The Milken Institute's signature tool for generating solutions is the Financial Innovations Lab.® Each Lab assembles a multidisciplinary group of investors, industry experts and public officials to tackle a specific financing or policy question. During an intensive daylong workshop, they explore the problem from every angle. It's a roll-up-your-sleeves approach that encourages collaboration and practicality. The results are fully documented in our Financial Innovations Lab Reports — and the recommendations are ready to be put to work in the marketplace and the policy arena.



March 2004

Financing Hydrogen: A Look at the Year Ahead

Milken Institute Conference Center

The California Hydrogen Business Council presents a special event Thursday, March 4, 4-8 p.m. at the Milken Institute.

This event, Financing Hydrogen: A Look at the Year Ahead will explore near-term opportunities for investors, entrepreneurs and industrial concerns in the emerging Hydrogen Economy.

Consider that:

  • Our newly elected governor has appointed Terry Tamminen, Secretary of Cal EPA, as the architect of a plan to build a hydrogen fueling station every 20 miles along California's Interstate Highway system.
  • The California State Treasurer has asked that 0.5 percent of the assets of the state's largest pension funds be invested in environmental technologies.
  • President Bush's recently proposed FY 2005 budget calls for $228 million to support hydrogen-related programs, a 43 percent increase over 2004 spending.

  • Come and join us along with leading investors and organizations involved in hydrogen related technologies and infrastructure to learn about opportunities in this emerging sector.

    The event will begin with "2003: The Year in Review," an assessment of recent investment activity, provided by Reed Global Advisors.

    Two panel sessions will follow:
    Investments In Hydrogen Infrastructure and
    Investments In Hydrogen Technologies.

    A buffet and beverages networking session will follow the presentations.

    Participants include NextGen Partners, the Rustic Canyon Group, Garage Technology Ventures, Chrysalix, ChevronTexaco, Praxair, The Hydrogen Car Company, PriceWaterhouseCoopers, South Coast Air Quality Management District, California Treasurer's Office, and many more.

    View agenda.

    PREREGISTRATION IS REQUIRED and attendance is limited.
    Advance registration (payment received before Feb. 26) is $65 for CHBC members and $100 for nonmembers. Late registration is $100 for members and $150 for nonmembers. Registration deadline is March 2.

    Download the meeting registration form at or at
    or, you may contact:
    California Hydrogen Business Council
    Attn: Melissa Stock
    3532 Katella Avenue, Suite 108
    Los Alamitos, CA 90720
    Phone 562-493-4014

    Public parking for this event is available in Public Parking Lot #1 on 4th street, immediately adjacent to the Milken Institute.

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    February 2004

    Market-Based Solutions through Environmental Finance: the Case of the Chicago Climate Exchange

    Back when he came up with the idea of creating a public exchange that would trade the rights to carbon dioxide, many on both sides of the equation — the financial community and environmentalists — thought his chances of success were, well, small.

    After all, the markets were down and the U.S. had pulled out of the Kyoto Protocol, which could have helped jumpstart the initiative.

    But Richard Sandor, who created the idea of trading financial futures in the 1970s, knew it could work. And in December 2003, through perseverance and perhaps a little luck, he saw his dream come true in the form of the Chicago Climate Exchange, a self-regulatory exchange that administers a voluntary greenhouse gas reduction and trading program for North America.

    At a Milken Institute roundtable meeting with government officials, environmental organizations and members of the financial community, Sandor said the Exchange has been wildly successful in its first two months.

    Already on board as members are such firms as Ford, DuPont, IBM, Motorola and American Electric Power, as well as the city of Chicago and the University of Oklahoma. And the trading of carbon dioxide has nearly tripled since the Exchange opened on Dec. 12.

    "This is going to dominate the environmental forefront," Sandor said of the idea of cap-and-trade programs. It could even expand into the areas of trading the rights to air and water.

    "They are our most important commodities, and they have to be rationed," he said. He added that markets are the best way to do that — much better than armies fighting over it.

    The meeting was part of the Milken Institute's ongoing series of presentations of financial innovations addressing long-standing public policy problems bringing together financial practitioners, policy makers and change agents in the public and private sector.

    Dr. Sandor, Chairman and CEO of the Chicago Climate Exchange, was the recipient of the Milken Institute's 2003 Award for Financial Innovation and the subject of recent in-depth reports in Time and Forbes magazines. He is a director on numerous boards, including the Intercontinental Exchange, an electronic marketplace for commodity and derivative products, and is a member of the design committee of the Dow Jones Sustainability Index.

    For more information about the Exchange, visit (Note: This link takes you to a web site outside of To return, hit the back button on your web browser.)

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    December 2002

    Springboard Enterprises Bootcamp

    Milken Institute Conference Center
    Santa Monica, CA

    As part of its ongoing efforts to support programs for entrepreneurs and encourage investment in markets that stimulate the economy, the Milken Institute hosted a workshop by Springboard Enterprises on Dec. 5, designed to prepare and connect women-led businesses to investors in the equity capital markets.

    The in-depth, one-day "BootCamp" brought together more than 50 women entrepreneurs and local business people to talk about how to raise needed capital for their growing firms. It included a talk by Katrina Garnett, founder of CrossWorlds Software, case studies, panel discussions with leading industry experts and a fast-pitch session highlighting four local entrepreneurs.

    Garnett, Managing Director of Garnett Capital, opened the program. She drew from her own inspiring story to illustrate to the audience how to map out their course, detect opportunity to create a new space in the marketplace, stay afloat financially and be flexible when the need arises. Her key pieces of advice were to file patents early on and find the right niche. She also discussed the importance of educating the market about your company's product and knowing how to use the media. Other key points: raise money before you need it, know everyone — customers, analysts and vendors — and let your customers speak for your brand to bring you credibility. In sum, she said, know your vision, execute in phases and have an exit strategy.

    Don Fracchia of Wells Fargo Bank spoke about raising capital in general terms. Wells Fargo has long been a small-business friendly bank, said Fracchia, and he advised the attendees to show discipline, focus and have a plan beyond their entrepreneurial vision and passion.

    Three brass-tacks panels filled the next several hours. The first, moderated by Betsy Zeidman, head of the Milken Institute's Emerging Domestic Markets Program, discussed the key elements of a growth business. The panelists represented venture capital, banking, law and accounting, and included a former Springboard participant. They discussed financing models and how to assess the competition so that your product stands out above the rest. Their key points: analyze and evaluate the competition as well as barriers to sale, bring in a team that can execute and be credible.

    The next panel took it one step further: doing the deal. The panelists focused on due diligence, good connections and good corporate housekeeping. They touched on the structure of different deals and stressed the importance of knowing which fund is the right one for your business. Most of all, they agreed, be patient.

    The lunch session, moderated by the Milken Institute's Director of Capital Studies, Glenn Yago, discussed today's economic realities — investors are now looking for companies with high margins, typically 45 to 65 percent, with experienced management teams. The definition of "early stage" financing has migrated upward and investors expect significant milestones before considering a firm. Again, infrastructure, a solid business base and good corporate governance were at the forefront. But investors are still interested in good ideas and consumer product companies. When it came to where the capital would come from, a common theme emerged: match your company's needs with the right fund.

    The day then shifted from panel discussions to a case study of a successful woman-led firm, SatisFusion, presented by its chairman, Fay Wood. She was followed by four fast pitches presented by local entrepreneurs who were treated to feedback by a panel of investors.

    For more information about its programs, visit the Springboard Enterprises web site.

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    March 2002

    Milken Institute-CommerceNet Business Risk Management Roundtable

    Milken Institute Conference Center
    Santa Monica, CA

    This event assembled business, finance, manufacturing and policy-making leaders to discuss the impact and current and future use of financial risk management in non-financial markets. They sought to identify areas that need non-market intervention that would, in turn, advance and accelerate the use of sophisticated risk management tools and frameworks in intra-enterprise and inter-enterprise trading networks.

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    January 2002

    Examination of S&Ls Roundtable

    The Anderson School of Management

    What Can an Examination of S&Ls Reveal About Financial Institutions, Markets and Regulation?

    Some 50 specialists in financial services gathered at the UCLA Faculty Center on January 25, 2002, to assess the lessons of the 1980s S&L mess for financial institutions, markets and regulation in the years ahead. The give and take at the invitation-only meeting, co-hosted by the Milken Institute and UCLA's Anderson School of Management, reflected the diverse backgrounds of the participants. Some argued that today's financial markets are in much better shape than they were 20 years ago, while others asserted that not nearly enough has been done to prevent future problems. The glass-is-half-full view was expressed most clearly by James Wilcox of the University of California's Haas School of Business. Among the lessons learned:

    The value of diversification

    We have seen what happens when institutions are not permitted to diversify their investments. Diversification across sectors, geographic regions and services, all make a difference.

    The need for risk management

    We now have a much better understanding of how much interest rate and credit risk are in the system, and how these risks can be handled. Financial institutions have more latitude to hedge now than they did 20 years ago.

    The imperative for closure

    Instead of letting firms try to grow out of problems, we should opt for "reincarnation" — reorganizing struggling institutions, bringing them back with different managers, different owners and perhaps different balance sheets. Other participants, including Susanne Trimbath of the Milken Institute, were less sanguine. In the long term, she noted, the share of U.S. financial assets held by banks and thrifts is falling. "We might well look to pension funds and mutual funds as the next set of institutions to become vulnerable if a conflict arises between asset classes and market conditions," she argued. A forced divestment of company stock from pension plans, for example, could leave those financial institutions vulnerable.

    "Exactly the same things happened in Superior," a recently failed Chicago thrift, as happened in the 1980s, seconded George Kaufman of the Center for Financial Studies & Policy at Loyola University. Kaufman appends to Santayana's admonition that those who forget history are bound to repeat it.

    "What do those who do remember do? They agonize first and then do it again."

    To focus the discussion, the day included sessions on government policy, the public record, and the parallels in international banking. The final session summarized the day's discussion.

    Government policy: were there unintended consequences?

    Government policy left S&Ls vulnerable to shifting market forces, including interest rate volatility, deteriorating asset quality and increasing industry competition. "Public policy at the time included a rigid institutional design," explained Glenn Yago, director of capital studies at the Milken Institute. "That design inhibited the ability of S&Ls to adapt to technological developments, federal and state deregulation that came after the industry was in serious trouble, and tax law changes that weakened the financial condition of savings and loan institutions by adversely affecting real estate values."

    Public record: was there fair and accurate coverage?

    News coverage mediates society's understanding of events and often becomes the accepted history. The media frames the coverage, promoting certain issues as problematic, certain outcomes as undesirable, and certain strategies as inappropriate. In representing the S&L industry in the 1980s, it generally failed to go beyond terms like "crisis" and "bailout," which fit into 30-second sound bites. "Catch a crook" attracted more attention than how thrifts could fulfill their historical mission to "build a house."

    Martin Regalia of the U.S. Chamber of Commerce reminded the conferees that "for the most part, newspapers are not the guardians or watchdogs of our society, but just another business trying to make a buck. And that is not all bad."

    U.S. S&L experience: are there parallels in other countries?

    The problems of financial institutions in the 1980s anticipated or paralleled those of other countries. When problems occur here, U.S. analysts prefer to look to unique circumstances or the failings of individuals. When problems occur elsewhere, they find systemic causes with simple solutions.

    But what happened to the S&Ls was not so different from financial disruptions that occurred overseas both before and after the 1980s. For example, James Barth of the Milken Institute points out that "S&Ls were essentially directed toward the politically motivated investments in residential real estate." Equivalent policy-directed investments are common in other countries with state-owned or controlled financial systems.

    Summing up: do S&Ls provide a useful perspective?

    The 1980s witnessed the collision of vulnerable financial institutions with frenetic regulatory policy. An examination of the portfolios of institutions that invested in similar assets shows that the S&Ls were treated differently in a systematic way. Banks were underwater at the same time as thrifts, yet the banks were not closed. The seizure of S&L assets amounted to an extraordinarily large — perhaps the largest ever — nationalization of private assets. The S&L case was more visible than other examples of policy mixing poorly with markets because government deposit insurance put the S&Ls in a very visible position. Government- insured institutions were naturally subject to political competition over who was to blame for their demise. But looking below the surface, the similarities in these conflicts generally exceed the differences.

    Future roundtables in the series will focus on different forms of financial institutions and different types of asset classes. The conferences will be represented in a book series from Kluwer Academic Publishers, the Milken Institute Series on Financial Innovation and Economic Growth.

    The book from this event, The Savings and Loan Crisis: Lessons From a Regulatory Failure, is available through Kluwer Academic Publishers. Read summary.


    • Michael Klowden, President and CEO, Milken Institute
    • Timothy Anderson, former banking consultant
    • James Barth, Auburn University and Milken Institute; formerly Chief Economist, Office of Thrift Supervision and Federal Home Loan Bank Board
    • Philip Bartholomew, International Monetary Fund; formerly Federal Home Loan Bank Board; U.S. House Banking Committee
    • Gordon Bjork, Economics Department, Claremont McKenna College,
    • Elijah Brewer, Federal Reserve Bank of Chicago
    • R. Dan Brumbaugh, Senior fellow, Milken Institute; formerly Federal Home Loan Bank Board
    • Charlotte Chamberlain, Jefferies & Company; formerly Federal Home Loan Bank Board
    • Michael Darby, Anderson School of Management, UCLA; formerly Assistant Secretary, U.S. Treasury
    • Mollie Dickenson, Author; Worth magazine
    • Stephen Ege, Elias, Matz, Tiernan & Eric; formerly Special Assistant to the Chairman of the Federal Home Loan Bank Board
    • Robert Eisenbeis, Director of Research, Federal Reserve Bank of Atlanta
    • Peter Elmer, Director of Mortgage Analysis, Deloitte & Touche; formerly FDIC, RTC, FSLIC
    • Catherine England, Department of Finance, Marymount University; formerly Cato Institute
    • Ernest Fleischer, Blackwell Sanders Peper Martin; formerly Chairman, Franklin Savings
    • James Freund, Director of Research, Research Institute for Housing America, Mortgage Bankers Association of America
    • Catherine Galley, Cornerstone Research
    • Peter Haje, Time Warner Inc.; formerly Paul, Weiss, Rifkind, Wharton & Garrison
    • William Hamm, Law & Economics Consulting Group; formerly World Savings
    • Jean Helwege, Max M. Fisher College of Business Ohio State University; formerly Federal Reserve Bank of New York
    • Anne Henry Farchmin, Ralls,Wagoner; Regulatory Watchdog;formerly Overland Park Savings & Loan
    • Paul Horvitz, Department of Finance University of Houston; Shadow Financial Regulatory Committee; formerly Director of Research, FDIC; Director, Federal Home Loan Bank of Dallas
    • Michael Intriligator, Burkle Center, UCLA; Senior fellow, Milken Institute
    • Edward Kane, Wallace E. Carroll School of Management, Boston College; past President of the American Finance Association
    • George Kaufman, Center for Financial Studies & Policy, Loyola University; Shadow Financial Regulatory Committee
    • J. Livingston Kosberg, Chairman,Remington Partners; formerly CEO Gibraltar Savings and First Texas Financial
    • William Lang Deputy Director, Office of the Comptroller of the Currency
    • Arthur Leibold, Dechert Price & Rhoads; formerly General Counsel, Federal Home Loan Bank Board
    • David Malmquist, Director of Economic Analysis, Office of Thrift Supervision
    • Stephen Neal, Cooley Godward, LLP; formerly of Kirkland & Ellis
    • Richard Nelson, Wells Fargo; formerly Chief Economist, Federal Home Loan Bank of San Francisco
    • Gerald O'Driscoll, Director, Center for International Trade & Economics, Heritage Foundation; formerly Federal Reserve Bank of Dallas
    • Peter Passell, Editor in Chief, Milken Institute Review
    • Martin Regalia, Chief Economist, U.S. Chamber of Commerce; formerly Director of Research, Savings & Community Bankers of America
    • Richard Roll, Anderson School of Management, UCLA; past President of the American Finance Association; formerly Director of Mortgage Securities Research, Goldman, Sachs & Co.
    • Jeffrey Scott, Vice President, Wells Fargo Bank; formerly Federal Home Loan Bank of San Francisco
    • William Shear, Assistant Director, Financial Markets and Community Investment, U.S. General Accounting Office
    • Lewis Spellman, Department of Finance, University of Texas
    • Kenneth Spong, Federal Reserve Bank of Kansas City
    • Michael Staten, Director, Credit Research Center, McDonough School of Business, Georgetown University
    • Kenneth Thygerson, Digital University, Inc.; formerly CEO, Imperial Corporation of America and Freddie Mac
    • Susanne Trimbath, Research Economist, Milken Institute
    • Robert van Order, Chief Economist, Freddie Mac
    • Kevin Villani, Economist; formerly CFO, Imperial Corporation of America
    • George Wang, Director, Market Research, Commodity Futures Trading Commission; formerly Federal Home Loan Bank Board
    • Lawrence White, NYU Stern School of Business; formerly Board Member, Federal Home Loan Bank Board
    • James Wilcox, Haas School of Business, University of California at Berkeley; formerly Chief Economist, Office of the Controller of the Currency
    • Glenn Yago, Director of Capital Studies, Milken Institute

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    September 2000

    Milken Institute-CommerceNet Financial Technology and E-Markets Seminar

    Milken Institute Conference Center
    Santa Monica, CA

    Attendees identified opportunities and issues that need to be addressed through research and development by both technology and financial professionals jointly.

    In general, application of financial technology on the Internet is relatively unsophisticated. While we do find the first examples of auctions, exchanges, barter and simple market concepts, these examples have little of the sophistication (or liquidity) found in modern financial markets. Conversely, until the emergence of the Internet, opportunities to apply financial technology more broadly (taking technology from the financial community and applying it to non-financial markets) have been constrained. Recent advances in the evolution of Internet markets indicate that application of financial technologies to a new set of transactions holds significant promise for accelerating the evolution of electronic commerce.

    Participants were an invited group of industry, academic, and policy experts whose backgrounds encompass a wide variety of expertise and approaches. Their efforts focused on issues, opportunities and problems in this area, communicating existing results and methods among these communities, and exploring the benefits of further collaboration, research and development.

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    January 2000

    The Economy, Politics, and the Peace Process in the Middle East

    Milken Institute Conference Center
    Santa Monica, CA

    Former Israeli Prime Minister Shimon Peres, in a visit to the Milken Institute, said diplomacy and military might are giving way to education and the economy as keys to the future of the Middle East.

    Thanks to globalization, technological change and a new generation of Israelis and Arabs, the dynamics of the region are changing, he said.

    "The nature of peace has changed," said Peres, Minister of Regional Development in the current government. "You cannot have any more diplomatic peace. You must have economic peace."

    Peres was at the Institute to learn more about the Institute's research on the economy of Israel and the region. Over the past few years, the Milken Institute has engaged in research and development concerning financial innovations to assist in Israeli economic development.

    During a roundtable discussion with a group of prominent local business executives and public officials, Peres told them that his generation - which built the modern Jewish state - is seeing major changes take place in the region.

    "The whole landscape of leadership in the area is of an old age, irrelevant to a new epoch coming in our lives," he said. The new generation of Israeli's and Arabs is more worried about jobs and getting a good education than tanks and borders.

    "They don't understand why they should be stopped at borders, why they should kill or be killed," Peres said. "What for? You cannot explain it to them."

    The impetus behind these changes is globalization and technology, which Peres said has resulted in three separate economies:

    *The Global Economy: This economy knows no borders or distance. There is a lot of competition, and only those with the most creative ideas and best technology will win, he said. "It is detached from geography, and connected entirely with science, technology and information."

    *The Regional Economy: Israel's economic future is tied to its neighbors, so it's important to help them. "For our own existence, we must understand that we can't be an island of wealth in a sea of poverty, an island of cleanliness in a sea of pollution, or an island of security in a sea of violence and terror. Our interest in our neighbors is essential for our own existence."

    *The National Economy: Education is the key to Israel's economic future, and the government is planning to spend much more on schools in the near future. "The country with the best education system will be the winning country," he said.

    For the region to succeed, money must be spent wisely - on schools, infrastructure, tourism and other vital areas. It cannot continue to go to the same old sources decided upon by central governments. It needs to go to regional development and businesses, he said.

    He cited Europe's planned spending of $6 billion in the Middle East as an example of good intentions gone bad, since the money will go to the same central governments that have received funds before, not to the needs of today's new economy.

    "They're collecting money from the poor in the rich countries and giving it to the rich in poor countries," he said. Instead, the money should go to such critical needs as roads, water pipes, tourism and education.

    "Give this money on a regional basis to every enterprise that wants to develop tourism, education, water and infrastructure," he said. "And the government will use its money for two purposes - to guarantee the investment and to reduce the cost of capital.

    "Use the money for these purposes and you will change the Middle East," he said.

    He added that it's important to build all economies in the region, Arab and Israeli alike.

    "If they remain poor, we will not have peace," he said of Israel's neighbors. And, he added, "Peace will not be done in the police stations. It will be done at universities."

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    June 1999

    Lessons from Lexecon: Battling Back Against Frivolous Securities Lawsuits

    Milken Institute Conference Center
    Santa Monica, CA

    Securities litigation against corporate America could impact the economy as the fear of lawsuits by investors and the costs of defending them by companies divert capital away from productive uses, presenters at this roundtable discussion said.

    "I've talked to investors from all over the world, and their deep concern is securities litigation," said Mickey Kantor, former U.S. Secretary of Commerce and now a partner in the law firm of Mayer, Brown & Platt. "It strikes fear in their hearts."

    With investment driving the economic boom of the '90s in the U.S., the economy could suffer if investors are scared away from American companies because of the increase in class-action lawsuits alleging securities fraud.

    "Without that investment, which can be inhibited by the fear of these kinds of lawsuits, we're going to shoot ourselves in the foot," said Kantor, who also served three years as U.S. Trade Representative.

    To prevent this from happening, several things are needed — from tort legislation and tougher judges to a legal strategy that fights these lawsuits based on sound economic research and theory, said members of the panel, who were also attorneys from Mayer, Brown & Platt, co-sponsor of the event.

    The firm recently won a $50-million settlement in a lawsuit against Milberg Weiss Bershad Hynes and Lerach, a New York law firm that has sued hundreds of companies on behalf of shareholders. Mayer, Brown & Platt sued the firm, accusing it of abusing the legal process by trying to destroy the reputation of Lexecon Inc., a consulting firm that has testified on behalf of companies sued by Milberg Weiss.

    In April, a jury in Chicago awarded Lexecon $45 million in compensatory damages in the case. The two sides agreed to a $50 million settlement before the jury could decide on punitive damages.

    The volume of securities class-action lawsuits in federal court has been climbing. Recent research described in a Policy Short published by the Milken Institute, "The Economic Costs of Frivolous Securities Litigation," shows that in 1998, the number of such suits filed was close to one suit a day for every trading day that the stock market was open, breaking the record set in 1994. The research also shows that smaller companies — those that are the fastest-growing in the country, such as high-tech firms — are being sued more frequently than larger companies.

    Alan N. Salpeter, the lead attorney in the Milberg Weiss case for Mayer, Brown & Platt, said the Lexecon victory should send a signal to corporate America that it needs to fight securities lawsuits, not just settle them.

    "If everybody settles these cases, then we'll never make law in this area," said Salpeter. "We'll never be able to fight back as a defense bar and establish some principals that are helpful. There's only so much that can be done in passing legislation. But there's a lot that can be done through the appellate process."

    One of the lessons of the Lexecon case, he added, is that it "was clearly about someone who fought back."

    Other solutions offered by the panelists included:

    When building a defense, lawyers must think of the economics of the case. Many factors cause stock prices to fall, he said. Build a strong economics case as to why the price fell.

    Tort litigation. The Private Securities Litigation Reform Act of 1995 helped reduce the number of frivolous lawsuits, but the numbers are climbing back. New legislation is needed to curb these suits. Passing new laws is a long and difficult process, however, said two other speakers — Philip R. Recht, former deputy administrator of the National Highway Traffic Safety Administration who joined Mayer, Brown & Platt this year, and Mark H. Gitenstein, former chief counsel to the U.S. Senate Judiciary Committee who has been a partner with the firm since 1990.

    They, along with Kantor, stressed the need for defense lawyers to be as aggressive as plaintiffs' attorneys have been in taking their case to politicians in Washington and Sacramento.

    Gitenstein said he has learned four important lessons from his years in Washington:

    "There has to be a good public policy reason for reform." It's not just who you know, he said, but "what you know" that counts.

    "You cannot do tort reform in Washington unless it is bipartisan."

    Be prepared for incremental reform. "You can't go for the whole enchilada," he said. "You're not going to get the whole enchilada."

    Broad reform is possible, but only when the issue is positioned in a way that "the average American can understand it."

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    May 1999

    Korea Update '99

    Regal Biltmore Hotel
    Los Angeles, CA

    Diplomatic efforts currently under way may be North Korea's last chance to create permanent peace and stability on the Korean peninsula, South Korea's ambassador to the United Nations said today.

    "We sincerely hope that the North Korean leadership seizes the opportunity to establish a more permanent basis for peace and security," See-Young Lee said in a luncheon talk co-sponsored by the Asia Society, Milken Institute, and UCLA Center for Korean Studies. "It is incumbent on them to respond positively to our overtures so that we can together create a new paradigm for peaceful coexistence and respect."

    Lee's talk came one day before U.S. special envoy William Perry arrived in North Korea for talks meant to persuade its leaders to abandon their nuclear weapons and missile programs in exchange for a package of economic and diplomatic benefits.

    Perry brought with him a joint message from the U.S., South Korea and Japan, which have worked on a package of incentives to encourage the North to end its weapons programs.

    Lee said the package is part of a strategy of engagement with North Korea that his country hopes will finally persuade the communist regime to turn from confrontation to peace with its neighbors.

    "We believe the package deal presents the North Korean regime with its best chance for survival," said Lee, pointing to the North's numerous economic problems. "It may be their last chance as well."

    Also speaking at the event were Hilton Root, a senior fellow at the Milken Institute, and Ci-Wook Shin, a professor of sociology at UCLA.

    Hilton Root
    Root discussed his recent report, "The New Korea: Crisis Brings Opportunity," which proposes that compromises be made by the three major sectors in South Korea - the giant chaebols, labor and finance - so that needed economic reforms can go forward.

    "Labor markets, enterprise markets and financial markets are part of an integrated social bargain in Korea," Root said. "People there understand these as related, not as separate."

    Unfortunately, the International Monetary Fund only looked at financial reforms when it helped out the South Korean government in 1997.

    "The IMF failed to understand that reforms must include all three sectors at once if changes are to occur, and as a result, the necessary reforms have not taken place," Root said.

    Despite these failures, Root said there is room for optimism.

    "There still needs to be an integrated settlement. There still needs to be a meeting of labor with management and with the capital markets, the banks, the IMF and the president in which there are tradeoffs, in which different groups make concessions, because all of these three groups hold part of the power," he said. "Nothing will happen if one works exclusively with one of these groups and not with all three at the same time."

    Ci-Wook Shin
    Shin spoke on social crises affecting South Korea that, despite some recent good news about that country's economy, remain serious problems.

    "If you read Korean newspapers these days, you may get the impression that the crisis may be over," he said. "Stock prices went up. Some people are expecting growth of 4 to 5 percent this year. But if you talk to people in Korea, you get a more conflicting picture. You get the impression that the crisis is far from over."

    Among the most serious problems is unemployment, now at between 8 and 9 percent - very high by Korean standards.

    "Jobs are more than just about simply making money. The workplace is a place for social occasions," he said. "Losing a job is more than simply losing a means to make money, but also losing your social worth."

    As a result of this high unemployment, labor unions are in trouble. They have lost public support.

    "The labor movement is at a crossroads. It is facing a very tough challenge," he said. It must shore up its support, while being careful not to take actions that hurt its interests.

    "Any miscalculation may facilitate the demise of labor activism in South Korea," he said. "The next couple of months will be crucial for labor activism in South Korea."

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    May 1999

    Corporate Debt and the Technology Shock

    Milken Institute Conference Center
    Santa Monica, CA

    Thanks to rapid advancements in technology, the U.S. economy continues pushing to new heights, but while this growth may continue, the risks to investors have also grown, two economists said in a talk at the Milken Institute.

    "Technology is driving economic growth, not just in the United States, but by extension, in the world," said David Goldman, Global Credit Strategist for Credit Suisse First Boston. "It will continue to do so because of the unleashed forces that no force on earth can stop."

    The "technology shock," as Goldman calls it, has turned the investment world upside down. Price-to-earnings ratios have skyrocketed; companies that used to be secure, low-risk have become more volatile as they enter the high-tech market; and as the stock market continues to go up, volatility has gone up, too - exactly the opposite of what has occurred historically.

    All of these rapid changes have made life more unpredictable for investors.

    "We're in a world such as has never been seen before," Goldman said. "People are getting better stock returns, but feeling more and more nervous about it. This is an anomalous event."

    The American economy is so dependent on stock market gains from the high-tech sector that poor earnings could threaten the overall economy - and that has created uncertainty around the world.

    "The American consumer is spending, to some extent, capital gains out of her stock portfolio," Goldman said. "Consumption is very much dependent on the stock market, and the stock market is dependent on these kinds of valuations. This makes the world a riskier place. It means that although growth has been stronger than any of us forecast, it's a narrowly based growth, and one based on sources that are difficult to understand."

    One result of this volatility is that high-yield debt may be a safer investment than investment-grade debt, he said. The default rate for high-yield bonds is the lowest it has ever been.

    Although there are certain indicators that economists can use to gauge the market - with the volatility of stock prices and the cost of hedging equity prices being two of the most important - there are still many uncertainties, Goldman said.

    "The high-yield debt market is between fear and greed," he said. "We're likely to continue with that kind of very odd, not quite knowing how to look at the market for some time."

    Bob Kricheff, Managing Director at CS First Boston, highlighted some of the technology areas that are particularly active today, such as cable television, the Internet, and telecommunications. He said the high-yield market is feeding much of their growth.

    "The high-yield market really does not act without the major technology sectors and vice versa," he said. "They're closely linked."

    To show how much technology industries have restructured the high-yield market, Kricheff pointed to statistics that showed that in 1992, this area made up 13 percent of the market. Today, it makes up 30 percent.

    "It's creating some phenomenal opportunities for wealth, some phenomenal opportunities for productivity, and some phenomenal opportunities for employment," he said.

    But he added the same cautious note as Goldman about the risks of such a rapidly changing and popular market.

    "What worries me is people blindly investing money in everything that ends with a dot-com."

    He said investors should keep in mind four things:

    • The technology area is made up not of just one, but many sectors.
    • Rapid change is the norm, so don't get trapped in "old world views" and get stuck on one theme or one company.
    • Don't focus on a company's assets, but how well they execute their business plan.
    • Focus on customers; they are the key to this industry.

    "Everybody gets tied up in the technology," Kricheff said. "That is what's changing the economy. But at the end of the day, it's not necessarily what's driving businesses. It's still a lot of execution and focus and winning customers and revenue."

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    April 1999

    China in Transition: Social & Economic Challenges

    Milken Institute Conference Center
    Santa Monica, CA

    China has made tremendous progress in moving toward a market-based economy in just a few short decades, but still faces monumental challenges in the years ahead - from having enough food to feed its people to finding enough jobs for its millions of workers, a group of experts said Thursday night.

    But while the problems are vast and difficult, its leadership appears to be working hard to prevent them from becoming major catastrophes - and in many cases is succeeding, the speakers said.

    "What we're seeing in China today is a leadership that is struggling with enormous problems," said Barry Naughton, a professor in International Relations and Pacific Studies at the University of California, San Diego. "It might still be swamped by these problems, but so far, from everything we can see, it is maneuvering to keep a very dramatic forward momentum going on."

    One of the most recent signs is China's concessions on negotiations for entry into the World Trade Organization, he said.

    "It is a very large and very important package of concessions by the Chinese that has the effect of opening Chinese markets in very important ways to outside business," Naughton said. "I would say this WTO agreement represents a recognition that government-sponsored attempts to restructure industry in a planned way aren't working, and the only thing that works in China, and that the only thing that's going to work in the future, is to ratchet up the degree of competition, ratchet up the degree of economic change."

    Naughton was one of three speakers who addressed an audience at the Milken Institute Conference Center on, "China in Transition: Social & Economic Challenges." The event was co-sponsored by the Asia Society, the Milken Institute and the USC-UCLA Center for East Asian Studies. The event was moderated by James Tong, co-director of the center and a professor of political science at UCLA.

    All three speakers pointed to large-scale problems facing China's leadership, from vast environmental pollution to rural poverty.

    Vaclav Smil, professor of geography at the University of Manitoba, said China faces terrible problems of air pollution, soil degradation and water shortages - all of which spell trouble for China's ability to feed itself.

    With so many mouths to feed, and with only a limited amount of food available on the world market, China has no choice but to grow its own crops to feed its people.

    But, he said, "You have to have a reasonably healthy environment to do that."

    Anthony Saich, resident representative of the Ford Foundation in Beijing and Daewoo Professor of International Affairs at the Kennedy School of Government at Harvard University, said that rural poverty remains one of China's biggest problems.

    "The long-term future of China resides in resolving very deep-seated rural problems," Saich said. "It's still where 80 percent of the population lives, and it's where domestic demand will eventually have to be stimulated to keep the Chinese economy moving along."

    As the Chinese leadership struggles with these problems, it is faced with many dilemmas, the speakers said. One of the most difficult is being able to reduce the country's massive state-run enterprises while maintaining its strong growth rate, Naughton said.

    "In order to continue this process, (Prime Minister) Zhu Rongji needs to be able to hold out to the workers who are being laid off the possibility, the promise that they'll find some other kind of work, some new occupation, that they're not just going to be cast aside on the ash heap of history," he said. "Zhu Rongji needs to keep the growth rate up."

    To do this, the prime minister has injected government money into various infrastructure projects.

    "The reason this is a dilemma is that in doing so, Zhu Rongji is inevitably working at cross-purposes," he said. "The money that gets pumped from the state into infrastructure projects inevitably goes primarily back into the state sector. So on the one hand, Zhu is shrinking down the state sector by intensifying market competition. On the other hand, he is propping it up by pouring government funds into a large-scale investment program."

    "That's a set of choices that is easy to criticize," Naughton added, "but it's hard to figure out what he should do that's a whole lot better."

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    November 1998

    What's Happening on the Regulatory Front?

    Milken Institute Conference Center
    Santa Monica, CA

    The current push in Washington for more federal regulations - on everything from trade to high technology - poses a threat to the American economy, Fred Smith said at the Milken Institute.

    As a result of these regulations, some industries have been stymied, such as in biotechnology, where regulations make it difficult for entrepreneurs to get their products to market. In other industries, such as small drug manufacturers, regulations threaten their ability to compete with larger companies.

    "Right now, the whole mood toward regulatory reform is at an ebb," said Smith, president and founder of the Competitive Enterprise Institute. "The forces favoring greater regulation are having a bit of a renaissance."

    It is time for Congress to control this regulatory fever. The U.S. should treat regulations the way it treats the federal budget - Congress must authorize it and the president must sign it into law. Lawmakers cannot continue to allow each agency to impose whatever controls it wants, with little oversight, he said.

    "It's becoming recognized that it's something that has to happen," said Smith. "Over the next 20 years, we will have some form of regulatory accountability, which will essentially mean that regulations will be included in a more precise way in the U.S. budget. I think that will lead to a view that regulations can be promulgated by agencies, but they don't become law until Congress and the president sign them into law. That's a kind of tool that would attract bipartisan support over time."

    Lack of accountability is just one problem with current regulations, he said. The other is a feeling by many agencies that anything new is risky, such as medicines or the Internet. The problem with that way of thinking, he said, is that it inhibits progress.

    "There are risks of going too quickly into the future, but there are also risks of staying too long in the past," he said.

    Smith pointed out two areas in particular that are hurt by too much regulation. One is in biotechnology. In many ways it is similar to the computer industry, where bright entrepreneurs push the boundaries of technology. The difference, however, is that the computer industry has few regulations while biotechnology has many.

    "One of them produces a Bill Gates, the other hasn't produced much wealth at all," Smith said. "One of the reasons is a Steve Jobs or Steve Wozniak can start off with a brilliant idea, develop it in their garage and then, if it really works, attract capital and go out and become incredibly wealthy. A biotech firm can start with its product in a small lab, but when it wants to take the next step and become a marketable product, it has a real impediment, because it has to go through the regulatory process."

    The other area where regulations hurt is trade, where the end of the Cold War has resulted in the United States demanding more from its partners. With the Soviet Union in power, we dealt with the world "on its own terms," which sometimes meant dealing with countries with poor human rights records or repressive leaders. "With the Cold War over, in America in particular, a lot of utopian fantasies have been freed," he said.

    Groups as diverse as Greenpeace and the Christian Coalition are trying to impose their moral beliefs on the rest of the world through federal trade policies, which jeopardizes our commerce with the world, Smith said.

    "The risk with this new world is that protectionism will become a moral thing to do - 'Yes, we'll trade with Burma as soon as they have wonderful human rights.' These are areas that are not going to be easy to achieve and they create incredible backlash potential among the rest of the world."

    Smith is the president and founder of the Competitive Enterprise Institute, a public interest group that promotes market-based solutions to economic and environmental public policy issues. CEI publishes Ten Thousand Commandments, an annual survey of federal regulations. Smith co-authored the book Environmental Politics: Public Costs, Private Rewards, and has contributed to numerous other books as well as to leading national newspapers and public policy journals.

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    October 1998

    The Asian Crisis Updated

    Milken Institute Conference Center
    Santa Monica, CA

    The continuing financial crisis in Asia will not ease for at least another year, but if Japan undertakes needed reforms, we could see the economies of that region begin to turn around by the year 2000, Marcus Noland said in a speech at the Milken Institute.

    Japan's economic health is critical to Asia's future. If it doesn't solve its financial problems, the rest of Asia probably won't solve theirs either, he warned.

    "The real issue for the rest of Asia is Japan," said Noland, Senior Fellow at the Institute for International Economics in Washington, D.C. "Japan is key to a speedy and constructive resolution of the crisis."

    During his talk to about 150 guests at the Institute, Noland highlighted Japan's problems:

    - An estimated growth rate this year of between minus-2 percent and minus-3 percent.

    - Rising unemployment among the core male population.

    - An increase in precautionary savings.

    - The flight of deposits from commercial banks to government-run institutions.

    Noland offered several solutions:

    1. To stimulate demand for goods, Japan should establish a finite inflationary target and then "simply print money until it is reached" - an idea, he concedes, that does not have many supporters in Japan.

    2. Japan must follow through on its promises to spend public money to stimulate the economy - and spend that money wisely. "There have been so many special packages, so many stimulus plans and so many supplementary budgets in the last 15 years that haven't amounted to much that no one actually believes them," Noland said. So when the government announces, as it recently did, a 10-trillion yen stimulus package, he expects it to actually spend about 3 trillion yen.

    3. Japan must act aggressively to shut down insolvent banks and pay off bad loans, which some estimate as high as $1.5 trillion. The government recently earmarked 60 trillion yen (about $500 billion) to fix the problem, a decision praised by Noland. But, historically, the government has been reluctant to implement such plans. "The government doesn't want to act aggressively, because it fears that if it aggressively tries to shut insolvent banks that it will exacerbate a credit crunch. And it also wants to protect its friends," Noland said.

    Because of this reluctance, Japan runs a risk of making things worse.

    "Given the set of institutions, incentives and corporate governance practices that their economy operates under, one runs the risk of simply recapitalizing a flawed system and setting yourself up to exacerbate the crisis somewhere further down the road with a public that would, understandably, be even less willing to pay the bill," Noland said.

    Fortunately for Japan, it is stable and has many resources at its disposal. The rest of Asia isn't so fortunate. South Korea, Thailand, Indonesia, Malaysia and the Philippines have all suffered tremendous economic losses due to fiscal, regulatory and political problems. Unfortunately, righting Japan's economy may cause further damage to some of these countries - especially South Korea. A devaluation of the yen, for example, would cost Korea exports not only to Japan, but also to other countries like the United States as Japanese goods became more competitive.

    Noland also touched on these problems:

    - The U.S. trade deficit could reach $300 billion this year. While that is not a problem at the moment, it could become a big problem later. "If the U.S. economy weakens, the trade deficit could rise in terms of political salience in the U.S. And if Japan has not pulled out of its recession by the time the United States economy weakens, then the world economy could truly be a mess," Noland said.

    - China, while not as bad off as the rest of Asia, still faces many problems, including its own poor banking system and the transition of state-owned enterprises to the private sector. A devaluation of some type can be expected from China next year.

    Without a healthy Japan, however, the rest of Asia cannot recover, Noland said. Even the $30-billion stimulus package recently announced by Japan to revive the economies of other Asian countries will go only so far. "Restoring robust growth in Japan would be more desirable," Noland said. And that will take time.

    "This is going to be a slog," Noland said. "This is unlikely to turn around quickly. I don't think one can have any real confidence in positive growth until 2000."

    Noland is one of the nation's most preeminent scholars of East Asian economies. He formerly served as a senior economist on the Council of Economic Advisers and has authored numerous books and articles on subjects ranging from the impact of the Asian currency devaluations to the U.S.-Japan economic conflict. He has testified before Congress in his areas of expertise and has consulted the World Bank, the New York Stock Exchange, and the U.N. Conference on Trade and Development.

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    July 1998

    Financial Instruments and Portfolio Risk

    Milken Institute Conference Center
    Santa Monica, CA

    Do investors really know the risk of their high-yield bonds? Most methods currently used to value these bonds operate on the assumption that interest rates and equity returns are independent. But are they? Professor Theodore Barnhill argues that investors need to take both interest rate and credit risk into account, or else they will seriously underestimate the risk of holding such securities.

    Barnhill is a professor of finance at George Washington University and the director of its Financial Markets Research Institute, created in 1995 to fund and conduct research in a variety of financial studies. Barnhill also co-founded FinSoft, a financial software development company focusing on security valuation and risk management. His book High Yield Bonds, co-edited with William Maxwell and Mark Shenkman, is forthcoming.

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    April 1998

    The Economics of Consolidation in the U.S. Defense Industry

    Milken Institute Conference Center
    Santa Monica, CA

    In the early 1990s, the aerospace industry remained both the most technology-intensive U.S. manufacturing industry (measured by R&D as a fraction of sales) and the single largest high-technology industry (in terms of total R&D performed). From 1993 to 1997, as the result of changing Defense Department policies, U.S. aerospace and defense producers underwent an unprecedented wave of large-scale consolidation. With the recent decision to oppose the merger of defense giant Lockheed-Martin with Northrop-Grumman, U.S. government policymakers have signaled that further reduction in the numbers of potential prime contractors for key defense products will be subject to much more stringent scrutiny, closing a chapter in the recent history of these industries.

    What forces have been driving these policy changes, and what impact have they had on the structure of U.S. aerospace and defense industries? What was the public policy rationale for encouraging consolidation, and how has it changed in light of current and probable future trends in defense spending? Has government policy gone too far, or not far enough?

    As an economist, Kenneth Flamm has written extensively on trade, technology, and competition in global high-tech industries. His most recent book is Mismanaged Trade? Strategic Policy and the Semiconductor Industry. From 1993 to 1995 he served as Principal Deputy Assistant Secretary (Economic Security) and Special Assistant to the Deputy Secretary of Defense and was responsible for dual use technology policy and international programs.

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    April 1998

    The Frontiers of Global Economic Development

    Milken Institute Conference Center
    Santa Monica, CA

    How to govern for prosperity will be one of the most important policy puzzles of the next century. Although the study of political economy has provided many answers as to how political arrangements can create incentives for growth, not all leaders govern for prosperity.

    Hilton Root, a Senior Fellow at the Milken Institute and a former senior research fellow at the Hoover Institution and professor in public policy and international policy at Stanford University, discusses these issues as they relate to how paths to economic success or failure begin with the political institutions of sovereign states.

    Root organized and directed the Hoover Initiative on Economic Growth and Democracy, an advisory group that explores the relationship between economic performance and political choice in order to implement effective policies for developing countries.

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    April 1998

    Why Do Emerging Markets Have So Little Firm-Specific Risk?

    Milken Institute Conference Center
    Santa Monica, CA

    One of the most important roles of markets is to process information. But without secure property rights, judicial efficiency, honest government, and meaningful accounting information, markets cannot allocate capital efficiently and economic growth stands to suffer.

    Bernard Yeung examines how emerging markets are subjected to economy-wide fluctuations to a greater extent than advanced economies because of political conditions that discourage informed trading, and instead foster "noise" trading. Yeung is a professor of international business at the University of Michigan Business School. His current research includes trade policies and firm behavior, foreign direct investment, and international trade.

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    April 1998

    The Government as Venture Capitalist

    Milken Institute Conference Center
    Santa Monica, CA

    The Small Business Innovation Research (SBIR) program, the largest U.S. public venture capital initiative, provided more than $7 billion to small high-technology firms between 1983 and 1997. Harvard Business School Professor Joshua Lerner relates his findings about the long-run impact of the SBIR program, including the growth rate of SBIR awardees compared to other firms, the characteristics of the SBIR awardees that performed the best, and distortions inherent in the award process.

    Lerner worked for several years on issues in technological innovation and public policy at the Brookings Institution, for a public-private task force in Chicago, and on Capitol Hill. His research focuses on the structure of venture capital organizations and their role in transforming scientific discoveries into commercial products.

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    March 1998

    Restructuring Regulation and Financial Institutions

    Milken Institute Conference Center
    Santa Monica, CA

    On Monday, March 16, 1998, the Milken Institute hosted "Restructuring Regulation and Financial Institutions." This one-day conference presented the ideas of eight distinguished economists in sessions on banking, capital markets, mutual funds, pension funds, derivatives, insurance, government-sponsored enterprises, and systemic risks. Prominent discussants, including Nobel LaureateMerton Miller from the University of Chicago, discussed the papers presented.

    Donald H. Straszheim, president of the Milken Institute, provided introductory remarks, and Institute chairman Michael Milken spoke at lunch.

    As financial crises both at home and abroad highlight, the world's financial institutions face dynamic markets governed by a bewildering array of regulatory policies. This conference looked at the U.S. financial arena and placed each of the eight areas examined into an appropriate historical market and regulatory context. Presenters then examined what aspects of contemporary regulation either impede or enhance economic efficiency, and assessed what changes in regulatory policy are desirable. In addition, the conference addressed the influence of information technology on the future of financial markets.

    Papers presented at the roundtable were later published in a book, Restructuring Regulation and Financial Institutions.

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    February 1998

    Technological Change, Education, and the Labor Market

    Milken Institute Conference Center
    Santa Monica, CA

    Claudia Goldin and Lawrence Katz, both professors of economics at Harvard University and research associates at the National Bureau of Economic Research, present a historical view of the impact of educational and technological developments on the U.S. economy, focusing on the interplay among technology, education, and human capital in the 20th century.

    Professor Goldin's research covers a wide range of topics in American economic history, including industrial laws and legislation, women and employment, and the labor market and economic conditions in the past century. In the words of The Wall Street Journal, she is "a sort of historical detective." Goldin is a former editor of The Journal of Economic History and has authored and edited several books, the most recent of which is The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, with Michael Bordo and Eugene White.

    Katz's work has spanned the issues of income inequality, unemployment, changes in wage structure, and theories of wage determination. Katz has been editor of the Quarterly Journal of Economics since 1991, and is the co-editor of the recent NBER book Differences and Changes in Wage Structures.

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