Cognitive Dissonance at Skype

Here’s what I don’t understand about eBay’s

Skype write-down; I’d seriously love it if someone can explain it to me.

As I understand it, eBay bought Skype for $2.6 billion upfront, with the sellers

potentially getting as much as $1.7 billion extra if the company performed well.

Today, eBay paid out $530 million of that $1.7 billion, and said that the payment

"is reasonable given the progress and anticipated rapid growth of Skype’s

active user base." From eBay’s point of view, then, Skpe is now worth at

least $530 million more than the $2.6 billion it paid.

But at the same time, eBay wrote off some $870 million of the goodwill

associated with the Skype purchase: in other words, eBay is saying that Skype

is worth $870 million less than the $2.6 billion it paid.

How can both these things be true at the same time? I suspect that the answer

has something to do with some crafty drafting on the part of Skype’s sellers

at the time that the company was acquired – or else eBay is essentially

coming out and saying that the model it used to value Skype was seriously flawed.

But there’s definitely a fair amount of cognitive dissonance here – much

more than there is in a silly market quirk like Citi’s share price going up

as its profits go down.

Posted in technology | Comments Off on Cognitive Dissonance at Skype

The Dow Hits a New Record. Yawn.

What craziness is going on in the stock

market! The Dow is hitting

new highs! The biggest-gaining Dow component is Citigroup,

a company which just announced its earnings were going to drop by 60% this quarter!

MI-AN298_AOT_20070930205640.gifJustin

Lahart can’t make heads nor tails of this crazy volatility, and accompanies

his column

with the chart at left, showing the Dow zig-zagging crazily on its way to the

new highs above 14,000 that it’s hitting today.

To which all hysteria I just want to say: everybody, please, calm down. Here,

let me show you my own chart of exactly what the Dow has done this year. Citigroup

might be up a little bit today, but it’s still down substantially from where

it started the year (it’s at $47.95 now, after closing 2006 at $53.98). And

while stocks are certainly doing pretty well right now, movements of a couple

of hundred points in one day are really not very important when the absolute

level of the index is 14,000.

dow.jpg

So take a step back, take a deep breath, and let the markets have fun with

their intraday gyrations. It’s really no big deal.

Posted in stocks | Comments Off on The Dow Hits a New Record. Yawn.

FT.com Still Doesn’t Get It

What on earth are the executives at FT.com thinking? Instead of boldly following

the lead of the NYT and making the site free, they’ve arrived at a weird

compromise: articles and data will be free to users up to a total of 30

views a month. They will then be asked to subscribe for access to more material.

This is a silly decision, and I’m quite sure that eventually the whole site

will go free. Let’s count the reasons why this move makes very little sense.

  1. It’s a disincentive to read the site. The FT claims that the new model will

    "allow bloggers and news aggregators to link to material previously available

    only to subscribers" – but anybody seeing such a link will think

    twice before clicking on it, since doing so will cut into their precious allocation.

    At the margin, potential readers will probably make do with the summaries

    provided on the blogs and new-aggregation sites, and not visit FT.com at all.

  2. It’s a disincentive to link to the site. Let’s say a blogger links to one

    in ten articles that he reads. Then if the blogger isn’t an FT.com subscriber,

    he’ll basically be limited to three links to FT.com per month. Why minimize

    the link-love in this way?

  3. It’s a disincentive to use FT.com as an authoritative resource. Let’s say

    you’re interested in researching the story of how Paul Wolfowitz was ousted

    as the president of the World Bank. The FT covered that story very well, in

    dozens of articles. But you can’t read them all, and it’s not obvious which

    are the "best" ones, so you end up using some other, free source

    of information instead.

  4. It’s a disincentive to use FT.com as your home page, or as a go-to site

    to find out what’s going on in the world of business and finance.

  5. It maintains the existing confusion between free content and subscription

    content. Apparently "new blogs" will be part of the new FT.com,

    and presumably those will be free and will not count towards the 30-articles-per-month

    quota. FT.com publisher Ien

    Cheng says that “people find it much harder to get to know your

    content because they see a hard barrier at first, without even having a chance

    to get to know your best content”. But all he’s doing is replacing the

    hard barrier with a soft barrier: it’s still a barrier, and it will still

    have the same effect.

  6. No mention has been made on the subject of whether the blogs’ RSS feeds

    will remain truncated: back in May, the FT suddenly and idiotically decided

    that it would give its most loyal blog readers only a few words of each blog

    entry. If this protocol remains, they’re still not going to get much in the

    way of links.

  7. The NYT has demonstrated that it’s relatively easy for an authoritative

    newspaper to get its readers to register in return for free content. But FT.com

    is going to put up a registration firewall after just 5 pageviews per month:

    yet another obstacle to people reading its content. Given that FT.com will

    remain a subscription site, and that FT.com retains the right to lower the

    30 views per month hurdle at any time it likes and to alter it from market

    to market, it’s easy to see why people won’t even want to bother registering

    if they have no intention of subscribing.

  8. Cheng hasn’t read up on his Hume: you can’t get an "ought" from

    an "is". He says that "We have always believed that the journalism

    we produce is worth something to our core users," and that "this

    new model allows us to keep to that principle." But just because FT.com

    readers will pay does not mean that they should pay. Why

    charge for something, if you can get more readers and build a more valuable

    website by giving the same thing away for free?

  9. The new model doesn’t even make internal sense. "You’ve got to

    be able to target and registration is going to help us do that," says

    Cheng, right before he says that "any publication that goes completely

    free significantly risks ending up with an undifferentiated volume".

    If he’s targeting, then by definition he’s differentiating, and can still

    sell high-value readers to advertisers. Does he think that Vogue’s page-rates

    are adversely affected by the fact that it sells hundreds of thousands of

    copies in Wal-Mart?

This whole announcement smells of caution and weakness. As Henry

Bloget says, if Pearson can’t make bold decisions at the FT, maybe it shouldn’t

own the FT at all.

As with TimesSelect (gone), the paid Wall Street Journal Online (soon to

be gone), and other paid newspaper sites, we think that the FT’s half-measure

is not long for this world. Meanwhile, the Financial Times proper is likely

to be increasingly isolated and threatened in a world dominated by Murdoch/Dow

Jones, Thomson/Reuters, and other massive global financial brands. Owner Pearson

(PSO) should sell it to someone that can do more with it.

The pairing of the WSJ newspaper with the Dow Jones newswire worked out quite

well: I’m sure that Thomson/Reuters would be interested in what they could do

with the FT.

Posted in Media, publishing | Comments Off on FT.com Still Doesn’t Get It

The Ingredients of Richard Prince’s Success

It makes sense that Deutsche Bank is sponsoring

the Richard

Prince retrospective at the Guggenheim. Prince is the ultimate art-world

hot commodity: he was the first artist to break the $1 million barrier for a

photograph, one of his cowboy photos sold

for $2.8 million in the spring auctions, and Linda Sadler reported

in June that his new paintings sell for between $5 million and $7 million. That

prompted me to call

a bubble, but Sadler sees Prince as a

real blue-chip:

Like Dow stocks, artists such as de Kooning, Andy Warhol, Jean-Michel Basquiat

and Richard Prince are relatively easy to buy and sell and have abundant collectors.

Many artists resemble speculative Nasdaq companies that may disappear when

the bubble bursts, said a hedge-fund manager who declined to be named.

I don’t believe that Prince’s new paintings are selling for $5 million each:

cut that number in half and I think you might be closer to reality. But even

at $2 million apiece, Prince is clearly fetching sums for new canvases that

very, very few living artists can command.

There are two reasons for Prince’s art-market success. The first is that he

is a genuinely important artist: he took the idea of appropriation, which had

been an interesting theme in art running from Picasso through Duchamp to Warhol,

and stripped away everything else. By doing so, he became arguably the last-ever

artist to rise to prominence by challenging received notions of what art can

be, and he became enormously influential among younger contemporary artists.

To this day it is still hard for people to accept that a rephotographed advertisement

can be worth millions even as the advertisement itself remains worthless, as

art.

But Prince’s art-historical importance is only part of the reason for his art-market

success and for the fact that there’s probably no other artist who would impress

Deutsche Bank’s hedge-fund-manager clients as much. Prince’s abiding influence

comes from his early work: what Roberta

Smith calls "hip, hermetic mind games" and "an esoteric mode".

That stuff, no matter how important, doesn’t really sell, not on its own: I

don’t see works by Art & Language selling for seven-figure sums at auction.

Prince, you see, moved on:

For all its elegance, the early work had a spindly endgame air that seemed

to disdain anything as touch-feely as making an actual art object. But that

is just what Mr. Prince proceeded to do, regularly introducing new subjects,

mediums and techniques.

By the time you reach the end of the show, and the art that Prince is producing

right now, you are immersed in painterliness. Everything that Prince once stripped

out has now been put back in, and his paintings have more in common with Francis

Bacon or Willem de Kooning than they do with the austere conceptualism of his

early work.

What a collector gets, then, when he buys one of Prince’s new Nurse paintings,

is a twofer: he gets art-world cachet on the grounds that this is a Richard

Prince, but he also gets a lovely painting which would look great above the

fireplace. Call it user-friendly conceptualism.

Prince is not the first conceptualist to have trodden the path from formal

early works to large and expensive and expressionistic later works. But when

the likes of Barry Flanagan and Frank Stella do it, they essentially become

trophy artists, making big works for corporate lobbies while losing most of

their credibility in the art world.

Prince, by remaining a little bit outré (a huge recent painting at the

beginning of the show is painted over a ground of pornographic black-and-white

bondage photos) has leapfrogged the corporate world to become a darling of the

even richer art-collector set. Deutsche Bank might be happy to sponsor "Spiritual

America", which is the title of the show. But it would never in a million

years buy "Spiritual America", the photograph after which the show

is named. And it’s precisely that frisson of edginess which has great appeal

to the likes of Stevie Cohen.

Posted in art | 2 Comments

Debt Writedowns: The Universal Banks’ Turn

It doesn’t make a whole lot of intuitive sense, on its face. The investment

banks are up to their eyeballs in structured products and quantitative strategies,

while the big global universal banks are heavily diversified among different

products and countries. Yet it’s the latter which are making

headlines today: both Citigroup and UBS are writing down $3 billion or so

on their fixed-income portfolios.

Heads don’t seem to be rolling at Supertanker Citi – yet. At UBS, by

contrast, Huw Jenkins is out as head of the investment bank, along with 1,500

of his colleagues.

UBS is much smaller than Citi, of course, and therefore less able to suffer

a $3 billion writedown. And it’s not as though the likes of Merrill Lynch, Bear

Stearns, and Lehman Brothers have managed to get through this credit crisis

exactly unscathed. The fact is that banks are in the lending business, that

loans are their assets, and that when a whopping great subset of the credit

markets plunges in value, those assets are going to fall. It’s the nature of

the beast, and it’s a very good idea to come clean now.

But that said, the likes of Bear Stearns and Morgan Stanley are losing money

because they made a bet and the bet didn’t pay off. UBS and Citigroup, by contrast,

are losing money because they’re too big to be able to manage their risk nimbly

and even profit from credit-market volatility in the way that Goldman Sachs

has done. Investment banks like Salomon Brothers, Dillon Read and SG Warburg

might have great reputations, but ultimately their rudders are simply too small

to be able to steer something the size of Citigroup or UBS out of trouble. Indeed,

it looks very much as though the investment bank if anything was responsible

for steering the good ship UBS into trouble. Maybe they should stick

to Brazilian equities.

Posted in banking | Comments Off on Debt Writedowns: The Universal Banks’ Turn

iBrick Update

It seems that it’s possible to downgrade a bricked

iPhone and get

it back into its pre-bricked state, complete with third-party apps and everything.

But really. Is this whole cat-and-mouse game really necessary? The geeks,

the early adopters, the people who make incredibly

enthusiastic videos and post them prominently on nytimes.com – is

it really necessary to piss them all off like this? It might be true, as Jack

Schofield says, that there are no

user groups for Maytags and that Steve Jobs wants his products to be just

that simple. But the worst that happens if you fiddle around with your Maytag

is that you break it yourself: Maytag themselves aren’t going to try their very

best to break it for you if they find out.

Steve Waldman makes

an excellent point:

Suppose, accurately, that I am a small software developer. Suppose I write

a shareware application that includes a click-through license that states,

ordinarily enough, that if you wish to use my application for longer than

a 15-day trial, you must pay me. Suppose, ordinarily enough, my application

periodically checks for updates, notifying users and offering to install the

updates when they become available.

Now suppose that in the click-through installation process, I include a warning,

in bold text even, that says "Warning: If you’ve been using this application

for longer than the 15-day trial period and have not entered a license key,

installing this update may cause your hard drive to be erased!" And,

suppose the update does just that.

I would be in jail. Not in a month, or a week, but yesterday.

One of the weird things about the whole iBrick fiasco is that Apple has historically

been quite good at turning a blind eye to the kind of things that the most enthusiastic

and sophisticated parts of its customer base get up to. Its latest strategy

seems to have lots of downside and negligible upside, so why are they doing

it?

Apple is great at mocking Microsoft for selling crippleware: if you buy Windows

Vista, there’s a good chance you’ll end up buying one of the cheaper versions

which has been deliberately crippled by Redmond. But now Apple is going down

the same road, and deliberately crippling the palmtop computers that it has

sold well over a million of in the past few months.

Lord knows I don’t

always agree with Fred Wilson on matters iPhone-related. But he’s right

about this. The 1.1.1 update might have been great

news from a billing point of view for those of us who aren’t at the bleeding

edge of technology. But from a corporate-branding perspective, it’s a disaster

– or at least it should be.

But here’s the thing: Jack Flack says

that this kind of anti-consumer behavior on Apple’s part "never seems to

dent Apple’s groovy reputation, at least with anyone other than the truest of

geeks". I’m half convinced. Thirty seconds playing with Google Maps on

my iPhone convinced a technophobic English friend of mine this evening that

he simply had to have one as soon as possible. Apple’s design nous has always

been its strongest selling point, the iPhone’s user interface is its

design, and so it makes sense for Apple to want to have complete control over

that user interface.

But on the other hand, Apple has never been quite this unabashedly vindictive

and vicious in the past. Maybe it’s taking hints from AT&T.

Posted in technology | Comments Off on iBrick Update

Ben Stein Watch: September 30, 2007

I’m a uniter, not a divider. I’m a lover, not a fighter. I don’t like to engage

in the politics of personal destruction. But as Jonathan Landman might say,

we have to stop Ben Stein from writing for the Times. Right now. And so, by

popular demand, the first weekly Ben Stein Watch.

Stein uses his

column this week to ask a question: "Is It Responsible to Shun Military

Contractors?". Stein is a believer that investing isn’t just about money:

I certainly believe in socially responsible investing for myself. I sold

my tobacco shares long ago. (They have done fantastically well since then,

but I don’t regret my decision.)

Unfortunately, Stein doesn’t tell us why he sold his tobacco shares. So we’re

going to just have to take a wild guess: maybe it’s because cigarettes kill

people?

Yet somehow Stein just can’t comprehend why some socially responsible investors

don’t want to invest in arms manufacturers. "I don’t understand this

whole attitude," he writes. "Maybe someone can explain it to me."

Here, Ben, let me try, in words of one syllable:

Guns and bombs kill people.

Oh, damn, "people" is two syllables.

But let me rewind, to the very first sentence of Stein’s column:

Henry Blodget should have started out as a writer.

I might point Stein to the second sentence of Blodget’s wikipedia

page:

Blodget received a Bachelor of Arts degree from Yale University and began

his career as a freelance journalist and was a proofreader for Harper’s

Magazine.

Sigh. But then again, we’re talking here about a man who can’t even quote himself

accurately. Last

week, he wrote this:

This famous equation, MV = PT, had long been thought to explain everything,

and maybe it did. But why, then, if M rose and V and T showed only modest

growth, if any, didn’t P rise? (Anyone? Anyone? Bueller? Bueller?)

Stein, of course, is the man who played the economics teacher in Ferris Bueller’s

Day Off. "Anyone? Anyone? Bueller?" is funny when it comes from Brad

DeLong, attacking

Stein. But the thing is, Stein’s character never actually says it in the

movie.

Stein finishes up his column seemingly asking the SEC to regulate everything

that absolutely anybody might conceivably invest in. He doesn’t claim that this

massive expansion of regulatory responsibilities would do any good,

mind you; he just ends his column, cryptically enough, by saying that "the

ladder of law should have no top and no bottom." It’s a Bob Dylan lyric

which Stein obviously loves, since this is the second time this year he’s trundled

it out.

So here’s my idea. Since Stein clearly isn’t being featured in the business

section on the grounds of his economic expertise, he’s obviously got this gig

on the grounds of his celebrity status. Maybe the Times has no desire to replace

Stein with someone (like DeLong, say) who actually knows what he’s talking about

– what they want is a writer who’s vaguely familiar with economic concepts

but who’s also something of a household name. My suggestion: Bob Dylan.

Update: Of course, the column came out in September,

not October (which was in my original headline). Thanks to Mark

Thoma for catching the cock-up.

Posted in ben stein watch, Media | Comments Off on Ben Stein Watch: September 30, 2007

Song of the Year

On the fourth day of Crisis the markets sold to me

Foreclosure loans

Three French funds

Two structured notes

and a sub-prime bankruptcy.

From Tim Price, of course. Go

read the whole thing.

Posted in humor | Comments Off on Song of the Year

Could the UAW buy GM?

As part of the GM-UAW

settlement, GM is paying $29.9 billion upfront into an animal called a VEBA,

or Voluntary Employees’ Beneficiary Association. It will also add somewhere

between $5.4 billion and $7 billion more to that VEBA down the road. That’s

a lot of money, but GM gets a lot of benefit, too: it has now managed to transfer

its enormous healthcare lilabilities off its own balance sheet and into the

hands of the VEBA. In fact, the VEBA will have so much money that, should it

be so inclined, it could buy GM outright.

Now the VEBA, according to the WSJ, is a union-run

trust – which means that the UAW now controls more than enough money

to buy GM.

Of course, the VEBA is designed to pay healthcare costs, not to run a car company.

So what it should probably be doing is trying to place its investments with

money managers mandated to beat some kind of healthcare-cost benchmark. And

the obvious way to do that would be to invest in hospitals, pharmaceutical companies,

health insurers and the like – rather than in the declining US auto sector.

On the other hand, there are obvious advantages to the union owning the company

– it would be very unlikely to go on strike, for starters. And there wouldn’t

be a conflict between shareholders wanting to maximize dividends and workers

wanting to maximize earnings.

Back in January 2006, Portfolio’s Jesse Eisinger was already thinking along

similar lines, writing the Long & Short column for the WSJ:

"There is almost a universal recognition that the union already owns

the majority of this enterprise. This crystallizes it," [Rod] Lache [of

Deutsche Bank] says.

The academic research suggests that employee-ownership plans work best if

employees are given some say in the management. It has rarely been tried on

a grand scale. United Airlines became majority owned by the employees, but

failed for myriad reasons having to do with an ill-designed plan and the industry’s

troubles.

"Just owning a piece of the action without affecting the value has no

value," says Avner Ben-Ner, a professor of industrial relations at the

University of Minnesota’s Carlson School of Management.

So in order to make up for the loss of benefits and the risk of stock ownership,

the plan would give GM workers board seats and thereby a say in running the

company.

The employee-owner solution isn’t easy. Management and the union have very

prickly relations, which would make negotiations tough. There would be complicated

tax implications and legal hurdles requiring legions of lawyers and investment

bankers, and, probably, congressional intervention.

Lache’s plan back then was to give the union some of the equity in

the company, which would indeed cause problems. But if the union buys all

the equity in the company, I have a feeling that a lot of those problems go

away.

GM’s workers are presumably proud of their work. How would they feel if given

an opportunity to own their company?

Posted in labor | Comments Off on Could the UAW buy GM?

Look Who’s Winning a Liberty Medal

blog-bono-ngozi-large-.jpg

A rock

star receives the Liberty

Medal yesterday in Philadelphia. With her is some Irish dude.

(Via TED

Blog. Photograph by Jim Young/Reuters/Landov.)

Posted in development | Comments Off on Look Who’s Winning a Liberty Medal

Apple Solves International Roaming Problem

Thank you, Apple!

The iPhone is a great product, but one of its biggest weaknesses was the fact

that it was incredibly easy to run up enormous

cellphone bills if you use

the data services abroad, either inadvertently or on purpose. What iPhone

users needed was a way to allow wifi to be used (that’s free), allow phone calls

to be made (you know when you’re on the phone, and how much phone calls cost

when you’re abroad), but not allow the exorbitant data plan to be used

(which would charge you $20 to download a single web page, if you weren’t on

a wifi network).

Well, the iPhone 1.1.1 update is now out, and that’s exactly what we’ve been

given: an option to turn off EDGE roaming. Engadget has the screenshot.

Now to spread the word. If you travel abroad for any reason, turn EDGE

roaming off. Do not even think about turning it on. And you

should be fine.

Update: I just installed 1.1.1 myself. It’s actually

better than I thought: rather than a cryptic button talking about "EDGE

Roaming", there’s a simple button called "Data Roaming". Underneath

it, in plain English, is this:

When abroad, turning off Data Roaming may avoid roaming charges when using

email, web browsing and other data services.

Better yet, the default position for Data Roaming is off, not on.

Posted in technology | Comments Off on Apple Solves International Roaming Problem

Adventures in Aggregation

The entire econoblogosphere,

in one place.

Posted in technology | Comments Off on Adventures in Aggregation

Proof that Manhattan is Still the Capital of the World

ft.jpg

visa.jpg

Posted in Media | Comments Off on Proof that Manhattan is Still the Capital of the World

Econowisecrack of the Day

Tyler

Cowen:

Mark Broski, a loyal MR reader, asks:

If you woke up one morning and said to yourself, "You know what my

problem is? My damn discount rate is too high." What would you do,

if anything, to lower it?

Maybe Mark should lower his discount rate later, not now, thus solving the

problem right away.

Posted in economics | Comments Off on Econowisecrack of the Day

The Economics of A-Rod

I neither know nor care much about baseball, which means I don’t read Will

Leitch’s Deadspin. I did, however, read his

excellent article in New York magazine about what’s

going to happen to Alex Rodriguez’s contract at the end of this season.

Now the obvious outcome is that A-Rod will stay with the Yankees, even though

he does have an option to sign elsewhere. As I see it, there are three really

good reasons why he’ll stay:

  • The Yankees have a habit of winning the World Series.
  • The Yankees have more money than anybody else.
  • The Yankees have a $29 million headstart on any other bidder: that’s the

    amount of money they’ll be subsidized by the Texas Rangers towards A-Rod’s

    salary for the next three years of his contract.

And yet. There seems to be a feeling that A-Rod might well decamp elsewhere

at the end of this season, due largely to amorphous things like the absence

of an aggressive tabloid press in Chicago, or the fact that he still hasn’t

been fully accepted by the Yankees fans or players as a true member of the team.

So is this whole article an attempt by A-Rod’s agent, Scott Boras, to increase

the FUD

surrounding his star player, and thereby maximize the size of his next contract

with the Yankees? Or are there aspects of sports economics which I’m not even

close to understanding? Calling Allan Kreda!

Update: An anonymous commenter makes an excellent

point in the comments. For all the hundreds of millions that A-Rod gets paid

in salary, his total income is much higher still, thanks to sponsorships and

endorsements and the like. The better A-Rod’s public image, the more he’s worth

on Madison Avenue. So if his public image suffers in New York, it might well

make sense for him to move, even if the Yankees can offer more money.

Posted in sports | Comments Off on The Economics of A-Rod

John Carney Doesn’t Like Shareholder Democracy

How much do you care about shareholder democracy? John Carney, of Dealbreaker,

cares a lot. He’s a fan of people like Lynn

Stout and Larry

Ribstein, who say that shareholder democracy is a very bad idea, and he’s

willing to say so at great length: 1,360

words yesterday, and 1,026

words today, all of which are devoted to the idea that giving shareholders

greater control of managers is something which, counterintuitively, will work

against the interests of most individual shareholders.

I IMed Carney to try to understand what all the fuss is about. As ever with

Market Mover interviews, the interviewee gets the last word.

Felix Salmon: You are very opposed to shareholder democracy, ostensibly because

the interests of ordinary investors can be at odds with those of special interests.

But how often do those two interests diverge in practice? Can you give me some

obvious examples? By contrast, the interests of managers and owners nearly always

diverge, since the managers pay themselves with owners’ money. Doesn’t it make

sense to give the owners some actual power over managers?

John Carney: Two examples are in my first piece.

John Carney: Union dominated pension fund buys stake in company, negotiates

its workers pay with managers.

John Carney: Activist demands dividend which damages company’s long term prospects.

Felix Salmon: And in practice, not in theory? We can all come up with a parade

of horribles in theory on either side of the argument

John Carney: Well, arguably the second one happened with Carl Icahn already.

John Carney: But, in practice, union dominated pension funds have conflicts

of interest with ordinary investors right now. They just can’t act on them because

proxy rules make it difficult.

Felix Salmon: On the other hand, I don’t see ABN shareholders complaining about

Christopher Hohn

John Carney: Sometimes activists can be helpful, that’s definitely true.

John Carney: But that’s accidental.

Felix Salmon: Wait, when an activist investor is helpful, that’s accidental?

John Carney: Sure. It’s accidental that the interests of two different shareholders

with different motivations become aligned. Activists are active to make money

for themselves. Sometimes their interests align with other shareholders. Sometimes

they don’t.

Felix Salmon: OK, you’ve lost me. It seems obvious to me that a higher share

price is nearly always in the interest of nearly all shareholders.

Felix Salmon: Activist or not.

John Carney: Activists argue for more than a higher share price. They can argue

for dividends or a quick sale of assets. Either of these might not be optimal

use of money, and might deprive shareholders of value that can be realized longer

term.

Felix Salmon: and they often want a level of leverage which smaller shareholders

might be uncomfortable with

John Carney: that’s true too.

John Carney: One of my points is that there is no such thing as a generic shareholder.

Shareholders are a diverse class.

Felix Salmon: but would you not agree that in most big companies, management

has effectively captured the board?

John Carney: Hmmm. I’m not sure, actually. I think the situation is a lot better

now than it has been in the past. Lots more independent directors, etc. etc.

And shareholders are pretty quick to oust underperforming management teams.

John Carney: What’s the average CEO tenure these days?

John Carney: It’s gotten a lot shorter.

John Carney: In any case, to the extent that management capture is still a problem,

I’m not convinced that special interest shareholder capture wouldn’t be worse.

John Carney: For one thing, there are legal checks on the activities of managers

that don’t check the activities of special interest shareholders.

Posted in governance | Comments Off on John Carney Doesn’t Like Shareholder Democracy

RBS Acquisition of ABN Amro More Likely Than Ever

In the battle for ABN Amro, the consortium of RBS, Fortis, and Santander has

now clearly bested its rival, Barclays. The RBS consortium’s bid is about 20%

higher than Barclays’ bid, thanks largely to Barclays’ sinking stock price,

and Barclays now looks much more like a takeover target itself than a serious

suitor for the Dutch giant.

And so it is that the RBS consortium, having seen off Barclays, is now turning

its attention to the one last obstacle standing in its way: ABN Amro’s shareholders.

They might prefer the consortium’s bid to Barclays’ bid, but what if a lot of

them prefer no bid at all, and would rather their bank remain independent? At

the moment, the consortium requires 80 percent of ABN shareholders to accept

its offer for it to be declared unconditional, which means that an apathetic

20%, simply not voting at all, could throw a nasty spanner in the works.

So the 80% figure might not last long: the consortium announced

today that it might accept just a simple majority of acceptances. The move

makes the consortium’s bid seem a little bit weaker than it was before, but

that’s not a major worry: after all, to all intents and purposes the consortium

is now the sole bidder for ABN Amro. There might be a small question mark over

getting 80%, while 50% is a foregone conclusion, thanks to the number of arbitrageurs

in the stock.

Posted in banking, M&A | Comments Off on RBS Acquisition of ABN Amro More Likely Than Ever

The Greenspan Irony

Congratulations are due to Alan Greenspan, whose book still sits atop the Amazon

bestseller list, and which sold, the

WSJ says today, 129,000 copies in its first week. Or, to be precise, it

sold at least 129,000, and probably more like 172,000, since Nielsen

BookScan tracks about 75% of retail book sales in the US.

It seems, indeed, that Greenspan and his publishers are actually profiting

from the credit-market turmoil and the housing bust which may or may not be

the natural and disastrous consequences of Greenspan’s loose monetary policy.

If we were still in the middle of the Great Moderation, and the markets were

still awash in liquidity, I can’t imagine that Greenspan’s book would have got

nearly as much attention as it did.

Posted in fiscal and monetary policy, Media | Comments Off on The Greenspan Irony

Metaphor of the Day

Nouriel Roubini:

The literally plunging figures in new home sales – now down another 8.3%

in August alone, the lowest level in seven years – are the last nail in the

coffin of a housing market that was comatose until now and is now effectively

dead. The only things alive and moving in the housing market today’s are the

undertakers taking care of a zombie housing market and carrying the coffin.

Posted in housing | Comments Off on Metaphor of the Day

Morgan Stanley’s Email Problem

Morgan Stanley has been fined

$12.5 million for not providing emails. The Wall Street journal also notes

that the company was also fined $15 million in 2005 for not providing emails.

It doesn’t note that Morgan Stanley was ordered

to pay Ron Perelman $1.45 billion in 2005, ultimately because it was so

bad at providing emails:

In an unusual ruling in March, the judge hearing the case, Elizabeth T. Maass,

ordered the jury to take as granted that Morgan Stanley and Sunbeam acted

together in the fraud, because of what she called obstructionist behavior

on the part of Morgan Stanley, who she claimed was holding back e-mail evidence.

Interestingly, a large part of Morgan Stanley losing that case (which later

rose to $1.57 billion but which was ultimately overturned

on appeal, although it’s still being litigated) was that the company fired

its lawyers, Kirkland & Ellis, just before the trial began – and

then wouldn’t tell the judge why, leading the judge to refuse a motion giving

the bank’s new lawyers more time to prepare their case.

Something to ponder, next time you wonder whether

you should fire your lawyer. I wonder, what are the odds that by now

Morgan Stanley has finally got its email act in order? It’s weird: when I started

writing about banks and the internet back in 1995, Morgan Stanley was very much

ahead of the curve, both in terms of investment ideas and in terms of its own

IT expenditure. I wonder what happened.

Posted in banking, law, technology | Comments Off on Morgan Stanley’s Email Problem

When Bonuses are Contraindicated

Should companies pay out performance-related bonuses? It turns out that such

payments might well be counterproductive:

The logic of bonus payments itself seems straight-forward: by paying a bonus

on the condition of success, the successful outcome becomes more attractive

to the agent and he puts in more effort to increase the likelihood of success.

But do bonus payments necessarily increase effort and the likelihood of success?

Here, I examine this question and find that the answer is “no.”

The logic is quite clever. Let’s say I get a fixed bonus if I manage to achieve

a certain result, and that working a lot harder will make that result a bit

more likely. Then I have two choices. The first choice is that I work a lot

harder, in which case the probability of getting a successful result goes up

– a bit. The cost of this choice is high: it involves a lot of hard work.

The benefit is low: a relatively small increas in the likelihood of me receiving

my bonus.

On the other hand, I can choose to work less. The cost of this choice is low:

there’s now a slighly smaller chance that I will receive my bonus. But the benefit

is high: lots more leisure, and a substantial chance of receiving the bonus

without actually doing any extra work for it, which is nice.

Chris Dillow applies

this theory to the real world of CEOs:

I suspect this might be true for quite a few CEOs with stock options. They

might figure:

It’s going to be really hard work to genuinely improve this business.

And even if I do so, it might not raise the share price by much, because

equity analysts are stupid buggers and the company’s share price depends

upon stock market conditions. I’ll just talk a good game and hope

the market rises – as it usually does over time – taking the company‘s

share price up with it. If I must do something, I’ll increase the

gearing of the company by buying back shares. That’s easy to do, and

it’ll increase the share’s beta and hence its chances of the

share price rising a lot if the market rises.

Posted in pay | Comments Off on When Bonuses are Contraindicated

The Search for Consistently Uncorrelated Assets

Are you worried about your stock-market exposure? Buy into something even more

bubblicious: natural resources! That seems to be the message of a

recent article in the Journal of Financial Planning by William Coaker. Coaker

went searching for one of the holy grails of the investing universe: low correlation.

(Remember, “uncorrelated

assets are now correlated".)

The dataset he used goes from 1970 only until 2004, so it might well miss out

some of the more recent volatility in correlation. But even stopping at 2004,

Coaker concludes that it’s not enough to invest in uncorrelated assets; you

have to invest in consistently uncorrelated assets. And if you want

a consistently uncorrelated asset to offset your US equity exposure, the best

thing he can find for you is natural resources.

Natural resources have had a correlation of less than .20 to all 17 other

assets in this study, with the highest being just .19, for both small growth

and small value. Natural resources have had the lowest average correlations—and

the most consistently low correlations—to every asset in this study,

including every category of stocks, bonds, and alternatives. Hence, natural

resources have provided more diversification benefits than every other asset

in this study. Of special note, natural resources have had a negative correlation

83 percent of the time to U.S. bonds, due to their inverse relationship to

inflation.

I would dearly love to see how that correlation has held up since 2004, though.

All good things – including low correlations – must come to an end

at some point.

(Via World

Beta, via Abnormal

Returns)

Posted in investing | Comments Off on The Search for Consistently Uncorrelated Assets

Something Smelly at the Fahey Fund

Michelle Leder points

out that the Fahey Fund’s web design

leaves something to be desired, and might have tipped off investors to the

sketchiness of the operation. She might have added that the email address

for the fund manager was bigcheese@faheyfund.com. As a general rule, it’s probably

not a good idea to entrust your millions to a person who refers to themselves

as any kind of dairy product.

Posted in hedge funds | Comments Off on Something Smelly at the Fahey Fund

An Interactive Guide to the Econoblogosphere

Have at it.

Posted in Media | Comments Off on An Interactive Guide to the Econoblogosphere

Why 2-and-20 is Here to Stay

So here’s the weird thing about that

Citigroup survey

of pension-fund managers. Apparently the notorious 2-and-20 fee structure is

doomed, even though the fund managers are going to increase their allocation

to alternative investments:

Almost 60% of managers surveyed indicated that the 2/20 fee structure was

unsustainable for private equity firms and almost 80% indicated that the fee

structure was unsustainable for hedge funds. Having said that, almost 70%

of US managers indicated that they are willing to pay the typical fee structure

if the alternative manager’s performance warrants…

About 85% of pension managers will increase their allocation to alternatives

over the next 3 years. Additionally, the alternative asset allocation within

pension funds will approach 20% (vs. 14% currently) over that same time period.

The actual expected increase in alternative investments is 35%: from 14.4%

of funds under management to 19.4%. So why on earth do 91% of European pension

fund managers think that the 2-and-20 structure for hedge funds won’t last another

five years? It’s lasted much more than that even as the number of hedge funds

has exploded. Now that the inevitable consolidation is beginning in the hedge-fund

industry, I see absolutely no reason to believe that anybody is going to move

away from 2-and-20 any time soon.

But what about Mohamed El-Erian’s move to Pimco, where he’s going to beef up

the west coast giant’s presently nonexistent alternative-investments arm? Surely

he won’t be charging 2-and-20?

No, he won’t, but (a) he will be investing in other hedge funds which do

charge 2-and-20 (at least to non-Pimco clients); and (b) he’s Pimco, and Pimco

tends to be an exception to many rules.

For the time being, the most successful hedge funds continue to be those which

charge more than 2-and-20, not less. So long as fees are perceived

to be a sign of ability, no one’s going to start discounting.

Posted in hedge funds | Comments Off on Why 2-and-20 is Here to Stay