The WSJ reports on Alan Howard:
His firm is blossoming, soaring from $12.5 billion at the beginning of 2007 to become one of the largest hedge funds in the world.
The article is illustrated with a hedcut of George Soros, godfather of global macro funds. His flagship Quantum Fund peaked at about $7 billion in 1996. Nowadays, that’s a level from which you grow to become big: Howard’s fund has now reached $20 billion.
The proviso on a carbon tax – determining the price of carbon – is a show stopper
Credit markets beware: CPDOs on the cusp of forced deleveraging: I love it when Sam Jones gets his nerd on.
China Mobile: 400,000 Unlocked iPhones On Our Network
Tax Futures, "In Real Life": InTrade is launching tax-rate futures contracts.
Consumer Sentiment Not All Dark
Vanguard Battles Barclays Over `Derivatives for the Masses’
Cheer up, Professor Krugman: One of the weirdest and most inexplicable charts I’ve seen in a while.
In Hotel Design, He’s Mr. Prolific: "In the current market, a mid-range Manhattan hotel room — typically 250 square feet — is worth $400,000 to $500,000 to the developer."
Lies, Damned Lies: And Roger Clemens statistics.
This graphic comes from Gretchen Morgenson’s front-pager in the NYT yesterday. I’m not going to try to reproduce it here, because my column width isn’t big enough to really see what’s going on. But suffice to say that it shows the market in credit default swaps, at $45.5 trillion, dwarfing the markets in US stocks ($21.9 trillion), mortgage securities ($7.1 trillion), and US Treasuries ($4.4 trillion).
Morgenson’s article makes it clear that it’s reasonable to directly compare market sizes like this. Indeed, she refers to CDSs as "securities" in the third paragraph of her piece:
The market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion — roughly twice the size of the entire United States stock market.
But of course a credit default swap is not a security, it’s a derivative. The $45.5 trillion is a notional amount; the size of the stock market is a hard valuation. There’s an enormous difference.
Morgenson is right that there are problems in the CDS market. But she over-eggs her pudding so much that it’s very hard to separate the good points from the bad. And when she leads with the statement that credit default swaps are securities, it’s hard to take the rest of the article seriously.
There’s another chart in the article, too, which explains that one counterparty to a CDS transaction can "assign" his liability to a third party who may have to be "tracked down" and who "may or may not be in a position to pay".
The irony here is that the problem of assigning CDS liabilities to third parties is actually relatively small for exactly the same reason that the nominal size of the CDS market is so big. Let’s say a trader at a hedge fund or an insurance company has sold credit protection to a client. In order to balance out his books, he can do one of two things: either assign that contract to a third party, or simply buy the same amount of credit protection from someone else. The way the CDS market works, he will almost always do the latter rather than the former.
As a result, there are lots of equal-and-opposite contracts being held on the books of all manner of banks and hedge funds and insurance companies. When people tot up big numbers like $45.5 trillion, they’re adding all those contracts up together as though they don’t cancel each other out, when the whole point of writing them was precisely that they offset existing positions.
Of course, that doesn’t mean counterparty risk has gone away – far from it. But it does mean that the problem of tracking down your counterparty is probably smaller, in practice, than Morgenson makes it out to be: in the vast majority of cases, your counterparty will be whoever you entered into the contract with in the first place.
Morgen also uses up a lot of space talking about what happens in an event of default, when the protection seller has to pay up. But it’s not clear if she’s worried that protection sellers will have to pay too much, or whether she’s worried that protection sellers will have to pay too little. At first, it seems like the former:
A bank that has bought protection to cover its corporate bond exposure thinks it is hedged and therefore does not write off paper losses it may incur on those bond holdings. If the party who sold the insurance cannot pay on its claim in the event of a default, however, the bank’s losses would have to be reflected on its books.
In this case, a bondholder buys protection against default, but never gets paid by the protection seller, who can’t afford to pay out on all the claims he’s written. Later on, though, the problem is different:
When Delphi, the auto parts maker, filed for bankruptcy in October 2005, the credit default swaps on the company’s debt exceeded the value of underlying bonds tenfold. Buyers of credit insurance scrambled to buy the bonds, driving up their price to around 70 cents on the dollar, a startlingly high value for defaulted debt.
Market participants worked out an auction system where settlements of Delphi contracts could be made even if the bonds could not be physically delivered. This arrangement was done at just over 36 cents on the dollar; so buyers of protection on Delphi who did not have the bonds received $366.25 for every $1,000 in coverage they had bought. Had they been valuing their Delphi insurance coverage at $1,000 per bond, they would have had to write off that position by $633.75 per $1,000 bond.
In this case, a bondholder buys protection against default, but only gets $366.25 for every $1,000 of bonds he insured. If he thought that protection was worth $1,000, then yes, there will have to be write-offs. But no one values credit default swaps as though recovery value is zero. And if the bonds are trading at 70 cents on the dollar, then it’s worth pointing out that a bondholder with $1,000 face value of bonds, plus an insurance contract on those bonds, now has bonds worth $700 and an insurance contract worth $366.35, for a total of $1,066.25. Which doesn’t sound like too much of a loss to me.
Josh Barbanel reports:
So far this year, 13 co-ops worth $20 million or more had closed or were in contract, compared with only 11 completed sales in that price range for all of last year.
Note this is co-ops, not condos, so it excludes the Plaza, 15 Central Park West, and any other new developments.
Northern Rock will be nationalized, and the FT says that There Will Be Grumbling:
The government believes nationalisation is now the best option, even though it is likely to spark a political storm, an angry reaction from some shareholders and big job losses in the north-east of England.
All this depends, of course, on the baseline you’re using. There would be angry shareholders and laid-off workers whatever the outcome, but maybe it’s worse if the new owner is the government. On the other hand, maybe it’s better: since taxpayers were ultimately taking on the Rock’s risk anyway, it’s good that it’s also going to receive the Rock’s returns.
And shareholders should probably be quite happy. (Not that they ever are, of course.) Paul Murphy estimates they’ll get 100p per share from Her Majesty’s Government, which is four times what Richard Branson was proposing to pay them.
It gives me great pleasure to announce that Market Movers has nabbed itself 11,000 valuable pixels on the Million Zimbabwean Dollar Homepage, for the bargain price of just $0.41, plus a $0.35 paypal fee. From the FAQ:
8. How long will the site be online?
The site will be online for 5 years guaranteed (at least until 11th February 2013), however the aim is to keep the site online forever (or at least as long as Zimbabwe remains a country).
9. If you’re from the USA, why are you selling the pixels in Zimbabwean dollars?
I think Zimbabean dollars are the closest thing we have to a universal currency on the internet, so it made more sense to do it in Zimbabean dollars. ‘The Million Dollar Homepage’ just doesn’t have the same ring to it!
Also, if I did it in US dollars, it would be way too expensive – US$1 per pixel! Who would pay that??!
10. Are you worried about copy-cats/rip-offs?
No I am not really worried about that at all.
Last year, I extolled the virtues of listening to new-music pieces more than once. Yesterday, I went to Carnegie Hall to hear the new Doctor Atomic Symphony by John Adams, and it was wonderful; but it was also very dense and complex, and I’d love to be able to listen to listen to it again. The problem is that it’s unlikely to be either performed in NYC or recorded any time soon. Which is why I think that last night’s concert constituted a large missed opportunity on the part of David Robertson and the Saint Louis Symphony Orchestra.
Am I saying that he should have performed the entire symphony twice? Yes, that’s exactly what I’m saying. The symphony, you see, was “put on liposuction” (John Adams’s words) since it was first performed at the Proms in August. Back then it was over 40 minutes; now it’s less than 25 minutes. And as a result, David Robertson had to “scramble” (his words) to rejigger the program, which originally had the symphony taking up the entire second half. Since 24 minutes is a very short second half by anyone’s standards, he inserted an 18-minute Sibelius piece after the interval and before the symphony.
Now I’ve got nothing against Sibelius, but the audience certainly wasn’t coming to listen to Sibelius (they bought their tickets before the Finn was added to the menu), and most of them were very much coming to listen to Adams.
Given that the Adams symphony is now so trim, why not play it twice? Here’s what I wrote last year, after listening to Michael Gordon’s Decasia three times in a row:
Let me recommend repeat visits to any great musical experience, whether it be a contemporary symphony or a magnificently-performed opera. Too often, I think, people have the opportunity to go back and relive a wonderful performance, and don’t. Many symphonies and pretty much all operas are performed more than once: take advantage of that, if you can! I remember once going to a London Symphony Orchestra concert at the Barbican in London, where Kent Nagano started off the program with a short piece by, as I recall, Olivier Messiaen. After playing it, he announced to the audience that new and unfamiliar music really needed to be heard more than once — so he played the whole thing a second time. I wonder if that kind of thing ever happens in New York.
Robertson himself talked admiringly of the way in which composers like Sibelius and Adams do radically new things when composing their music — even as he himself originally stuck to the standard appetizer-concerto-symphony structure which concertgoers are getting increasingly bored by. Given the necessity of shaking that up a little, he chose the safest route possible, rather than doing something much more interesting and imaginative.
Indeed, during the pre-concert talk, Robertson said that his choice was between scheduling a new piece and “playing a really long encore”. He speaks fluent French, he knows exactly what “encore” means. So maybe that’s what he should have done: played the Adams symphony, taken his bow, and then asked the audience if they wanted to hear it again. The ones who didn’t could just have left; the vast majority would have very, very happily stayed for the repeat.
Citigroup Leveraged Fund Falls
Amid Bond Market’s Volatility: Falls by 52% in one quarter, to be precise.
Who wants a recession: More people than you might think.
McCain and Obama Skirmish on Financing: It’s possible we might yet have a publicly-financed general election. Which the political parties would then undercut by spending unlimited amounts anyway.
I wasn’t too surprised to learn that Ben Bernanke is an optimist. But Peter Orszag too? The director of the CBO always seems pretty downbeat to me. Yet today, releasing an updated economic forecast, he says that "CBO’s projections do not show the slowdown in economic growth becoming severe enough to meet the economic definition of recession". In fact, he projects 1.9% growth in real GDP this year.
Orszag sees inflation falling, too, with the CPI dropping from 4.1% in 2007 to 2.1% in 2008 and 1.9% in 2009, while the core CPI (excluding food and energy costs) will fall from 2.1% in 2007 to 1.7% in 2008, ticking up a little to 1.8% in 2009. All in all, not a bad performance for an economy where "the risk of a recession remains elevated, and economic activity will remain subdued for some period as the economy continues to work through the effects of problems in the housing and financial markets and the high price of oil".
The New York Post says that Yahoo’s board is splitting into factions, with one group taking its fiduciary duties seriously, and the other, more emotional, group supporting CEO Jerry Yang’s attempts to rebuff the Microsoft takeover bid. It also reports that Yahoo’s share price is still trading at a premium to the bid:
Yang pleaded his case in a letter to shareholders Wednesday night, reiterating that Microsoft’s bid substantially undervalues the company.
Investors didn’t agree with Yang, as they pushed up Yahoo!’s price to $29.98. Microsoft’s offer currently stands at $29.05.
That’s a premium of more than 3%; when we last looked at the bid arithmetic, the premium was 2%.
I suspect that there are three different merger-arb plays going on here. The first is the obvious one – buying stock in the hope and expectation that Yahoo’s board (perhaps installed as a result of a Microsoft proxy fight) ends up accepting the Microsoft bid. Obviously you wouldn’t buy Yahoo stock at a premium to the bid price if that was your game.
The second merger-arb play is that Yahoo is just playing hard to get, and that Microsoft will end up buying the company after raising its bid to $36 or $40 or whatever. If that’s what you think will happen, then the shares might well be a strong buy at these levels.
And the third merger-arb play is somewhere between the two. Microsoft buys Yahoo, for $31 in cash and stock, which is what the terms of the original bid were. Since then, Microsoft stock has fallen in value, so it might have to bump up the exchange ratio between its shares and Yahoo’s shares. But the headline dollar value of the bid remains the same as it always was. If that happens, then there’s another 5% or so left in Yahoo stock – something which can be quite profitable, if you’re leveraged enough.
The one thing that you can be quite sure of, however, is that absolutely no one is taking Yang’s words at face value and buying Yahoo at these levels because that’s what they think the company is worth absent a bid from Microsoft. If the bid fails, Yahoo’s stock plunges. That’s the risk the merger arbs are taking.
A banker makes a $10 million loan to a client at an interest rate of 10%. He then turns around and securitizes the loan, selling it to bond investors at an interest rate of 10%. Does that sound like a breakeven deal to you? Me too. But somehow, thanks to the magic of pricing conventions, our banker still manages to make a substantial profit of $270,000 on the deal. That’s finance, that is. Be careful out there!
Front-page stories in the WSJ and FT: two great tastes which go great together!
First there’s David Enrich in the WSJ, talking about a Citigroup hedge fund named CSO Partners, which contracted to buy a bunch of loans and then tried to back out of the deal. Then there’s Henny Sender in the FT saying that it’s not just hedge funds owned by banks which are trying to back out of loan deals, it’s also the banks themselves – maybe. If following through on their loan commitments will cost them more than the reverse break-up fees if they walk away, then it might make sense to walk away.
The upshot of all this would seem to be that it’s a bad idea to count any chickens in the world of loans. Until you have your cash in the bank, don’t assume you’re going to get what a bank says you’re going to get.
(Incidentally, this is the first and last time I’ll ever use a "bank on" or "banking on" headline here at Market Movers. I have a self-imposed all-time quota of one such headline, which is hereby used up.)
First the NYT, now Bloomberg – what is going on with art auction reporting? Bloomberg’s headline on the (RED) auction today is just plain wrong: "Hirst Cabinet Fetches $6.2 Million for Bono AIDS Sale". The story quotes lots of information from the Sotheby’s press release, so it’s not as though the reporters couldn’t simply have followed Sotheby’s lead and said that the Hirst cabinet sold for $7.15 million. That is, after all, the amount of money that the buyer paid.
But no: Bloomberg seems to be dipping its toe into the waters of hammer-price reporting – with highly embarrassing results. The hammer price on the Hirst cabinet was actually $6.5 million, not $6.2 million – Sotheby’s commission was 10%, bringing the total price up to $7.15 million. It looks as though someone tried to reverse-engineer the hammer price from the stated total, and got the commission rate wrong.
In fact, Sotheby’s seems to be getting very short shrift from Bloomberg in the whole article:
Hirst’s cabinet, titled “Where There’s a Will There’s a Way,” brought in more than a sixth of the proceeds at the so- called (Red) auction at Sotheby’s, which raised $38.7 million for HIV/AIDS treatment in Africa, beating its top estimate of $29 million.
Again, the Sotheby’s press release very clearly says in its headline that the auction raised over $40 million for the Global Fund. Why would Bloomberg not include the money which Sotheby’s is donating from its commission? The total commission charged was $3.87 million, and although some administrative costs are going to come out of that sum, the majority of it will end up being donated to charity.
My feeling is that if you’re reporting on the price fetched by artworks, the headline price should always be the total price paid: the hammer price is a bit of a fiction really. Yes, it’s useful if you’re comparing the price paid to the estimate, since the estimate is for hammer price. But that’s it. Certainly sticking to the auction houses’ in-house convention would avoid silly errors like Bloomberg’s today.
Remember those subprime class-action suits? Well now Navigant Consulting has put together another league table – not of the most-sued companies but rather of the law firms filing the most suits. Amir Efrati has the lowdown:
Wannabe securities class-actions brought by investors of mortgage-backed securities and others made up about one-fifth of the filings, or more than 60 suits, and it’s perhaps no surprise to learn that San Diego-based plaintiffs powerhouse Coughlin Stoia Geller Rudman & Robbins LLP filed the most-more than a dozen.
Who are Coughlin Stoia? There might be a bit more name recognition if I told you they’re the former Lerach Coughlin Stoia Geller Rudman & Robbins. As in Bill Lerach, the man shortly to spend two years behind bars for his conspiracy to obstruct justice.
Wasn’t Lerach at Milberg Weiss Bershad Hynes & Lerach, you ask? Well, yes, he was, until 2004, when Lerach and some other west-coast Milberg lawyers split off and formed their own competitor, Lerach Coughlin Stoia.
Interestingly, it’s Lerach’s old law firm, Milberg Weiss, which has suffered the most from his indictment and conviction. His new firm, Coughlin Stoia (no Lerach there any more), seems to be going as strong as ever.
Eliot Spitzer, having fought and won his battle with investment banks when he was New York’s attorney general, has now set his sights on the monolines. There are two diametrically opposed ways of looking at what’s going on, which is not an uncommon state of affairs when Spitzer starts getting righteous.
The first is the point of view of the companies involved: the monolines, their investors, and individuals who believe that corporate legal entities have rights, even when they’re closely regulated. These companies have a range of businesses, some of which are profitable and some of which turn out to have been profoundly misguided. Spitzer is essentially seeking to swoop down and grab the profitable, sustainable bit of the business, leaving the crazy structured-finance bit to wither and die (it likely won’t be mourned).
Goverments very rarely eviscerate companies in this manner, except for on anti-trust grounds. Would regulators try to force Apple to spin off its iPod/iTunes franchise? Could they grab American Airlines’s lucrative international flights to Nigeria? Don’t companies – even insurance companies – have rights, and even consitutional rights?
Not really, says Spitzer – not if they’re regulated entities like insurance companies which are critical to the smooth functioning of American government. What the monolines do is in the public interest, and if they fail that’s in the public disinterest. The regulator was given wide-ranging powers for a reason, and he would be remiss not to use them in this instance.
More to the point, it’s worth considering exactly what is the thing which needs protecting. Monolines are so-called because they have just one line of business: in this case, it’s insuring municipal debt. Why the regulators ever allowed them to start insuring structured-finance vehicles is far from clear at this point, but it does seem to have involved little bit of a bit of legal sleight of hand and a lot of lax oversight. If the monolines enter a non-core business which puts their all-important triple-A credit ratings at risk, then the regulator can and should be able to separate that non-core business from their real business, which is insuring municipalities. And if the non-core business then fails, that just shows how silly it was to enter it in the first place.
In the middle is a third view. The main benefit of municipal bonds is that they allow small towns and obscure public agencies to raise debt at low rates of interest. It’s true they can’t do that these days with an MBIA or FGIC wrap, but Warren Buffett has already announced his own municipal monoline, so the municipalities can simply move their business from the old monolines to the new one, while leaving the old municipal business written by the likes of MBIA to subsidise its old non-municipal business.
There are two problems with this compromise view, if you’re Spitzer. Firstly, no one wants to give Warren Buffett a monopoly on municipal bond insurance, and it’s hard to see who else is going to compete with him going forwards if the existing monolines fail. And secondly, there’s a public interest on the buy side of the municipal bond market as well: munis are almost uniquely in the fixed-income market bought by small retail investors who have no interest in taking credit risk. Their bonds have fallen in value not because the issuers have become less creditworthy, but because the monolines ventured out of their core competency. These millions of individuals deserve protection too.
In the long term, as Jesse Eisinger says, the best-case scenario is to do away with municipal bond insurance altogether, or at least radically scale it back. But right now there’s a crisis which needs dealing with; once it’s dealt with, then we can try to ensure that it doesn’t happen again. It’s a bit like the Electoral College: it needs reforming, but not in the middle of Bush v Gore.
Is Spitzer a bully? Yes. But I think in this case his bullying can actually be justified. He’s elected to represent the best interests of his consituents, and that’s what he’s doing. Even if that involves a handful of corporate entities who made bad bets losing money or going bankrupt. As Barry Ritholtz puts it:
Understand that this is not just any business; This is an extremely regulated insurance business that exists solely to facilitate capital raises by States and Municipalities to build State facilities for the public good.
They operate by the good graces of the State. No State approval, no business.
If the larger, more influential States — NY, California, and especially The Port Authority of NY/NJ — say, WE NO LONGER TRUST YOU, your recklessness has endangered our ability to raise funds thru bond issues to build schools and hospitals and bridges etc., then it is game over.
At the (RED) auction last night, eight works by Damien Hirst were sold – if you include the one he gave to Banksy to deface. Between them, they sold for $20,955,000 – call it half of the $42,584,300 that the auction’s 72 lots raised in total. It’s also an average of $2,619,375 per Hirst. And remember, these aren’t classic Hirst pieces: they were all made, brand new, specifically for this auction.
It almost goes without saying that these works were all made not by Hirst himself but rather by his army of low-paid assistants. Hirst is a business, and qua business he must have pretty much the highest profit margins in the world.
Privately Public: Equity Private on public investment banks.
McCain takes aim: At Obama.
In defence of the investment bankers: John Gapper doesn’t think much of regulating bankers’ pay.
College a waste of time and money for kids
Online Ad Spend by Industry – January 2008: Financial services dominate. Which is good for Portfolio.com, I guess.
Depression risk might force U.S. to buy assets: Says notorious euroskeptic Bernard Connolly. If he’s as right about this as he was about the euro, we’ve got nothing to worry about.
I managed to grab a few minutes at the Money:Tech conference to talk to Mike Masnick about his company, Techdirt, and specifically the Techdirt Insight Community. What he said intrigued and excited me: it seemed like a fantastic way for bloggers to be able to monetize their ideas and insights. At first.
I, like many bloggers, love to receive and to answer very specific questions from my readers. (This post, for instance, was very popular and was basically a reply to an email.) Blogging is a conversation, and this is one great way to get a conversation rolling. What’s more, if my answer is good and/or insightful, my blog entry might actually have some substantial value to the person asking the question. That’s the idea behind Techdirt: companies ask questions, and get a large number of valuable answers from various bloggers. In return, the best answers (as judged by the questioner) get paid a few hundred dollars each; the top bloggers on Techdirt can make some pretty substantial sums on the site, without having to deal with any advertising at all.
In practice, however, I’m much less excited about Techdirt than I am in theory. For one thing, the whole thing resides behind a very high registration firewall. No, you don’t need to pay to become a member. But you do need to be a blogger, and fill out an application form, and wait some time for your application to be reviewed and accepted. Unless and until that happens, you can’t see anything going on: questions and answers, be they current or old, are all off limits to both you and Google.
Bloggers are free to post their own insights on their own blogs. But most don’t do that, as far as I can make out. And in any case when that happens the conversation becomes fragmented: one insight here, another insight there, largely defeating the point of having the whole thing going on at one place. And since the Techdirt site is off-limits, it only really makes sense to post your initial answer on your blog: after that you’re responding to stuff which 99% of your readers aren’t allowed to read.
Oh, and did I mention? For reasons which make no sense to me whatsoever, even registered members aren’t allowed to read the open questions unless and until they’ve answered that question themselves first, at some non-negligible length. It’s yet another barrier to conversation and collaboration: first you have to go through the registration process, then you have to answer the question yourself, and only then are you considered worthy of reading what your fellow bloggers have to say on any given subject. You might well find that everything you said is redundant, and has been written already by many other bloggers, and all the effort you put into answering the question was a waste of time. In which case, too bad.
Mike told me via email that "we do this to ensure that the initial thoughts are your own, rather than immediately built on others" – but isn’t the whole point of blogging that it builds on the thoughts of others? Mike also told me that things might change – he hinted as much on his (open) blog here. But for the time being, I have to say that the Techdirt system seems broken to me.
And the proof of the pudding, to me, is in the eating. After registering as a Techdirt community member, I looked through a few closed cases. They generally featured precious little discussion; the vast majority are simply a concatenation of unrelated stand-alone answers, as you’d expect if the bloggers weren’t allowed to see what their peers had written. And boy are those answers boring. It’s as though the minute someone starts offering them money, bloggers transmogrify into dry-as-dust financial analysts, losing all hints of personality or verve. I can see why they don’t post this stuff on their public blogs: no one would read it.
I think the problem is that the money poisons many if not all the great aspects of blogging. Rather than linking joyously to someone else with an excellent insight, the bloggers are incentivized to treat that person as a competitor. As a result, you can’t really trust what the different bloggers are saying about each other. And people – with good reason – think that long and detailed and boring answers are much more likely to earn them money than blog-style hit-and-run insights. Which in turn means that there’s precious little value in the answers for anybody but the original questioner. The answers feel like chores, rather than the kind of blog entry which anybody would ever want to write if they weren’t being paid.
So for a few devoted members of the community, there’s an income-generating opportunity here. As a widely-applicable model of monetizing blog content, however, I think Techdirt falls well short of what it could be. Here’s hoping it evolves into something much more fabulous – and open – than it presently is.
Update: Writing this blog entry, and posting it at Techdirt, allowed me to see what other users were saying about the service. This comment, by Sean Murphy, summed it up for me:
I have reluctantly concluded that community is the wrong word for the Techdirt Insight effort. The mechanisms established to make clear who owns each individual insight work against again real collaboration or shared contribution. It’s become a rolling essay contest more than a blogging community, which probably better suits Techdirt’s business needs but it’s not the reason I joined.
One of the biggest sponsors of the World Economic Forum at Davos this year was Cisco. That’s entirely natural: Cisco is huge and global and powerful, which is all you need in Davos. And Cisco does its part to make the world a better place, too: more than 2 million students have passed through its Networking Academy Program, which has more than 11,000 academies in over 160 countries.
But when Marc Musgrove, Cisco’s PR chief, cornered me in Davos and started trying to sell me on all the wonderful things that Cisco was doing in sub-Saharan Africa, I was a bit dubious. Sub-Saharan Africa doesn’t need networking equipment, it needs clean water, and widespread efforts to eradicate malaria and Aids. This kind of thing generally strikes me as reminiscent of failed 1970s-era industrial policies:
Turning Ethiopia, one of the world’s poorest nations, from an agriculture-based economy to one influenced heavily by information and knowledge is no small challenge. But it is one the Ethiopian government is intent on rising to – with help from Cisco Systems.
In fact, the government sees this transition as vital for the future of the country.
The man in charge of selling Cisco’s networking equipment to emerging-market goverments like Ethiopia’s is Scott Blacklin, and I spoke to him at some length today. Blacklin is unapologetically commercial: he says that Cisco asks him to be just as profitable in Africa as he is anywhere else in the world. Sure, he’ll pinch-hit for the philanthropic arm of the company when they ask him nicely, but his job is to make money by selling networking equipment to emerging-market countries, and in pursuit of that job he’ll happily look at the World Bank’s priorities and try to make sure that Cisco gets as many of the resulting contracts as it can. "It’s abundantly commercial, I’m not here to save the world," he says. But he also understands the importance of understanding the bigger picture: "We do ourselves no favor by thinking that the willy-nilly dissemination of networking gear is a good thing without the ability of the population to absorb and use it."
That said, however, Blacklin is optimistic about the ability of networking gear to change sub-Saharan Africa for the better. It does so in commercial projects, where the government or schools or hospitals are networked. Where there is electricity, says Blacklin, there can be networking, and "there is a role for arming people with information in categories that they can use".
And of course the non-profit arm of Cisco is interested in sub-Saharan Africa as well. Blacklin, wearing his corporate rather than his sales hat, got into an interesting discussion in Davos about malaria diagnostics. In many parts of the continent, if a child falls ill, he or she might have to walk for 24 or 36 hours just to find out whether it’s malaria or only a fever. (This is something which World Bank managing director Ngozi Okonjo-Iweala knows at first hand.) Cisco, then, is interested in partnering with a pharmaceutical company which aims to eliminate malaria in Africa; Cisco’s role would be to use computer networking to get diagnosis immediately, rather than with a possibly fatal 24-hour delay.
Blacklin is humble about Cisco’s ability to make a big difference. Cisco’s a very small player in the development space, and a lot of what it’s trying to do isn’t going to work. What’s more, Cisco has definitely not signed on to Bill Gates’s idea that international companies should be operating on a breakeven basis rather than a for-profit basis when serving the bottom billion.
Cisco’s also well aware of some huge constraints on what it can do, starting with the supply of electricity – which is obviously necessary for any kind of communications equipment to work – and continuing on to questions of literacy. But Blacklin is of the opinion that Africans don’t actually need a lot of literacy in order to be able to use computers to learn about disease prevention or what to do in the event of a crop failure.
That might be true. And if I were Cisco, I’d be working in the same space: companies should help out where they can. If I were a government minister in a sub-Saharan country, however, trying to wrangle ownership of all the development programs going on, I’d still be very sceptical of just how much information and communications technology can really achieve. All too often, companies like Cisco will come along and offer to donate valuable resources and expertise, and governments don’t want to turn down the offer, even if it doesn’t easily fit in to a broader strategic vision. For long-term sustainable results, however, it’s often important to stick to the plan, and not get sidetracked by shiny new toys.
As Congress holds hearings on bond insurers, it’s worth reading MBIA’s official response to Bill Ackman. There’s nothing in there about “the unscrupulous and dangerous market manipulation of short-sellers,” as Herb Greenberg feared. Rather, it’s a pretty sober analysis, which seems to have convinced Alea, at least. Here’s one juicy bit:
Mr. Ackman has been consistent in his suggestion that his estimates of
loss are more accurate than the company’s. He alleged, in his 2002
attack on the company, that our portfolio subject to FAS 133 would have
$2 — $3 billion of losses. That portfolio, which has largely amortized
or been prepaid at this time, experienced no loss. We don’t believe
there’s any basis for giving his current estimates any more credibility
than those from 6 years ago.
I don’t have a dog in this race, I’m actually quite happy to watch the grenades being lobbed back and forth. But for the time being at least MBIA retains its triple-A rating and is trading at more than $12 a share, up from a low of just $6.75 (but down from a 52-week high of $72.38). I think it would be premature to count out MBIA quite yet.
I actually read Ben Bernanke’s testimony today all the way through to the end – this should get me a gold star from Barry Ritholtz, at the very least. The not-particularly-surprising news, of course, is that he’ll continue to cut rates. That’s the main thing: actions speak louder than words. But it’s still interesting that Bernanke’s words are so much more bullish than his actions:
At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt. At the same time, overall consumer price inflation should moderate from its recent rates, and the public’s longer-term inflation expectations should remain reasonably well anchored.
"Sluggish growth" means "we’re not in a recession and we’re not going to be in a recession" – which counts as bullish, these days. And then growth picking up in the second half of the year implies that the non-recession will be not only shallow but also short. Meanwhile, all this monetary easing will somehow manage to coincide with inflation falling.
I guess all this is possible, but I can’t bring myself to put a high probability on it. For what it’s worth, the InTrade recession contract last traded at 65, which means that just the avoiding-a-recession part of Bernanke’s forecast has roughly a one-in-three chance of being right. Combine that with the falling-inflation forecast, and I think we’re in the realm of the decidedly improbable.
Stephen Grocer has a great post about Yahoo’s M&A track record: the companies it did buy and shouldn’t have, as well as the companies it didn’t buy and should have.
In the former camp: the $3 billion acquisition of GeoCities, the $4.3 billion acquisition of Broadcast.com. In the latter camp, Yahoo could have bought, but passed on, MySpace, Facebook, YouTube, and even, at one point, Google.
Of course, Yahoo being Yahoo, all of those companies, even Google, might have turned into GeoCities of their own had they been incorporated into the maw of the original Web Portal. Even Google’s not all that great at acquisitions: look at how Dodgeball went nowhere after Google bought it.
In fact, with the possible exception of MySpace, it’s hard to think of any big tech-space acquisition which looks like genius in hindsight. YouTube might do eventually, but the jury’s still out on that one. If Microsoft does end up buying Yahoo, it’s going to have to buck a pretty strong trend.
Why is the German government bailing out IKB? It’s small, it’s not systemically important (although it is politically important, which is probably the key here), and there’s all sorts of moral hazard involved in keeping this insolvent bank afloat. Willem Buiter is scathing about the decision, calling it downright illegal.
But Sam Jones notes that if IKB was allowed to fail, that would trigger a guarantee mechanism which would cost German banks €24bn. Maybe the IKB bailout isn’t an IKB bailout at all, but rather a bailout of the rest of the German financial system.
I’m not a big fan of the WSJ’s front-page story about trouble in the auction-rate securities market today. It’s long – over 2,000 words – which means that most readers won’t make it all the way past the jump to the end. But it’s only in the last 200 words that things suddenly start making sense and a reader gets to see both sides of the story, which starts off dramatically:
When M. Brian and Basil Maher sold their family’s shipping business last July for more than $1 billion, they quickly put the money in a safe place.
Or so they thought.
The two brothers handed much of it to Lehman Brothers Holdings Inc. with marching orders to make only the most conservative, cashlike investments. Within weeks, however, they had lost access to more than a quarter-billion dollars.
I’ve got my father in town, he’s a former investment banker who knows his onions, and the first thing he asked me on reading this is how something as safe as auction-rate securities could have lost 25% of their value. It’s a good question, and the answer is: they didn’t. Oh, and the Mahers don’t just want their money back, either, they want much more than that. Allow me to skip to the end of the story:
If buyers return to the auction-rate-securities market, the Mahers could sell their holdings and come out whole. The companies that issued the securities could also buy them back from the Mahers. In the meantime, the Mahers are collecting interest on the securities of more than 6%…
In their claim, the Mahers are demanding their $286 million back from Lehman, along with interest, and are seeking punitive damages of up to an additional $857 million.
If you want to understand the details of how auction-rate securities work, Accrued Interest has a good primer. But in a nutshell, the Mahers own performing bonds, likely from municipal credits. Remember that these municipal bonds essentially never default – that’s the point of Jesse Eisinger’s piece in the March issue of Portfolio, saying that municipal bond insurance is a racket. And note too that the Mahers are receiving more than 6% interest on these securities.
But they’re so unhappy about owning extremely safe short-term debt that they’re asking for more than $850 million in punitive damages.
If the Mahers simply took a deep breath, they’d realise what’s going on. Their auction-rate bonds roll over every 28 days or so, but right now there’s more supply than demand for those bonds, which means that the auctions reset at the maximum allowable interest rate. The municipalities paying interest on the bonds are not happy about this at all – they’re paying much more than their natural cost of funding – and so this situation won’t last long: either liquidity will return to the auction-rate securities market, or else the municipalities will call the debt. Either way, the Mahers will get their money back, and lots of interest.
But of course that way they wouldn’t get their punitive damages.
Update: Mark Conner provides a lot more detail in the comments. Turns out the Mahers don’t have municipal credits, but rather subprime-related credits, which means the chances that the issuer will call the bond are lower than I thought.
The most expensive building in the world is up for sale, with a $3.5 billion price tag. Its owner, Harry Macklowe, has been served a default notice, which has forced him to put his greatest asset on the block. It’ll be fascinating to see how much it goes for, in the end: Macklowe bought the building in 2003 for $1.4 billion, which gives you an idea of how much of a run-up there was in commercial property.
When the building’s sold, I have a feeling that the purchase price will set and hold the most-expensive-building record for some time. Appetite for big real-estate deals has largely been lost now that the liquidity for funding them has dried up, and people who own iconic skyscrapers tend not to want to sell them in any case.
In this particular instance, I suspect there’s going to be no shortage of men with large egos wanting to own this property and doing everything in their power to line up the needed funding. Or you never know – given the times we live in, it might end up being sold to a sovereign wealth fund. I wonder what Evan Bayh would think of that.
