(pensive music)
- We're ready for our final panel session
of the first day of our Festschrift.
This one is on macroeconomic linkages,
hedge funds, derivative
markets, futures, and options,
and the moderator is
Professor Brian Wright.
Brian is a professor of
agricultural and resource economics
here at Berkeley.
His interests in economic
uncertainty and innovation
date from early experiences
on his family's sheep farm
in New South Wales.
He received a bachelor of
agricultural economics,
first class honors,
from the University of
New England, Armidale,
where he won a Frank Knox
Fellowship to attend Harvard,
where he received an AM
and PhD in economics.
Prior to joining the faculty at Berkeley,
he taught at Yale in their
economics department.
His research interests
include economics of markets
for storable commodities,
market stabilization, agricultural policy,
industrial organization, public finance,
invention incentives,
intellectual property rights,
the economics of research and development,
and the economics of conservation
and innovation of genetic resources.
Brian.
- Okay, it's a pleasure
to be on this panel,
and it's not necessarily a pleasure
to be given the task of
having everybody keep on time,
but I thought I'd go back
and, before I make other remarks,
say how I first met Gordon,
and even before that, how I
first became aware of him.
When I was at Harvard,
I started working on some
large-scale economic models
with Dale Jorgenson.
When I went to Yale,
I started working on how to
explain the simple economics
behind the results from
these large-scale models,
and in the course of doing
that, I went to a conference,
and I'm not quite sure what
the conference was, but--
- [Audience Member] You
got the Dr. Kiel Exchange.
- Maybe that was it,
but anyway, Gordon remembers everything.
If you ever go to one
of these conferences,
behave yourself because he
remembers everything forever, and
but anyway, I was sitting
pretty much down the back,
and he was sitting next to Richard Just
on the right-hand side
of the center aisle,
and they came in,
and they looked so confident
in what they were doing
and so focused,
and what they were
presenting was a comparison
of futures markets as forecasts
with the results of
several large-scale models,
including the Chase Econometrics
model, the Wharton model,
and the DRI model,
which I'd worked with delight at Harvard
with Marty Feldstein and with Jorgenson,
and their papers showed,
and I think it was later published
in the "American Journal
of Agricultural Economics,"
but I think that's right.
Anyway, it showed that the
futures market did about as well,
if not better than the other markets.
Maybe it had a little more variance,
but better accuracy,
and that was kinda the beginning
of the end of the market
for the work of those
models in price forecasting.
Now, that's the good part.
Gordon didn't really get totally convinced
with the message of this work
because then he did another
paper with Colin Carter
on pricing in the soybean complex
where he was a bit more wishy-washy.
Said, "Well, for some of these products
"in the soybean complex,
"it looks like the model's
made it a little better."
Jeff Williams and I then
looked at this again
using simulations from a
rational expectations model,
where you recognize the role of storage,
and found out that their
critical regions were all wrong,
so they're actually re-proving
what Gordon had done
in the first model.
He should have stuck with that,
but the first model that worked
really was the beginning of the end
of believing these
complicated large-scale models
over things like markets
from commodity exchanges,
and I think that was very important work,
and I was quite impressed with it,
but I didn't get to know him at that time.
About that time, I got
an overture from Stanford
to go to the Food Research Institute,
and I didn't pick that up
because I wasn't that interested.
I wanted to learn more,
but then I went to another conference
about three years later,
and I met Gordon in the
men's room, and he said,
"Would you be interested
in coming to Berkeley?"
and I said, "Yeah, well, maybe,"
and that was maybe my
first real conversation
with him in life.
He didn't really know me at all,
but that was the start
of a wonderful period
where he was chair there,
and he was setting the
department in the right road,
the department of the head
being a certain amount of miss,
and then, after that,
after he got the department
straightened out,
he took the college, which
was totally directionless,
and very contentious between
different departments,
and put that on the right
road, a very difficult job.
He had to fire people.
It wasn't fun, but it was
a tremendous achievement,
and then he used this experience
to inform his work on
public-private partnerships,
which I think is very insightful.
One defect in that work, I
think, is that he assumes
that the people negotiating
these partnerships
have the same qualities that he has
and the same integrity he has
with respect to the university.
He maybe overestimates the
average person's ability
in these areas,
and also maybe their ability
to work 40 hours in a 24-hour day,
but one thing that I can say about Gordon
is there's nobody in this room
who loves the UC system more than he does,
and everything to do with
quality, and academic rigor,
and excellence of talent
is what he's interested in,
and that's about all he's interested in:
the mission of the
university, of the college,
and the department.
Now, I have a difficult task here
keeping everybody else on time,
so I'm going to try and not go over,
and so now I'll introduce the next person.
We'll go by the program,
not by the seating order,
so Vito Palmieri will be next,
and he's a cofounder of
E-A-S-I, or EASi, I guess,
and I'd like him to...
- Well, hello, people.
My talk today is gonna be a lot different
from the people who told you
about all this great research,
and academic excellence,
and awards that are won
because I didn't work with
Gordon in any of that.
My work with him is
I don't know if you know,
but Gordon has had four
careers simultaneously.
He's the hardest working person I've seen
in academia and beyond.
We've all heard today about
all the papers he does,
and obviously all the help
he's given to students,
and pushing ideas ahead.
We also have touched on
some of the work he's done
as a consultant,
but few people know that he's
been a hedge fund manager,
and he's been consulting,
or helping develop young companies,
and has been the chairman
of several companies,
so I'm kinda working on
the third and fourth,
but just to give an introduction that
how I found
how I met Gordon is
he was my what they call
managerial economics professor
at Harvard Business School.
Now Harvard Business School
is kind of a little different
academic environment
than most places,
and everything is the case method,
so everything is done through
kind of a Socratic method,
which is a lot of fun for the students.
They have a business
case, a problem to solve,
and then they go at it, and they solve it,
and as they go at it and solve it
they found out how bad they were,
and they learned to become better,
so it actually works very well.
We, however, had Gordon for, really,
a mathematical statistical course
in managerial economics and
decision theory, basically,
and it's very hard to teach
that in the case method.
You know, they give you little papers.
You learn a little bit about
the R-squared or whatever,
and you try to
you kinda pick this up,
and it was up to the
guy who was teaching you
to actually
have you understand what
the stuff was about,
but the method was Socratic,
so you're supposed to
kinda pull from within
this chi statistic,
which most people didn't even
know how to pronounce, so
but the thing that was really great
was that Gordon really
was a great teacher.
I mean, he was incredible.
He was only about 32 then.
We were probably 25.
He was young, and
energetic, and he used to
we were all in amphitheaters of 80 people,
and he'd run up and down the amphitheater
and yell out, "Well,
suppose this happens!"
and then we were saying,
"I don't know," and
(chuckles)
(audience laughs)
it was kind of a blur,
but the truth was that Gordon
was so good in those days.
You really picked stuff up.
He would knew how to throw out
the little bits of information
which sometimes were wrong
so that you would challenge him on it,
and you'd actually learn
how to make decisions,
and I gotta say that
throughout my business career,
I never was in academics after that,
it really worked.
I was with one company,
and they were deciding on how much money
they should put into a
new area of business,
and I remember I was standing up there,
and I was actually the computer guy,
and I was doing a little
model, and analyzing,
you know, if you put this much money in
you'll probably get that much
if this many people bought the product,
and the bottom line was that
according
Gordon worked with a
fellow named Howard Raiffa,
who was a famous economist at the time,
and he came up with a thing
called a decision tree,
and we created a little decision tree,
and from the decision tree
we decided they were
gonna put a lot of money
into this area.
Well, 20 years later
they sold the company
for 73 billion dollars,
and I always think that
Gordon was there a little bit,
you know, about doing
some real analytical work
instead of just sitting
and pulling a number out
of your ass, you know?
(laughs)
(audience laughs)
Which is the way a lot
of business works, okay?
Now, the one fun thing,
and I promised I would
keep this story short
because Gordon isn't particularly
proud of this story, but
(laughs)
(audience laughs)
we would spend about
they gave us these cases.
You had three cases a night,
and you spent about an
hour, an hour and a half.
That's all the time you
had to prepare these cases,
and they were pretty hard
trying to figure out,
especially these mathematical concepts,
how this guy was gonna
apply it to business.
You had absolutely no idea
when you started the case,
but you read this case,
and it became obvious what
they were trying to tell you
is there's a lot more to
statistics than the R-squared.
That was kinda the bottom line,
so I figured, well, I've
got enough to go on,
and then they gave you some examples,
and I started to do the example.
I said, "Wow, there's a
lot of math in all this.
"I won't get to sleep tonight
if I do this sort of stuff.
"They can't expect us to
solve these problems,"
so anyway, going to class the next day,
and Gordon, he supposes a first
a few things, and he said,
"Well, what is the best answer?"
and I said, "Gordon, number two
"because it has the highest R-squared,"
which I knew was the wrong answer,
but I felt that that would
get discussion going,
and Gordon looks at me,
and he says, "My Palmieri, you're wrong,"
and I went, "Professor Rausser, prove it,"
and Gordon takes up a
piece of chalk, and we had,
I think it was seven chalkboards
in the front of the room,
which were rarely used,
but he started
to actually solve this
problem mathematically,
which I knew was very complicated,
so all I kept hoping
is that he would go beyond
the hour-and-a-half class,
and not get back to me,
(audience laughs)
so he's there, and he's
writing integrals on the board.
I'm trying to remember from
calculus how all this worked,
and so I'm
but I was able to follow it
pretty well, and he kept moving,
and I kept going, "Ah, shit,
he's gonna come back to me,
"and said 'You're wrong,'
and do I just admit it,
"or do I say something
funny, or do I ask him,"
and the best thing is always
to ask him another question
because then he'd go back to the board
and prove that one too,
so anyway, he kept on going really fast,
and he was going like a
long time, which in those
like four minutes or something
trying to solve this,
and then, at one point, he stops.
He looks back at all his calculations,
and I go, "Aha, he found something wrong,"
and the trouble was is that
what this case was about,
it's a look at the chi-statistic,
as well as the R-squared.
That'll help you solve
the problem properly.
Well, the truth was that was true,
but it also was the example
that had the highest R-squared,
so I immediately said, "It's
time to seize victory,"
and I jumped up on the desk.
I went, "Up the R-squared!"
to which my classmates,
given the fact that they
were in the same situation.
They don't know what they hell they do.
They cheered me on greatly,
(audience laughs)
but the best thing was,
and this is the thing,
is that Gordon laughed, and
it's, you know, that was
that really kind of changed
all the students' view of him
because he always was on our side,
and whatever it took
for you to get educated,
he was willing to go there,
even though it might be a
little bit circuitous to him,
but it was a way for him
for you to learn,
and that's really what Gordon's magic was
is that he really was one
of us, and it just was a
it was amazing thing to make this
to underscore this,
Gordon was the only professor
of the history of Harvard Business School
to get a straight five in the
rankings from his students,
which got him the Harvard
Excellence in Teaching Award,
and also two skits from his classes.
Skits were the kinda the highest honor
a class could give to a teacher,
and one of the skits was
written by a guy who eventually
went to be Jay Leno's and
David Letterman's chief writer,
so he, Gordon inspired him, too,
into different directions,
so anyway, so the teaching
days were, at Harvard,
really were a wonderful
time to meet Gordon
and to see all the things
that I would normally not learn,
but given the way Gordon
was such a great teacher,
as one of the women who
became a romance writer,
she went to Harvard Business School
and ended up writing Harlequin romances
and was very successful.
She said,
"I was never really afraid
of math after his class.
"I knew that if Gordon
did it, it must be right,"
so anyway, so that was
that's the one little thing
I was gonna put on the side,
but Gordon's teaching.
The thing, of course, been
most involved with with Gordon
is, yeah, few minutes,
is the trading,
Gordon's trading program,
which was a third of his fourth
third of his fourth jobs,
and he's done that 40
for 40 years.
It's always been a side thing.
I know he doesn't like this,
but I always called it his hobby,
and many people would be very, very happy,
and live on a great retirement
if they only had his skill and his happy,
but the thing about it
was, as you might know,
Gordon was a Golden Gloves
boxing champ as a teenager,
and also he was had
was a one of the youngest full professors
at the University of Davis.
He told me he wasn't absolutely
youngest, but by 24 he was,
and by 30 he had appointments
with the statistical people at Iowa State,
which was, at that point,
one of the leading math
statistics universities.
University and Harvard
by the time he was 30.
That was pretty good, so that's pre-us,
so the one thing that I
the best thing that ever
happened to me with Gordon
is I went into this class,
and most people went,
and they wanted to understand
something about mathematics,
but it turned out that a
lot of people in his class
went for life understanding.
He was our youngest professor,
so he could understand some of the things
that we were going through,
so I went in, and I said,
"Gordon, how do we make a lot of money?"
and Gordon smiled, and he
I came out to here to California,
and while he was building
his academic profession,
we were building the hedge fund,
and basically a hedge fund
is any non-standard pool of money.
You could go and get a
regular fund, Magellan and,
but he would do things that
were a little different--
- Thanks for--
- Yeah, thank you.
(audience applauding)
- Well, I think I knew most of that,
but I didn't know that the
way he taught at Harvard
inspired a lot of jokes on Jay Leno,
but that's something else.
Now, next we'll have Bill Balson,
and he'll talk from the
same side of Gordon's life,
and like to hear what he has to say.
- One theme that runs
through all of the stories
that you'll hear on this panel
and the previous ones
that I've listened to
are Gordon's command of the details
of the projects that he's involved in
at the same time that he retains
a high-level strategic vision,
and I was first introduced to Gordon
when we were both working
at consulting companies.
He was at LECG.
I was at Strategic Decisions Group.
At the time he founded a
company called Opt4 Derivatives
that developed some trading technology
that he and I have gone on to demonstrate
has some real-world
applications in today's economy
for systemic risk,
and I'll explain a little
bit about the details,
and how it can be applied
at the systemic risk level.
First, I'd like to mention
there's a typo in the agenda.
I was not the chief financial officer.
Laura Craft was.
I was the chief risk officer,
so they brought me on after
they had founded the company,
brilliantly thinking that
the new concept, then,
of value-at-risk could
have some application
in a matching trading venue
for structured contracts,
so a structured contract,
very common business-to-business
type of trading,
where you have a single contract
that embodies a number of elements.
Could be forward elements
in agriculture, chemicals, and so forth.
It could also embody derivatives
or optional elements,
so these contracts can be quite involved,
and as we saw in the financial crisis,
they can pose very large
risks to companies,
but also to the economy as a
whole if those risks build up,
so Opt4 developed what we call a real-time
pre-trade risk-based
transaction permissioning system,
so let me break that down for you.
Real-time meant
we were able to do over a
million transactions per second,
and this is before the technology
of graphic accelerator
cards that expands that
by six to 10 orders of magnitude
in terms of rapidity.
Risk-based means that
we used value-at-risk,
which is an analytic
risk-based methodology,
to measure the risk for each counterparty
as they're doing their trading,
and if you think about a
counterparty doing some trading,
either on a standard futures contract
or a very complex structured contract,
they have both the risk
of the contract itself,
and they have the risk that's mitigated
by their offsetting
collateral or other contracts,
and so we wanted to take both
of those factors into account.
Pre-trade meant that we did
all of these calculations
on a risk-based basis before
a contract was executed,
and that's a lot different
than the way the system works, even today,
so even today, in CME or ICE,
they use a double-sided
auction methodology,
so contracts are executed,
and then, behind the scenes,
there's a risk analytic process,
and their theory
is they don't wanna delay the
execution of the contracts,
and then have to possibly unwind them,
so our system was intended
to do the collateral and credit checking
before the contract was executed,
and that meant, of course,
you had to do all of this sub-second,
and people said we couldn't do it,
so we had a key technology that we used,
which was to use
the analytic delta-gamma
value-at-risk function
as an interpolating function,
where normally, when you
read the VaR textbooks,
they'll present several
different methodologies.
You've got historic.
You've got analytic.
You've got Monte Carlo simulation methods,
so what we wanted to do
is we wanted to have the
accuracy of a simulation method,
but the speed and rapidity
of calculation of the analytic method,
and so we used the analytic VaR,
not as a per se model by itself,
but to use it as an interpolation model
that would be periodically trued up
to the more accurate simulation model,
and so it was capable of being fast,
but also accurate on a several
hour to overnight basis.
The design was at Opt4,
but it was actually implemented
by the Board of Trade
Clearing Corporation,
which has subsequently, a few years back,
been acquired by ICE,
and we chose them as the counterparty
for this partnership
between Opt4 and BOTCC,
particularly because
they had the expertise
in the classic way of doing clearing.
They knew how to do it well.
They were the world's leader in doing it,
and so we wanted them to take
our model of value-at-risk
and implement it, and
that's what happened,
so without any more details about Opt4,
let me flash forward to 2012
because we had the financial crisis
in the rear-view mirror at that point,
but congressional
investigations produced the book
or the portfolio of
AIG Financial Products,
which owned all the derivatives
that caused the $30 billion loss at AIG
and the subsequent restructuring.
Turns out that AIG was
$9 billion underwater
before the very first
collateral call was made.
Well, if you and I are
doing futures trading,
how quick are they gonna wait?
You're underwater.
They're gonna be on you by
8:00 a.m. the next morning
if they don't have
somebody at your front door
at 8:00 p.m. the night before, right?
But that didn't happen then.
It still doesn't happen that way,
so we looked at the
transactional portfolio
of AIGFP as it existed,
and then we proposed
a conjectural modeling margining system,
and we wound the clock back to about 2003,
and then we wound it
forward, month by month,
through the end of 2008,
and lo and behold we found that
if you had a very reasonable
value-at-risk-based margining system,
collateral calls would have started
in early 2007.
Now, remember,
in late 2008 the CEO of AIGFP
gave congressional testimony
that these contracts had
zero financial risk, zero,
but our winding it back and then forward,
we saw that, by about March of 2007,
a half a billion to a
billion-dollar collateral call
would have been made.
That would have riveted the
board of directors' attention.
They got the CEO of a division
saying there's no risk,
and they get a collateral call?
It'd be like your wife,
reading your margin call
in the morning, saying,
"What do you mean there's no
risk on this trading book?"
So it highlights that these
big, systemic problems
can be solved by the right kind of data,
the right kind of technology,
but we have to move
forward and implement it,
and I will make a side comment about that,
which is if you actually look
back at the crisis period
from '06, '07, '08,
the two companies that
went under, Lehman and AIG,
were the two that did not start hedging
in December of '06
through about March of '07.
They didn't hedge their books,
and they're the ones that went under.
- Thanks very much, it's--
(audience applauding)
Now we'll go back to the academic side.
Colin Carter, distinguished professor
from a pretty good agricultural
economics department
at UC Davis.
- Thank you, Brian.
Are you staying, Gordon, or leaving?
- [Gordon] Yeah, I'm staying.
- Oh, okay. (laughs)
(audience laughing)
I got the feeling when it was
my turn you were gonna leave.
- No.
- Anyway,
congratulations, Gordon.
Like many people here,
I'm indebted to Gordon.
He was on my PhD dissertation.
There were three members,
and I think Gordon's the
only one who ever read it
and gave me comments,
so thank you so much,
(audience chuckling)
and he taught me
a lot about futures markets,
so I got the e-mail that said
three to five minutes, Brian,
so it's my Canadian roots.
I'm gonna stick to three to five,
so I wanna recognize a paper
published in the "Journal
of Finance" in 1975
by Gordon and Tom Cargill,
and I think Tom was a
student at Davis, right?
You were probably his advisor,
and this paper is called
"Temporal Price Behavior in
Commodity Futures Markets,"
so this paper was written 45 years ago,
and I actually read it
a couple of days ago,
and it was so interesting
because they talked about
using the computer to do this,
the computer to do that.
In those days it wasn't that
common what they were doing,
but I would argue that this paper
actually anticipated
the financialization of commodity futures.
They argued that the futures
will be attracting a lot more
attention by the industry,
there'll be new products
developed, new investors,
and so on.
Well, guess what?
They were absolutely right.
This was 1975.
Subsequent to that,
there was a huge expansion
of futures trading
into financials and energies,
and then, in addition,
in the last 15 years there's
been this financialization,
and what that means
is there's been this
incredible, incredible
inflow of outside managed
money into commodity futures
looking for a so-called new asset class.
Now, the industry attracted this money
because, as Gordon anticipated,
the markets give investors exposure
to a broad class of assets,
including equity indexes,
interest rates, currencies,
metals, agricultural,
and energy commodities,
and around the time that
they wrote this paper,
the amount of money in futures
markets under management
was just north of $200 million.
It's not a lot of money,
and today it's 360 billion,
so it went from 200 million to 360.
That's a 1,200-fold increase,
and today, index speculators
are the largest participants
in the futures industry,
and these are largely
pension and hedge funds,
the type Vito was talking about.
Now, you go back to their paper,
and Cargill and Rausser
studied the statistical
properties of futures markets
in a very sophisticated way back in 1975,
and they actually found
that futures prices
could be forecast with some
systematic trading filters,
so it was pretty innovative.
Now, coincidentally,
last month there was an article
in the "Financial Times,"
and it talked about this college dropout,
and Gordon's helped a
lot of people in college,
but I guess he's also
helped college dropouts.
This guy's name is Mike
Adam, and Mike was in the UK,
and his dad happened to be a sugar trader,
and Mike dropped out of
college, and his dad was upset,
so he put him to work
drawing charts of sugar futures prices,
literally drawing charts by hand,
and he got sick of that,
and he started talking
to a couple of his mates,
and they said, "We can probably
do this with a computer,"
and this was after Gordon's paper, right?
So they got the idea
that they should design
futures trading systems
on a computer following
trend-following methods,
which exactly what Gordon did,
and they started a firm called AHL,
and today they control
30 billion in assets,
and one of the three left
the company, Mr. Harding,
and his fund that he runs
controls 20 billion today.
Not bad.
He's probably the
wealthiest man in the UK,
so having read that, I
thought, "You know what?"
I wouldn't be surprised if,
back in that sugar firm,
back in the back rooms of that sugar firm,
when Mike's dad told him,
"Well, you go to work and
start drawing these charts,"
that somehow these guys
'cause one of his friends was an academic.
They ran across Gordon's paper.
You could just imagine, in those days,
this college dropout trying
to figure out Gordon's paper,
but you could just imagine
it'd be a lot of notes in the margin,
a lot of things were underlined
when they designed these
computer trading systems,
and I know one of them's
a billionaire today.
Probably all three are,
so Gordon, I hate to state the obvious,
but there's one instance
where you should have kept
the research to yourself,
(laughs)
(audience laughs)
or at least given it to Vito.
- Well, very nice.
(audience applauding)
I'm glad you didn't say
that if he stayed in college
probably would never
have done any of this.
(panelists and audience laugh)
'Kay, next is Alan Love, from
Washington State University,
where he's the director of the
School of Economic Sciences.
- So I have a quick correction, as well.
I was director of a school
of economic sciences.
- Oh, it's Jill.
- Now Jill is,
and she's very happy that
that transition's happened,
but I wanna say I first
became aware of Gordon
one day in my office in
Lexington, Massachusetts.
I was sitting there,
and I just happened to lift
up an article in the AJAE,
and it said, "Commodity price forecasting
"with large-scale econometric models
"and the futures market,"
and that's where I was working.
I was at DRI, and I
started reading through.
I didn't know anything
about Richard Johnston and Gordon Rausser,
but as I read through,
it became clear that they liked
futures markets really well,
and that I was kind of a
little disappointed in that,
but then I kept reading,
and we were particularly good at corn,
and that was one of the things I forecast.
We beat the futures market in corn.
I don't know if you remember
that, Gordon, or not,
but then I got disappointed again
because I saw, oh gosh,
these forecasts were between '76 and '78,
and that was before I joined the company,
so I thought, "Okay, fine,"
but it is disappointing
that I didn't do those
great corn forecasts myself,
but anyway, it was fun,
so I got sort of ready to change career,
and go back and do a PhD,
and I applied to a bunch of schools.
One of them was because of this article.
I applied at Berkeley.
I also applied at Yale,
and kind of coming back full circle here.
- I first met you.
- Yeah,
I first met Brian, (laughs)
I was traveling around
with DRI a fair amount,
and so I went to see Yale.
I applied there, and I
saw Brian, this guy Brian.
Brian says, "You know, you
don't wanna go to Yale.
"You wanna go to Berkeley." (laughs)
Like, I thought, "Wow,
okay, here's a school
"I don't need to worry
about getting into anymore
"because I went to see the
guy I was gonna work with,
"and he says, 'Go to Berkeley,'"
and then I went out to
Berkeley, and I met Gordon,
and I was supposed to talk
with Gordon about a half hour.
My to-be parents-in-law
were in San Francisco,
and they said, "We'll just
take you over and wait for you.
"It'll just be a short trip."
I think we ended up talking, Gordon,
about three hours that day.
Turned out he was trading,
and I had no idea about that.
I was trading a tiny, tiny bit,
and it was model-based stuff,
and I'd say Gordon had
an infectious enthusiasm,
and it was really clear when I left
that I wanted to go to Berkeley,
and I hoped I could get
in and work with Gordon,
and that did work out,
so I wanna thank you for that very much,
so kinda moving on.
One of the very first things
I got involved with there
was a paper with Gordon Rausser
and other authors who can't
aren't here today,
and it was a paper that ended up winning
the Quality of Research Discovery Award,
and I wanted to talk
about that just a bit,
and it's about the ag macro
linkages that Gordon's part of
a big part of his work has dealt with,
and it doesn't come as
a surprise to anybody,
agriculture's a highly
capital-intensive industry,
which means that it's closely related
to interest rates, inflation,
and it's very
trade-dependent area as well,
so exchange rates play a key role,
and on the other side of the equation,
ag prices tend to be very
volatile, move around a lot,
so they contribute to inflation,
inflationary conditions.
All of that became really obvious
at the early stages of 1980s
because we'd switched from
a regime of, effectively,
easy money, high inflation,
high unemployment,
low exchange rates,
or should say a dollar that was very weak,
and very high inflation rates,
so and low interest rates,
which had benefited agriculture.
If you looked at it,
it was like a subsidy to
agriculture at that time,
and a 19, early 1980s the
Federal Reserve changed
to a kind of a Milton
Friedman-type recommendation
of a fixed money supply coming in,
and it put the brakes on everything,
so what happened was interest
rates went very high,
U.S. exchange rate got very strong,
inflation weakened dramatically,
and it was like a tax on
agriculture, in effect,
because of the export dependence
and capital intensity of the industry,
so in that work, Gordon's team,
and it was a big team of people,
built a big model, almost
like the DRI model, frankly.
It was a quite sizable one.
Had a macro sector.
It had corn, wheat in it.
Had livestock,
three different categories
of livestock in it,
and we worked on that
model pretty intensely
for couple of years, I guess,
but were able to run simulations
mimicking this period of taxation,
this period of subsidization,
and sort of see what happened,
and there was a lot of
discussion at that time
from Jeff Frankel, also here at Berkeley,
about overshooting models,
and we were able to, in that work,
see how these macroeconomic
linkages were really working,
and it turned out that it was
kind of a surprising result.
There was overshooting,
and farmers were benefiting
quite tremendously
during the periods of
subsidization, like the '70s.
The prices went up,
they captured the rents,
farm incomes increased, and so on,
but the surprise was
on the taxation period,
and the taxation period,
what was happening
was the government subsidies
were effectively overshooting.
Farm incomes actually
weren't that much lower
because of the
subsidization of agriculture
from the depressed prices,
but government budgetary expenditures
went up quite dramatically,
and so I think that work
was pretty insightful,
and I think, as well,
it probably contributed to a lot of work
that Gordon did afterwards and
before on political economy
because what's very clear
from, I think, that research,
and I read it just recently again,
is that you can't really understand
long-term events in agriculture,
and make forecasts out
a long period of time
without really understanding
the political economy
because agriculture's still an area that's
governments consider high-risk,
that you need to provide a food supply
that's going to be reliable,
black swan events, those
sorts of things come along,
and there's still gonna be need for
some sort of agricultural interventions.
Another thing that's
came out of it as well,
and for years, and taking
classes with Gordon,
he had recommended, in effect,
moving from a system of very intricate
and detailed institutional settings
where we had target prices,
deficiency payments,
support payments, acreage diversions.
It was a really complex
and laden with dead-weight loss
sort of regulatory policy
that was subsidizing it,
and moved into, in effect,
the missing market.
The real reason that the
farm problem was around
was due to risk that couldn't be hedged
because of issues with moral
hazard, and adverse selection,
and so on,
that the government, in
subsequent ag policies,
had really moved much more
toward these insurance markets
and a government-subsidized
insurance markets,
and I think Gordon's policy work
had a lot to do with that as well,
so it had a big impact,
so I wanna say I'm still
learning from Gordon.
It's hard to miss his
enthusiasm, and it is infectious,
and thank you for all of that.
(audience applauding)
- Now, finally, we'll have Vito Palmieri,
whose work with Gordon
on the other side of
his activities, again--
- He's already spoken.
- Oh, excuse me,
excuse me.
- Gordon Fallone.
- Gordon Fallone, sorry.
(panelists chuckling)
- (laughs) Bravo.
Okay, well I'm tremendously
academically underqualified,
based on this group,
but what I will say is, in
a weird, small-world way,
my dad was a PhD in mathematics
and taught for 35 years at
University of Connecticut,
and ended up doing his sabbatical
with Bob Shiller in the mid-'90s
as he was putting together the research
for "Irrational Exuberance,"
so it's an interesting small world here
that connects us all from
an economics perspective,
but I'm also in a different position,
in that I represent Christmas future,
in a Charles Dickens
sense, for Gordon Rausser,
in that we started a company two years ago
with another partner,
and I'm very, very excited
to have him as a partner,
and am gonna use all of the things
that he's obviously been
lauded for here today
in helping us make that company
as successful as we can,
but what I wanted to say,
specifically, was we started
I met Gordon 10 years ago
when we started assessing and investing
in venture capital companies
and, in some cases, funds,
but back to Vito's point.
He's been a mentor,
not just to people,
students, and academics,
but to entrepreneurs and
founders along the way
over the last 20-plus years
in a way that many people
may not understand,
but it was that enthusiasm for
investing in those companies
that brought us together,
and now, 10 years later,
we've decided to start a
company around that process,
so in short, OPAC Capital Partners,
which is the name of our small
company, goes and invests
looks to invest in what we'll
call milestone financing,
so that's a phrase Gordon
and I have come up with
in that the venture capital ecosystem
has some inefficiencies, we've found,
and one of those is that in
between rounds of financing,
companies tend to get short on cash,
and as they get short on cash,
they find that an injection
of a small amount of capital
can allow them to achieve a milestone
that can dramatically impact valuation
at the next round of funding,
so we've found that little
niche and carved it out now,
and through relationships that we've,
all the three of us have built
in the venture capital community,
see a tremendous amount of deal flow.
We've married that
with something that came
out of the '08/'09 crisis.
On the individual
on the high-net-worth individual
and family office side of investing,
there was a tremendous amount of money
that flowed into fund of funds
to access venture capital.
Those fund of funds created
a layered fee structure
that you were paying a lot
to get access to these funds of funds,
and what '08 and '09 showed you
is that when thing went really bad,
you weren't really
protecting yourself at all,
and you lost every bit as much
as if you'd made individual investments,
so this started a renaissance
back to family office investors,
ultra-high-net-worth individual investors,
wanting to do the work to
invest directly in companies,
and that's what we began to leverage off,
which formed what's now OPAC,
so we're really excited about
the prospects of the business.
We think it fits a really unique niche.
We think we have a unique
sort of deal-flow process
to generate ideas,
and we think we're helping
the family office world
get access in a way that they
haven't had access before.
That all being said, I would say that,
and it's hard for me because
there's two Gordons here,
so I immediately said,
"I'm gonna have to use
something other than Gordon,"
and since my dad was a PhD,
Gordon's been Dr. Rausser to
me from the day I met him,
and he continues to be Dr. Rausser,
so Dr. Rausser, thank you
very much for having me here,
and more importantly,
thank you for being just a
terrific mentor and partner,
but one of the things that all
of you know about Dr. Rausser
is he will be incredibly
straightforward with feedback,
so he's been very straightforward
with feedback for me,
and one of the things is
he's continued to coach me
on being a better listener,
so to that point, I
listened today, Doctor,
and in listening today,
I can tell you I now understand
why you've become such a good
partner for our business,
and why you will continue to be,
so I just wanna throw a
couple sound bites at people.
Hyperbole and narrative control, okay?
Hyperbole and narrative control's
very important in our business
because every time a founder
sits in front of you,
he's guessing about
everything he's telling you,
so he's gonna be wildly optimistic
about how good his product is,
how much people are gonna buy,
and how quickly he's gonna
sell all this product,
and that narrative needs to be controlled,
and so when the doctor and
I sit in front of founders,
I've found that he's been
now I know, since he's
doing research in the area,
why he's been so good at seeing through
that hyperbole and narrative control.
The second thing I wrote down
was the sausage factory
of policy formation.
Well, I could tell you that
there's the famous quote
about the two things you
never wanna watch made
are laws and sausages.
I would throw venture
capital right in there
because anyone who's ever been involved
in the process of taking a company
from an idea to a business,
it's hard to really articulate
the pain that's involved in that,
so his experience in
policy formation, I think,
sets a wonderful foundation
for the pain and suffering we go through
with a lot of these
investment opportunities.
The other thing is
ecosystem inefficiencies.
I think, as we looked at the
venture capital ecosystem
to find the right fit for OPAC,
it was this sort of concept
and his ability to see this
that allowed us to say,
"Hey, there is a spot for
us to be able to fill,"
which is where the larger
venture capital firms
don't wanna do the smaller investments,
two to six million, let's call it.
It's very rare than they
would wanna do that small
because they look at
investment on ownership.
They want a certain ownership percentage.
That's how they view their portfolio.
We don't have to view it that way
because we're servicing our clientele,
which is simply providing access.
We're not as worried.
We're not running a fund,
so there was this opportunity
for us to fit our model
into that in-between stage
process for a company
and really add value
in creating the ability
for them to hit significant milestones,
so again, the inefficiencies
of the ecosystem
were something that he's studied
and became very clear, came
to roost for us as well.
The last thing, and
probably the most important,
is what I'll call
performance under pressure.
I have found over the years
that there is no person I
would rather have next to me
when things go bad.
It simply is what he excels in:
the calmness under pressure,
the ability to take
and analyze a situation
where emotions are very
high, failure is imminent,
and to sort of strategize
around a solution
has been truly a revelation for me,
and a wonderful learning experience,
but I tie that back
to the fact that there was
probably a lot of pressure, too,
when communism fell,
and he had to figure out
how to transition the
world economic landscape.
That seems like a lot of pressure,
so to have a company start to implode
probably isn't all that big a deal,
so for all of these reasons,
Doctor, I did listen,
and I do understand, now more than ever,
why it's been such a joy working with you,
and I continue to look forward
to many years of that going forward,
so thank you very much.
(audience applauding)
- I think you've proved
you take notes better
than most of our students.
(panelists and audience laugh)
Anyway, now we've got time
because everybody kept
pretty much within time,
for about 12 minutes of questions.
Any questions from
anybody in the audience?
- No, I think exhaustion
has settled in.
- Yeah, yeah, yeah, yeah,
yeah.
- It was the clarity
of our presentations.
- Yeah. (laughs)
- Yeah, yeah, yeah, yeah, yeah, yeah,
- The curse of the last panel.
- Yeah, yeah, yeah, yeah.
I've got one comment,
which is the kind of experience you have
when a company's failing.
I think a lot of students
would say that's the kind
of experience they have
the night before their
oral exam in the ARE.
You need to have that kind
of stability and confidence
to go through it.
Anything else?
Anybody else?
If not, we can finish early and--
(audience murmuring)
Oh, there is one?
David.
- Okay,
there are so many people
that speak about the future markets.
The previous head of the Federal Reserve
several times suggested that high finance
is a basically taking the, some extent,
a transfer of resources
from the poor to the rich.
If you can make a case,
for people that care
about political economy,
why would should we really
support future market
and how do they perform for society?
What is your assessment on the balance?
How did it do?
- Okay, I'll take a crack at that, David.
I think, given the fact
that there's been this explosive growth
in the number of products
offered on futures markets,
and I mentioned some of them:
equity indexes, energy contracts,
has meant that the
industry, broadly defined,
is much
in a much better position to manage risk.
Just think about the
airlines, for instance,
just that's one example.
About 30% of their
operating costs are fuel,
and you have the price of oil
going from $40 to 140 back to 30.
Most airlines also have
huge exchange-rate risk.
You know, British Airlines
earns revenue in British pounds,
but they buy fuel in dollars,
so that market,
whether people are trading
directly or indirectly
through swap dealers,
offers them the opportunity
to manage their risk,
and then they pass it
on to you as a consumer
because your flights are cheaper.
That's just one example,
so I think the markets have
offered tremendous benefit
to risk management, to price discovery.
You know, a farmer in
India, a farmer in China
knows what his cotton is worth
because he has a cell phone now,
and he can check the price of cotton
on the New York Exchange,
and that's of tremendous value
to that individual as well.
They can't be taken advantage of
because they know what
their product is worth.
- [Brian] I think I have
another answer here.
- Well, I just wanted to
make a cautionary note
that unbridled and unregulated,
those same markets can be
subject to what Enron did
in 2000, 2001,
where prices were deliberately,
purposefully manipulated
over extended period of time.
- [Audience Member] No reason to have it.
- Yeah.
- I would make
one other comment, which is that I think,
if you compare futures
markets and open pricing
to what happens when you get
governments getting together
and doing trades in commodities
that aren't traded on exchanges,
I think the latter gives
you way more problems
with corruption, and illicit
transfers, and other problems
than when you have open
information on futures markets.
It's a good question.
Anything else?
Okay, well--
- going once, going twice.
Sold. (laughs)
- Yes, sold.
- Well, thank you all
very much for this panel,
and all of the panels today.
(audience applauding)
(lively percussive music)
