. Audience participants spoke to the importance of securing small donations from a large number rather than large donations from a small number. With the surge of online social networking, this is more attainable then ever. Other ways the audience proposed expanding philanthropy included allowing for "indirect impact" by investing in a for-profit company that has charitable activities; mission-based philanthropy; and recognizing that there are resources other than money people can provide to help others.

In this economy, philanthropy has an opportunity to evaluate itself and be creative, to invest wisely and to think beyond monetary gifts, including donations of time, advice and expertise.

Moderator:
John Calamos Sr., Chairman, CEO and Chief Investment Officer, Calamos Asset Management

Convertible securities are not just for the weak — many healthy and well-respected companies are using convertible securities as a flexible and inexpensive way of accessing capital.

The panel agreed that convertible securities are more flexible than debt because they do not have as many restrictive covenants and allows companies to tap into funding even when debt spreads are high. Moderator John Calamos Sr. of Calamos Asset Management explained that the convertible securities market is "more resilient over time in providing access [to capital] to companies."

Companies access capital along a spectrum, with equity on one end as the most flexible but most expensive option, and debt on the other end as a relatively inexpensive but restrictive mechanism. Additionally, Calamos added that debt is not accessible to all firms: some are too small to raise a significant debt offering or have their debt rated. "Convertibles really provide the ability to enhance each part of the spectrum," Calamos explained, allowing companies to raise equity at a premium or issue debt with a higher yield.

Jason Lee of Goldman, Sachs & Co. added that convertible securities have also been very attractive because of their accounting treatment, although the panel agreed that the Financial Accounting Standards Board will soon take away that advantage.

The panel also addressed whether CFOs and investors really understand convertible securities. Michael O'Grady of Bank of America Merrill Lynch stated that CFOs may not start with a full understanding, but by the time they finish, they understand. Lee agreed. "The challenge of this asset class is educating those companies who don't get it," he said, noting that there are a large number of "classic American companies that still have a bit of a perverted perception about what this security is."

However, the panelists agreed that there is a great value proposition to investing in the convertible securities market once participants are educated. The speakers noted that this market has experienced a tremendous dislocation that has opened up a myriad of ways to invest in convertible securities.

Christopher Zafiriou, Senior Investment Analyst of the Investments of the Pew Charitable Trusts, stated that convertibles can be used in three common ways: as a means to invest in distressed securities, through convertible arbitrage and as a defensive equity substitute. Zafiriou did warn that he did not feel that convertible arbitrage is a long-term proposition; he believes it will eventually devolve to hedge funds trading among themselves. But he stated his belief that convertible securities offer an excellent risk/reward ratio and states that if an investor is "gun-shy about rebalancing into equity, then convertibles are a great way to transition."

Moderator:
Sarah Coxe Lange, Managing Director, Guggenheim Partners Asset Management

Why are private companies doing well in the current environment? Instead of focusing on the companies that have failed and trying to identify what went wrong within them, this panel suggested that we examine what private companies are doing right and why they are doing better than their public counterparts.

When asked how private firms different from public companies, Dave Marks had a ready answer: "Culture eats strategy for breakfast." As a public investment officer, it is very easy to be worried about "the now": this week, this month, this quarter, this year. But private firms can focus on the long-term direction of the company and the needs of their customers without worrying about analysts, quarterly reports or the press, creating a stark contrast of cultures.

Mark Lipson of Bessemer Trust stressed that "we don't have a daily share price to distract us," one that might give rise to short-term thinking. Freed from fluctuating stock prices, companies can focus more fully on their core competencies, partnering with clients and customers, customer retention and market share. Being private allows a company to be more nimble and flexible, and most importantly allows companies to make decisions more quickly and efficiently. It also allows for more efficient capital utilization and keeps management more focused on knowing what the margin of safety is in the organization.

There are drawbacks, however, to being a private company. One of the biggest is the lack of access to capital, which is not as easily obtainable as it is for a public company. Another pitfall of being private can be the lack of shareholder discipline that exists for publicly traded companies. Activist shareholders can steer a company in the right direct and call for change when the current management is not pursuing the right strategies to create shareholder value and increase the profitability of the business.

The lessons to be learned from private companies can be profound — and staying "under the radar" can be advantageous in fragile economic times. Privately owned companies tend to have more discipline and don't have the luxury of "playing with the houses money to the benefit of senior management," according to Scott Minerd of Guggenheim. Instead, they can focus on longer-term thinking that tends to enhance decision-making skills.

Moderator:
Steven Drobny, Co-Founder and Partner, Drobny Global Advisors

The issues facing hedge funds of negative average industry performance, increased redemptions from limited partners, and fund terminations are not new. In fact, the industry faced similar issues in the 1970s. The question now is how the hedge fund industry will adapt and evolve in the current environment.

Through the first quarter of 2009, hedge funds overall were down an average of 20 percent, but one in three realized positive returns over the same period. At approximately 2 percent, hedge funds account for a relatively small percentage of global assets under management. However, hedge funds have accounted for a disproportionate share of attention from the financial media due a handful of high-profile implosions. The panel of two fund managers, two pension fund limited partners and an industry consultant were largely in agreement on how the industry got to where it is today.

Jason Cummins said hedge funds got into trouble simply by taking on excessive risk with high leverage levels. Managers have historically been incentivized to "reach for yield," necessitating a move to riskier assets. As a result, Joseph Dear said, the compensation structure for hedge fund managers needs to be modified. "A serious misalignment of interests exists in the current model," Dear said, and a move toward pay for performance, increased transparency and an institutional model is needed.

Orin Kramer, also on the limited partner side, agreed with Dear's assessment and suggested that hedge fund managers adopt characteristics of a private equity fund structure with preferred returns for LPs and clawback provisions. Marc Lasry said increased transparency is necessary and not an unrealistic expectation from investors.

The panel agreed that screening from managers simply based on low fee schedules would lead to a negative selection bias. However, the LP representatives were emphatic that regardless of the fee structure adopted by a hedge fund, interests must be aligned with their investors and compensation should be based on performance.

When discussing the near future of asset allocation and fund flows to hedge funds, Stephen Nesbitt was optimistic about growth in hedge fund assets for multiple reasons. First, large institutions need to take calculated investment risks because depressed asset valuations across their portfolios mean that pensions are significantly underfunded. In addition, other asset classes are not terribly attractive on a risk-adjusted basis relative to hedge funds. Nesbitt expects to see more movement of money into hedge funds in the last quarter of 2009 and continuing into 2010.

Looking forward, Cummins said the macro economic environment will experience materially more volatility than historical levels. After the shakeout of the past 12 months, best-in-class managers will emerge and will be well-positioned to capitalize on an environment of decreased competition and increase volatility. Lasry described potential government regulation of the hedge fund industry with the simple statement, "It's not if but when."

Moderator:
Ryan Streeter, Senior Fellow, Legatum Institute

Given the turbulent times we live in, where is long-term growth going to originate? The debate on this question is inseparable from understanding the nature of healthy societies, which provide reservoirs of human capital and stability. As shown by The Prosperity Index, a measure of healthy societies created by the Legatum Institute, economic factors aren't the only important elements needed for prosperity. There are also important "livability" measures that must be considered, such as equality of opportunity, sensible governance, social capital, religious freedom and health. This panel examined the factors that generate and restrain national prosperity, and who will drive global growth.

Moderator:
Kara Swisher, Co-Executive Editor, All Things Digital

Electricity storage, alternative energy sources and efficient adaptations to existing processes are all areas attracting notice from this panel of venture capitalists. With bond financing still sluggish and the IPO market currently producing few deals, the best source of financing for new enterprises is the Department of Energy and other government sources — but that doesn't mean VCs have stopped looking for opportunities.

The trouble in the capital markets has not deterred Eric McAfee of McAfee Capital. He highlighted a $4.5 billion solar energy project that includes bond financing and funding from McAfee Capital of just under $50 million.

Solar, he says, is where the majority of VC money is going. This is reflected elsewhere in the world — especially in the Middle East, where according to McAfee, sovereign wealth funds are investing in the infrastructure because of limited remaining oil resources.

As other forms of generation advance, electricity has the potential to be the new basis of the world's transportation network. McAfee stressed, however, that investors need to be wary of what part of the value chain they choose to invest in. Specifically, there are many manufacturers of solar cells, and McAfee predicts that there will be a "bloodbath" as competition forces most of the 80 or so participants out of the market. The power in the value chain has moved to the utility customers. Ford Tamer of Khosla Ventures cautions that the "Google of solar" has not yet been invented and that there is not enough efficiency in the overall cost structure.

Shifting gears to the larger electrical network, the panel agreed that the U.S. government is in a unique position to spur investments in the historically neglected electrical infrastructure. Specifically, if national policy dictated a goal of building out a "smart grid" for electricity distribution, venture funding would flow toward producing energy-efficient retail goods.

Tamer stated that while some venture participants are looking to batteries as improvements that can meet electrical infrastructure needs, his firm is looking at other forms of electricity storage that can meet demand for 100 MW of storage.

Compatibility with a "smart grid" is also on Tamer's mind; he pointed out that Khosla is still looking at consumer-based devices like advanced adaptations of cell phones that include projector functions as well as uses that will replace traditional credit cards.

The panel also agreed that other forms of alternative energy are providing opportunities right now. Alec Ellison of Jefferies & Company proposed a move toward compressed natural gas as a clean technology with one-third of the emissions of traditional car fuels, cautioning that the costs of producing biofuels may be too high at the moment due to the costs of food for algae and other microbes. Tamer suggested that the technology exists for zero net emissions through the use of advanced geo-thermal techniques and bio crude oil production.

McAfee supported that effort, adding that McAfee Capital was looking at a biotech approach to creating fuels using only the cheap inputs of sunlight, carbon dioxide and seawater. Steve Jurvetson, of Draper Fisher Jurvetson, also echoed the drive toward biofuels through the use of advanced genomics in algae capable of constantly excreting oils.

The overall industry tone was reflected by Ellison, who said that although it is experiencing difficulty, the IPO market will return later this year, but not with very high volumes.

Jurvetson added that difficulties in the capital markets have dried up financing for ventures at a time when good ideas need funding. The result, he says, is that 2009 and 2010 will be fantastic vintage years, meaning that in a few years' time investors will look back and wish they had taken part.

Moderator:
Michael Milken, Chairman, Milken Institute

Moderator Michael Milken convened this timely panel before a packed house, exploring the current crisis in the credit markets and a host of possible solutions to solve it.

David Malpass of Encima Global opened with a basic rundown of the importance of credit as the underpinning of any healthy economy, stressing the importance of proper valuations and accurate ratings. Without well-functioning credit markets and proper credit allocation, he warned, expansion will be limited.

According to James Walker of Fir Tree Partners, the core of the crisis came from off-balance-sheet securitizations in mortgages; cars and credit cards; and securitization of securitization (i.e., CDOs). This securitization phenomenon was driven over the past 15 years by a combination of financial institutions, investment management firms and rating agencies with little skin in the game operating under misaligned incentives to generate fees rather than execute accurate, well-considered analysis. Through this process, Walker said, these asset managers essentially became "asset gatherers," and the world became a global casino with governments acting as the house and taxpayers taking the losses.

Milken turned the discussion to the question of ratings, pointing out that almost 17,000 instruments received AAA ratings in 2007, while today we only have four U.S. companies holding that distinction. He noted that much of the exuberance in ratings was driven by analysts' over-reliance on historical asset appreciation, pointing out that schools typically teach students backward-looking regression analysis as a way of charting the future. The flaw in this model is that raters really need a realistic grasp of future dynamics to understand where things are headed. "The past can't pay you interest," Milken remarked.

Echoing points raised by Milken and the other panelists, Stephen Nesbitt of Cliffwater noted that many institutional investors were hurt because they looked to the past and trusted the ratings firms to provide realistic evaluations of risk. Over the past 35 years, credit has been a bad deal for these investors, Nesbitt said, pointing out that Treasuries actually would have provided a better return. He cautioned that just because an instrument has a high rating or good spread doesn't mean it's attractive. Milken summarized these points by noting the importance of looking at "facts rather than perception."

To round out the discussion, Milken challenged the panelists to focus on solutions. Walker said the key lies in the equitization of debt, otherwise known as deleveraging. Currently there is just too much debt out there at the institutional, corporate and consumer level. To remedy this, Walker proposed banks build tangible common equity and deleverage through asset sales. Corporations must swap debt for equity, pursue secondary equity offerings and enter bankruptcy if necessary. Finally, Walker argued that consumers need to similarly raise their savings rate, restructure debt and enter bankruptcy if needed.

Stephen Tananbaum of GoldenTree offered his thoughts, focusing primarily on the corporate side since he feels it′s easier to change the balance sheet for corporations than consumers, at least in the near term. He spoke of his experience in working with distressed firms, noting that companies are generally receptive when approached with a reasonable offer. He also made the point that the market may be willing to value debt equity at a higher price.

Milken seized on this last point, noting that in good times, a firm's value will likely go up when it takes on debt. In the current environment, however, enterprise value may actually go up when equity is swapped for debt.

Moderator:
Brian Sullivan, Anchor, Fox Business Network

Everyone agrees that the U.S. housing market is troubled, but when it comes to solutions, there′s a raging debate.

Recounting the challenges facing the housing market, panel members agreed that the causes are numerous. Donald Brownstein said the downturn was the result of easy money for homebuyers in the form of mortgages that were too high for people′s income. Steven Mnuchin agreed: "The industry began making loans based on the value of the property instead of on the home-buyer′s income. The problem is lending gone wild."

Other panelists noted a complete breakdown in the mortgage system observing that no one, from homebuyer to mortgage lender, understood the risks associated with high housing prices and mortgages based on home value instead of income.

The panel said the troubled housing market a large contributor to the economic downturn. "What we have now is a depression in the housing market, and it is why we have an overall economic slump," Ross DeVol said. Housing's decline has taken approximately two years' growth from the nation's gross domestic product.

The bottom is still ahead, Brownstein said, and the essential question is when will the economy turn around and how. While forecasts predict an uptick in the housing market in the next few years, there is a lot of room for government and free market solutions.

Richard Smith said, "The administration has failed so far in addressing the housing crisis. The focus of the administration has been on the foreclosure issue, but the solution to the problem is on the demand side." But Mnuchin said stabilizing housing prices is part of the solution.

The panel addressed some misconceptions about the housing market, especially the idea that there is a national housing market with challenges that can be addressed on a one-size-fits-all basis. Devol said that misconception leads policymakers to miss the fact that 50 percent of foreclosures are in California, Las Vegas, Phoenix and southern Florida. "The plan from the federal government addresses the housing problem as on a national problem but doesn′t tackle it locally," he said.

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

A bright spot has been overlooked among the headlines about economic failure: Community Development Finance Institutions. Not only have they been doing better than larger banks, but several have been performing remarkably well. They have done so by sticking to the fundamentals of good banking — fundamentals from which larger banks have apparently strayed.

CDFIs are small, local banks that have strong connections to the communities they serve. Most are nonprofit institutions and are considered to be of the community and for the community. According to Ellen Seidman, they know local needs, can better anticipate changes and have more flexibility. With a strong interest in the success of their borrowers, they are in the business of "community conservation."

CDFIs operate in communities that the Milken Institute classifies as emerging domestic markets: poor and marginalized areas often characterized by bigger minority populations. Larger, mainstream banks generally don't invest in these areas because of the misplaced perception of risk, Seidman said. George McCarthy reinforced her point, saying that "risky" groups are not really risky if the loans are properly made and managed. He added that the notion of blaming the current banking crisis on subprime loans to risky groups of borrowers did not hold up after examining the facts.

Doug Bystry knows this well because he runs an extremely successful for-profit CDFI in California that has grown while other lending institutions have been floundering. Bystry incorporated as a for-profit firm rather than a nonprofit because he thought it would be easier to attract capital. His loan officers use guidelines that encourage them to say "no" when necessary. By engaging in good business practices, he has shown that these emerging markets are viable.

David Sand agrees. His firm, Access Capital, provides money management services for CDFIs. It only invests in double bottom-line activities, and officials do their homework before providing securities. Unlike many of his industry counterparts, Sand ensures that they only provide securities backed by real, underlying collateral. They take the time to ask the right questions and ensure the value of their activities. As a result, Access Capital has grown 22 percent since December 2008.

Phaedra Ellis-Lamkins provides green jobs as a career ladder for people from these communities and thinks the time is right for large-scale job creation within this sector. Her firm, Green for All, looks for areas with new net jobs and dirty industries that are transforming themselves into green ones.

One challenge is access to capital. While testifying before the House Appropriations Committee on this issue, she noted, many "Republicans don′t believe in global warming, but they want to be part of the solution if it means new jobs for their constituents." New jobs in recycling, waste management and the logistical functions of a green economy will increase the economic activity within these "emerging markets" and lead to real economic growth, she said.

The panelists agreed that as long as credit markets remain frozen, the economic woes will continue. But CDFIs have been doing well in areas where financial success was least expected. In fact, McCarthy said CDFIs were created to fill the gap left by the large financial institutions that refused to serve poor communities. However, CDFIs will not be able to "scale up" and solve our financial problems. Perhaps the real lesson for larger, struggling financial institutions is that they can perform better by following the example of CDFIs: stick to the basics of good banking.

Moderator:
Larry Band, Consultant, Environmental Defense Fund

Fish form the primary source of protein for more than 1 billion of the Earth′s inhabitants, yet the natural fish supply continues to be irreparably harmed. The panel explored the fishing industry's desperate need for innovative approaches that will protect the world's damaged fish supply while also generating revenue for investors.

Larry Band opened the discussion with a bleak picture of the state of the world's fisheries, noting that the majority of the world′s stocks have been damaged. "The ocean is going to be a different ocean in 50 years," said J.R. Schubel, noting that the damage can be attributed to human actions causing oceans to be warmer, more acidic and less diverse biologically.

David Festa said overfishing also is devastating fish populations and blamed ineffective regulations, in part. Regulations narrow the length of the fishing season, which encourages fishing entities to maximize their catches during that window by employing far more boats, hooks and crews than the ecosystem can sustain.

Festa advocated the idea of "catch share" fisheries as a remedy. Quotas would limit the size of a fishing entity's annual catch, but the fishing season would be substantially longer. Festa said this would encourage fishing entities to be more responsible and would cause them to bring in their catches over longer periods of time, increasing the product's desirability and value.

David Crane agreed that catch share fisheries were a much-needed step that would benefit fishing entities and the ecosystem. "Nothing will work unless we come up with innovative ideas that solve the environmental problem but allow people to earn a great living," he said.

Jason Winship said the financial benefits of catch share programs are attractive to investors. "We do see a significant opportunity," he said. But while catch share fisheries offer significant potential, just 15 are in existence. The panel expressed hope that by 2030 the number of catch share fisheries might increase to 70.

The goal will require significant and early investments in fishing equipment and vehicles. "Money needs to come into fisheries ahead of catch shares taking place," Band said, explaining that improvements in the tools of the trade must take place before sustainable fishing can occur.

The panel agreed that the infusion of private capital into these enterprises will be essential to advancing this innovation in fishing. "We need capital to rationalize the fishing fleet," Band said.

Moderator:
Duncan Goldie-Morrison , CEO, Calyon Americas

There's no denying that the global meltdown and frozen credit markets slowed deal-making significantly in 2008. But according to some of the experts on this panel, value can be captured despite the gloomy economic outlook.

According to Leon Black, Founding Partner of Apollo Management, Americans are living in "treacherous times." The financial system is broken and the outlook for conventional buyouts is dreary due to the lack of capital. Black predicts that it will take 18 to 24 months before the lending market begins to ease.

In the meantime, he believes private equity firms should play defense with their existing portfolios. The majority of Apollo's concentration is on current assets while the rest is focusing on identifying new opportunities. One recommendation from Black is for private equity firms to focus on cash management, working capital, operational savings and delivering through debt restructuring. Echoing similar sentiments was Ted Virtue of MidOcean Partners, who also recommended stretching out maturity holds and simply "weathering out the storm" for solid companies that are still believed to be good investments.

For those private equity firms looking to take the offensive approach, the panel of experts weighed in on attractive opportunities. Virtue sees distressed assets and in-house debt as attractive options. Thomas Lee of Thomas H. Lee Capital currently seeks value in deals without leverage, thus independent of the credit markets. Looking at industry attractiveness, Black believes that there are great opportunities in commodities and nonperforming loans in Europe.

Jim Davidson of Silver Lake revealed that he is taking a more aggressive approach, with majority of time and effort spent on looking for new opportunities as opposed to tending existing holdings. Davidson finds attractive companies that are market leaders in several sectors, including technology and power and energy management.

One carrying theme throughout the discussion was the need and urgency for communication. Moderator Duncan Goldie-Morrison of Calyon Americas reiterated that in these times of capital scarcity, communication across varying partnerships is critical. Elected representatives have and will continue to struggle with the complexity of America′s financial crisis; in such an environment, interests must be aligned and strategy communicated.

As a final note, the private equity industry will most likely return to different purchase price and debt multiples but will still operate under a business model that provides solid returns to investors. Statistically, private equity returns are most attractive coming out of contrarian environments, so don't count the industry out just yet.

Moderator:
Frank Luntz, President, The Word Doctors.com

Never mind the weak economy. Carl Schramm of the Kauffman Foundation remains a strong believer in the power of entrepreneurship.

"The American spirit is alive and well . . . and will continue to surprise and impress," he insisted. Schramm outlined the rise in entrepreneurial ventures during the down economies of the past, and predicted that history will repeat itself. He noted that more than half of all Fortune 100 companies were created during a bear market, most notably FedEx, Genentech, Microsoft and Apple. Schramm continues to believe there are many opportunities available to young, brilliant minds with heart and determination.

William Saito of AIST agreed strongly with Schramm. "America really is the land of opportunity," he said, contrasting the United States with Japan, where it is difficult to start a business. He noted that features of Apple's successful iPhone were present in many of Japan's mobile phone technologies even two years ago, but America was faster to get those technologies to market than Japan. "America's got the 'do factor,' the secret sauce of innovative genius."

Kris Gopalakrishnan of Infosys was gung ho about his native India as the hot place for entrepreneurial ventures. He believes that technology is providing unprecedented access to market information and new opportunities, and an abundance of highly educated young workers ready to deploy those advantages. In the past, India focused inward, and most ventures maintained their operations within the nation's borders. But that is now changing rapidly. Gopalakrishnan saw limitless opportunities in infrastructure, consumer goods, insurance and banking, and today he believes that innovative Indian firms will have an impact across the globe.

James Cain of Cain Global Partners noted a cultural shift toward greater entrepreneurialism in young Americans. "The current population of young, well-educated people will have had around 8 to 10 different jobs in between graduation and turning 30 years old. That means that they are taking charge of their careers and enjoy being in control of their lives," he remarked. Cain, the former U.S. ambassador to Denmark, believes that the U.S. stimulates creativity, rewards results and celebrates success, while Europe, by contrast, is focused on security, equality and what he termed "yenta law," a combination that he believes stunts growth in the long run.

The panel concluded by calling for the U.S. government to cut back taxes and regulation of the private sector and grant more funds to start-ups. They also hope to see universities adopt a greater role in feeding young entrepreneurs. "We hope that President Obama . . . allows our up-and-coming entrepreneurs the space to grow and innovate," said Schramm. "This will keep talent in America and continue to attract the best and brightest from all other countries."

Moderator:
Charles Van Vleet, Director, Portfolio Investments, United Technologies Corp.

The credit crisis was not U.S.-centric but rather a global event with an excess of liquidity followed by a massive contraction, according to Bruce Kasman. The lessons learned from the crisis are evolving in real time, and Kasman thinks the perspective a year from now will be different than it is today.

In hindsight, it was apparent that companies had too little equity, James McCaughan said. Financial services firms were placed under a great deal of pressure to lever up their balance sheets to generate returns in line with their peers. The combination of available debt and public market pressure led to excessive leverage levels. McCaughan said that this run-up in debt levels was a matter of human behavior and that cheap, available debt in an inflationary environment was the root cause. One key lesson learned from this cycle is that debt markets drive the equity markets although review of historical data indicates that this lesson is not new.

Gary Shilling blamed speculation in part for the credit crunch. Shilling′s key lessons learned were that regional economies cannot be decoupled in a global environment and that future cycles will continue to be global in nature. He cautioned that the dynamic between inflation, deflation and debt levels would be important to watch for the duration of this cycle.

James Gellert discussed the rating agencies at length and their role in credit cycle. Although not solely to blame, the rating agencies were enablers in providing excessive credit to the market and "there has not been a significant focus on accuracy with the ratings," he said. Gellert also brought up the faulty incentive and compensation structure between the debt issuers and the agencies. He said more competition is needed in ratings to provide an alternative model to S&P, Moody's and Fitch. "In terms of the credit rating agencies, not a lot new has been learned from the credit crisis, but a least people are aware of the problems," Gellert said.

The panelists discussed the savings rate of U.S. households at length, and the panel agreed that savings would continue to be higher than historical levels. The economists disagreed slightly on the magnitude of savings, with estimates ranging from current levels of 4 percent to 5 percent for the foreseeable future to increases of 1 percent per year for 10 years.

Alexander Friedman discussed the impact of the cycle on the developing economies of the world and the tangible ramifications of decreased aid to the poor.

The panel seemed to develop a consensus that the U.S. economy will experience flat to low growth over the next three to five years, but the speakers stopped short of providing predictions. All agreed that governmental policy moves create a great deal of uncertainty in the market and discourage investors and lenders from putting capital out due to confusion as to what may happen next.

Moderator:
Michael Milken, Chairman, Milken Institute

It's become a Global Conference tradition for Michael Milken to moderate a discussion with Nobel laureates in economics, and this year was no exception.

In thinking about how to address the economic crisis, Gary Becker says he would use the first principle of medicine: do no harm. He pointed out that although the U.S. economy is currently facing a number of issues, it is fundamentally powerful and should not be dramatically altered by excess government intervention. Instead, specific changes should be made to attack the weaknesses of the system in the form of regulation that would be more automatic and rule-based rather than discretionary.

His fellow Nobel laureate Myron Scholes added that regulation often has unintended consequences. He proposed that while financial institutions may be regulated, their functions cannot be regulated and that these functions will continue even if financial institutions are regulated to the point of destruction. Tying economic fluctuations to his namesake option pricing model, Scholes explained that volatility increases the value of options and is conducive to learning.

But restoring global confidence in the U.S. financial system is a key step toward economic recovery, according to Nobel Prize-winning economist Roger Myerson. "The rules of the game matter," explained the game theorist, attributing the historic success of Wall Street in part to the political and legal framework in the United States. He foresees economic growth resuming "when some kind of credible financial reform package is articulated and passed through Congress."

On the question of whether capitalism will survive, Myerson was quick to point out that a capitalist system provides mechanisms that solve complex problems in efficient ways. Going one step further, he claimed that a well-functioning financial system "requires respected and wealthy captains of industry." When moderator Michael Milken revealed that in a recent survey, only 53 percent of Americans believed capitalism is superior to socialism, Becker questioned the accuracy of the statistic, arguing that the American public most often votes in the direction of free markets. Citing recent changes in India and China, he stated "capitalism is by far a much more successful at eliminating poverty."

Discussing a longer-term problem facing the United States, the panel proposed solutions for issues in K-12 education. "If indeed one of the secrets to the success of the United States was the fact every decade from 1880 to 1960 the average person in the United States added one year of schooling, why have we not found an effective solution to this issue?" asked Milken. Resistance to change seemed to be the culprit.

Applying free market principles to the education system, the panel agreed that schools should compete in a system that rewards performance, thereby allowing market forces to determine which teaching methods are most effective. According to Becker, human capital makes up about 75 percent of all economic value and therefore a small increase in human capital could more than offset losses in financial capital.

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

Moderator Paul Calello kicked off this session by briefly summarizing the troubled financial environment, and the picture he painted wasn't pretty. He called special attention to the ballooning credit swap market leading up to the crisis.

A veteran of Wall Street since 1961, Jim Robinson III of RRE Ventures expressed strong assurance it will survive as the seat of global capital. He suggested market participants overlooked the importance of size and complexity, and never deployed the technology necessary to truly manage these risks. As a result, the business model may have been changed irrevocably. In terms of government policy, he suggested that the stimulus plan, coupled with "easy money," has helped to offset the contractionary impact of corporate deleveraging on the economy.

Robinson jokingly suggested that Congress represents the new risk, given that it may oppose regulatory reform. He further emphasized the importance of maintaining Federal Reserve independence, and suggested that the Fed is best suited to lead regulatory efforts.

Meredith Whitney of the Meredith Whitney Advisory Group reported being more worried by problems at IndyMac, Washington Mutual and Wachovia — since these "struck at consumer confidence directly" — than by failures at Bear Stearns and Lehman. Problems developed, she suggested, because trillions of dollars in loans were underwritten using poor math, while banks "bled reserves" and added leverage.

While Whitney felt government intervention was necessary, she believes that it came at a price. She also noted that U.S. regulatory agencies are "super-siloed" and that the SEC relies heavily on information provided by firms. Whitney forecast that roughly 10 banks, all nearly the same size, will survive. She suggests banked will not be permitted to repay TARP money, but instead will be expected to absorb other firms.

Leon Wagner of GoldenTree argued that the proportions of this crisis are unprecedented, and believes markets will be smaller as a result. He traced its origins back to the market′s failure to monitor leverage. His comments regarding the ambiguities associated with TARP (for example, is proprietary trading with TARP money permissible?) found strong resonance with the other panelists.

Global finance cannot survive without Wall Street, insisted Peter Weinberg of Perella Weinberg Partners. He attributes the survival of banks worldwide to intervention from global governments. Failing to permit banks to quickly repay TARP money would, in his view, harm market dynamics. He suggested that the continued presence of large firms is inevitable, noting that boutique industries rely upon large firms for their existence.

Like the other panelists, Weinberg vocalized several related questions regarding TARP (who is subject to its provisions?). Regarding failed banks, he suggested they could continue to operate in an open receivership rather than liquidate. Weinberg also cautioned against trying to "predict" the crisis in hindsight, on the basis of current knowledge. Any CEO who tried to reduce leverage four years ago would have, in his view, been sent into early retirement.

The panel discussion relating to bank accounting was particularly interactive, and no clear consensus was achieved. Panelists noted that IFRS in Europe permits banks to transfer assets to accrual accounting, and that recent FASB changes permit a more flexible accounting for illiquid assets. Robinson stated that he likes mark-to-market, but believes alternative methods that provide robust information on asset valuation may be more appropriate for banks. Weinberg warned of the potential dangers of altering language to benefit a particular institution(s). Meredith Whitney suggested that mark-to-market and accrual accounting, in the long run, are equivalent. Banks either take a hit immediately, or bleed ROA, such that accrual accounting is playing constant catch-up.

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

Can incorporating environmental, social and corporate governance factors bring added returns to investors, or are these factors already embedded in the intelligent investor′s framework?

Considering the effects of environmental, social and governance factors could make for equal if not better returns in the long run, Barbara Krumsiek said. Calvert Group Ltd. looks at the quality and sustainability of earnings and the quality of management in prospective investments, she said.

Harold Bradley said those issues already are accounted for in any reasonable investor's system of evaluating companies. "Bad governance leads to bad investment decisions," he said. If an environmental or legal issue is going to result in litigation, that is a financial risk that should be considered before investing. Besides, Bradley said, the definition of a socially responsible investment is subjective.

"I am assaulted with the green venture funds coming to see me. Right now, the biggest green investors in the world are ExxonMobil and British Petroleum. Are they good or bad?" Bradley said.

David Marchick outlined principles that The Carlyle Group has adopted: incorporating environmental, social and governance factors into investment decisions, engaging stakeholders, and showing transparency. While he agreed that these principles were probably already part of Carlyle's decision process, formalizing the framework had changed some of Carlyle's decisions.

Marchick said one potential investment appeared to have excellent financial returns, but Carlyle's concern about the company's labor relations caused it to reject the investment.

The issue of how to deal with a conflict between financial factors and responsible investing was of real concern to the panelists. Sean Harrigan said activism in proxy voting is one way to address the problem. Krumsiek pointed to Calvert′s interest in communicating with boards of portfolio companies to promote board diversity. She also favors say on pay, or the ability to vote on executive compensation packages. Bradley concurred, saying a long-term view of performance for executives would more closely align management′s interests with those of investors. He also said claw-backs should become a major part of the discussion of compensation.

Moderator:
Liam Kennedy, Editor, Investment & Pensions Europe

Like everyone else, institutional investors have taken major hits. Though they have longer investment horizons to recoup losses, pension funds, in particular, are vulnerable to shortfalls in the benefits promised to retirees. How are strategies and portfolios changing as managers seek to ride out the storm? Are there opportunities in these battered markets? Is it time to consider distressed assets at historically low prices? What will be the implications (and unintended consequences) of regulatory reform? How can we reap the benefits of financial innovation while limiting exposure to excessive risk? Some of the industry's most influential investors discussed their strategies for stemming losses in the short term while positioning themselves to take advantage of an eventual recovery.

Moderator:
James McGregor, Chairman and CEO, JL McGregor & Company

China's next growth engine will be its own people, panelists said, but its population and economic profile make it clear that some things must change at the same time.

David Tao said consumption as a fraction of GDP in China is 37 percent compared with 75 percent in the U.S., with exports making up a large share of the difference. At the same time, demographic projections cited by Perry Wong show that, in 20 to 30 years, the average worker will have to support more than 3.5 elderly Chinese. With a high rate of savings and a decline in exports, these numbers will force China to restructure its economy.

China will have to deal with two areas that went unaddressed during its decades of export and infrastructure-driven expansion. One, the environment, has been receiving more attention in China in recent years. "China will run out of water before it runs out of capital," Timothy Dattels said.

The other area is social and human capital. China is already investing in human capital through higher education. McGregor said university enrollment has ballooned from 3.4 million in 1998 to 21 million in 2008. Wong said social safety nets, insurance and pensions are all key neglected areas. China's pension fund holds just $63 per capita, he said, while the admittedly troubled U.S. Social Security system has 100 times that per capita. As with education, the government is taking some steps, devoting a large portion of its economic stimulus package to insurance programs to drastically increase coverage, panelists said.

The group focused on the government's ability to solve problems with a strong hand. "The irony is, regulated industries are actually good places to invest in China," Dattle said. "Yes," McGregor agreed, while making clear the potential consequences: "But you can get thwacked."

Moderator:
S. Alexander Haverstick II, Founder, CEO and Managing Partner, Boxwood Strategic Advisors

The goal of a wealth manager should be to act as the family's chief financial officer, Alec Haverstick said. Think of high-net-worth individuals as companies with their own balance sheets that sometimes need restructuring.

Haverstick said too many family planners focus on financial products and securities and don′t consider housing needs, investing in hard assets, an affordable lifestyle, cash-flow requirements or even liabilities. He suggests a new paradigm that focuses on analyzing cash flow and risk management.

He started with a case study on a hypothetical individual, Hiram Smith, the founder and majority owner of a publicly traded company who borrowed against the company stock to invest in other assets. His assets include the family residence, vacation homes, agricultural land, private equity and hedge fund investments, and an extensive collection of fine art and antiques.

With the decline in the stock market last year, the bank liquidated his stock and issued a margin call for a few hundred million dollars. This puts Smith in a precarious position. If he declares bankruptcy, according to the Sarbanes-Oxley rules, he would never be able to hold an executive position in a public company again. If the bank were to force a liquidation of assets, it would likely be poorly compensated. The best solution would be to offer Smith a workout plan, letting him keep his job and lifestyle and giving the bank a better chance of recovering its losses in the long run. However, with banks under excessive scrutiny nowadays, this might not be possible. What′s the solution?

A good outcome would entail a private loan to help Smith out. Private investors often provide such mezzanine funding, and the terms aren′t too onerous. Haverstick said. He cited one such loan for $500 million with a five-year term at LIBOR plus 4.5 percent, plus 20 percent of the upside on the borrower's investments in private equity and hedge funds. The loan was cross-collateralized by first liens on the borrower's primary residence, land holdings and direct investments. Such a loan would have allowed Smith to keep his job and given him room to come back up over the next few years.

Such out-of-the-box thinking is the real value that family wealth managers will be offering in the future, Haverstick said.

Moderator:
Christopher Ailman, Chief Investment Officer, California State Teachers' Retirement System (CalSTRS)

Just weeks before the May 4 results of the government′s "stress tests" of the 19 largest financial institutions, moderator Christopher Ailman drew upon the expertise of the panel to reveal what market opportunities exist, where vulnerabilities remain, and what indicators to watch.

Panelists see the potential of recovery in the market, but no quick fixes exist. As Meredith Whitney put it, "The American economy is resilient, but it′s going to be a long haul."

With the morning′s release of a second straight quarter of 6-plus percent declines in gross domestic product and a loss in wealth of nearly 50 percent since late 2007, Whitney pointed to a less obvious but equally perilous indicator of market health — fleeting consumer credit. As much as $2.7 trillion in unused credit will be recalled by banks in the near future, harming both consumer spending capacity and sentiment, Whitney said.

David Solomon said volatility will be affected in the short term by the results of the federal stimulus package, the likelihood of future funding, and what borrowers' obligations will be. Among Solomon's signposts for recovery is improved access to credit. He noted that corporations have done better in the past six months but have a long haul ahead. Another indicator is stabilizing home prices; until prices stabilize, both consumer behavior and commercial credit access will continue to suffer, he said. And, finally, financial losses must end.

Rebecca Patterson introduced several leading indicators that are out of the mainstream but offer invaluable insight into market health. Advertising expenditures, a luxury for cash-strapped firms and often involving multiple-month contracts, offer companies' forward-looking self-assessments. In addition, she said one can infer the health of the Euro zone from Belgian National Bank statistics tracking new manufacturing orders, which make up a large share of goods sold in France and Germany.

Solomon and Todd Boehly pointed to high-grade debt as having a lot of upside in the current market. And Patterson said, "One of the least appreciated opportunities is a basket of soft commodities." Given current conditions, an investor would receive the same protection other commodities offer, a great entry price, flat supply and recovering demand, he said.

No one on the panel fears rampant inflation in the next 18 months, but the level of government intervention and market reactions going forward make inflation beyond that a real concern. Several panelists pointed to exogenous events as the primary concern for future economic stability, while consumer anxiety-driven market volatility remains an ongoing concern.

Nonetheless, the panelists were ultimately bullish on the market opportunities to be had. "We look at it as bad economy, great prices," Boehly said. "There are more interesting ways to make money now than there have been in a long time."

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

Entrepreneurs across the world depend on patient risk capital to establish and expand their businesses. In developing countries, however, small and medium-sized enterprises (SMEs) often lack access to such funds, partly due to the difficulty investors face in exiting their investments. As a result, fewer SMEs are started, their growth is stunted, and countries fail to benefit from their collateral benefits, such as job creation and economic growth. In February 2009, the Milken Institute gathered fund managers, investors, entrepreneurs and other experts to explore potential solutions in a Financial Innovations Lab. This roundtable followed up on the Lab's discussions and allowed participants to explore next steps. Specifically, participants discussed how to implement innovative solutions, such as an exit finance facility; leverage networks to identify deals and scale up capital to where it is needed most; and align investments with investor interests.

Moderator:
John Bryant, Founder, Chairman and CEO, Operation HOPE; Vice Chairman, U.S. President's Advisory Council on Financial Literacy

One of the many factors feeding the economic recession is the general lack of financial knowledge among consumers, according to a panel of experts.

The financial markets depend largely on consumer confidence, so the more knowledgeable consumers are about the markets, the better off the markets will be, panelists said.

"We′ve got to fix the system, not the individual," said Sean Cleary of Strategic Concepts.

Among the causes of this financial illiteracy is the increasing complexity of finances over the past century, said Richard Hartnack of US Bancorp.

Fifty years ago, he said, it was difficult to get into huge amounts of debt; a home loan typically came with a fixed rate and lasted 30 years. Today loans are multifaceted. "We need to help people understand how to buy and consume," Hartnack said.

David Simon referred to financial literacy as a sort of "alternative medicine" to help remedy the economic downturn.

"There is a massive amount of greed in a capitalist system. The only way to protect yourself is through financial literacy," moderator John Bryant said. Cleary agreed, saying the only people who succeed in a market economy are those with monetary know-how.

Cleary has teamed up with the U.S. President′s Advisory Council on Financial Literacy to educate South Africans. In the first year, the program reached 7,000 children in schools and 200 in college. The target for the next academic year is 25,000 students.

Beverly Daniel Tatum of Spelman College said most of her students depend on loans for tuition but don′t totally understand the process. A major reason students of color do not graduate from college is because of money rather than academics, she said. "We need a tool kit to help students get through this."

Tatum encourages her students to understand philanthropy. Their tuition is just 46 percent of the actual cost of their education. The remainder is subsidized by donations. "I want my students to understand how to pay it forward," she said.

To reach out to U.S. adults, Charlie Rahilly of Premier Radio Networks uses his media outlets to communicate with consumers and connect them with resources to better understand finances.

Moderator:
David Pollock, Senior Managing Director, Bear Stearns/JPMorgan.; Chairman, Milken Institute Israel Center

The West Bank is open for business, and venture capital is welcome as Palestinians and Israelis work together in the private sector to create wealth and economic stability, a panel of experts and entrepreneurs said.

Opportunities exist in high-tech fields like information, communications and technology, or ICT, said Israeli entrepreneur Zvi Schreiber of G.ho.st and Palestinian venture capitalist and ICT expert Saed Nashef.

Together with Yadin Kaufmann, an experienced Israeli venture capitalist who funded Veritas and Tmura Venture Funds, Nashef is establishing Middle East Venture Capital, which focuses on Palestinian ICT companies and startups.

"Palestinians are well-placed to capitalize on the growing market in Arab-language content and mobile applications," Nashef, a Microsoft veteran, said. The Palestinians are technically savvy, and ICT is resistant to political volatility while opening global doors, offering high-paying jobs and fostering local stability.

With offices in the West Bank and Israel, G.ho.st is experiencing exponential growth in international virtual computing services and garnering international awards. CEO Zvi Schreiber talked about the challenges and achievements of his Palestinian-Israeli team of 30. Joking that he is probably the only CEO who has never visited his own company′s central office, Schreiber described how the company uses videoconferencing as a main management and meeting tool. He said his is the first Palestinian-based company to attract international venture capital (Benchmark Capital).

Coincident with these developments is the first planned community at Rawabi, in the West Bank. Amir Dajani from Bayti Real Estate Investment Company manages this first of its kind project, which will provide 5,000 residential homes in a mixed-use community that includes retail, a high-tech business cluster, a research university campus, education facilities and a multi-purpose cultural center. The cost of construction is estimated at $500 million, said Dajani who emphasized the job-creation potential of the project. He estimated the project will bring 8,000 -10,000 construction positions, 3,000-5,000 permanent jobs for residents and various employment opportunities for nine surrounding villages.

East Jerusalem presents its special challenges, but entrepreneurial spirit and opportunities exist there as well. With a focus on "what can be done now independent of 'final status' outcome," Steven Zecher of Strategy Partner highlighted opportunities in Jerusalem in international tourism, business networking, business skills training and targeted branding. These industries are scaleable and strengthen local brick-and-mortar businesses, providing greater value for tourists and opportunities for local youth, Zecher said.

All projects and entrepreneurs could potentially benefit from U.S. involvement through the Overseas Private Investment Corporation. James Williams of OPIC sees great economic opportunities in Palestinian communities as OPIC helps organize private-sector financing and equity while serving unaddressed needs by providing small-business loans and offering innovative instruments such as specialized insurance for political risk and trade disruption.

These successes encourage local banks to lend locally instead of investing overseas. Local lending has been problematic, said James Prince of the Democracy Council. The Palestinians receive significant aid, but political and security instability has encouraged local banks to invest overseas, he said. Reversing this trend is important because local banks are best-positioned to support local small business.

Other business challenges are the restricted physical movement of people and goods and the need for greater emphasis on investment and development instead of security and politics, panelists said. Technology reduces some physical movement challenges, but the absence of high-tech economic development zones complicates business operations where Palestinians and Israelis need to come together to produce goods and services, they said. The current security checkpoint and administrative processes are inefficient, complicating travel and making business planning and operations relatively difficult and expensive. Where physical projects materialize, solutions are a prerequisite for the completion of the project itself. For example, in Rawabi building materials will need to be transported and an access road must be built.

"Strengthening the economy of Palestinian neighborhoods is in Israeli interests," Israeli Consul General Jacob Dayan said at the end of the panel. The "everything or nothing" approaches are gone, he said. Israelis and Palestinians are working together to strengthen the economy through private development, to expand the Palestinian middle class and to foster and sustain democracy.

Moderator:
Michael Milken, Chairman, Milken Institute

Intervening in the economy is similar to treating a patient, said Dr. Jonathan Simons of the Prostate Cancer Foundation. First, "do no harm."

Continuing the parallel, Simons stressed the importance of independently verifying all information, performing due diligence and checking the facts, regardless of the source. Like the systems of the human body, everything in the economy is related, and repairs must be made holistically, he said.

"Housing has created economic problems that we will have to work through," said Lewis Ranieri opf Ranieri Partners LLC. Still, Ranieri was bullish on the future. The U.S. economy is "within shouting distance of the bottom," he said, and home affordability is at its lowest point in 25 years. "At the cost of the bond holder, at the cost of the taxpayer, we are resetting a person′s wealth in their home," he said.

Ranieri termed the government restructuring of home loans and foreclosure forbearance as an unprecedented transfer of wealth and said actions taken so far have been effective. "TALF worked," Ranieri said, referring to the Federal Reserve′s Term Asset-Backed Securities Loan Facility, intended to help market participants meet the credit needs of households and small businesses.

Michael Milken cited data from past recessions and recoveries. New-home sales and housing starts were the early indicators of recovery, while the unemployment rate and payroll employment lag recoveries. Looking at the correct metrics is critical to judging the health of the economy, much like kidneys are early indicators of disease, Simons said. "The system doesn′t fix itself over night," Ranieri said. "You have to give it time."

The mechanism of wealth creation has changed from manufacturing in the decade after World War II to the commoditization of information in the 1990s. Wealth creation in the 2000s will come from the commoditization of air and water, said Richard Sandor of Chicago Climate Exchange Inc.

As an example of a financial solution to a social problem, Sandor cited the U.S. reduction in atmospheric sulfur dioxide. Initial estimates to reduce acid rain were $2,000 per ton, but it now trades on the Chicago Climate Futures Exchange at $61 per ton because of financial market innovations. Numerous societal and financial benefits have come from the reduction in acid rain, including substantial health-care savings. Sandor stressed the need for the U.S. to move to a national electricity grid similar to natural gas trading.

Ranieri expressed concern about current legislative actions threatening the rule of law and potentially undermining the sanctity of contracts. Removing the rights of creditors without appeal is a slippery slope, he warned.

Finance can provide elegant solutions to public policy issues via dynamic, transparent markets, panelists said. Sandor stressed the need for a national cap-and-trade program along with a comprehensive renewable-energy program. Acceleration of the flow of credit to the critical factors in the economy will lead to the end of the recession and aid the transition away from government support. "We have the basis of everything we need. We just need to execute at this point," Ranieri said.

Moderator:
Rick Newman, Chief Business Correspondent, U.S. News & World Report

"It's premature to talk about green shoots and financial healing," said Barry Eichengreen of the University of California, Berkley, noting that global demand for American exports does not point to a economic turnaround and that recapitalization of the banks is being done more slowly than is optimal for recovery.

James Barth of the Milken Institute outlined the major factors that led to the crisis in the mortgage and credit markets in the United States, drawing on the extensive research and data contained in his new book, The Rise and Fall of the U.S. Mortgage and Credit Markets. These included issues that are commonly cited, such as lax monetary policy, the ability of lenders to pass along risk and the failure of rating agencies, but also some factors that are often overlooked, such as the procyclicality of regulation (the tendency for regulation to be loose during good times but much more stringent in financial downturns). Barth pointed out that regulation of the financial system is overly complicated, causing inadequate enforcement and a lack of accountability.

When comparing the economic situation in the United States to the situation in other developed countries, Eichengreen forecast that many European and Asian countries are likely to have more severe and lengthier recessions. Although investors around the world bought up securitized U.S. mortgages, he doesn't believe the American financial system was entirely to blame for the world's financial crisis. Poor financial decisions were made at various financial and government institutions in Europe; panelists noted excesses in the financial industry in Iceland and Germany. "How could the Icelanders allow their banking and financial system to grow to eleven times their economy?" asked Eichengreen.

Alan Boyce of Absalon proposed that an alternate system of mortgage lending, similar to the one in Denmark, would reduce the number of foreclosures in times of declining real estate prices. The system would distribute risk among the loan originator and the ultimate owner of the mortgage while giving upside potential and downside protection to homeowners; it would structure mortgage-backed securities in the same transparent manner that has long been used successfully for corporate bonds. He noted that Denmark had a substantial run-up in home prices, but is weathering the aftermath of the bubble without the turmoil experienced elsewhere. Boyce is currently working to encourage the implementation of the system in the United States.

When asked to predict when the housing market will bottom, the panel of experts suggested that until economic growth resumes, real estate prices are likely to continue to decline. Although only 10 to 15 percent of mortgages are currently in delinquency or foreclosure, the situation can become much more grave by the end of the year if we do not take bold action, warned Boyce.

Moderator:
Robert Hormats, Vice Chairman, Goldman Sachs (International); Managing Director, Goldman, Sachs & Co.

How will the U.S. and the rest of the world adapt and change because of the economic downturn? The biggest turning points will be in education and technological innovations, a panel of experts said.

The U.S. economy will thrive on its strengths, such as the powerful effects of education, the growth of trade and the creation of new technologies, Nobel laureate Gary Becker said. The financial sector will face increased regulation, "some of which will be good and some that will be counter-productive," he said. He also sees an increased concern with energy, innovation and more economic power veering toward Asia.

The panelists agreed with Becker's notion of a power shift. Kris Gopalakrishnan of Infosys Technologies said consumers are driving the shift. At the same time, he sees interconnectedness among economies within Asia and worldwide. India's economy has slowed because of its dependence on foreign economic investment. Still, consumers are becoming wealthier, and they are investing more in their children's education, he said.

"Here, again, there is an opportunity to collaborate more," Gopalakrishnan said. The recession could bring about innovation that will drive significant changes in technology and health.

Keng Yong Ong of the National University of Singapore agreed but said the recession shows how much China still depends on the U.S. The best outcome for China from the recession would be to reduce its dependence on the U.S., which will take time, he said. Then, the value of China′s own traded goods will increase, and Asia will move up the technological ladder as more manufacturing returns to the U.S.

Ong says the U.S. is still the No. 1 market. "No one can beat the American consumer in spending," said Ong, to laughter from the audience. Going forward, Ong predicted more saving in developed countries and less saving in Asia as consumers begin improving their own lifestyles.

As all countries reevaluate their economic systems and operations, the shift of power could also mean a shift — and perhaps redistribution — of the burden, according to Karen Monaghan of the National Intelligence Council. She is confident the power will remain with the United States.

"It′s one thing to sit at the table," Monaghan said, "but it′s another to be willing to carve the turkey. I don′t think the other players are willing to take that role."

Moderator:
Rick Newman, Chief Business Correspondent, U.S. News & World Report

"Why did Treasury let Lehman fail?" audience members asked the panelists. "That assumes it was a choice we made," replied David Nason, a former Treasury official.

That exchange and others came during the Q&A portion of a panel on how the Troubled Asset Relief Program, or TARP, came about.

Despite rumors of a Barclay's deal, there was no buyer at the table that was ready to guarantee Lehman's liabilities, Nason said. Bear Stearns was a different story because JP Morgan was willing to guarantee the liabilities, he said.

Audience members also wanted to know why the TALF program — short for Term Asset-Backed Securities Loan Facility — required assets to be rated by S&P, Moody's or Fitch, given that the agencies themselves helped contribute to the credit crisis.

"Hank (Paulson) used to say, 'We′re doing this with duct tape and fishing wire.' That′s what the ratings agencies are," Nason said, referring to the previous Treasury secretary. The ratings agencies are useful as third-party validation, he said.

Asked about Wachovia vs. compared with Washington Mutual, Nason said WaMu was handled according to the process the government has in place for failed depository institutions. What bewildered Nason was the market's surprise that bonds that had been trading at cents on the dollar also cleared at cents on the dollar. So when a similar situation arose with Wachovia, Nason said, there was considerable debate inside the Treasury Department about whether it should be handled the same way WaMu was. Ultimately, he said, they decided to do it differently because they thought doing otherwise would cause a major crisis in confidence in banks.

The discussion of the TARP program included a timeline of the "inflection points" leading up to Sept. 17, 2008, when the acronym was born. In April and May 2008, after JP Morgan acquired Bear Stearns, Treasury officials began considering whether the primary dealer credit facility was large enough to support investment banks. In July, Treasury became worried about bulge bracket investment banks, Freddie Mac, and Fannie Mae. Officials approached Congress for the ability to backstop the government-sponsored enterprises, and that bill was signed into law July 30.

"The entire month of September was an inflection point," Nason said, as he outlined the events of the conservatorship of the GSEs, the Lehman Brothers bankruptcy, the government investment in AIG, Bank of America′s acquisition of Merrill Lynch, and, ultimately, the creation of the TARP program.

Communicating the need for and the terms of the TARP program was a significant challenge, according to Kevin Fromer, another former Treasury official. It was difficult to sell the package to members of Congress and difficult for Congress people to communicate to their constituents. They returned to Washington angry because they were hearing that businesses in their districts were seeing credit tighten.

But the TARP program was not just about providing credit to the economy, Nason said. There was another major purpose: stabilizing the overall financial system. The reason Treasury officials approached Congress in the first place was to prevent the total breakdown of the financial system, and a significant portion of the program was intended to buffer against losses.

The panel's outlook for the next two years was not encouraging: double-digit unemployment through 2010 and continued valuation problems with many of the assets on banks′ balance sheets.

Moderator:
Yossie Hollander, Chairman, Israeli Institute for Economic Planning

In 2007, spurred by financial reform legislation and direct foreign investment, Israel experienced a great leap forward in the Milken Institute Capital Access Index, rising from 25th to 12th place among the 122 countries ranked. As coordinated measures for financial reform faltered and the growth of Israel's entrepreneurial economy slowed, the 2008 index shows that Israel relinquished some of those gains, falling back to 21st place in the international competition for increasingly scarce capital. How can Israel set a course forward, navigating through the global financial crisis, restructuring debt and enhancing investment? What are the financial, economic and technological drivers that can boost Israel's economy? How can the next wave of entrepreneurial growth be financed? In an open and rigorous discussion, panelists outlined the next steps for Israel's new government and new markets.