the integrity index lynn brewer from the and integrity institute is here with us and we're going to be talking about some companies that well i don't know do you want to avoid them or not that's going to be up to you len welcome back thank you stan it's good to be here again just very briefly for those who don't know the integrity institute and the integrity index could do summaries of yes so the integrity of souter's a research think tank that is focused on predictive modeling and so we have built a predictive model designed to predict the likelihood that companies will succeed or fail and those are publicly traded companies that investors invest their hard earned money and pension funds and invest when so how do they get funded in the first place how  the how does so the old way of course the original thing of you know back in the one nine hundred thirty s one nine hundred twenty s it was that you would come to the market and you would say i would like to raise capital for my company and people bought that stock and you got a stock certificate and you went home and over time you would get dividends and you held that stock for a very very long time now today there's a number of ways but generally speaking people raise capital through their friends and family and then ultimately angel investors who put up a little bit more money and all along the way the company meets milestones and then ultimately they may go and get what's called venture capital and that's  companies that have been invested by hedge funds and pension funds and they then make investments in startups or companies that are like facebook you know well if you're going to if you're going to have venture capital in your company going to give away some of your company right you give up a lot of your company if you're going to take in ventura county money and it is a very very aggressive way to raise capital when you talked about  startups just a minute ago i mean i i was in preparing for the show i was reading this very cool thing a jobs act i was thinking wow you know you're the united states so the government is coming around with how to build jobs but then i saw no this is jumpstart our business this is for startups what is this all know so the idea is that the number of public companies are i p o s like facebook has to mannish drastically over the last decade and congress believes that wealth would be generated in greater volume if we had more publicly traded companies and you know my argument is well let's make sure the ones we have succeed for us this just adding more onto the pile but ultimately  what they want to do is reduce the regulation that is currently on companies small companies so that they can actually ultimately go public as we saw everyone votes to be mark  and make eighteen million dollars or whatever you made overnight but it's a long road to get there and my personal opinion is i don't think at twenty six that mark has the experience and wisdom to be a c e o and if i do sheri of public money that we haven't trusted in him he just doesn't have that experience to be built up the company though he didn't build up the company and he took in a great deal of money to do that and let me be really clear facebook has done an amazing job at changing the world and connecting people and they are leveraging that whether or not they'll turn that into a revenue model where it actually generates income i think no one sort of looked at that they kept seeing this young man who was doing amazing things so the jobs act is designed they've created crowdfunding that means that it means that you can basically similar to the way that occupy wall street was funded where people get together with a common cause and they put in ten dollars well there's all sorts of problems with that when you're doing a publicly traded company because currently the regulation is that you have to be an accredited investor and postcard frank accredited investor said that i must have assets worth over a million dollars excluding my primary residence and so these are sophisticated investors who have a lot of money and if they lose ten thousand here or ten thousand there it's not a big deal but crowdfunding is basically the guy on the street that says give me ten dollars any takes and everybody's ten dollars and it all to motley if he has a good idea that can go viral he can raise sufficient capital but from a from a publicly traded company perspective it makes a lot of problems down the road to something that i that i don't understand though in this jobs act when i look at it i was thinking to myself why do seriously and you kind of touched on it why do we need more i p o s instead why don't we need companies that are successful from a management standpoint they build a product that the public wants and there's more demand for it that creates more competition so it kind of floats all boats the i p o seems to be a game to me well it is a game and there are as we're seeing now with the facebook i p o there are people inside wall street that get very wealthy off of these things and get inside information when the rest of the world is left out and left in the dark i got out but i thought that this was for publicly traded companies and i was supposed to be protected by the f c c well you're exactly right so if the f c c cannot manage what it currently has on its plate why would we want to add more volume to that especially companies that are young on the other hand there are a lot of people with great ideas you know the integrity and sue for want i mean we are a for profit company  order to raise sufficient capital we have to go out and get investors so you know having more free flow of capital is important because you can't get a loan today i mean if we wanted to go to the bank and get a loan we couldn't get a loan but yet we have a great idea with this integrity and x to change the world well if i had personally funded it for my speaking engagements it would never have seen the light of day and that and the help of a few really good investors now you talk about the free flow of capital is that the same liquidity so liquidity is that if you have something to sell but there is a demand in the marketplace and people are willing to pay for what ever that is if that demand for whatever you're selling goes away there is no liquidity so you know if you talk about liquidity as in the market place it's right if no one's trading the liquidity dries up and so it's important that these things continue to trade now the reality is is that on any given day especially with high trading free high frequency trading algorithms you know the price of procter and gamble doesn't go up i mean the value of price of proctor and gamble doesn't go up exponentially with the stock price every thirty seconds you know it just simply doesn't but it is a back and as of buy which we understand the value of the stocks we use the s and p to understand where the markets are going as an indicator  as one of those economic factors that we consider well the reason i asked that and you touched on it already the high frequency traders the quantz i mean they've been in the news a lot for the past couple of years where they and their algorithm trade stocks and essentially they say that their value is that they create liquidity at the same point in time they're not buying stocks on the basis of management or the performance of the company yes so they're not they may be creating liquidity because there's a demand there is a buying and selling of something that creates liquidity but that's not what keeps our market sustainable what keeps our market sustainable is that companies are able to go to the markets raise capital they're able to keep enough growth in their business to create some demand in the stock that they have if there is sufficient demand for the stock in the stock price will grow and as it grows we are able to fund our pensions so coming back to the jobs act i have to tell you i'm feeling pretty cynical about congress and this particular act as to as to the reason for it to be done and at the same point i would like to think that congress is acting least somebody is acting in my best interest what's the good part of this well the good part is it makes capital more readily available to companies like the institute that if it won if you go public well know the jobs act actually makes or has mechanisms in place that allows us to raise capital with less restriction so prior to the passage of the jobs act if you had certain number of investors like let's say you had ten thousand people who gave you ten dollars those ten thousand people to you you would now be considered a publicly traded company the jobs act was designed to create some risk you know reduce some of those restrictions to allow people to actually raise capital because you have to find the people who have the money and who are willing to risk it in the end if you create more businesses you do create more jobs in the end but that was not the purpose of this particular act but i should mention is it had bipartisan support unlike anything i've ever seen everybody voted for in primarily because they use the acronym jobs nobody wanted to be seen as voting against jobs but i think they're all scratching their head in the face of the facebook which was expected to be this huge success as an i p o and now they're going to hold a credit if we can't get facebook right what are we going to do with everybody else so i get it as long as there's a nice acronym in the name of the law then congress should vote for it just we're talking about a little brewer who is the head of the integrity institute as we as we talk about funding of companies  private investment and public equities private investment in public equities so that means that when warren buffett makes an investment and a publicly traded company he does so in most cases outside the purview and when i say that i want to clarify it meaning that if i'm a publicly traded company and my stock is flat so let's say facebook in two years from now no one wants to buy the stock no ok i'll say this the stock is ten bucks so if a stock is ten bucks if the stock starts going down and that no one wants to buy the company the company may ultimately go out of business or sell assets the company may say you know what let's find a private equity firm that is willing to put up the money to be able to raise capital because they can't raise capital no one's buying what they're selling anymore so what they do is they go and find a private equity firm that will invest in their company and they issue a series of stock with preferences that the other stockholders don't get and they don't find out about it until the next analysts call so why even though i thought if they were publicly traded stock it was a publicly regulated company by publicly regulated by the f c c and i own stock in that company it's a certain value but if somebody else can come along privately and buy stock then doesn't that diminish the value of my so it certainly dilutes which is my concern about it because i think that you know now i understand we don't want companies to fail i get that right and i also get that people aren't investing in their stock so absent no one investing or if no one invests then the company will ultimately fail so it's a catch twenty two or if they just borrow the money well in most cases that borrowing is based on a credit rating that requires you have confidence in your stock and if the stock is not trading and it's flat because no one's interested in it they're in this catch twenty only way that a large investor you mentioned warren buffett but a large investor would maybe be willing to invest in a particular company or that you describe would be to get preferential treatment that's exactly right i thought was completely opposed to what the  all about and what those regulations were all about well i mean here's the here's the fact of the matter is that warren buffett keeps companies in business and so if we're talking about a loan to goldman sachs or we're talking a loan to a i g or we're talking a loan to anyone some would say that for public policy this is a good thing and in the end it was great for berkshire hathaway shareholders because they got a huge return on their investment but in the meantime  you know goldman sachs investors suffer their stock is down by half if there's no transparency with those transactions how do you judge it how do you go to your pension fund and you and you say hey i w and invest in this company but but then there's no way that the pension fund can know what's happened you can't how can you trust the value of the stock so pension funds are defined benefit plans that have regulations of their own and so they invest huge amounts of money in a particular stock and so these pension funds are getting hit not knowing you know because let's say they invest in goldman sachs they think the pie has a certain amount of pieces and warren buffett comes in and has given you know cuts everybody's piece in half and they don't know when it then you know i think that there should be some additional disclosures but you know i stand in sort of a lone wolf and that because i think yeah how does the integrity index even measure that yes so what we do at the institute in this integrity index is we look at patterns of behavior so we can tell you the likelihood the probability that  goldman sachs is going to be more reliant on same pipes or another firm might be just by looking at their integrity and ducks score so bottom line if a company's play in the pipes then the likelihood is maybe not so good things coming down the yeah there's probably there there maybe as a predictive indicator that the music will come to the end and you will not end up with a chair at the end of it and that's what we're really trying to protect society from so whether they're self directed and again i mean  pricing on our you could get access to a score from you know a star rating for free i mean you can go just like google allows you to do searches for free and we will allow you to do searches for free and we will give you a star rating if you actually wanted to you know you were actually investing and you wanted to get into a little bit more detail you could search any company and their annual ratings their actual an a rating annual rating from one to one thousand for one hundred dollars for the entire dataset so all ten thousand companies you can get for one hundred dollars total we're talking with lynn brewer who is the founder and chair of the integrity institute it's the website up on the screen integrity institute dot com they have a what is called the integrity ended index which is a predictive model with regard to certain behaviors of companies and maybe well you can decide for yourself what you would do with that information lim w are in a presidential campaign as we record the show on may thirtieth two thousand and twelve and private equity is a term that you've used is something that is coming up in the campaign lots of people probably didn't even know what it was a much for that i know what it is what is so private equity you know there are different private equity funds and many of those have a certain focus you know they may invest in certain industries sectors and that kind of thing and so what private equity does is the easiest way to think of private equity is it as a private bank where it goes in but it says to the company we want to make changes because we'll invest in your company but we don't like the way you're running your company because you wouldn't need us if you had done it right so some private equity firms come in for instance if a company is up for sale as an example avon i believe avons for sale i could be wrong so but i do know that they have suffered and avon is looking and there was a company another cosmetic company that wanted to come in and buy in and they pulled out if we look at t mobile an eighteen t same thing well if a company can't get sold then they're going to have problems and so they may go instead to a private equity fund and say avon will see bain capital which is mitt romney's former company and they'll go to bain capital and say we need money to run the company we'll give you an investment in this company they may take the company back private if it's a publicly traded company and then the layoffs start because what they're trying to do is create efficiencies and then the the private equity firm may say ok now we've built this sub so that it's efficient we're going to turn around and now sell it we're going to take it back public i mean they may decide to do that because they've turned the company around well when i hear efficiencies it sounds like a code word for reducing reduction of employees well you know let's face it i mean if you look at hewlett packard today they just announced they're going to layoff twenty seven thousand  there if you can layoff twenty seven thousand people you have some inefficiencies you know so so i think that over time companies grow and what you end up is these fiefdoms within companies where they say i need more people i need more people and pretty soon the company doesn't need those people any more you look at rahm the black berry you know they're they're a dinosaur brehm is looking for a private equity firm and have consulted with some investment and some of these these private equity firms they don't buy stock on the public market or don't they they're certainly do private equity funds are diversified in a lot of way or they may take a position of the company by buying up a certain amount of the stock i mean in some cases they may buy a pipes and yes so there's lots of ways that private equity infuse themselves into these companies so we all know what we have lived through for the past several years and i'm not sure that the rules are really better that the circumstances any better it's just that the money seems to have dried up or has gone away or is in hiding or something like that and on and on frontline just recently the quantz the high frequency traders they've kind of indicated that they believe that they can fix things is there a way for high frequency trading or for kwan's or for these really bright people to fix this through a formula i would say and i would agree that they could fix it now what i also will tell you is that with our bags for instance our index can't be used by high frequency trading algorithms because we take a long horizon so if we're predicting an event or the likelihood of an event one to two years in advance that's of no interest to a high frequency trading firm high frequency trading firm make money on volume that's turning right and like dog paddling out of the water i'm not going anywhere i'm just churning and they make money off of that and most of them are very very very successful but they're not adding anything to society i know that's not their function is to add anything to society but i guess it's kind of the only winning movie may be to not play well it makes it unfair for the rest of us right it's it's trading on steroids right we don't allow our baseball players to do it and you know if we're going to prosecute roger clemens you know because we've got certain rules the problem is the new york stock exchange makes an enormous amount of money off volume and the new york stock exchange is a publicly traded company so if i need to generate revenue because i'm a publicly traded company and i'm the measure by which i make that money is to allow more frequency you know i mean we're a recent economist article pointed out that c e o s are far more likely to face corporate disaster than they ever ever were now is that of their own making is that  outside event like a tsunami or what is that so the article to which you refer says that there isn't that c e o s have an eighty two percent chance of facing a corporate disaster within any by given five year period of time which is up from twenty percent ten years ago and so what that says is that there is it's gone from twenty percent to eighty two percent in ten years in ten years the time of enron there was a twenty percent chance that a c e o would face a disaster today it's eighty two percent chance that a c e o will face a disaster within any given five year period of time so what that means is that the entire markets are a bigger risk because if these disasters come as we talked about black swans you know the little investor who is really put his faith in the market and stepped out there and put his toe in the water is going to get burned by this the bigger thing is not necessarily that a particular company will get hit it's what we now found with the after the collapse of the mortgage industry is this thing called counterparty risk so that means that if you and i have a contract with one another and you also have a contract with your neighbor and i fail and your neighbor is dependent upon you to come good on yours but you're dependent upon me and i fail there is a daisy chain or a domino effect to this which is exactly what happened with the failure bear stearns and lehman brothers and  get this counter party risk is one of the things the systemic counterparty risk that the end acts will do very very nicely and standing because we can actually fix the problems before they current we can help board members understand when their company is at risk not at their own doing but if they have contracts with bear stearns and lehman brothers and rawdon and while they know they're going to be in trouble if any one of those fails you know and all those people that said trickle down doesn't trickle trickle down really does trickle down to us and trickle somewhere that's for sure and you know even to a certain extent the jobs act it sounds like there were we're getting into this dark pool area where there are transactions that are happening that impact the value of our stock which is held by my pension fund but i don't know about it and i can't know about it and i can't do anything about it so why would i all want to enter the market that's an interesting question i mean i think that what i'm hearing you say is i don't know who to trust and that that's the key is we just don't know if the waters are safe  jaws and you know we've got to be able to get people back to the beaches where they feel like it's safe to get the water and that requires a better understanding of where the risks are there are always going to be those who look at new ways to manipulate the markets for their own personal gain you know they are in rand kind of thing self interest in the case of and in fact you know high frequency trading algorithms really came under scrutiny and the thought was that they were doing a lot of these in this dark pool area i think that if you look at part of the jobs act and some of the things that have happened with respect to dodd frank you will actually see that oil prices are down because now some of the trading that used to go on that was speculative you cannot do speculation without clearing those traits meaning if i put in a buy order i have to be buy and if i'm just sort of put my chip out there just to drive up the price to benefit myself i can't do that anymore we have about a minute left and i got to get the glass steagall yes so you know we have within the end x we've rated every single publicly traded company between one thousand nine hundred eighty and two thousand and eleven on a quarterly basis so we can tell you which banks are at high risk even though they have a retail name that you go and do your banking at and certainly you would be protected under the f d i c guidelines but these big  behemoth companies that fail can take down this entire system so in this too big to fail i clearly believe that glass steagall was you know the removal of that was the one of the single biggest catalyst to what what has brought about but i do think i want to i want to real clearly quickly stayed on i think that you're up is recognizing the this fast and loose playing that the us has done that they're going to put restrictions in place if we're not willing to do it they're going to do it and we're not going to be able to play in their sandbox anymore without recognizing that we're