Felix Salmon

One Question for Paul Wolfowitz

Posted on May 7, 2007 by Felix

Your top aide and spin doctor has quit, with no mention of you in his statement.

Your other top aide has distanced herself from you in a more literal manner,

moving out of her office, which was just outside of yours. And your board of

governors has found

you guilty of a serious offense, although it hasn’t (yet) come up with a

condign punishment. As David

Corn points out, this means that you’re actually guilty of two

serious offenses, since it means you lied to the panel as well. If by some miracle

you manage to keep your job for more than a week, you will have no respect within

your institution and you will be utterly ineffective. So I have but one question

for you: Why on earth haven’t you resigned already?

I’m quite sure that in your own mind you’ve done nothing wrong. Fine. Life’s

not always fair. Get over it. The longer you stay, the more damage you do not

only to your own reputation, but also to that of the USA. You’ve left it too

long already, but, please, resign. Today. You’ll feel better once you do, I

promise.

Posted in defenestrations, world bank | Comments Off

Charting for Business Geeks

Posted on May 7, 2007 by Felix

And you were envious of your colleague who does very clever things with a Bloomberg.

This is vastly more powerful: the latest version of Stephen Wolfram’s

Mathematica

has the ability to do all manner of really clever charting, where you can adjust

variables in real time and see the results in full-color glory.

Wolfram’s website has demonstrations in business,

finance,

and economics

– and all of them have little animated previews of what’s possible using

the software. Says my friend Stefan

Geens, who tipped me off to this: "droolworthy stuff for econ geeks".

Posted in charts | Comments Off

Lou Dobbs, Harmful Populist

Posted on May 7, 2007 by Felix

Matt Cooper makes

an interesting point today: none of the presidential candidates in the US has

what you might call populist credentials. John Edwards probably

comes closest, but his rhetoric is still miles away from what one hears from

Lou Dobbs on a daily basis.

I don’t share Cooper’s happiness with Dobbs’s show: I think that he’s a rabble-rouser,

who causes far more harm than good. But at the same time I think the 60 Minutes

where Dobbs was interviewed by Leslie Stahl attacked

entirely the wrong thing: not his opinions, but rather the fact that he has

opinions at all.

He admits he is not a fan of President George W. Bush. "Whether it’s

outsourcing, the war in Iraq, just disregard for our middle class…,"

Dobbs says.

"I’m sitting here saying to myself, ‘This man runs a news show? …

And you can just tell me you don’t like the president. Woo," Stahl

remarks.

"I, matter of fact, insist that the audience know where I come from,"

Dobbs says.

"What about fair and balanced?" Stahl asks.

"I’ve never, Lesley, found the truth to be fair and balanced. I’ve

found it to be…," Dobbs remarks.

"But, that’s, but wait, what’s the definition of ‘journalism?’

That that’s in there. That has to be part of what a journalist is, is

fair and balanced," Stahl remarks.

"I truly believe there’s a non-partisan, independent reality,"

Dobbs says.

"But, it’s your reality," Stahl remarks.

"It is my reality," Dobbs acknowledges.

"But, it’s not ‘the’ reality," Stahl says.

"Well, how so?" Dobbs says.

Dobbs scoffs at suggestions that his "advocacy" tarnishes his credentials

as a journalist. "The idea that a reporter should be disqualified because

he or she actually cares, actually isn’t neutral about the well-being of the

country and its people, that’s absurd," he says.

Dobbs clearly wins this fight. Journalists, believe it or not, actually do

have opinions. And one of the most corrosive forces in US journalism is the

idea that journalists should always report "both sides of the story",

even when one side is true and the other side is false. That’s the way that

things like the Swift Boat attack ads get currency: journalists feel that they

have to find someone to defend them if they’re also quoting someone attacking

them. And heaven forfend that they should actually attack the ads themselves,

rather than finding a mouthpiece to do the attacking for them.

Brad DeLong has a great piece up on this subject at Project

Syndicate. The US press, falling over itself to be "fair" to the

Bush Administration, ended up giving it a pass for the first five years. A bit

more attitude, and a bit less "objectivity", would have gone a very

long way. Dobbs is right that there is a non-partisan, independent reality,

and that it is the job of journalists to report it. It’s just a pity that Lou

Dobbs is one of the few journalists to think that way, given that he is more

than a little nutty. The best way to deal with Lou Dobbs is not to attack his

right to broadcast forthright journalism. It’s to ensure that many other forthright

journalists join him on the airwaves.

Posted in Media | Comments Off

Should Yahoo buy Dow Jones?

Posted on May 7, 2007 by Felix

Barry Ritholtz has surpassed

himself today:

Yahoo! could match Murdoch’s $5B offer, and essentially be a white night

to BOTH family shareholder groups. They should be acceptable to the Bancrofts,

who have been rather equivocal in responding to Murdoch’s offer, as well as

the the Ottaway family…

All things considered, a combination of Yahoo!/DJ makes much more sense than

either a NEWS CORP/DJ or even the recently rumored MICROSOFT/YHOO!

It’s not going to happen, of course. Yahoo wants to be a high-growth company,

and high-growth companies don’t buy negative-growth companies. And it’s far

from clear how Yahoo could pay for the acquisition. If it paid in stock, then

the Bancrofts and Ottaways would simply be trading one underperforming stock

for another.

On the other hand, if it did happen, that would be kinda fabulous. Yahoo is

one of the few companies which could really revolutionize news on the internet,

by making all of the WSJ’s content and archives freely accessible to all. Overnight,

wsj.com would overtake nytimes.com as a default website for people to link to,

and its traffic would skyrocket. Somehow I doubt that Rupert Murdoch,

bold as he is, is that bold.

Interestingly, Yahoo stock has given up only about half of the gains it made

on Friday morning, when the rumors of a Microsoft acquisition hit the market.

Clearly there’s hope yet for some kind of deal.

Posted in Media | Comments Off

In Favor of a Private Equity Income Tax

Posted on May 7, 2007 by Felix

The Wall Street Journal’s editorial page has never met a tax hike it didn’t

hate, and the proposal that billionaire principals of private equity funds pay

income tax on their income is no exception. But if today’s

leader assailing the proposal is any indication, the tax should come into

law without any difficulties. Here’s the WSJ’s argument against the tax, which

implicitly casts itself in opposition to a New York Times leader

from early last month:

"Carried interest" is long-term, risk-based investment income derived

from future profits. Those profits are anything but a sure thing…

Doubling the tax rate on public equity will hurt them for sure, but the lower

after-tax returns will undoubtedly mean fewer deals, which will do collateral

damage to investors and entrepreneurs who depend on this capital for financial

sustenance…

The biggest losers from a private equity tax hike may be pension funds, which

have become large investors in these funds; their high performance has made

millions of Americans wealthier in their retirement. The California public

employee pension system is thought to be one of the largest private equity

investors in the country.

Let’s take these one at a time.

First, "carried interest" is not "derived from future profits",

it’s derived from past profits. Which are, very much, a sure

thing.

Second, increasing the tax rate on private-equity principals will not lower

the after-tax returns for investors in private-equity funds. No one is proposing

changing the rate at which those investors are being taxed.

Third, increasing the tax rate on private-equity principals will not "undoubtedly

mean fewer deals". They will still be raising the same amount of money,

which means the total number of deals will remain the same. The only difference

will be in the after-tax income of the principals, which will undoubtedly remain

stratospheric.

Finally, the pension funds and other investors in private-equity funds have

no dog in this race. They get the same returns no matter what. In fact, insofar

as the tax hike increases the amount of money that the government has to give

to public employees, their stakeholders come out better from the proposal.

If Congress can come up with a bill where private-equity principals pay income

tax on all of their income, especially if that bill doesn’t hit other partnerships,

then it should sail through the legislature.

Posted in private equity, taxes | Comments Off

Wolfowitz’s Ouster: The End of the Bretton Woods Carve-Up?

Posted on May 7, 2007 by Felix

We’ve known for a while that Europe’s finance ministers have made up their

mind that Paul Wolfowitz must go as president of the world

bank – the only question is over the manner of his leaving. Today, we

learn just how tough they’re being – and how long they’ve held their hard-line

position. Steven

Weisman in the NYT:

At the annual spring meetings of world finance ministers in mid-April…

top European finance and development officials spoke with Treasury Secretary

Henry M. Paulson Jr. about the possibility that Mr. Wolfowitz

would resign in return for the Europeans’ permitting the United States

to pick his successor.

So the deal on the table was this: the US serves up Wolfowitz’s head on a platter.

In return, the US gets to nominate the next president of the World Bank. Which

is something the US has always been able to do in any event – after all,

there’s no other way that Wolfowitz would ever have been chosen. It’s hardly

surprising that Paulson wasn’t particularly impressed by the offer.

Given that Paulson rejected the offer, however, it’s definitely possible that

the Europeans will follow through on their implied threat to finally drag the

presidential nomination process into the 21st Century and force the nomination

of someone who is chosen on the merits, as opposed to someone who is chosen

on the basis of Executive Branch internal politics. There’s no doubt if that

were to happen that the Europeans would lose their stranglehold on the managing

directorship of the IMF, too – but that would be no bad thing, either.

This could be the single biggest silver lining to the disastrous Wolfowitz

presidency: the end of the outmoded convention that the president of the World

Bank is always an American and the managing director of the IMF is always a

European. If that’s the case, it’s about time.

Posted in defenestrations, world bank | Comments Off

ABN War Descends Into Fiasco

Posted on May 7, 2007 by Felix

How silly is the war over ABN Amro getting? The $24.5 billion bid

by the RBS consortium for LaSalle Bank is silly, because it’s contingent "on

the group not being exposed to any litigation related to the sale of LaSalle".

But such litigation, from Bank of America, is a foregone conclusion.

But the rejection of the bid by ABN Amro is, if anything, even sillier. ABN

says that it is rejecting the bid because it is contingent on the RBS consortium

also buying the rest of ABN Amro. But the RBS bid has to include that contingency,

or else the rival bid for Barclays simply rises in value because it includes

whatever monies ABN gets from selling LaSalle. And there’s no way that RBS is

going to deliberately sweeten the Barclays bid.

The whole battle over ABN Amro has descended into fiasco at this point, and

the only thing that’s certain is that it will end up in years-long litigation.

If ABN CEO Rijkman Groenink had only done from the beginning

what was best for his shareholders, rather than trying every underhanded method

in the books to ensure that his bank wasn’t broken up, we wouldn’t be where

we are now. But as things stand, there’s no really good outcome to this mess.

Posted in banking | Comments Off

The Murdoch Charm Offensive Peters Out

Posted on May 7, 2007 by Felix

There are limits to the effectiveness of Rupert Murdoch’s

charm offensive, it would seem. Judging by today’s news, indeed, the offensive

seems to have worked only on the journalists who were physically in the room

with him when he was putting his case.

On Sunday, the reporter who interviewed him, Andrew Ross Sorkin,

gave him a follow-up

wet kiss in the NYT, in which he explained that "Mr. Murdoch may be

the perfect publisher of The Wall Street Journal." Among Rupert’s attractions

is that he’ll increase spending, rather than cutting it, Sorkin says, along

with the fact that he’s "farsighted" and "creative". He

even goes so far as to say that selling to Rupert is the best way of "preserving

the Dow Jones legacy".

On Monday, however, Sorkin’s colleague David Carr gets out

the long knives. He doesn’t believe for a minute Murdoch’s protestations that

he would ensure editorial independence for the Journal, and he also sees, contra

Sorkin, "a tough scrubbing on costs" at a newspaper which has already

suffered no little cost-cutting.

And the man who is possibly the single most influential shareholder in Dow

Jones, James H Ottaway Jr, released a statement

which was harsher still:

[Murdoch] has for a long time expressed his personal, political and business

biases through his newspapers and television channels,” Mr. Ottaway

said. The Post “regularly runs biased news stories and headlines supporting

his friends, political candidates and public policies, and attacks people

he personally opposes,” while at Fox News, “one man’s political

opinions have become the editorial and news policy.”

He accused Mr. Murdoch of caving in to political pressure to advance his business

interests, contrasting the actions of a News Corporation property, Star TV,

in bowing to Chinese government censorship, with The Journal’s editorial

page censure of Chinese human rights abuses. “I doubt its freedom to

criticize the Chinese government would continue under Murdoch ownership,”

he said.

The right answer to the News Corporation bid, Mr. Ottaway added, is that “Dow

Jones is not for sale, at any price, to Rupert Murdoch.”

Of course, the only way of ensuring that Dow Jones never be sold to Rupert

Murdoch is to ensure that Dow Jones never be sold. Anybody else could and quite

possibly would simply flip the property.

Nevertheless, Dow Jones stock is still trading over $55 a share: the market

still believes a deal will be done. As David Carr says, "brute-force capital,

like flood waters, always finds a way to break through."

Posted in Media, publishing | Comments Off

Microsoft-Yahoo: Move Along, Nothing Here

Posted on May 7, 2007 by Felix

On Friday, there was a lot of heat, if relatively little light, surrounding

prospects

of some kind of a "possible merger or other matchup" between Yahoo

and Microsoft. Much ink was spilled, and in a rather surprising turn of events

Henry

Blodget, of all people, seemed to have the best analysis.

I left the story alone, partly because I was at a conference away from wifi

for most of the day, partly because I didn’t have much to say about it, and

partly because the whole thing just felt a little bit feverish and silly. The

New York Post does break the occasional business story, but nothing as huge

as a Microsoft-Yahoo merger. And even the Post didn’t seem to place much weight

on the story, burying

it as it did on page 34.

In the end, the story turns out to have been a non-starter from the beginning.

Robert Guth and Kevin Delaney of the WSJ reported on Sunday that yes, there

were talks, but that "the

merger discussions are no longer active". It’s not clear when the talks

took place, or how serious they were, but anybody who bought Yahoo on Friday

in expectation of a takeover is likely going to be a seller when the markets

open on Monday.

The lesson here is one of the oldest: don’t let yourself be distracted by intraday

noise. People who are glued to the markets all day burn far too many cycles

on the kind of stuff that simply doesn’t matter for anybody with a time horizon

longer than a couple of days. Investors, certainly, shouldn’t care about this

kind of thing – only traders and the sell-side have any real reason to

try to keep on top of such matters.

Posted in M&A | Comments Off

US Moves Towards Energy Efficient Light Bulbs

Posted on May 5, 2007 by Felix

Great

news on the front page of the Saturday WSJ today: it looks very much as

though a nationwide energy-efficiency standard is going to come into force which

will essentially force every household in the country to move from incandescent

bulbs to light bulbs which are both much more environmentally friendly and,

over the medium term, much cheaper to run.

With 4 billion light sockets in the US, this is an opportunity for the likes

of GE and Phillips akin to the great move from vinyl to CD. The light bulb manufacturers

actually come out very well from this deal, because from now on much more of

the total cost of light bulbs is going to go on the bulbs themselves, rather

than on the energy needed to power them.

If the standard is agreed upon, that will give the manufacturers every incentive

to combine two important technologies, and create screw-in LED bulbs which are

also dimmable. The main

problem with compact fluorescents is that Americans don’t like the quality

of light they generate; this is being worked on. But the other big problem is

that they don’t work on dimmers – and even the new supposedly dimmable

ones don’t really work very well.

With LED bulbs, all that’s needed is a technology which reduces the number

of LEDs which light up when the bulb is dimmed. It’s not rocket science. Received

wisdom has it that LED bulbs are too expensive to appeal to the consumer market;

I say test it first. I’ll certainly buy them, if and when dimmable LED bulbs

come on the market.

This is just the first of what must be many steps towards changes which save

both energy and money. Such profitable ways of reducing carbon emissions are

the low-hanging fruit: let’s have many more!

Posted in climate change | Comments Off

Who Regulates Wal-Mart’s Bank in Mexico?

Posted on May 4, 2007 by Felix

I made a promise, yesterday, that I would give you "more on the subject

of Wal-Mart banking" today. And so, I point you to a new

paper by the ever-astute Anna Gelpern, who’s discovered

something of a loophole in international banking regulations. The problem relates

to Adelante, the new bank that Wal-Mart is setting up in Mexico.

As long as Adelante remains Wal-Mart’s only banking venture worldwide,

the Mexican authorities will have sole responsibility for regulating and supervising

it. Because it is Wal-Mart’s first banking venture worldwide, the corporate

headquarters in Bentonville, Arkansas will likely take a keen interest in

the new bank. But Wal-Mart’s Mexican hosts—formally the “home”

regulator of its banking operations—have at best indirect leverage over

its unregulated U.S. parent. This raises the possibility of a supervisory

gap, where no authority has a comprehensive view of the entire corporate structure

containing the bank.

Indeed, the way that Adelante is set up, the Mexican regulators will regulate

only Adelante, the subsidiary: they won’t even have access to Wal-Mart de Mexico,

let alone Wal-Mart in the US.

Gelpern quotes Mexican central bank governor Guillermo Ortiz as saying that

international conglomerates today make credit policy at the parent level, driven

by global strategy and country risk perceptions. That’s true, but at least a

bank like Citibank, which is huge in Mexico, is also very closely regulated

at the parent level as well. In the US, no bank regulators have any interest

whatsoever in Wal-Mart. Gelpern teases out the worst-case scenario:

A business like Wal-Mart might be tempted to ride the consumer lending boom

in Mexico, using its Mexican bank subsidiary in the short term to make up

for flagging U.S. sales. A further rapid, large-scale credit expansion in

a sector already growing by over 30% a year could easily turn unsustainable.

A rash of consumer defaults could have systemic financial and political implications

in Mexico. Moreover, should the lending boom go bust, or in the event of a

macroeconomic shock of the sort that regularly befall the emerging markets,

the bank subsidiary may seek liquidity from Mexico’s Central Bank. Should

the bank fail, it would have a claim against Mexico’s deposit insurance

fund.

Here the parent retailer’s size and political power become all-important.

As the country’s largest private sector employer, Walmex would be in

an unusually strong position to demand support from the Mexican government

by threatening to abandon the bank along with its labor-intensive retail operation.

Neither foreign banks operating in Mexico, nor Mexican retailers that have

opened banks, have similar leverage. Citibank has no shops; Azteca cannot

leave.

The most interesting thing about Gelpern’s paper is that she concludes this

is a problem without a solution: while the present situation is hardly ideal,

there’s no obvious way of fixing it. There are regulatory patches which could

be imposed, but they would likely weaken Mexico’s standing, possibly to the

point at which the Mexican authorities wouldn’t be allowed to let Wal-Mart do

any banking at all, even if they wanted to.

This is "an important case study in financial globalization," says

Gelpern – and it remains to be seen whether it will be a positive one.

Posted in banking | Comments Off

The Murdoch Charm Offensive Hits New York

Posted on May 4, 2007 by Felix

The Rupert Murdoch charm offensive hits the New York Times

today, which features a long

interview with the man himself. And give him credit: he says all the right

things.

He’s modest in the face of WSJ brand-name journalism, claiming that he doesn’t

always understand Walt Mossberg perfectly. Of course he does

always understand Mossberg – the whole point of Mossberg is that he’s

easy to understand – but it’s polite to feign ignorance.

On the other hand, he’s open about the fact that he wants to shake up the WSJ

newsroom:

We’re not coming in with a bunch of cost-cutters,” he said, but

added: “I’m not saying it’s going to be a holiday camp for

everybody.”

And as far as his dealings with the Bancroft family are concerned, he knows

exactly what it’s like to run a family business.

The [Bancroft] family, which owns 64 percent of the voting shares, has said

that 52 percent of those voting shares oppose Mr. Murdoch’s offer. They

have not answered any of his invitations to meet with him and his sons, James

and Lachlan, and a daughter, Elisabeth.

“My real intention is to try to get a meeting, not to impress them with

my charm — if I have any — but to impress them with the intentions

and feelings of my adult children,” Mr. Murdoch said…

While he said he still hopes to address the family as a group, Mr. Murdoch

said he did not personally plan to start to lobby any individual shareholders

on the fence…

“I don’t want to be in a position of putting one Bancroft against

another Bancroft. I’m not in the business of stirring up trouble in

the family,” he said. “Our understanding is that there are several

members of the family who have not made a final decision,” he said.

“I think the next step for us is to be patient — and to be available

at anytime should they respond to my suggestion for a meeting.”

And if a large majority of the family ended up clearly rejecting his bid?

“It would be ugly — depending on your perspective, it might be

admirable too,” Mr. Murdoch said.

This is really pitch-perfect stuff. He’s not pretending to be someone he’s

not, but at the same time he’s being very reasonable and respectful towards

the Bancrofts.

The one piece of real news in the interview comes with Rupert explaining exactly

what he means by "editorial independence":

While Mr. Murdoch went to great pains to explain that he sees himself as

a lifelong newspaperman who learned journalism from his father in Australia,

he also tried to say that his reputation as an interloper owner was overstated.

He said he was not involved with the news operations of the higher-end newspapers,

although he takes a closer role in tabloids like The Sun in London and The

New York Post.

And he said he would propose to the Bancrofts setting up a separate board

for the newspaper, mandated with ensuring its editorial independence, as he

has done since he acquired The Times and Sunday Times in 1981.

He said the independent board works, recalling that “The Sunday Times

came out loudly for the decapitation of Margaret Thatcher,” whom he

had personally supported. He said, “I didn’t know about it,”

and then joked, “I pretended I hadn’t read it.”

Again, this is pretty much true, although it surely falls short of what the

Bancrofts would like. Murdoch doesn’t interfere with his upmarket newspapers

as much as he does with his downmarket newspapers (we can’t call them "tabloids"

any more, because the Times is now tabloid too). On the other hand, he certainly

interferes with them much more than anybody at the WSJ would want to be interfered

with.

You want to know whether Murdoch will succeed in buying Dow Jones? All you

need to do is look at the stock price. It’s still up over $55, which means it’s

pricing in a successful takeover bid. If it falls back down to $35, you’ll know

the Murdoch bid is washed up.

Posted in Media, publishing | Comments Off

Envisioning a Canadian Reuters

Posted on May 4, 2007 by Felix

The FT’s Alphaville is doing a good job of moving the Reuters takeover story

along, giving not only details

of Reuters’ "Founders Share", which prevents hostile takeover bids,

but also a plausible

description of who’s saying what: apparently Canada’s Thomson offered 600p

per share, and Reuters replied they would only start talking at 750p per share.

The bid can be seen as some kind of vindication for Reuters CEO Tom

Glocer, who has made his company more attractive than it was only a

couple of years ago. On the other hand, the share

price has hardly taken off – until today – and the venerable

Reuters, mortifyingly, continues to have a smaller share of the market for financial

data than the upstart Bloomberg.

Reuters is a news company by brand, but a financial-data company by revenue.

Both sides of the company have a reputation of being very high quality, if slightly

boring. Being owned by Thomson, which is also a little on the boring side, wouldn’t

be such a bad thing, although I’m not sure how the UK hacks will take the news.

My guess is that if Thomson does bag Reuters, it’ll actually change its name

to Reuters as well: one could argue that it’s the world’s strongest brand in

the business of news.

Posted in M&A, Media | Comments Off

Obstacles to Infrastructure Privatizations

Posted on May 4, 2007 by Felix

Are infrastructure privatizations qualitatively different from normal private-sector

debt-financed investment? A couple of comments on yesterday’s

post on the subject suggests that they are.

Both Gari N Corp and Matthew suggest that there are security implications to

selling off toll-roads and the like, especially as regards disaster management.

I don’t see it. Government can always force a toll-road operator to subordinate

its profit motive to the greater good, if there’s any conflict – and in

fact I doubt that there would be any conflict anyway. If citizens are being

forced to evacuate a city, I have a feeling that the question of tolls is going

to be the least of anybody’s worries.

Gari also I think gets the role of bondholders in such situations wrong:

If your Equity Office LBO defaults, the result could be empty offices. What

happens when the owner of your city’s main toll road defaults? Current wisdom

says "it gets handed back to the government". That’s probably too

simplistic.

Why on earth would a default by EOP result in empty offices? The main result

of a default by EOP will be losses incurred by its new owners, as well as losses

incurred by EOP bondholders. Tenants in EOP properties would probably not notice

anything unless and until a new owner decided to change the way it managed the

properties. And if empty offices caused the EOP default, then maybe

a new owner might come up with a better way of filling those offices.

Similarly, if a toll-road operator defaults, that affects its creditors, but

it doesn’t have any immediate effect on drivers or the government. If the operator

goes out of business entirely, then the road will simply end up being managed

by someone else – either the government, or whoever takes over possession

of the operator’s assets.

Matthew, meanwhile, brings up the prospect of privatizing Amtrak. That is

a very bad idea. I happen to know rather more about rail privatization than

is really healthy, and I can assure you that selling a loss-making passenger

railroad is a recipe for disaster. (Let’s just say I’m English, and leave it

at that.)

Privatizing Amtrak would be especially difficult because of the fact that Amtrak

passenger trains use the same railroads that the enormous US freight-train industry

uses. There’s so much money in freight rail that passengers simply don’t have

priority – something which leads to endemic delays. The problem with US

passenger rail here is structural, and can’t be solved with privatization.

Posted in infrastructure | Comments Off

Will Venezuela Really Default on its Bonds?

Posted on May 4, 2007 by Felix

One of the more amusing episodes over the past few days in the world of emerging-markets

debt has been the storm in a teacup over the pledge by Venezuela’s Hugo

Chavez to withdraw from the International Monetary Fund. Christian

Oliver has a decent overview in the Washington Post today, although you

can take his hyperbole about Chavez triggering "a massive debt default"

with a pinch of salt.

In reality, the situation is this: if Chavez withdraws from the IMF, he breaches

a covenant in most of his global bonds. In turn that puts the bonds into technical

default, which means that bondholders, if they want to, can get together to

try to "accelerate" the bonds and make them due and payable, at par,

immediately. I’m almost certain that Venezuelan withdrawal from the IMF would

not constitute a "credit event" for the purposes of the credit

default swap market.

What’s more, bondholders are very unlikely to want to force Venezuela to pay

back its bonds at par, seeing as how most of those bonds are trading well above

par. One blogger

does note that there are three bonds outstanding which trade below par, and

that those bonds have a face value of $4.5 billion. But even in that case the

chances of acceleration are slim. Venezuela is not going to unilaterally withdraw

from the IMF tomorrow: chances are it will find some kind of legal workaround

which allows it to declare that it has withdrawn without triggering the covenants

on its bonds.

Posted in bonds and loans | Comments Off

Who Should Banks Be Worried About?

Posted on May 3, 2007 by Felix

The hedge funds might be treating

banks as toys, but according to Dana

Cimilluca today, it’s the private-equity boys who the banks really need

to be on the lookout for:

CapGen Capital Advisors, a new private-equity firm, plans to raise as much

as $1 billion for bank and other financial company acquisitions…

CapGen, which was formed last year by former Bankers Trust vice chairman and

U.S. Comptroller of the Currency Eugene Ludwig, is not alone

in testing the banking waters. Others including Vulcan Capital, the investment

firm of Paul Allen, the billionaire of Microsoft fame, recently

formed a joint venture with Bankers’ Capital Group to buy regional banks

in the Southeast.

Gene Ludwig is a very smart guy and a bankers’ banker to his toenails: he wouldn’t

shake up the industry much. And I reckon that Bankers’ Capital Group are hardly

revolutionaries, either. The real threat to the banking industry comes

not from private equity but from retail. If the likes of Wal-Mart ever get a

banking license in this country, then – and only then – might there

be the kind of banking revolution this country needs.

More on the subject of Wal-Mart banking tomorrow…

Posted in banking | Comments Off

In Praise of Infrastructure Privatization

Posted on May 3, 2007 by Felix

Business Week has a huge cover

story this week on infrastructure investment. "The public should be

nervous" about it, says author Emily Thornton, but I think she’s wrong.

I’ve written in the past about why lottery

privatizations are a good idea, and much of the same reasoning lies behind

my belief that other infrastructure privatization is a good idea too. Not that

you’d guess it from Thornton’s article. All of the good things that the proceeds

can do are described as "short-term fiscal problems"; meanwhile, the

investments themselves apparently yield more than the stock market, with less

risk than bonds. Sound plausible? Not really.

It’s worth correcting a few misapprehensions from the piece:

"There’s reason to worry about the quality of service on deals that

can span 100 years."

Well, there’s also reason to worry about the quality of service that the public

sector will provide over the next 100 years. There’s no particular reason to

believe that the private sector will provide worse service; certainly the experience

of private-sector infrastructure projects worldwide would indicate the opposite.

What’s more, most road maintenance done in the US by the public sector is done

with the aim of short-term, not long-term savings. You can fix up a road for

a small number of years for less money up-front, or you can do it properly for

more money and save money in the long term. Governments tend to have four-year

or six-year time horizons, however: they’re not particularly interested in saving

future administrations lots of money. A private-sector contractor with a 75-

or 100-year contract, however, will be more efficient.

And then if the private-sector contractor really fouls up, the state can simply

repossess the project. That’s happened before, it will happen again. It’s no

reason not to privatize in the first place; it’s more of an insurance policy.

With the market for infrastructure still in its infancy, every deal is

different. The ideal blend of up-front payment, toll hikes, and revenue sharing

hasn’t been found.

Privatization doesn’t need to be "ideal" to be a good idea. The

benefits of privatization come immediately, and can make a positive difference

to millions of peoples’ lives. I doubt the kids whose schools aren’t built with

the funds that the government doesn’t get from not selling its toll roads would

thank anybody for holding out until the "ideal blend" was found.

Infrastructure is ultra-low-risk because competition is limited by a host

of forces that make it difficult to build, say, a rival toll road. With captive

customers, the cash flows are virtually guaranteed.

Right now, it certainly seems like road traffic only goes up. Whether that will

continue to be the case for the next 100 years, however, is far from obvious.

What’s more, infrastructure prices are hugely dependent on discount rates, which

right now are at all-time lows. There’s a good chance that, if interest rates

rise, governments will realize that they will never again have the opportunity

to sell these assets for anything like the kind of money they’re being offered

now.

What’s more, as Thornton herself notes, "Federal, state, and local governments

need to spend an estimated $155.5 billion improving highways and bridges in

2007, according to transportation officials, up 50% over the past 10 years".

Could anybody have foreseen that 50% rise 10 years ago? Can anybody foresee

how much further such construction and maintenance costs are going to rise over

the next 10 years, let alone the next 100? Governments aren’t just

selling assets here, they’re also getting liabilities off their books as well.

The main reason to privatize is that the private sector is more efficient,

and, right now, with the huge amounts of infrastructure money chasing a relatively

small number of projects for sale, there’s a good chance that the successful

bidder will end up overpaying. That’s happened in the past, too. The government

gets more money than the asset is worth, and gets to spend it on the public;

meanwhile, the private-sector is burdened with the liabilities for the next

100 years. Sounds like the government might be getting a very good deal, to

me.

Posted in economics, infrastructure | Comments Off

Does Latin America Need More Investment?

Posted on May 3, 2007 by Felix

Uruguay: A Quiet Latin Success Story

Posted on May 3, 2007 by Felix

Posting has been erratic today because I’ve been at the Latin American Borrowers’

and Investors’ Forum

in midtown. While I was there, I was very happy to bump into an old friend:

Carlos Steneri, the director of Uruguay’s public debt management

unit. Steneri is a classic behind-the-scenes technocrat, who deserves vast amounts

of the credit that usually accrues to investment bankers and other flashier

individuals.

Steneri got me caught up on what Uruguay’s been up to over the past year, and

it’s incredibly impressive: the country borrowed a total of $3 billion on the

international capital markets – that’s an eye-popping 15% of GDP –

and used it to pay down debt maturing in the short term, to finance its budget

deficit, and to wipe out at a stroke all of the money that the country owed

to the IMF, the World Bank, and the Inter-American Development Bank.

We’ve now reached the point at which the private sector can fund Uruguay much

more cheaply than the public sector: Uruguay was paying about 9.5% on its loans

from the World Bank and IDB, while it pays only about 7% on the dollar bonds

it issues. The debt wipe-out is good news for Uruguay, which no longer needs

to worry about IMF conditionality, but it’s bad news for the international financial

institutions: they need to lend money in order to survive, but who are they

going to lend to if even Uruguay can get much cheaper funding from the international

capital markets?

Steneri has been at this game for a very long time: he was not only instrumental

in Uruguay’s ground-breaking 2003 restructuring, but also in earlier restructuring

around 1991. He knows full well that the markets which seem so generous today

can close up overnight – and that in that case, he will need the IMF to

help out. He’s also quick to deflect praise for orchestrating Uruguay’s debt-management

operations: it wasn’t him, he says, it was the flood of global liquidity which

made all this possible. In fact, it’s a combination of both.

One of the reasons that Uruguay has proved so successful and resilient over

the years is the fact that it has a very sophisticated set of technocrats such

as Steneri, who are adept at doing the right thing no matter which political

party is in power. SAIS professor Riordan Roett, at the same

conference, noted this morning that across the region, leftist governments are

doing a very good job at insulating their finance ministries from political

pressure – you can see it in Uruguay, Chile, Brazil, even Peru. Would

that the same thing could happen in the US.

Posted in bonds and loans, economics, technocrats | Comments Off

The $100 Billion Toy

Posted on May 3, 2007 by Felix

It’s one step forward, two steps back for ABN Amro CEO Rijkman Groenink.

After doing a deal to sell his bank in two pieces to Bank of America and Barclays,

he’s now faced with a court

ruling saying that he’s not allowed to do that without shareholder approval

– something which he knows he can’t get.

The FT reports

that Groenink complained to the Dutch comercial court that ABN Amro had become

a “toy for hedge funds”. In response, TCI, a UK hedge fund, requested

that Groenink be fired within 24 hours.

Shareholders are being well served by the Dutch court system, it would seem

– although net-net the amount of litigation related to this case is almost

certain to skyrocket, given that Bank of America now looks set to mount a lawsuit

against ABN Amro and there’s a good chance that Barclays will too.

Right now, it seems that the $100 billion toy is likely to end up in the prams

of RBS, Santander, and Fortis. Who will be thanking the hedge funds –

for the moment. Sooner or later, however, they’re likely to run into hedge funds

themselves. Live by the law of the hedge fund…

Posted in banking | Comments Off

Costas Implodes

Posted on May 3, 2007 by Felix

John Costas, who used to run the investment-banking division

of UBS, dealt frequently with hedge fund managers who were making vastly more

money than he was. So he decided to quit UBS and join them. UBS, in an effort

to retain him, basically allowed him to set up his hedge fund in-house. They

even allowed him to give it a storied name, Dillon Read: one of the many acquistions

that Swiss Bank made before it got swallowed by UBS. "We have the chance

to be the No. 1 alternative asset management company in the world," he

told

the New York Times at the time.

Or, you know, he could fall

flat on his face. It turns out that hedge funds, who often profit from others’

misfortunes, are sometimes equally capable of playing the schmuck:

Chief Executive Officer Peter Wuffli said in a statement that the hedge fund,

Dillon Read Capital Management, "did not meet our expectations."

The bank, which gave Costas control of the fund to keep him from leaving,

will now pay $300 million to shut it down after Dillon Read’s 150 million

francs of losses led to lower fixed-income revenue…

The losses at the hedge fund were "related to the U.S. mortgage-backed

securities market, which was obviously weakened by the U.S. subprime market,"

[UBS CFO] Standish said.

One wonders what the implications of the Dillon Read implosion are for Goldman

Sachs, which has pretty much exactly the same strategy, albeit with much more

success. Is there something in the water at 85 Broad Street which makes Goldman

immune from such blow-ups? Has it just been lucky? Or does it just appreciate

that good investment-bank managers don’t necessarily make great hedge-fund managers?

In any case, it’s hard to see Costas recovering from this blow. He’s made more

than enough money to live very comfortably for the rest of his life, and that’s

probably what he’s going to do. His dreams of dynastic wealth will have to fade

away.

Posted in banking, hedge funds | Comments Off

“They Look at Money as a Proxy for Aggression”

Posted on May 2, 2007 by Felix

Blogger "Chew your grouse" has a gimlet

eye for finance types:

The publisher of Trader and DealMaker magazines stands at the podium with

the "Top 100 Traders of 2006" issue, including the guy from Centaurus

in Houston on the other side of the Amaranth trade who made $2 billion for

the year. "Can you imagine what that feels like?" she asks, awestruck.

It was pretty pathetic to see a grown human — who herself made surely reasonable

money — get excited like this, and the mostly guy crowd tittered a little

as well at the mere thought of it.

The problem is that his attitude isn’t going to make him a gazillionaire. Indeed,

the very fact that he’s not pulling down the megabucks already is pretty

much enough to disqualify

him from the kind of job which will make him squillions in the future. Here

he is talking to a headhunter:

The guy is like, "so how much did you make last year," and I tell

him, and he’s like "ummmm, errrr. Well, that’s a problem, cuz they’re

gonna look at that and say: if he likes money, why hasn’t he figured out a

way to earn more? This is a job that offers the potential to earn seven figures

eventually, and they want people who want that." And I’m like "I’m

a friggin Slavist already, gimme a break." And he’s like "They look

at money as a proxy for aggression."

There is a certain beauty to the logic, it must be said. To get rich, you have

to be aggressive. If you’re aggressive, you’ll be rich. So if you’re not rich,

you can’t be aggressive. Ergo, to get rich, you have to be rich.

Which at least means the rest of us can stop worrying, I guess.

Posted in pay | Comments Off

Bancrofts: More Split Than They Might Seem

Posted on May 2, 2007 by Felix

How split are the Bancrofts, on the subject of the News Corp bid for Dow Jones?

Floyd Norris, behind the

Times subscription firewall, has been working his way through the Dow Jones

proxy

on file at the SEC. Here’s what we knew already: the Bancrofts control 64.2%

of the votes, and Bancrofts representing 52% of the votes are opposed to the

deal. Which means that about 81% of Bancrofts are opposed, which doesn’t sound

like there’s much of a split.

But look a little deeper, says Norris:

Many of the family shares are tied up in family trusts. I assume that a majority

of the trustees are on board for rejection, so all of those shares are against

this deal, at least for now.

If that is true, then about 28 percent of the votes are in shares held directly

by family members — or in foundations that they control. And if 12 percent

of them have not signed on, that would leave 16 percent that have agreed.

That leaves more than 40 percent of the family, as measured by votes, not

on board.

And that is a lot of dissension.

Maybe this is the genius behind the timing of the Murdoch bid. Yes, the Bancrofts

control more than 64% of Dow Jones voting rights. But the Bancroft family trusts

only control 36% of those rights; the rest of the Bancroft votes are in the

hands of individual family members. And everybody who’s ever been a member of

a family knows that individual family members don’t always act in concert with

each other.

As the Bancroft family gets younger and more dipersed, its solidarity will

necessarily fracture. Now might well be the point at which family members who

have no managerial role in the company decide that a lot of money now is preferable

to very little money in the future, as an independent Dow Jones continues its

inevitable and inexorable decline. Yes, the Wall Street Journal is something

to be inordinately proud of: it’s on everybody’s list of the top five newspapers

in the world. So maybe the selfless thing to do is to sell it to someone who

has a better chance of giving it a rosy future.

Posted in Media | Comments Off

Rogoff, Wolfowitz, and Blue Ribbons

Posted on May 2, 2007 by Felix

Ken

Rogoff has been lauded with many accolades in his time. But this

is surely one of the greatest:

Le Foreign Policy n’a pas jugé utile de préciser que

ce "mémorandum" était un faux, imaginé et réalisé

par Kenneth Rogoff, économiste et professeur à Harvard, qui

s’est glissé dans la peau de Paul Wolfowitz le temps de cet exercice

de style. Le Monde.fr s’est laissé abuser par le canular, trop pressé

de publier un article sur l’étonnante note du chef de la Banque mondiale.

I’m not sure how to translate this: I’m still struggling with the mental image

of Rogoff "glisse dans la peau de Paul Wolfowitz". Maybe Foreign Policy

itself has the best translation:

simply, "oops".

By the way, Rogoff wasn’t making up this part of his fake

memo:

Some of you may wonder how I can remain at the Bank when so many staff are

openly seeking my dismissal. (Thank goodness most of you have tired of wearing

those silly blue protest ribbons.)

As Portfolio’s Liz Gunnison is reporting,

the blue-ribbon phenomenon is very real.

The blue ribbons first started appearing on lapels around the World Bank’s

H Street headquarters in Washington about 10 days ago. No word yet on how

widely the trend has spread among other offices, or whether there is particular

significance to the color blue.

But the spokesperson says that in the capital, World Bank staffers are making

trips out to craft stores in the suburbs because everyplace in the District

is selling out of blue ribbon.

Posted in world bank | Comments Off

Moving a Carbon Tax Towards Cap-and-Trade

Posted on May 2, 2007 by Felix

We’ve already seen that a cap-and-trade system for carbon emissions is superior

to a carbon tax. But it’s not an either/or thing. If you want some of the benefits

of a tax from a cap-and-trade system, that’s easy: just increase the amount

of emission rights that you auction, and decrease the amount that you freely

allocate.

On the other hand, it’s hard to get the benefits of cap-and-trade from a carbon

tax, because a carbon tax simply can’t implement the main feature of a cap-and-trade

system, which is the cap on carbon emissions.

Still, Canadian environmentalist David

Suzuki and Liberal Party leader Stephan Dion do have one interesting idea

which brings a carbon tax closer to a cap-and-trade system:

Liberal Leader Stephan Dion also rejected the $195 figure as excessive, saying

that his party proposes a $20-per-tonne "deposit" instead of a tax.

"It’s a deposit that the companies will have to give to the environmental

bank — and they will have this money back if they decrease their emissions,"

Dion told Question Period co-host Jane Taber.

"It’s like when you have your bottle of Coca-Cola and you bring it back

to the grocery store. You get your money back. It’s not a tax."

Dion called his plan a "great incentive" for Canadians to reduce

emissions while not harming the economy.

If you don’t like the idea of a carbon tax, maybe this will help bring you

around. I’m not sure entirely how the plan is meant to work, but it seems a

little bit like the cap-and-trade system in that you can get financial benefits

from reducing emissions. That said, it also seems like a cap-and-trade system

which is governed not by market mechanisms but rather by a government bureaucracy.

And I can’t say I’m too excited about that.

Posted in climate change | Comments Off

One Question for Paul Wolfowitz

Charting for Business Geeks

Lou Dobbs, Harmful Populist

Should Yahoo buy Dow Jones?

In Favor of a Private Equity Income Tax

Wolfowitz’s Ouster: The End of the Bretton Woods Carve-Up?

ABN War Descends Into Fiasco

The Murdoch Charm Offensive Peters Out

Microsoft-Yahoo: Move Along, Nothing Here

US Moves Towards Energy Efficient Light Bulbs

Who Regulates Wal-Mart’s Bank in Mexico?

The Murdoch Charm Offensive Hits New York

Envisioning a Canadian Reuters

Obstacles to Infrastructure Privatizations

Will Venezuela Really Default on its Bonds?

Who Should Banks Be Worried About?

In Praise of Infrastructure Privatization

Does Latin America Need More Investment?

Uruguay: A Quiet Latin Success Story

The $100 Billion Toy

Costas Implodes

“They Look at Money as a Proxy for Aggression”

Bancrofts: More Split Than They Might Seem

Rogoff, Wolfowitz, and Blue Ribbons

Moving a Carbon Tax Towards Cap-and-Trade

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