Felix Salmon

Rupert Murdoch is Enjoying Himself

Posted on June 28, 2007 by Felix

Sometimes you’ve just gotta love Rupert Murdoch: a man who

seems to be able to hype a takeover campaign as well as Apple can hype a product

launch. Here he is talking

to Time’s Eric Pooley, and cocking a snook at the overstuffed

shirts of New York’s Journalistic Establishment.

“When the Journal gets its Page 3 girls, we’ll make sure they

have MBAs.”

The difference between Murdoch and someone like Arthur Sulzberger,

the proprietor of the New York Times, is that Murdoch clearly loves his job,

loves newspapers, and loves to enjoy himself while running a massive media company.

As a result, his papers are generally a joy to read. The NYT and the WSJ and

other pillars of the US establishment, by contrast, are so self-important that

they become dry and humorless: the journalistic equivalent of oat bran.

Murdoch understands that in order for newspapers to survive in the 21st century,

they will have to be something their readers want to read. The businessman

who dutifully subscribes to the WSJ is an anachronism, but if you put unique

and high-quality journalism online for free, where the whole world has access

to it, you can create a formidable brand. And Murdoch’s certainly thinking along

those lines.

"A great, great newspaper with big, iconic names, outstanding writers,

reporters, experts. And then you make it free, online only. No printing plants,

no paper, no trucks. How long would it take for the advertising to come? It

would be successful, it would work and you’d make … a little bit of money.

Then again, the Journal and the Times make very little money now."

The money, of course, would come from a WSJ-branded TV station: the newspaper

itself would provide the brand.

If anybody is capable of reinventing the stodgy world of US broadsheet journalism,

and making it relevant and vibrant in the decades to come, then Murdoch is.

I’m looking forward to seeing what he’ll do.

(Via Kedrosky)

Posted in Media, publishing | Comments Off

Unpacking the Risks in the CDO Market

Posted on June 28, 2007 by Felix

Saskia

Scholtes and Gillian Tett have a long piece in the FT on risks in and to

the collateralized debt obligation (CDO) market – the market which seems

to be the center of attention and fears these days, in the wake of the Bear

Stearns brouhaha. There are some good points made in the piece, but I think

it’s worth teasing out exactly what the different risks in the CDO market are,

because even the excellent Tett is failing to make some very important distinctions.

First, there’s the risk that holders of subprime mortgages will default
on their loans. This is a known and relatively easy to quantify risk. Subprime

mortgages issued in 2005 and 2006 already have high default rates, and those

rates are likely to rise even higher when the mortgages reach their second

birthday and higher adjustable rates start kicking in. The problem is that

the connection between subprime default rates, on the one hand, and CDO valuations

and default rates, on the other, is so complex that it’s very difficult to

say in a simple sense that a rise in mortgage defaults will lead to a rise

in CDO defaults. It’s worth remembering that the key risk in the market for

any mortgage-backed security is not default risk but prepayment risk, and

that a high mortgage default rate, in and of itself, is not necessarily particularly

worrisome from the point of view of a CDO holder.
Second, there’s the risk that CDO tranches, especially the riskier equity
tranches and the ones with relatively low credit ratings, will start to default.

It’s very unclear, to me at least, whether this has happened yet, but I suspect

that most of the worries are that it might happen in the future. A key problem

here is one of transparency: with many CDOs investing largely in other

CDOs, it’s very difficult often to get a handle on what the underlying cashflows

are and how likely they are to be impaired.
Third, there’s the discount which investors are currently demanding in order
to buy illiquid securities with precious little transparency. There’s talk

in the market that triple-A rated CDO tranches – which, we can reasonably

assume, are very unlikely to actually default – are getting bids at

270 basis points over Treasuries, or more. That huge spread is not a credit

spread; rather, it’s a good old-fashioned wide bid-offer spread on extremely

illiquid securities. CDOs are similar in some ways to private equity, in that

they tie up money for a long period of time and hope to provide excess returns

over that time. They’re not designed to be instruments which can

be liquidated easily or quickly. If investors start being forced to liquidate

their CDOs, then the price they receive might well be much lower than the

actual credit risk on those CDOs might suggest.
Fourth, there’s what used to be called rollover risk. If investors start
liquidating their CDOs, that means there’s going to be a pretty large supply

of cheap CDOs on the secondary market. In turn that means that there’s going

to be much less demand for expensive CDOs on the primary market. And the steady

stream of billions of dollars which has been flowing until now from CDO investors

all the way, ultimately, to private equity shops, homeowners, and other consumers

of credit will dry up. This is the credit crunch that many people are so worried

about. And it can happen even if CDOs don’t get liquidated en masse,

if investors simply lose their appetite for new ones.

These four risks form a nice little circle. Subprime defaults can, in theory,

pass through into defaults on CDO tranches. That, in turn, can, in theory, trigger

CDO liquidations. That, in turn, could mean the amount of liquidity in the credit

markets drying up. And that, in turn, will mean that subprime borrowers find

it much harder to refinance – thereby increasing the chance that they

will default.

But while all the risks are real, the linkages between them all are far from

clear, and the different risks don’t necessarily cascade onto and exacerbate

each other in this way. They might – or they might not. If investors turn

out to have reasonably strong stomachs, they might not want to liquidate at

prices well below their entry points. And CDOs themselves, even the ones based

on subprime mortgages, might not default nearly as much as homeowners. And without

the passthrough mechanism of risks two and three, the vicious cycle loses a

lot of its teeth.

So there is cause for concern, to be sure. But there isn’t cause for panic.

Posted in bonds and loans | 2 Comments

CDO Scaremongering, Ebola Edition

Posted on June 28, 2007 by Felix

Tim Price is some

kind of genius:

The role of the rating agencies has now been called into question. Leading

industry analysts suggest that the agencies have failed to disclose the true

risk of CDOs, which are a type of sub-strain of the Ebola Zaire virus. A typical

CDO causes an investor’s internal parts to liquefy – typically

during a broader-based market crisis – and then detonate violently. Holders

of the investment grade portion of CDOs, rated ‘Super Lovely’

by agency Duff and ‘Angel Delight’ by rival Substandard and Poor,

are deemed only moderately likely to have their major organs forcibly removed

by anonymous surgeons. Holders of second-tier ‘Mezzanine’ tranches,

rated ‘Ocean breeze’ by Duff and ‘Fields of soft, waving

grass’ by Poor, run a slightly higher risk of holders being tossed over

a cliff onto jagged rocks. The ‘Equity’ tranches, hitherto variously

rated ‘Piquant’ and ‘Saucy’ carry a fairly high risk

of holders having their body parts crushed with small hammers and then being

ripped apart by choreographed attack dogs.

Go read the whole thing. Right now, there’s only one story to be told in the

financial press: insufficient regulation in the subprime mortgage market →

delinquency, default, and foreclosure → Subprime Meltdown → massive

deleveraging → a self-reinforcing credit crunch, a rash of corporate defaults,

and the end of the world as we know it. Or something along those lines.

In reality, credit spreads haven’t widened out very much; the Bear Stearns

hype seems to have been overblown;

there’s still huge amounts of liquidity in the loan market (if not quite as

much as there was a few months ago); and the credit bubble seems on track to

deflate gently rather than burst disastrously. Of course, it’s always possible

that things will go horribly pear-shaped from here on in. Indeed, sooner or

later, something bad is bound to happen: it’s a statistical inevitability. But

right now, the doom-mongers are in dire need of a Tim Price skewering like this.

Thank you, sir!

(By the way, talking of doom-mongers, the incomparable Nouriel Roubini

is today talking about "$100

billion plus of losses for banks, financial institutions, hedge funds and

investors once these CDOs and subprime mortgage backed securities are marked-to-market".

$100 billion, as Michael Milken reminded

us in April, is the amount that Intel stock alone fell in one day

during the dot-com bust. Or, to use a present-day example, it’s less than one

tenth of China’s foreign exchange reserves. Let’s keep things in perspective

here, people.)

Posted in bonds and loans | Comments Off

How to Help the Bottom Billion

Posted on June 27, 2007 by Felix

Niall Ferguson reviews

the new book by Paul Collier, The

Bottom Billion, in Sunday’s NYT Book Review, and I’m not sure what

to make of it. Ferguson explains Collier’s thesis that most of Africa’s problems

stem from civil wars, and goes on to talk about Collier’s support of "foreign

interventions in failed states". Then, however, he retreats:

It would be wrong to portray Collier as a proponent of gunboat development.

In the end, he pins more hope on the growth of international law than on global

policing. Perhaps the best help we can offer the bottom billion, he suggests,

comes in the form of laws and charters: laws requiring Western banks to report

deposits by kleptocrats, for example, or charters to regulate the exploitation

of natural resources, to uphold media freedom and to prevent fiscal fraud.

We may not be able to force corrupt governments to sign such conventions.

But simply by creating them we give reformers in Africa some extra leverage.

Laws and charters? This is what Ferguson means when he says

that Collier’s solution to the problem of African poverty "involves more

— much more — than handouts"?

I should probably read the book to learn more: after all, it has been blurbed

by an very impressive list of individuals, including Ernesto Zedillo,

Nick Stern, George Soros, Martin Wolf,

Nick Kristof, and Larry Summers. Wolf seems

to agree with Ferguson, saying

that the book shows "how far western governments and other external actors

are from currently giving the sort of help these countries desperately need."

Maybe the fact that neither Ferguson nor Wolf is capable of reducing Collier’s

book to an easy-to-understand slogan is testament to its sophistication and

importance. The problem of Africa is not an easy one, and if there are solutions,

they won’t be easy either. I just hope that somewhere in the book can be found

some kind of faith in Africa’s abilities to help itself, maybe given slightly

improved initial conditions. Ultimately, "what can be done about the poorest

countries," to quote the books subtitle, is going to have to be done by

and within the countries themselves: development, like democracy, is one of

those things which is very, very difficult to export.

(Via Thoma)

Posted in development | Comments Off

A Plea to Jamie Dimon for Great Architecture

Posted on June 27, 2007 by Felix

Memo to JP Morgan CEO Jamie Dimon: The tower you’re proposing

to build at the World Trade Center site, designed by Kohn Pederson Fox, is a

monstrosity

which will drage down both your reputation and the WTC site as a whole. Understood

that the site is a difficult one. And yes, big trading floors will necessitate

a big cantilever over the St Nicholas church. But here’s the thing: cantilevers

don’t need to be this ugly. In fact, most cantilevers are really quite

beautiful and impressive.

So after reading David Owen’s piece on Arup’s Cecil Balmond

in the last New Yorker (slide show here),

I have a proposal for you: fire KPF, who clearly have the imagination and verve

of a flaccid haddock, and hire Rem Koolhaas/OMA instead. You

want a cantilever? Check

this out. Come up with something half as impressive as that, and you’ll

leapfrog the HSBC and Bank of China towers in Hong Kong to nab for yourself

the status of being able to call home the greatest bank headquarters in the

world.

It’s quite sad that for all Wall Street’s wealth, no New York bank has in living

memory managed to build an architecturally distinguished building. Indeed, many

bank buildings are breathtakingly ugly, including 85 Broad Street (Goldman Sachs)

and 390 Greenwich Street (Citigroup). Don’t follow in those dismal footsteps,

Jamie. Rather, be bold!

Posted in architecture, banking | Comments Off

Propping Up the Blackstone Share Price

Posted on June 27, 2007 by Felix

Many thanks to Calculated

Risk for explaining the finer points of the greenshoe option. It turns out

that those 20 million extra Blackstone shares that the lead managers sold

on Monday didn’t necessarily make $234 million for Steve Schwarzman personally

after all. The point of a greenshoe, it seems, is to help support the price

of the stock if it falls below the offering price – as BX, of course,

did

on Tuesday.

Of course, just because the banks can support the issue doesn’t mean

they are, in fact, supporting it. But if you look at the graph of the BX stock

price since it fell below the $31 level, it does look very – well, horizontal.

There was some volatility at the beginning of both Tuesday’s and Wednesday’s

trading, but then on Tuesday the stock rapidly stabilized just below the $31

offer price, and on Wednesday it stabilized at or slightly above the $30 level.

All of this is consistent with the banks using the proceeds from their Monday

sale of 20 million shares at $31 apiece to prevent the stock from dropping too

embarrassingly. After all, total volume in BX on Tuesday was only 29.6 million

shares, while volume on Wednesdsay was even lower, at 18 million.

Under the terms of a greenshoe operation, the banks can support a stock below

its offering price, but they can’t support it above the offering price. That,

too, is consistent with the fact that BX never seems to have traded above the

$31 level since the minute that level was broken on Tuesday morning.

If the banks are supporting the deal, then I was certainly wrong on Tuesday

when I accused

them of deserting their client. On the other hand, it would mean that Blackstone’s

closing price today, of $29.92 (or 3.5% below the offering price), might actually

be artificially inflated. Which is a little scary, considering that the stock

traded as high as $38 per share on Friday, and has already fallen more than

20% from that level over the course of four trading sessions. It would also

mean that the banks early on Tuesday decided that there was far too much selling

pressure at $31 to support the deal there, and decided instead to try to place

a Tuesday floor slightly below the offering price. And a Wednesday floor slightly

below that.

My guess – and it’s only a guess – is that the banks are intervening,

and that when they stop, the share price is going to fall even further. If holders

of BX don’t sell their ~~shares~~ units now, they might regret

their decision in a few days’ time.

Posted in banking, private equity, stocks | Comments Off

Lloyd Blankfein, Man of the People

Posted on June 27, 2007 by Felix

Goldman Sachs CEO Lloyd Blankfein came

out as a Democrat today, aligning himself with Robert Rubin

and Jon Corzine rather than with Hank Paulson.

I guess that means he’s now an automatic front-runner for Treasury Secretary

in any Clinton or Obama administration. But in the mean time, what does being

a Democrat mean in practice, as CEO of Goldman Sachs? Evidently, it means being

receptive to the bright ideas of all

your staff, no matter how lowly:

Goldman Sachs sponsors workshops at more than 50 schools giving advice on

resume writing and how to behave in the workplace. (Sample: Always have a

short pitch prepared about your current project, so that you can deliver it

if you ride the elevator with the CEO.)

Remember this, O Goldman interns, next time you find yourself in an elevator

with the big (well, actually quite little) man. That old cliché, the

elevator pitch, is not only accepted but positively encouraged! Now all you

need to do is ensure you share the same elevator bank as him. The rest, surely,

is kismet.

Posted in banking, Politics | Comments Off

Bear Stearns Funds: Is Everything OK Now?

Posted on June 27, 2007 by Felix

Well, that was quick. After throwing the entire financial media (if not the

actual markets) into a week-long tizzy, Bear Stearns seems to have found a way

to stabilize things without committing too much of its own money and without

subjecting its funds’ prime brokers to any losses. Can this really be true?

It’s really

hard to find a good overview of where we’re at with regard to the two Bear

Stearns funds. But on Monday, we started to hear that Bear’s $3.2 billion bailout

of its High-Grade Structured Credit Strategies Fund had been scaled

back to just $1.6 billion, and that the amount of money owed by the High-Grade

Structured Credit Enhanced Leveraged Fund had somehow managed to be reduced

from $7 billion to $1 billion. Now we’re getting official numbers out of Bear,

and it seems that the younger, riskier fund owes

$1.2 billion in total.

You could be forgiven for missing the good news amidst all the quotes and commentary:

the news on the impressive success of the newer fund in reducing its borrowings,

especially, has been buried deep in the coverage – in stark contrast to

the news of its $7 billion in debts when the troubles first started.

And it’s certainly far from clear how Bear managed to reduce the fund’s

borrowings so substantially, without putting in any extra capital itself. Was

there some kind of rocket science going on? Does the fund now have much more

embedded leverage than it did before? No one seems to be asking those questions.

But the chances that Bear’s lenders are going to suffer large losses now seem

to be greatly diminished – unless, of course, they’ve quietly accepted

some large losses already, and just not told anybody. Does anybody have any

clarity on all of this?

Posted in banking, bonds and loans, hedge funds | Comments Off

Punishing Short-Sellers

Posted on June 27, 2007 by Felix

If you’re a CEO and you’re upset that your stock is going down, never, ever,

blame short sellers for your woes. No one will sympathise, and the financial

press will have a field day tearing you apart. (See,

as a prime example, Overstock CEO Patrick Byrne.)

Generally, short-sellers are an important part of any efficient market, and

regulators should embrace them rather than punishing them. So what is the SEC

doing fining UK hedge fund GLG Partners $3.2 million over illegal

short-selling? (Reader Matthew Tubin sent me the link and

asked what the difference is between legal and illegal short-selling.)

The SEC has a huge set of rules regulating short-selling. It’s called Regulation

SHO, and you’re more than welcome to read all 30,000 words of it here.

Most short selling is allowed, but some short-selling is not allowed, and if

you’re an active trader in the markets it definitely behooves you to know the

difference. In the specific case of Rule

105, which GLG is accused of violating, you can’t short a stock into a public

offering, and then cover your short with shares you receive in that offering.

Can you short a stock into an offering, buy stock in the offering, and then

unwind both positions in the market at the market price? I have no idea: you’d

have to ask a lawyer about that one. But what does seem clear is that participants

in the market need to have a very detailed knowledge of the arcana of Regulation

SHO: I do believe GLG when it says that "it did not understand the rule".

In general, time and money spent worrying about compliance is wasted time and

money: it’s an inefficiency in the market. And rules against short selling in

general don’t seem to really help market efficiency and transparency very much

– if anything, quite the opposite. So while I have little sympathy for

GLG – they’re certainly big enough to know what they’re doing –

I also wonder whether this kind of fine serves any useful purpose.

Posted in hedge funds, stocks | Comments Off

Carlyle MD: The Blackstone IPO was “Highly Successful”

Posted on June 27, 2007 by Felix

With Blackstone stock languishing below its offering price, few people would

count the private equity firm’s IPO as a smashing success. But among

them, it would seem, is Carlyle Group managing director Jason Lee:

"The Blackstone IPO was highly successful. We are certainly evaluating

that option as well," said Jason Lee, Carlyle’s managing director and

head of the group’s real-estate division in Asia…

"Clearly we have to consider [an IPO] in order to be competitive,"

Mr. Lee said. "Our peers are obviously going to be accessing a huge amount

of capital in the public market."

On the face of it, this makes little sense. A quick glance at Blackstone’s

share price is enough to show that the IPO was not "highly successful"

in any normal sense of the term, unless a highly successful IPO is one where

the firm’s founders make billions while public investors lose money.

And the idea that private-equity firms need to raise equity capital "in

order to be competitive" is also a bit weird. The vast majority of the

proceeds from Blackstone’s IPO are going not into the company, where they can

be used for future deals, but rather straight into the pockets of the firm’s

principals. The amount of permanent equity capital that Blackstone is raising

for its own corporate use is tiny, compared to the magnitude of the funds it

manages.

So what on earth is Mr Lee talking about? Given that the simplest and most

obvious answer is often the right one, I’m going to go with the theory that

he wants to become a bona fide squillionaire himself, just like Pete

Peterson and Steve Schwarzman. And right now, the

easiest way to do that is to sell his company’s future profits at a vast multiple

to the investing public.

Posted in private equity, stocks | Comments Off

Murdoch: “Everything is Done”

Posted on June 27, 2007 by Felix

Reuters managed to snag

a quick interview with Rupert Murdoch in Warsaw, of all

places, where he’s meeting the prime minister (natch) and relaunching a television

station. "Everything is done. We are just waiting for a final approval

of the Bancroft family," Murdoch said – and given the twists and

turns this bid has been through, I’m inclined to believe that when Rupert says

everything is done, then everything is, indeed, done. The interview cleared

up all the other key questions, too:

"The final approval is in the next two, three week’s time or not at

all," he said.

Asked if his company, News Corp., planned to raise its bid, Murdoch said:

"No."

Given all the fuss that the Bancroft family has made over the issue of editorial

independence, I can’t see how they’re going to be able to ask for more money

to boot – especially with no interest in Dow Jones from anybody other

than News Corp.

Matthew

Karnitschnig of the WSJ says that a large chunk of the family’s votes already

seems to be sewn up:

Some in the family believe that Denver law firm Holme Roberts & Owen

LLP, which oversees trusts with 8.9% of the overall voting power, will vote

in favor of a deal. If that holds true, Mr. Elefante would need to deliver

less than half of the family’s remaining vote to guarantee a sale.

With no reports of hardened opposition to the deal within the Bancroft family,

it’s hard to see them blocking a deal now.

Posted in Media | Comments Off

Two Views of Congestion Pricing

Posted on June 26, 2007 by Felix

Gumby Fresh

has an interesting twist on congestion pricing today, riffing off a NYT article

about subway

congestion. The question: Does subway congestion make congestion pricing

more problematic, or does it, on the other hand, make congestion pricing more

necessary?

The first view is encapsulated in the article, and it basically boils down

to this:

Congestion pricing involves moving the public from cars and onto public

transport.

But the subway system is already running at capacity.

Therefore, congestion pricing has big problems.

That’s not how Gumby sees it, however. In fact, he says,

Congestion pricing, as it developed in London, though less so in Singapore,

starts with the assumption that large and mature cities have very little room

to expand their subway/rail/light rail systems.

Congestion pricing, on this view, is an attempt to get people out of the subway,

and onto buses. But no one is going to take the bus if the roads are ridiculously

congested. So you need to clear up space on the roads, by charging cars to enter

the congested zones. Think of it like this:

The subway system is running at capacity.

To reduce the strain on the subways, bus ridership will have to go up.

But buses are dreadful, because of congestion.

So we have to implement congestion pricing to reduce congestion and increase

bus ridership.

It has worked in London, but I have to admit that it’s going to be harder to

make it work in New York. One important reason why is that New York sets the

fare for a bus ride at exactly the same as the fare for a subway ride. That

gives no incentive at all to move from the subways to the buses: either bus

fares need to come down, or subway fares need to go up. And then, of course,

the number of buses on any given route has to increase substantially, so that

buses arrive at least as frequently as subways.

All you need then is a good network of bus lanes, a substantial reduction in

Manhattan traffic, and a wholesale change in public attitudes towards riding

the bus. Easy!

Posted in cities | Comments Off

Blackstone Deserted By Its Own Bankers

Posted on June 26, 2007 by Felix

What do equity underwriters do? Well, in the most basic definition of the term,

they underwrite a stock offering – that is, they pledge to buy shares

at a certain price if the public turns out not to have any appetite. Essentially,

they’re putting their corporate reputations on the line, and saying that a certain

stock is worth what they say it’s worth, and that if push comes to shove they’ll

put their money where their mouth is and buy it at that price.

Which means that if you have seventeen different underwriters on a

deal, and they all say that a certain stock is worth (say) $31 per share, there’s

bound to be a pretty strong bid at that level. Right?

Er, not so much. If you look at how BX has been performing

today, the $31 level seems to be more of an intraday cap than an intraday floor.

The banks are more than happy to sell stock at that price – indeed, they

exercised their greenshoe yesterday and raised

another $620 million for Blackstone (of which, naturally, they’re keeping

$22 million for themselves).

If the banks won’t support a deal on the day after they exercise a greenshoe,

how on earth do they justify their fees, no matter how "discounted"

the 3.6% rate is? And what point could there possibly be in hiring everybody

and their mother to help sell the deal? Yes, the stock markets in general have

been falling, but nothing like as much as Blackstone has been: it’s now almost

30% lower than the first price it traded at on Friday.

This IPO is bad

news for any other private-equity shop looking to go public, yes. But it’s

also bad news for Wall Street, which has now revealed just how quickly it’s

willing to desert a client whose offering isn’t quite going according to plan.

Posted in banking, private equity, stocks | Comments Off

News Corp-Dow Jones: It’s All Over Bar The Voting

Posted on June 26, 2007 by Felix

The ink isn’t dry, but if the news

from CNBC is to be believed, the uncertainty over the future of Dow Jones

is over. After

taking over the negotiations last week, the board of Dow Jones seems to

have come to an agreement with Rupert Murdoch over the biggest sticking point:

the editorial independence of the Wall Street Journal. I’m sure there are lots

of family members who don’t like it, but at this point the writing’s on the

wall.

Utterly failing to have any effect on the negotiations was the NYT’s damp squib

of a two-part series on Murdoch, which met with a pitch-perfect

response from News Corp:

“News Corp. has consistently cooperated with The New York Times in

its coverage of the company. However, the agenda for this unprecedented series

is so blatantly designed to further the Times’s commercial self interests

— by undermining a direct competitor poised to become an even more formidable

competitor — that it would be reckless of us to participate in their

malicious assault. Ironically, The Times, by using its news pages to advance

its own corporate business agenda, is doing the precise thing they accuse

us of doing without any evidence.”

It’s still conceivable that a minority of Bancrofts and Ottaways, vacillating

about how they will go down in history, will attempt a rear-guard action to

block the sale of Dow Jones to News Corp. In principle, holders of just 9.1%

of Class B stock could

block a sale, and it might be possible to find that many refuseniks if there

was a concerted campaign. But such a campaign would destroy what little semblance

of family unity there is left, to the benefit of no one.

Which means, I suspect, that there are champagne corks popping at 1211 Sixth

Avenue right around now.

Posted in Media | Comments Off

iPhone: Cheaper Than We Could Have Dared to Hope

Posted on June 26, 2007 by Felix

Great news today on the iPhone front. I’m buying one, by the way, whatever

the reviews say, if only because I’ve officially and finally given up on ever

being able to get my Treo to sync with my MacBook. But I was worried about having

to switch to ~~Cingular~~ AT&T, a company with which I’ve had

bad experiences in the past, and which has generally had significantly higher

prices than my present carrier, T-Mobile. But to my astonishment and delight,

AT&T’s

iPhone plans are decidedly reasonable:

Customers can pay as little as $59.99 a month for 450 minutes of cellular

time or as much as $99.99 a month for 1,350 minutes. The middle plan costs

$79.99 a month and includes 900 minutes… All plans include unlimited data

services, 200 text messages, and rollover minutes. There is also a $36 activation

fee.

My present basic plan with T-Mobile costs $40 for the phone calls, $20 for

the unlimited data, and $3 for the text messages – more than the basic

AT&T plan. And that T-Mobile package isn’t even offered any more: to get

anything similar today would cost $50

per month just for the unlimited data, plus an eye-popping 20 cents per

minute for all voice calls. What’s more, if you don’t have an iPhone, the AT&T

unlimited data plan costs $80

per month on its own before making a single call.

It seems that AT&T is being very smart here, and offering good-value plans

to iPhone buyers despite the fact that the company has a monopoly on the phone

and could therefore, in theory, charge pretty much anything they wanted. Instead,

they’re taking advantage of the fact that they’re not subsidising the handset,

and bringing their prices down in order to appeal to the widest possible audience.

Posted in technology | Comments Off

The Return of Hans Rosling

Posted on June 26, 2007 by Felix

The Hans Rosling video you’ve all been waiting for is now

live on TED.com.

With the exception of the sword-swallowing at the end, I think it’s actually

not quite as impressive as the

first one. But decide for yourself:

Posted in charts | Comments Off

The Art Trading Fund: Still Doomed to Fail

Posted on June 26, 2007 by Felix

The Art Trading Fund, which seemed

like a bad idea when we first encountered it last month, is going to officially

launch

on July 1, reports Kit Roane. Which seems like another bad idea to me: who

launches anything on a Sunday?

Roane, however, seems willing to give it the benefit of the doubt:

Besides art, hedge funds tracking the market for vintage wine and rare violins

have cropped up recently, while Wall Street traders have been making sport

of arbitrage on everything from fine watches to duck decoys.

"Tracking the market," of course, is basically just another word

for "buying the assets and then heading to the beach," or, even more

simply, "collecting". There are people who collect fine watches

or duck decoys, just as there are people who collect wine or violins. That’s

easy. The Art Trading Fund, by contrast, has set itself a much higher hurdle:

to trade in and out of art while somehow shorting the market as a whole, with

the intention of making money not only when the market goes up but also when

the market goes down.

In that sense, "returns" on the Mei-Moses Fine Art Index are irrelevant:

investors in this fund will expect to make money no matter what happens to Mei-Moses.

And in a much bigger sense, too, Mei-Moses returns are irrelevant: they can’t

be monetized. The index might have gone up by 18% last year, but there’s no

art-tracking instrument you could have bought at 100 on January 1 which you

could have sold for 118 on December 31.

And if you bought a painting at auction for a hammer price of $100,000 on January

1 and then sold it for a hammer price of $118,000 on December 31, you would

end up losing a packet. (If you paid a 12% buyer’s fee and a 10% seller’s fee,

then that would add up to about $24,000 right there.)

Art, contra NYU’s Mitchell Moss, is not an annuity: it pays no annual

dividend and in fact has a negative carry, thanks to insurance and storage costs.

And investors in the Art Trading Fund will be even worse off than collectors,

as Roane explains:

The fund will carry hefty fees—a 2 percent annual management fee and

a 20 percent charge on investment performance—and rapidly buying and

selling the art will drive up transaction costs, since auction houses and

dealers already heavily lard up the process with fees of their own.

Roane even disinters the ill-starred Fernwood Art Investments, the last attempt

to trade in and out of art. He quotes one investor as blaming Fernwood’s demise

on "garden variety human frailty," which is a problem much larger

than Fernwood. The fact is that the art market, more than any other market,

involves the tender stroking and exploitation of human frailties: without human

frailty, indeed, there would be no art at all.

The best art dealers make many millions of dollars by creating value:

they start with an intrinsically worthless layer of petrochemicals on canvas

and then massage the egos and vanities of collectors, stoking demand and raising

prices. The Art Trading Fund, on the other hand, will do none of that, believing

instead that it can jump scientifically in and out of geographical arbitrages

and the like.

It won’t work. Many dealers will make a lot of money by selling to and buying

from the Art Trading Fund. But the fund itself, in the final analysis, is just

another punter to be exploited by art-world insiders. At $40 million, it doesn’t

even count as particularly large, by the standards of today’s collectors who

will happily drop twice that on a single canvas. Still, with a management fee

of 2%, its principals stand to make at least $800,000 a year, all while soaking

up the glamor and flattery of the art world and having their egos massaged by

art-world types. It’s not a bad way to make a decent living – until the

investors get fed up and pull their money out, of course.

Posted in art | Comments Off

Blackstone Falls Below its Offering Price

Posted on June 26, 2007 by Felix

This is bad news for KKR, Apollo, and all the other private-equity firms looking

to go public. Blackstone’s stock is now trading below $31, back where it started

– which means that people who got in at the IPO price are beginning to

lose money, and anybody who bought in the secondary market is seriously underwater.

Yesterday, Under

the Counter said that "the $31 level is a line in the sand that this

suddenly jittery tape does not need to test," and although I’m generally

dismissive of lines, be they on charts or in the sand, I have a feeling he’s

right.

Over the course of just two trading days, Blackstone has lost all of its froth.

Frankly, it was probably priced too high to begin with, considering the tax

bills in the Senate and the uncertain future for leveraged buy-outs more generally

in a world where interest rates are rising rather than falling. But that won’t

be any consolation to the underwriters working on KKR’s IPO. For even if KKR

tries to go public at a lower multiple than Blackstone (and remember, there

are egos at work here, and it’s far from certain that they would do that), the

financial price loves to concentrate on price movements much more than valuations.

And if people think that private-equity stocks only go down, there’ll be precious

little demand for KKR’s or anybody else’s.

Posted in stocks | Comments Off

Will China Prevent the CDO Meltdown?

Posted on June 26, 2007 by Felix

Steve Waldman is looking

at the Bear Stearns situation today with his trademark perspicacity. He

begins with a long but clear version of the conventional wisdom, explaining

that there’s a Wile E. Coyote feel to the CDO market right now and everybody’s

trying their darndest not to look down. But then he throws in a possible deus

ex machina, in the form of China.

Weird as it may sound, it does make sense for Wile E. Coyote not to look down

if he can avoid it. Right now, the CDO market does indeed seem to have fallen

off a cliff, which means that any fund managers jogging along happily are actually

precariously running in mid-air. If they look down – that is, if CDOs

actually start trading at the prices that distressed-asset investors are willing

to pay – then there will be some very nasty bruises in the morning.

But if they just keep on jogging in blithe disregard of the landscape beneath

them, things could improve: the ground, in effect, could come back up to meet

them at some unspecified point in the medium distance. In any case, if the drop

to the bottom of the canyon floor starts getting shallower over time, then the

extent of fund managers’ injuries if and when they finally take the drop might

be mitigated.

And that’s Waldman’s big idea. China, in his view, is going to start a massive

public-works project to raise the valley floor:

Stability and growth remain China’s objectives, and a financial crisis beginning

in New York is every bit as threatening as a stock market crash in Shanghai.

China could not have acted fast, as the US Fed did during the LTCM crisis.

But, so long as only a few funds are in crisis and the unwindings are "orderly",

I think China will find it in its interest to be a "bagholder of last

resort", purchasing a few assets at prices high enough to prevent cascading

markdowns or defaults against margin lenders. Fund investors will still lose

money, but that rarely has systemic implications.

It’s an interesting and hopeful idea. And it certainly makes at least as much

sense as all the acres of speculation

over the future of Bear Stearns in response to a $6 drop in the share price

over recent days. I mean, did anybody notice the $25 drop in the share

pice at the end of February? I don’t recall the same kind of speculation then.

As ever, everybody tends to get much more excited about share-price movements

when they happen to coincide with a spate of negative news. Even when those

movements are entirely normal if you look at the history of the stock in question.

Posted in banking, bonds and loans, housing | Comments Off

How To Make $300 Million Without Really Trying

Posted on June 26, 2007 by Felix

Here’s an idea. (1) Spend $7.5 million on the business.com domain name. (2)

?. (3) Profit!

The crazy thing is, it seems to have worked. The bright people who bought business.com

for $7.5 million in 1999 are now selling it for upwards of $300

million. What’s more, they barely did anything beyond buying the domain

name: they just sat back and watched the dollars roll in.

What’s the moral of this story? Let’s just say that when mortal

enemies Nick Denton and Marc Andreessen agree,

then you can pretty much be sure they’re on to something.

Nick

Denton, on Friday:

The Business.com site is little more than a rebadged version of Google Adwords,

serving the search engine’s text ads in both the main column of search results,

and the sidebar, alongside a few perfunctory business listings. Business.com

pages are so useless that the site is its pages don’t appear in the Google

index, but the search engine’s text ads still fund the company. The company’s

pitchmen claim earnings will hit $15m this year, making the $300m pricetag

quite reasonable, at least by the degraded standards of this internet boom.

So, what’s the moral of the story? It certainly helps to have a domain that

web newbies are likely to type into a browser address bar. And those are the

internet users most likely to click on text ads. But here’s the bigger lesson:

search is such a lucrative business that fortunes can be made by even the

most cynical of operators, with the thinnest of products, and the tiniest

slice of the market.

Marc Andreessen,

on Monday:

In a great market — a market with lots of potential customers and/or a highly

growing set of potential customers — the market pulls product out

of the startup. The market needs to be fulfilled and the market will

be fulfilled, by the first viable product that comes along. The product doesn’t

need to be great; it just has to basically work. The market doesn’t care how

good the team is, as long as the team can produce that viable product. In

short, customers are knocking down your door to get the product; the main

goal is to actually answer the phone and respond to all the emails from people

who want to buy. This is the story of search keyword advertising, and Internet

auctions, and TCP/IP routers…

Monster market, weak product, terrible team — startup will probably

be a huge success, as long as the team can do the basics of getting the weak

product out and fulfilling the customer orders. The market pulls the product

and the team.

Posted in technology | Comments Off

On News, Analysis, and Charlie Gasparino

Posted on June 25, 2007 by Felix

Charlie Gasparino has been in touch regarding something I wrote

about him this weekend, and it’s obvious that I wasn’t making myself completely

clear. I did not mean to criticize his reporting, and in fact I’m quite happy

to say that he has been out in front in terms of breaking news about what’s

going on with the troubled Bear Stearns hedge funds. Here’s what I wrote:

In the case of the Bear Stearns situation, the rush to be first has also

meant that CNBC’s Charlie Gasparino, especially, seems to be reporting as

news things which are really just informed speculation. (JP Morgan is liquidating

its collateral! Barclays stands to lose hundreds of millions of dollars!).

If these things appeared in a blog entry, it would be easier to take them

with the requisite pinch of salt.

It’s worth expanding on this. Gasparino is a highly competitive reporter, who

prides himself, quite justifiably, on being first with many big stories. And

when JP Morgan decided, internally, that they were going to liquidate the collateral

seized from Bear’s hedge funds, that was undoubtedly news.

Now there’s a difference between a decision to liquidate and an actual liquidation.

In the case of illiquid securities such as CDO tranches, that difference can

be measured in days or even weeks. The decision to liquidate did not mean that

any collateral was actually sold. Rather, JP Morgan, and others, started showing

the Bear portfolio to the market, looking for bids. As it turns out, those bids

either didn’t come at all, or if they did come they came in at unacceptably

low levels. So the collateral was never sold in the market, and a large chunk

of it was eventually bought back by Bear Stearns itself.

Similarly, in the case of Barclays, there’s no doubt that the UK bank does

have a large exposure to the Bear Stearns funds. If either one of the Bear funds

goes bust and the investors in that fund are left with zero, then at that point

losses start to be borne by the fund’s lenders, as well. As a major lender to

the funds, Barclays certainly has a contingent liability. Thus far, however,

it has not lost any money, and any future losses will depend on whether, when

and how the newer and more highly levered of the two funds is liquidated.

Gasparino was the first to report JP Morgan’s decision to liquidate, and he

was also the first to report Barclays’ exposure. That’s good reporting, and

there’s nothing to criticize there. But in the overheated atmosphere of CNBC,

it’s easy to get confused between facts and informed speculation on those facts.

A decision to liquidate becomes a liquidation, and an exposure becomes a loss.

Dealbreaker’s John Carney was on CNBC

duty Wednesday:

CNBC’s Charlie Gasparino is reporting that JP

Morgan and Deutsche Bank have already begun selling collateral they seized

from the hedge fund.

Keith

Hahn took over on Friday:

One of the hardest hit banks could be Barclays. Several sources are reporting

that Barclays committed $1.2bn linked to the highest risk “sludge”

tier of subprime loans, which is way more than the $300mm or so in exposure

originally reported. Barclays could lose almost $500mm in all, CNBC’s

Charlie Gasparino reports.

Again, nothing against Gasparino, who was just doing his job and doing it well.

But this kind of reporting does start to mix news and speculation in –

yes – a rather bloggy way. News: Barclays has a large exposure. Speculation:

It could lose as much as half a billion dollars. And in the case of the liquidation,

there are all manner of nuances to the word "selling" which really

can’t be teased out adequately in the rapid-fire context of live TV.

I’m not saying that Gasparino got anything wrong. But those of us who rely

on CNBC and the WSJ and Bloomberg for our news place a lot of value on being

able to tell what bits of the news are facts on the ground, and what bits are

speculation about what might happen in the future. And making that distinction

is becoming increasingly difficult as news organizations move towards bundled

news and analysis.

Charlie Gasparino is a very experienced and intelligent chap, and it would

be silly for CNBC not to leverage his experience and intelligence by getting

his instant analysis of the news that he’s breaking. So I’m not saying he should

do anything differently to what he’s doing now. I just wish, sometimes, that

it was easier to get access to the raw facts, so that it’s easier to separate

them from the analysis.

There’s nothing wrong with combining news and analysis in a bloggy way. I wouldn’t

have a job if there were. But what you gain in insight by doing so you lose,

to a certain degree, in authority. We bloggers, who like to provide our own

analysis, are often looking not for the most insightful news source, but rather

for the most authoritative. And for me, for what it’s worth, the most authoritative

financial news source is not CNBC but Bloomberg.

Posted in Media | Comments Off

Finance Professor Salaries

Posted on June 25, 2007 by Felix

The juiciest parts of business profiles are often the bits in parentheses.

In the latest New Yorker, John

Cassidy profiles Harry

Kat, professor of risk management at Cass Business School in London, and

drops this in the mix:

(As a professor, Kat earns less than a hundred thousand pounds a year—about

a tenth of what he was earning as a financier.)

A hundred thousand pounds, of course, is $200,000. (These pounds-to-dollars

conversions are really easy right now.) That might be low by finance standards,

but it’s pretty high by finance-professor standards. The Association to Advance

Collegiate Schools of Business, or AACSB, has a salary

survey showing that the average finance professor makes $134,000 per year,

with new hires getting slightly more, on $142,300. Even the average dean makes

only $174,000. So maybe we shouldn’t be surprised that Kat is more than happy

with what he’s earning:

“I like my life as it is,” he told me. “If we made a lot

of money, I wouldn’t know what to do with it. I’ve got a house

here. I’ve got a summer house in Spain. That’s enough.”

I’ve often wondered how supply and demand works in the specific case of full-time

finance professors at business schools. Presumably any salary would be much

lower than what these people could make in the finance industry – so are

the business schools competing with each other for talent? Or is there more

of a gentlemen’s agreement to keep salaries down? Certainly the AACSB surveys

show that finance-professor salaries aren’t growing nearly as fast as finance

salaries – or even as fast as the salaries of the first-year associates

that business schools churn out.

Posted in pay | Comments Off

Comparing Members of the $170 Billion Club

Posted on June 25, 2007 by Felix

MarketBeat

notes today that Google has caught up with Berkshire Hathaway in terms of market

capitalization. So I thought it would be interesting to see how the two companies

compare in other ways – and I threw in another similarly-sized company,

Pfizer, for good measure.

	Berkshire Hathaway	Pfizer	Google
Market Cap	$166 billion	$179 billion	$166 billion
Revenue	$49 billion	$109 billion	$12 billion
Gross Profit	$48 billion	$48 billion	$6 billion
Price/Book	1.5	2.5	8.9

Posted in stocks | Comments Off

The Fed Chairman Always Votes With the Majority

Posted on June 25, 2007 by Felix

The Economist has a great

post up today on a key difference between the UK and US central banks: in

the UK, it’s perfectly fine for the governor of the Bank of England to be in

the minority when a vote is taken on interest rates. In the US, if the chairman

of the Federal Reserve ever found himself voting in the minority, it’s expected

that he would resign.

"Losing occasionally doesn’t do the governor’s credibility

any harm," notes the blog. "In fact, it may do the opposite."

So why the need for the Fed chairman always to be in the majority? I can’t think

of a single good reason, and in fact I’m having difficulty even coming up with

bad reasons. Can someone explain the US system to me?

Posted in fiscal and monetary policy | Comments Off

House Prices: The Short-Covering View

Posted on June 25, 2007 by Felix

It’s pretty obvious that when a country’s population rises, demand for housing

goes up. If you’re a financial-market type like Paul McCulley

of Pimco, you can see the rise in demand as a short-covering

rally: "you are born short a roof over your head," he writes,

"and must cover, either by renting or buying".

I hasten to add that McCulley is by no means a housing-market bull, and that

he reckons that the recent rally in house prices is speculative, rather than

short-covering. But it makes me wonder why we’ve seen enormous house-price spikes

in places like Spain, where population growth is negative, and that in general

there seems to be almost no correlation between population growth and house-price

growth.

Part of this is because countries with fast-growing populations, like Mexico

and Brazil, also have supercharged construction sectors. The total value of

housing is going up, but that’s because the number of houses is going up, rather

than the price of houses.

The US is no outlier. It has moderately positive population growth; it has

also had a housing-price spike which while big in absolute terms is small by

the standards of other countries such as the UK and Ireland. The difference

can be explained, in part, by the fact that the US has had a massive construction

boom.

But I still like the idea of housing as short-covering, even if I’m not sure

how useful it is.

Posted in housing | Comments Off

Rupert Murdoch is Enjoying Himself

Unpacking the Risks in the CDO Market

CDO Scaremongering, Ebola Edition

How to Help the Bottom Billion

A Plea to Jamie Dimon for Great Architecture

Propping Up the Blackstone Share Price

Lloyd Blankfein, Man of the People

Bear Stearns Funds: Is Everything OK Now?

Punishing Short-Sellers

Carlyle MD: The Blackstone IPO was “Highly Successful”

Murdoch: “Everything is Done”

Two Views of Congestion Pricing

Blackstone Deserted By Its Own Bankers

News Corp-Dow Jones: It’s All Over Bar The Voting

iPhone: Cheaper Than We Could Have Dared to Hope

The Return of Hans Rosling

The Art Trading Fund: Still Doomed to Fail

Blackstone Falls Below its Offering Price

Will China Prevent the CDO Meltdown?

How To Make $300 Million Without Really Trying

On News, Analysis, and Charlie Gasparino

Finance Professor Salaries

Comparing Members of the $170 Billion Club

The Fed Chairman Always Votes With the Majority

House Prices: The Short-Covering View

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