Your quote of the day

Dec 28 2009

From Douglas McIntyre:

Stable home prices may be overrated. Every month that there is an artificial barrier that prevents real estate prices from falling faster is a month that the market does not reach rock bottom, and rock bottom prices are what eventually bring buyers into the market. Real estate prices are being destroyed by the current “hundred year storm” in the industry and buyers will find the bargains irresistable, even if mortgages rates are not at a historic low. The government can draw out that process unnecessarily instead of standing aside as it takes it natural course.

The taxpayer will write a check to Fannie Mae and Freddie Mac in the name of keeping real estate prices from falling. That taxpayer might buy a house with his check, but the government is keeping home prices too high.

Everyone (well, some people anyway, the ones who were paying attention, not including those who were playing the game) worried about the clearly-building bubble in the real estate market. Poof! Turns out it was real.

And now, those who should have taken action (Greenspan’s folksy alleged wisdom notwithstanding) are blowing as hard as they can, attempting to reflate the bubble. Marvelous.

In 2004, Stephen Roach was quoted: (Economist)

…the chief economist at Morgan Stanley, has long argued that the Fed is a “serial bubble blower”. Its cheap money is stimulating another round of irrational exuberance. America’s property market certainly looks pricey: the ratio of house prices to incomes is currently at a record high, and about a fifth above its 30-year average.

He was right then, and it’s still true today. Clearly, they’re at it again.

To avoid gloom and doom? Too late – that already occurred, and should have been left, in late 2008, to burn itself out by whatever means necessary. Stretching the pain of the adjustments over the next 30 years is not preferable to allowing the markets to have regained equilibrium on their own.

To assure affordable housing for everyone? As any economist, observer of recent history, or both should be able to point out, the fact that everyone with a pulse was allowed to purchase a home, even when many would clearly have been better served to rent or live with their parents, did nothing but goose the price of real estate to the point where it not only became unaffordable to all those this magical low price was supposed to help, it ALSO cratered the financial system.

Great work, Fed/Treasury (but I repeat myself). Give yourselves a pat on the back. And then get the hell out of the market. You’re killing us.



Stupidity, populism, and playing to the idiots? It’s evergreen.

Sep 20 2008

Where to start?

The short-selling ban that is in place from yesterday through October 2 (or later) is an abomination. Not only is it bad policy in an absolute sense, it’s made worse by the cynical hypocrisy of those who begged for it to be put into place.

It’s one thing for an amiable boob like Patrick Byrne to whine about short-sellers and how they’re killing his company. I’m willing to give Byrne some small measure of benefit of the doubt, since finance isn’t his claim to fame. But when the chairmen of the Federal Reserve and the SEC, along with the former CEO of Goldman Sachs, now Treasury Secretary, start whining out of the same hymn book, they’re not serious, not believable, and are clearly playing to the idiots in the audience.

Short selling, the act of selling shares you don’t own, with the expectation that you’ll be able to buy them back later at a price equal to or lower than the price at which you sold the. Simple, really. And it’s got nothing to do with wanting to harm the company whose shares you’ve sold short. It’s simply an expression of opinion that the shares are overvalued, for one reason or another.

Selling short, then spreading false rumors against a company is an offense for which one can be pursued in a court of law. Funny thing, though – not selling short, then spreading false rumors against a company is also an offense for which one can be pursued in a court of law. If you do the verbal algebra, it becomes clear that selling short has nothing to do with the illegality of false rumors. And the law recognizes this – selling short is, in anything approaching sane regulatory times, not illegal at all.

Selling short can occur for many reasons, in many different contexts. Everyone I’ve read focuses on bets that a stock might or should go down. I’ll go you one better. For instance, to take a random example, let’s just say that the Investment Banking group in Goldman Sachs’ Chicago office were doing a public offering of stock for a client.

Such offerings typically include an underwriter’s option for an additional 15% of the shares being offered as “the green shoe”, to cover overallocations. Since an investment bank typically has no interest, and certainly has no requirement, to be an owner of stock in the companies for which it provides underwriting, if an offering looks successful, and the demand is high enough to make exercising their option for the “green shoe”, the normal action an investment bank takes is to sell short a number of shares equal to the amount of the green shoe, knowing that they’ll be able to replace those shares with the additional 15% for overallocation. If the stock has run up in the aftermath of the offering, better still – they can sell stock that’s more expensive than the offering price, knowing full well that they can replace it at the offering price. But at a minimum, they already know the price at which they can buy the stock in the future, so this isn’t a bet that the stock will go down.

Treasury Secretary Hank Paulson, having been the head of investment banking for Goldman Sachs’ Midwest Region (1983-1988), then managing partner of the Chicago office, followed by co-head of IB for the entire firm, can safely be presumed to know all of this.

Neither SEC Chairman Cox and Fed Chairman Bernanke has any experience in capital markets, but neither of them can assert ignorance of the role that short selling plays in the market.

And who’s been calling loudest for limitations on short selling? The investment banks, solvent and formerly-solvent:

Lehman:

Lehman executives complain that they have been singled out by hedge fund investors that are short selling — or betting against — their stock, and Mr. Fuld has called senior executives at competitor banks demanding that their employees stop criticizing Lehman.

Morgan Stanley:

The mood was far different at Morgan Stanley, which lobbied vigorously for the ban on short selling. The bank’s shares shot up 21 percent, to $27.21, on Friday. Analysts said the reprieve might be only temporary, though, because the firm’s business model still requires a big balance sheet and core base of deposits for financing.

Goldman Sachs:

…the SEC is this afternoon holding a meeting to “determine if they need to take further steps to curtail what both Mac and [Goldman Sachs CEO Lloyd] Blankfein characterize as improper short selling that is really causing damage to the share price of Morgan Stanley and Goldman Sachs.” Blankfein also spoke with Cox to complain of short selling of their stock, as did New York senators Chuck Schumer and Hillary Clinton, according to Gasparino’s sources.

And so on. Fannie Mae, Freddie Mac, Bear Stearns, AIG, and a host of others, all now functionally dead as public companies, claimed loudly, with much gesticulation, that short sellers, not their crappy business models or abysmal risk management, were the reason for the drops in their stock prices.

New York’s AG Andrew Cuomo:

Likening such traders to “looters after a hurricane,” New York Attorney General Andrew Cuomo Thursday said his office is investigating “a significant number” of complaints about improper short selling in shares of Lehman Bros., AIG, Morgan Stanley, Goldman Sachs and other financial stocks.

Cuomo said his investigation would use the New York state Martin Act, which subjects violators to criminal as well as civil penalties, to combat the illegal practices.

“The markets need to be stabilized,” Cuomo said. “And one way to bring about such stability is to root out and deter short-selling that is based on the spread of false information.”

Sorry, Spanky – you left one class of people out: Weather forecasters before a hurricane. Deter short selling based on the spread of false information? Sure – go ahead, although there are already laws in place to do that, so knock yourself out enforcing them, with my blessing and encouragement. Disallow short selling itself, as though there’s no valid reason for a non-rumor-spreading trader to do? Utterly stupid. And impressive only to the self interested (the banks) or ill-educated (all other non-bankers who’ve complained about short selling).

Applauded only by the greedy & ignorant? Must be a great plan, then. I’ll take all this addle-pated nonsense about “gangs of people getting together to sell shares of a stock” seriously when several things also happen:

  • The same idiots decide to go after “gangs of people getting together to buy shares of a stock” (Cramer – I’m looking at you and everyone like you).
  • Someone explains to me the difference between a short seller selling a share of stock and an actual holder of the stock selling a share of stock. The market neither knows nor cares.
  • Which raises the question of what’s next? Disallowing down-ticks entirely? Disallowing any sale of the stocks of the protected 799 alleged-financial companies? Even by widows and orphans who actually hold shares? What is this, the Hotel California?

Issue Two” (please read that to yourself in John McGlaughlin’s voice, for best effect)
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That monetary hammer I mentioned?

Jul 19 2008

In a post yesterday, (just below), I mentioned the difficulties in the Pakistani stock market, and the related destruction at the Karachi stock exchange. I contrasted, in a brief and cursory manner, the market there (and the reaction to its fall) to the market here in the US (and the general lack of reaction to its fall).

I also asserted that most of the tools available to the Pakistani government for reacting to the problem are available in other markets, and that they generally don’t work, because they don’t actually address the problems, instead focusing on the symptoms.

Finally, I mentioned in passing that the solution that seems most likely to help resolve matters can be found in monetary policy. It’s the one that everyone has avoided, though they surely have thought of it. Fed chairman Bernanke has begun nibbling around the edges of monetary policy, but may not, based on recent past history, be able to pull the trigger on any actual implementation – huffing and puffing that you really dislike inflation isn’t the same as, say, Paul Volcker (with the full support of Ronald Reagan, and not caring at all what Wall Street wanted) jacking interest rates to the moon and killing inflation dead.

Monetary policy is a complex subject, and one at which I’d hardly claim to be an expert. The meat and potatoes are simple – make money too easy to borrow and people will treat it cheaply, spend it too easily, and invest carelessly (think “drunken sailors”). Result? A debased and devalued currency. Follow that with a commodities supply/demand crunch, and the devaluation of a currency can spiral, as crucial commodities, priced in dollars, increase in price due to the decreases in the real value of the dollar, encouraging (if the Fed is gutless enough) further loosening of credit, further real devaluation of the currency (now itself effectively valued in “barrels of oil”, “tons of iron”, “Euros”, &c).

Silly “stimulus checks”, of the sort pushed by Congress this year and shamefully not vetoed by Mr. Bush, had a one-time effect on spending, which makes sense – they were a one-time return of tax dollars, disproportionate to actual taxes paid, and could reasonably be expected by anyone with a memory extending longer than six months ago to have had precisely the anemic and worthless effect that they did. Undaunted, Speaker Nancy Pelosi thinks (or at least claims to think) that all we need is $50 billion more in such stimulus. Which proves at a minimum only that her memory extends even less into the past that the rest of the nitwits who voted for the somewhat politically astute, but utterly economically absurd notion of the initial stimulus.

Politically astute – why only “somewhat”? Because one-time stimulus is politically astute only if one is trying to impress those who lack mental acuity. On one view of how we might measure such a thing, elementary statistics, something close to 50% of all people have less than average intelligence. Or, as George Carlin put it:

Think of how stupid the average person is, and realize half of them are stupider than that.

Of course that one-time stimulus seems helpful, at the time, and if you don’t think too deeply about it, to have someone handing out money. Better yet if it’s someone else’s money. And if it’s done in a crafty enough way, those same people who don’t think deep thoughts might be gulled into missing the realization that if the money’s better in our hands than the government’s during these current difficulties, why not every year?

But enough of that – I could go on in (small) circles about monetary policy, but have already devolved into fiscal and tax policy, so to keep this from turning into more of a rant than it already is, I’d like to tie this post back to the one from yesterday, and I have found the perfect foil with which to do so.

In an article in the Saturday July 19, 2008 Wall Street Journal, the always-readable James Grant, of Grant’s Interest Rate Observer asks “Why No Outrage?” (subhead: “Through history, outrageous financial behavior has been met with outrage. But today Wall Street’s damaging recklessness has been met with near-silence, from a too-tolerant populace”)

No, he’s not suggesting that we man the barricades, pitchforks in hand, Molotov cocktails at the ready. But he does make the easy case that things haven’t worked out as well as hoped in our current system of carrots, sticks, checks, and balances.

“Raise less corn and more hell,” Mary Elizabeth Lease harangued Kansas farmers during America’s Populist era, but no such voice cries out today. America’s 21st-century financial victims make no protest against the Federal Reserve’s policy of showering dollars on the people who would seem to need them least.

Long ago and far away, a brilliant man of letters floated an idea. To stop a financial panic cold, he proposed, a central bank should lend freely, though at a high rate of interest. Nonsense, countered a certain hard-headed commercial banker. Such a policy would only instigate more crises by egging on lenders and borrowers to take more risks. The commercial banker wrote clumsily, the man of letters fluently. It was no contest.

The doctrine of activist central banking owes much to its progenitor, the Victorian genius Walter Bagehot. But Bagehot might not recognize his own idea in practice today. Late in the spring of 2007, American banks paid an average of 4.35% on three-month certificates of deposit. Then came the mortgage mess, and the Fed’s crash program of interest-rate therapy. Today, a three-month CD yields just 2.65%, or little more than half the measured rate of inflation. It wasn’t the nation’s small savers who brought down Bear Stearns, or tried to fob off subprime mortgages as “triple-A.” Yet it’s the savers who took a pay cut — and the savers who, today, in the heat of a presidential election year, are holding their tongues.

Possibly, there aren’t enough thrifty voters in the 50 states to constitute a respectable quorum. But what about the rest of us, the uncounted improvident? Have we, too, not suffered at the hands of what used to be called The Interests? Have the stewards of other people’s money not made a hash of high finance? Did they not enrich themselves in boom times, only to pass the cup to us, the taxpayers, in the bust? Where is the people’s wrath?

(continues)

No calls for violence there, no stoning or burning either. But he does wonder why people just accept this asinine state of affairs.

So do I.

Half-baked solutions, designed to appeal only to the stupid, will not solve the problem, and will actively and quickly make it worse. Freely available money, ala Bagehot, but at near-punitively high interest rates, can make it possible for the blockages in our financial system to work themselves out.

The alternative, where the Fed (and the implicit “Bernanke Put“, and let’s not forget the “Greenspan Put“, either) continues to think that Wall Street is more important than Main Street, hasn’t worked and won’t. (Candidate Obama has used that Wall Street/Main Street formulation in his stump speeches; the difference between his use and mine might be that I actually understand what it means, and why it’s a crucial failure in our system).

It’s probably best that I’ve never been a combat medic, because I think that a quick bleed, with full understanding of where the blood is likely to gush, is preferable to a five year drip, or worse, a five year internal bleed of reasonably knowable but still-indeterminate origin.

And if that bleed (the quick gusher) occurs on Wall Street, then so be it. Chasing the dollar down to $250 per barrel of oil/$250 per metric ton of iron ore/$0.25 per Euro seems hardly worth it, when the sole reason for doing so is to continue the pretense that what’s good for Wall Street is good for America.

The rot’s got to stop before the economy can properly heal. Half-measures will continue not to do.

See also:
   WSJ – Stupidity and the State, and Stupidity and the State, Part II
   NYT – Given a Shovel, Americans Dig Deeper Into Debt



So that’s what an unsophisticated investor looks like.

Jul 18 2008

(The excitable investors, that is, not Pakistanis in general)

Clues can be found in a Marketwatch article from yesterday evening:

EMERGING MARKETS REPORT
Investors riot in Pakistan as market tumbles

Benchmark down for 15th straight session; loses 27.5% this year so far
By Polya Lesova, MarketWatch

NEW YORK (MarketWatch) — Popular anger over tumbling equity prices erupted in Pakistan on Thursday, underscoring the difficulties regulators face in attempting to prop up falling markets as turbulence in many of the world’s financial markets continues unabated.

The turmoil in Pakistan comes at a time when several emerging markets are considering market stabilization measures, while regulators in the United States are moving to limit short selling and speculation in the oil market.

Regulators in China have signaled their intention to stabilize the local market, which became the worst performer among global markets this week. India has suspended futures trading in several commodities.
In Pakistan on Thursday, more than 200 protestors attacked the Karachi Stock Exchange, the country’s main equity market, and demanded a temporary closure of the market to curb further drops in share prices, the BBC reported.

Smaller protests took place in Islamabad and Lahore.

[continues]

For reasons not so easy to articulate, I find it breathtaking that such a reaction makes any sense at all to these aggrieved investors.

Capital markets wizards at work

Capital markets wizards at work

What, I ask myself, is the logical conclusion they’d expect here? To be offered their money back? By whom? With or without smoke-stains and cinders?

Are the investors in emerging Asian markets really so unsophisticated (Albania comes to mind, among others) that they’ll buy anything, at any price? I suppose so – this has happened throughout history, in Asia, the US, and elsewhere. But in the majority of those other cases that come to mind, when it all goes wrong, the populace doesn’t seem to automatically think that all can be made better by burning buildings down, do they?

Not only are such reactions destructive (to property and to society in general), they’re also of no use in resolving the problem.

Some folks, I suppose, should be completely protected from themselves, and prohibited from taking actions they might later regret. Much the same, I further suppose, as special needs kids are sometimes not allowed out of the house without a styrofoam-lined helmet.

Such paternalism would be troubling to those of us who feel able to take responsibility for our own actions, but, by definition, we’re also not the sort of people who’d think burning down the stock exchange (which, really, is just a building, and had no effect on the stupid prices people were willing to stupidly pay for securities, right?) was a great idea. The Pakistani authorities’ “styrofoam helmet” for the markets includes circuit breakers to dampen price volatility, short-selling limitations, and a “market stabilization fund”. Much the same set of tools has been used by other governments over the years, with little beneficial result.

The connection made in the original article to US commodity (primarily oil) markets and allegations of skullduggery in shorting of financial behemoths such as Fannie Mae, Freddie Mac, Lehman, et al is apt, though the differences between the two situations are meaningful. When you add in the other bugbear, the rapidly deflating asset (real estate) bubble, within the US, the focus is on systemic risk (in the financial behemoths) and pure political grandstanding (regarding the oil futures markets and residential real estate), but surely, a minimal number of buildings will be burnt to express disappointment.

The point the two situations have in common is the ultimate futility of efforts to game the market excessively, from either the regulators’ or the speculators’ side of the table. Market stabilization fund? Ask George Soros what he thinks of the efficacy of such devices.

Market volatility curbs? They are a band-aid solution, i.e. no solution at all. If the limits are hit on a given day (particularly down days), the selling frenzy can just as easily be pent-up until the next day. And the day after. In cases where limits on asset price increases would be helpful to halt bubbles of speculative excess (tech stocks in the 1990s, real estate more recently), the proper method isn’t price movement limitations, but instead should be monetary, in the form of interest rates and margin requirements.

Where does it all end? Not in violence, and not in wanton destruction of real property. Too many more gimmicks, such as stimulus checks designed to gull the electorate into thinking all’s well, or handouts to flagrantly uncreditworthy home buyers, and the road to the end of this mess gets steeper and more slippery. Oddly enough, that monetary hammer mentioned above, in the form of interest rates, can play a big part in solving the current woes, though it won’t solve them quickly.

Devaluation of the dollar is the flip side of cheap credit, and while dollar devaluation is a subject for another day, reducing speculative excesses by making money more expensive to deploy in speculation, whether it be in commodities, real estate, or the financial markets seems likely to be the only path out of the current unpleasantness.

If that turns out to be the case, many will feel the pinch. Fortunately, the stoics who make up a lot of the American population, sophisticated or not, seem more likely to suck it up, endure the pinch, and exit the other side better off than they are today. An optimist would further hope that this was all done without the government stupidly taxing the starch out of the economy, but if the government does so, perhaps the government after them will repair the damage, and reap the delayed benefits.

Regardless of government policies, the flame-throwing non-sophisticates of the Pakistani markets may not fare better nearly as soon.



Prognostication Perils

Jun 15 2008

Based on the events of Friday afternoon, I’m reminded of the only phrase I can recall from Nancy Reagan’s tenure as First Lady: “Just say no”.

About an hour before Wall Street closed for the week, I got a call from an old friend who’s an equity analyst for an east coast hedge fund. He wanted to know whether it was possible that there was any truth to the rumor he’d heard about a merger in the waste industry.

That merger? Republic Services and Allied Waste Industries.

While it turns out that I should have just said no, that I had no idea, and moved on to other matters, I first told him that I’d heard no such rumor. Not that all, or any, rumors run through me before they’re generally available to the rest of the populace, mind you, but I do have some experience in the waste industry, including some related to M&A activity. So his question wasn’t out of place, my specific ignorance of this rumor notwithstanding.

I thought about it for a bit, and then, while allowing that of course anything’s possible, told him that this was highly unlikely, for a lot of reasons. For instance, have a look at these two track records:

The Beast


Beauty

One of those two report cards is decidedly not like the other, yet this is billed as a “merger of equals”. Hey – we’re in the 21st Century – so we’ve got to say whatever makes the kids feel good about themselves, I guess. Everyone gets a trophy! I realize, of course, that they’re roughly equal in market cap, with Allied being the bigger of the two by several hundred million dollars, but that market cap was smaller than RSG’s before the rumor of a deal leaked out, and with good reason.

Feel free to have a look for yourself – RSG has outperformed most of the waste industry by a noticeable margin in the last five years.
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Stupid investment theses, poorly executed

May 6 2008

In an item in the May 5, 2008 WSJ, I saw the “Fund Track” column, by Daisy Maxey, entitled “Democratic Booster Blue Fund Group Has Been Singing the Blues Lately

The focus of the story was on a small Washington DC based fund that’s done poorly of late.

Blue Fund Group is having a rough year.

Blue Investment Management LLC, the fund group’s Washington, D.C., investment adviser, has liquidated Blue Small Cap Fund, which managed less than $1 million.

It is now in the process of changing the name of its Blue Large Cap Fund, which has a little more than $10 million in assets, to, simply, Blue Fund. So far this year, that fund has underperformed both its large-cap growth category and the Standard & Poor’s 500-stock index, according to Chicago investment-research firm Morningstar Inc.

Odd, that. Not the results, particularly, but the fact that the story appears at all. “What’s the problem?”, I wondered, and what makes this tiddler of a fund worthy of coverage in the WSJ? I read on…

In addition, in a rather odd development, $9.5 million of the large-cap fund’s assets were invested recently by a trust that has said it may hedge its bets on some of the fund’s holdings.

Blue Investment Management was formed in 2006 to invest in companies that “act blue” and “give blue,” those that engage in practices consistent with progressive values and give the majority of their political contributions to Democratic candidates.

Following a proprietary managed index of U.S. companies, the large-cap fund invests in “blue” companies in the S&P 500 index, while the small-cap offering had invested in “blue” companies in the Russell 2000 index.

Additional info, according to an April 2007 article at Morningstar:

The Blue funds (Blue Large Cap and Blue Small Cap), launched late last year, invest in companies that give a majority of their political contributions to Democratic candidates and organizations, in addition to passing various standard social screens. There are no funds focused specifically on Republican-leaning companies, though the Free Enterprise Action fund (FEAOX), launched two years ago, promotes free enterprise and opposes shareholder resolutions that might dampen companies’ profitability, including most SRI-type proposals. Also, the Camco Investors Fund (CAMCX) specifically uses socially conservative screening criteria, as do several of the religious funds we looked at in our earlier column, notably the Ave Maria and Timothy Plan funds.

Quintuple odd.

No “Republican-focused” funds? Because nobody would buy them, I presume, preferring instead to just focus on companies well-situated to make money.

Aside from the fact that the new biggest investor in Blue Funds may choose to hedge its bet, taking contrary positions to that of its now-majority owned fund, the slack-jawed investment thesis behind the fund is a real eye opener.

How is it, I wonder, that someone was able to correlate the political contribution tendencies of companies, and then to target them for investment? Wait – I’m not done yet: Of course it’s simple, though a bit labor-intensive, to do such a thing, but having done such a thing, how could someone have done such a bang up job of choosing a thesis with a correlation apparently approaching -1? And then put client money behind such a spastic idea? And still slept at night?

It’s possible to grotesquely overthink investment theses, even when, unlike the strategists of the Blue Fund, you leave political proclivities out of the mix. Running such a tiny fund, and apparently running it nearly into the ground, causing closure of the “small cap” side of the fund, abandonment of the “large cap” moniker on the other half, and causing the new largest investor (sort of) to consider hedging its exposure to your attempts at splitting atoms with your mind (and political views) seems like an item one would leave off one’s resume.

The same goes for all “Socially Responsible Investing”, if you ask me, not that you did.

Unless, of course, the goal isn’t to make money at all.

Granted, it’s been a tough year in the markets, but it’s not been impossible to make money. For comparative purposes, one of the things I do on a daily basis, with a very small portion of my time, is participate in running a proprietary hedge fund. The assets under management seem similar to those reported for the Blue Fund family by the WSJ, yet our focus is solely on making profits. And overall, we’re up more than 40% so far this year.

It’s not impossible, and properly done, it’s not even particularly difficult. The difference might be that there’s no ideology behind our investment choices, and no attempts at claiming correlations that don’t exist in the real world.

There’s nothing wrong with social, or political, responsibility. Neither has much of anything to do with investing, however. I don’t invest to help those in need or to advance a political point of view – I invest to make profits. To help those in need, I give to the Red Cross. And to advance a political point of view, I vote.

In investing, as in many other things, avoiding confusion about why you’re doing it is a fundamental prerequisite to being even mildly competent.



Too clever by half?

Mar 27 2008

This question might apply both to the Marketwatch website and to the principals in the Clear Channel LBO saga (details at Dan Primack’s always enjoyable peHub).

First, though, Marketwatch – their blast email message a bit ago, was entitled:

Clear Channel Communications: Judge orders banks to fund $19 billion buyout

As this is a subject that interests me, and I happened to be up and at the computer when it arrived, I clicked on it, only to find the title now was:

Clear Channel: Judge grants restraining order against banks

Which actually makes much more sense, and congrats to them on the quick kick-save. The first headline was so intriguingly worded as to be downright inflammatory (unintentionally, on the inflammatory part, I’m sure). The case went before the judge only within the last 12 hours or so, and it would seem to me (a non-lawyer) that an order to fund a $19 billion deal, under terms that everyone seems to think will start out causing a large hole in the pockets of the funding banks, would at least take longer to arrive at.

From Heidi Moore’s WSJ Deal Blog entry of yesterday afternoon, “Clear Channel: What Would Yoda Say?”, a plausible argument that neither the PE group (THL & Bain) nor the banks want to carry the deal forward:

In this upside down world, it’s easy to see doubts behind every negotiation. Blackstone Group, for instance, pointed to apparently onerous regulatory requirements as a reason it was wary of the buyout of ADS. Last week, the OCC clarified its stance. Now many people are watching Blackstone to see if that was enough.

Similarly, the buyout firms and lenders involved in Clear Channel are arguing over the terms of the debt financing. Does their inability to agree indicate a healthy negotiation, or a passive-aggressive attempt to spike the deal without suffering reputational consequences?

Sometimes contracts encourage parties to take the fight as far as possible. Walker told us, “One of the ways that the buying group can argue that it has satisified its obligations is to bring a lawsuit against the lenders. Once they satisfy that, their only obligation is to pay the termination fee, not to close the deal.”

By that playbook, the penultimate act by the banks and PE firms was taken yesterday, and a reasonable person might have concluded that CCU was well and truly a dead deal.

Whoops. The Texas court, at least (there’s a separate suit in New York) has thrown a spanner into the works, and might well, before it’s over, force a financing camel through the eye of this particular deal needle.

The commenters on Ms Moore’s blog entry are almost unfailing in their desire to say she was wrong about the intent of THL and Bain, but a reasonable person could say the jury’s still out on that.

And I do.

Addendum: In today’s PE Week Wire, Dan Primack adds:

In case you haven’t heard, Clear Channel and its prospective buyers – Bain Capital and Thomas H. Lee Partners – late yesterday sued six banks for refusing to fund the protracted $19.5 billion deal. The suits were filed in New York and Texas, with the primary difference being that the plaintiffs asked for the death penalty in Texas. No, wait, I’m being told that’s not correct. The primary practical difference is actually that CCU is being represented in the Texas suit by Joe Jamail, who represented Penzoil in a suit against M&A backtracker Texaco. The result was a jury award that essentially bankrupted Texaco, so the banks should be more than a bit concerned about that one.

(emphasis mine)

I do so like a clever turn of a phrase.

It was only after reading his piece that I realized Joe Jamail was involved, and I find myself questioning whether the addition of Jamail should cause any tremors, based on something he did half-a-life ago. He’s fast approaching 200 years old (though, admittedly, no faster than I am), and has had at least one big case in recent years that I’m aware of which ended badly enough for him that he fired the client rather than appealing.



Happy second birthday…

Feb 13 2008

…to one of my favorite sites, Going Private. Among the best written and most enjoyably read sites I frequent, the only problem I’d cite is that its author doesn’t have time to write several posts per day.

And when she must, for a variety of surely-good reasons, let extended periods pass without new material, I find myself almost pining for the next post.

Which is really rather sad, now that I see it written out there, above. But no matter – I’m a big fan of her work.

…1.34 million page views, 401 posts, 86 trackbacks, 26.3 points of lifetime IRR net fees, 18 transactions, 14 date requests, 8 ambiguous invitations to coffee, 5 marriage proposals, 4.5 death threats, 4 threatening legal letters, 3 cities, 2 years, 1.5 promotions and 1 love letter later…

Of course, this post will effect the 87th (or 88th, or 89th…) trackback for her site. And if I were certain she actually existed, I’d probably bump her up to her 9th ambiguous invitation to coffee, just to hear how in the world she’s been able to craft, in addition to the business-specific but impersonal and well written posts, such an interesting body of obfuscated writing about supposedly real situations.

I don’t have cause to doubt the reality of her subject matter – far from it, as many of the events she chronicles have analogues, if not doppelgangers, in companies I’ve observed up close and personal. How such a widely read site can relate the stories she does and still hedge the risk of being de-cloaked remains a fascination for me.



On the bright side, this might mark a low for the dollar

Nov 6 2007

From Bloomberg, dated yesterday (first seen in this morning’s WSJ – Breakingviews column):

Nov. 5 (Bloomberg) — Gisele Bundchen wants to remain the world’s richest model and is insisting that she be paid in almost any currency but the U.S. dollar.

Or perhaps not – the story might be apocryphal, and even contains its own counterargument:

“Contracts starting now are more attractive in euros because we don’t know what will happen to the dollar,” Patricia Bundchen, the model’s twin sister and manager in Brazil, said in a telephone interview in September from Sao Paulo. She declined to discuss details of the arrangements last week.

No shock, that. The question is, how long it remains true.

“Gisele has contracts in dollars,” said Anne Nelson, Bundchen’s agent in New York at IMG Models, in an interview today. “When she works in Europe she gets paid in euros, when she works in the U.S. she gets paid in dollars, when she works in Brazil she gets paid in reais, and so on and so forth.”

Also self-evident. And it goes without saying that, in a world of fixed exchange rates (which, with few exceptions, doesn’t exist now and hasn’t for years), she could choose to simply do the math, and get her desired real pay rate at whatever nominal rate & currency she chose.

The fact that she or her IMG handler is reported to have decided to denominate pay in a currency other than dollars, presumably for future contracts, brings to mind the market mania of early this century, when people actually thought tech stocks would stay high forever.

Read the rest of the Bloomberg piece, by the way – it provides far more detail than did the Breakingviews column (due to format and space availability differences, I’m sure), and goes well beyond the only-moderately interesting fact of Gisele Bundchen’s purported payment preferences.



When worms turn – continuing melodrama

Nov 1 2007

From the just-prior entry here, this was the closing line:

Let the race resume, because this melodrama has several acts yet to play, but it seems unlikely at this point that, regardless of moves in the prices of assets under their management, Messrs Cayne & Prince will repeat the mistaken actions of Mr. O’Neal.

Unsurprisingly, it turns out that even without repeating the mistakes of Mr. O’Neal, it’s pretty easy for other members of the august group of executives listed above to be kicked to the curb.

Today’s WSJ, in an article too long and beefy to effectively excerpt without violating fair use, entitled “Bear CEO’s Handling Of Crisis Raises Issues“, you’ll find the anatomy of a palace coup. Omitting only malfeasance, fraud, and necrophilia, Mr. Cayne is “charged” (in the sense of the items having been discussed in a front page WSJ article) with a laundry list of complaints. Among them:

  • Lack of attention to detail
  • Excessive enjoyment of personal time
  • Being filthy rich
  • Enjoying golf and bridge
  • Being a marijuana smoker

One of these charges is not like the others. And the article in which the complaints appears is made quite lopsided by the short, seemingly random inclusion of his alleged preference for the killer weed.

Sure, the article has lots of quotes from supportive staff members, relating that he’s always reachable when needed, totally engaged in the business, and so forth. But the overall picture gives the impression of a calculated character assassination.

Not that there’s anything wrong with that, mind you – perhaps he even deserves it. But this one is so heavy-handed, that my first thought on reading it was “Cui bono?“. I don’t know who might be among the “players” within Bear Stearns, but surely in a firm known for its sharp elbowed trading prowess, they must be found in every corner office, no? Honestly, though, this one makes the attempted embarrassment of Blackstone’s Stephen Schwarzman look like a grade-school taunt.

The connection, to the extent one exists, between Mr. Cayne’s current agonies and those of Mr. O’Neal might be the “alumni network”. Apropos nothing much, there’s this, from the WSJ story of Nov 1:

Late in June, as the outcry from investors in Bear’s hedge funds grew, Bear authorized an 11th-hour loan of up to $3.2 billion to the less-risky of the two beleaguered funds. The fund ultimately borrowed about half that amount from its parent company.

On July 12, chatting with visitors over lunch, Mr. Cayne seemed less interested in discussing the markets than in talking about a breakfast-cereal allergy and his stash of unlabeled Cuban cigars. On another occasion, he told a visitor he pays $140 apiece for the cigars, keeping them in a humidor under his desk.

Five days later managers of both funds informed investors their holdings were virtually worthless.

The next day, July 18, Mr. Cayne left for Nashville to play in the bridge tournament, accompanied by his wife, Patricia, who is a neuropsychologist and another avid bridge player. Mr. Cayne took part in a prestigious event called Spingold KO. He was in Nashville all or parts of 10 days, according to bridge and hotel records.

For most of that time, Warren Spector — then co-president of Bear and also a competitive bridge player — was in Nashville as well. Mr. Spector was in charge of asset management at Bear, along with all of its trading operations and its prime-brokerage unit, which handles trades for big clients such as hedge funds as well as lending them money.

Amid the turmoil, Mr. Cayne on Aug. 1 called in Mr. Spector, the co-president who had been with him at Nashville. Mr. Cayne was annoyed that Mr. Spector had been away from the office during the fund crisis, according to people familiar with his thinking. He told Mr. Spector he had lost Mr. Cayne’s confidence and should resign, these people say.

(ellipsis mine)

Just being a conspiracy-monger, I find myself wondering whether this is all just a comeuppance delivered on behalf of, or directly by, Warren Spector? Seems pretty obvious, I know, but his having taken the bullet several months ago on Bear’s behalf seemed odd at the time (since they were both at the same tournament), and seems odder now.

Perhaps, then, Cayne’s getting knifed by a guy who owes him a knifing. Perhaps it’s far broader than that.

But it might provide an object lesson: Make sure you’ve got competent friends and incompetent enemies. Corollary: Be sure not to convert a competent friend into an enemy.

And it’s not over yet. Tomorrow’s WSJ will contain a follow on, entitled “CEO of Crisis-Hit Bear Denies He Used Marijuana“, (a gratuitous pile-on, I think, given that the original article also contained his denial) including this:

In a note to clients, Punk, Ziegel & Co.’s Richard Bove said “the article clearly places the company in play” because Mr. Cayne would more likely sell Bear than retire “in disgrace.”

The original WSJ piece, above, reported that Bear (which is heavily owned by employees, with Mr Cayne being personally among the largest shareholders) has been able to spurn earlier merger approaches:

He [Mr. Cayne] has resisted overtures to sell Bear. In 2002, when Mr. Dimon, then head of Bank One Corp., raised the possibility of buying Bear, Mr. Cayne didn’t give the idea much consideration, according to people to whom he spoke. Mr. Cayne told members of Bear’s executive committee he would do a deal only for a significant stock price premium, a big personal payout and the use of a private jet, say people familiar with the conversation. The takeover idea ultimately faded away.

So, of course, another plausible explanation for an airline toilet being dumped on his head, aside from the possibility of revenge from a former associate, is that this is all a bit of inside baseball, and that one way or another, Bear’s going to be owned by someone else.

Ignoring the unsavory undertones of such a public defenestration, this story seems likely to get more interesting before it gets boring.

Addendum – Might as well throw this one in too, to keep the circle (Cayne/O’Neal/Prince) complete. In addition to continued rumblings about Prince’s stewardship of the post-Sandy Weill Citigroup, WSJ’s Deal Blog reports other strange things potentially afoot at the Circle K.

Addendum – (11/2/2007 3:24PM) This just in:

NEWS ALERT from The Wall Street Journal

Nov. 2, 2007

Citigroup board members are expected to gather for an emergency meeting this weekend, two people familiar with the matter said. The meeting comes amid worries of potential writedowns and pressure on CEO Charles Prince.

Addendum – (11/4/2007 5:15PM) No story link yet, just an alert from WSJ:

NEWS ALERT from The Wall Street Journal

November 4, 2007

Citigroup CEO Charles Prince resigned at a board meeting Sunday, as the bank faces big new losses from distressed mortgage assets. Board member Robert Rubin, the influential chairman of the company’s executive committee, will be named Citigroup chairman, while Sir Win Bischoff, chairman of Citi Europe, will become interim CEO.

I’m sure the story will be up shortly, and of course this event is no surprise. What will surprise me, however, is if the chattering classes avoid the usual hand-wringing and shirt-rending over his “exit package”.

Like Merrill Lynch, Citigroup has no reported severance agreements in place for its exiting CEO. Stan O’Neal walked away with about $160 million, and Prince is reportedly set to leave with about $40 million. In the first case, the storyline was that O’Neal got a massive golden handshake. A fairer reading might indicate that he just received what he’d earned and owned. This would also be the case for Prince at $40 million – to all appearances so far, he’s got an earned and owned stake of $40 million.

Even operating under the presumption that they were both constructively fired for cause, there’s no case to be made for depriving either of what they already own. I look forward, perhaps futilely, to press coverage that recognizes this, if in fact it also ends up being true in Mr. Prince’s case.