The Big Picture | Corporate Management

Same As It Ever Was

Tuesday, July 01, 2008 | 07:47 AM

in Corporate Management | Credit | Derivatives | Finance | Valuation

Welcome to the second half of 2008.

We begin the second half pretty much the same way we finished the first half: Equities under pressure in Asia, Europe, and judging by the futures in the US, domestically as well.

One of the things that us foolish idealists hope for is that the current set of crises will force the fantasy brigades to actually start interacting with that hypothetical construct known as reality. Perhaps by confronting the actual problems facing the economy, we can actually begin the process of repairing them by taking the painful write-downs and instituting the medicinal policies that make sense.

Such hopes are misplaced. The latest evidence of such comes from no other than Blackstone Group (BX) CEO Stephan Schwarzman. On the occasion of the private equity firm's one year IPO anniversary, Schwarzman places the fault for the current crises squarely on FASB 157.

You read that correctly: This was not the fault of incompetent lending to borrowers who could never afford to pay back mortgages; nor was it the fault of the rating agencies that slapped AAA on paper that turned out to be garbage; nor was it the responsibility of an MIA Fed that utterly failed in their responsibilities as the chief supervisor of the banking system; nor was it the liability of fund managers who in a misguided grab for yields bought billions of dollars worth of securities that they had no idea of the specific details contained therein.

No, it was the accountants' faults.

You see, those persnickety bean counters forced banks and brokers to actually write down paper for which there was no market.

Therein lies the foible of Schwartzman's Folly, for if you own marketable securities for which there is no market, then by definition, these are not really marketable securities.

How then to price all of this paper on the books? Why, just rely on the people who bought them in the first place! Never mind that they don't understand what they own, they failed to do their due diligence before buying this garbage in the first place. Do not acknowledge these folks have an enormous personal incentives NOT to mark this junk down.

You can trust them! They're good people.

Perhaps this helps to explain why Blackstone Group's stock is off nearly 50% since the IPO: The foolish shareholders of BX have been making the mistake of marking the stocks-to-market. My suggestion: Forget that they are a private equity firm, and consider instead your own approximate fair value interpretation of what the company is worth!

Attention fund managers: Here is my new Stephan Schwarzman inspired idea. Y'all should be buying Blackstone in the open market today at $18, and at the four o'clock close, be marking it at $36. That will be not only be your fair value interpretation of what it's worth, but it reflects a 100% gain instantly.

And, that's before the $.30 dividend.

Indeed, for those investors struggling with the current selloff, I suggest you forgo mark-to-market accounting at present, and instead start implementing mark-to-subjective-self-interested valuations. Your portfolio returns, and you're outside investors, will thank you for the immense improvements in your performance.

The Blackstone Group, Since IPO
(daily chart, one year)

Musical reference and soundtrack via the Talking Heads

Previously:
FASB 157 -- Delayed, or Not? (November 15, 2007)
http://bigpicture.typepad.com/comments/2007/11/fasb-buncha-bit.html

SFAS 157: Market Prices Too Low? Just Ignore Them! (March 31, 2008)
http://bigpicture.typepad.com/comments/2008/03/sfas-157-market.html

Source:
Are Bean Counters to Blame?
ANDREW ROSS SORKIN
NYT, July 1, 2008
http://www.nytimes.com/2008/07/01/business/01sorkin.html

Related:
Summary of Statement No. 157
Fair Value Measurements
http://www.fasb.org/st/summary/stsum157.shtml

Mohamed El-Erian Argues for Propping Up Asset Prices
Naked Capitalism, MARCH 18, 2008
http://www.nakedcapitalism.com/2008/03/mohamed-el-erian-argues-for-propping-up.html

~~~

Continue reading "Same As It Ever Was"

Reshaping of Wall Street

Sunday, June 29, 2008 | 03:30 AM

in Corporate Management | Credit | Derivatives | Finance | Video

Mike Santoli on the Reshaping of a newer, smaller Wall Street:

click for Video

This is based on the article in this week's cover story in Barron's, Future of the Street.

Source:
Future of the Street
MICHAEL SANTOLI
BARRON'S June 30, 2008
http://online.barrons.com/article/SB121460952736112313.html

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Chuck Prince Discovers the Housing Slump

Wednesday, June 18, 2008 | 06:32 AM

in Corporate Management | Credit | Derivatives | Real Estate

An amusing Bloomberg article details the difficulties that former Citigroup Inc. CEO Chuck' Prince III is having selling hios Greenwich home.

Bloomie ironically notes that Prince "lost his job because of the housing slump" -- and the same slump is giving him a hard time when it comes to selling his home:

"Prince's five-bedroom Tudor-style house in Greenwich, Connecticut, has been on the market for six months. He has cut the price by $300,000 to $5.85 million, according to the property listing.

The housing recession has hit the bedroom communities that Wall Street favors most. The median home price fell 8.1 percent in Greenwich in the first quarter from a year earlier. Declines were as much as 25 percent in 14 of 19 wealthy Manhattan suburbs in Connecticut, New Jersey and Westchester County, New York, since the start of the year, according to a Bloomberg survey of brokers and multiple listing services. The drop shows that 83,000 job cuts and $393 billion of mortgage-related losses and asset writedowns at financial firms are damaging even the most expensive U.S. real estate markets."

It is sad and almost -- but not quite -- amusing.

Don't feel to bad for Chuckie, though; His total compensation and severance were in excess of $100 million dollars.

Source:
Chuck Prince Finds Selling Home No Easier Than Fixing Subprime
Sharon L. Lynch
Bloomberg, June 18 2008
http://www.bloomberg.com/apps/news?pid=20601109&sid=auXmRexARYhc&

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Updating Lehman Sell Call

Thursday, June 12, 2008 | 12:25 PM

in Corporate Management | Credit | Earnings | Short Selling | Valuation

2 weeks ago, we reiterated a previous Sell on Lehman Brothers (LEH). That worked out pretty well. Even with the Dow up 160 points today (after falling 1,000 points in only 14 trading sessions) Lehman cannot catch a bid and remains under pressure.

The LEH news is the management shuffle -- CFO, COO out. I suspect more heads will roll, including Fuld's. The bottom line is the Short sellers and bloggers were right, management was full of crap, and my friend Charlie Gasparino was --w ell, watch the video below.

Let's go over the two calls from two weeks ago on CIT Group (CIT) and Lehman (LEH):

CIT is a break-even -- you lost nothing by avoiding the stock. The Lehman Sell call was a jumbo winner:

If you avoided the stock, well, good for you! You stayed out of trouble;

If you sold it, Congrats! You just saved yourself a 30+% whackage.

And if you shorted it or bought put options, well, you should be covering half here, and letting the rest ride. Then you should visit this portion of my Amazon wish list. (Pick out something nice !)

~~~

Here's the breaking news about the first heads rolling at Lehman (more to follow).

Sometime ago, my pal Charlie Gasparino quoted a CEO about how "the shorts were full of bullshit" on air. (were is that link?) or that "the shorts are getting desperate" or "the shorts are full of it."

As it turns out, not so much.

Charlie -- who is buying me a beer next week -- is now on CNBC, breaking the news, discussing Lehman's CFO and COO, bloggers, shorts, and more. Charlie admits these guys were liars, and that they sandbagged everyone.

click for derogatory video

Previously:
Financial Sector: Beware LEH, CIT http://bigpicture.typepad.com/comments/2008/06/financial-secto.html
(back up post)

Dirty Tricks at Lehman?
http://bigpicture.typepad.com/comments/2008/06/dirty-tricks-at.html

Lehman posts Jumbo $3B Loss; To Raise $6B http://bigpicture.typepad.com/comments/2008/06/lehman-posts-ju.html

Chart(s) of the Day: Bear Stearns & Lehman Bros http://bigpicture.typepad.com/comments/2008/03/charts-of-the-d.html

Fuld's Misquote Contest

Tuesday, June 10, 2008 | 07:00 PM

in Corporate Management | Short Selling

At Lehman's annual meeting held in April of this year, Richard Fuld, CEO of Lehman Brothers, was rumored to have said: "I will hurt the shorts, and that is my goal."

That quote was widely circulated -- but it turns out to be wrong. You see, Fuld never actually uttered that phrase. The speech he gave was incorrectly transcribed.

What Fuld actually said was "____________."

~~~

You can fill in the blank below

Sell Rating on Brokers

Monday, June 09, 2008 | 09:15 AM

in Corporate Management | Credit | Derivatives | Earnings | Valuation

Note: This was written Sunday, and scheduled to post later this week -- but given the Lehman news, its more timely this AM:

>
We have been discussing some of the issues surrounding the brokers. We have had an "AVOID" on the sector for the past 2 years (due to balance sheet concerns), and we reiterated a sell on Lehman Brothers (LEH) last week for due to Technical factors. (My pal Charlie Gasparino disagrees with me on this).

Research from Portales reveals the some of the details regarding exposure to further write-downs.

click for larger table

Source: Portales

I do not have high expectations for sector earnings in Q2’08, with more write-downs of RMBS, weak underwriting activity, and questionable trading returns.

Previously:
Dirty Tricks at Lehman? (June 2008)
http://bigpicture.typepad.com/comments/2008/06/dirty-tricks-at.html

Related:
Lehman Set To Raise $5 Billion Amid Losses (WSJ)
http://online.wsj.com/article/SB121296377617855623.html

Lehman Sheds at Least $120 Billion of Assets to End Bear Stigma (Bloomberg) http://www.bloomberg.com/apps/news?pid=20601087&sid=aUaJYcbwzbjI&

Where Will U.S. Banks Beg Next? (WSJ)
http://online.wsj.com/article/SB121296970442155821.html

Lehman posts Jumbo $3B Loss; To Raise $6B

Monday, June 09, 2008 | 07:19 AM

in Corporate Management | Earnings | M&A | Valuation

I'll have more on the brokers later today, but this is simply an enormous whack:

Lehman Brothers to post $3 bln loss; sets $6 bln stock sale
Marketwatch, June 9, 2008
http://tinyurl.com/3qnacq

Charlie Gasparino on CNBC is reporting that he does not expect Lehman to exist as an independent company 6 months from now.

Einhorn comment: "Lehman is raising capital it said it didn't need to replace losses it said it didn't have."

LEH is expected to open 10% lower . . .

UPDATE 2: June 9, 2008 8:48am

Here are the details (via CNBC) of the Lehman offering:

$6 Billion secondary is priced at $28.00 common stock.

Convertible offering carries a 8.75% coupon

%18 conversion premium

UPDATE: June 9, 2008 8:02am

Moody's (MCO) ever timely and precisely accurate, lowers the rating outlook on Lehman Brothers to negative from stable. Moodys: "Concerns over risk management decisions that resulted in elevated real estate exposures and the subsequent ineffectiveness of hedges to mitigate these exposures in the recent quarter."

Previously:
Dirty Tricks at Lehman? (June 2008)
http://bigpicture.typepad.com/comments/2008/06/dirty-tricks-at.html

Gasparino vs Einhorn, Kohn & Ritholtz

Thursday, June 05, 2008 | 01:52 PM

in Corporate Management | Credit | Derivatives

We have a rugby scrum!

ProBanks, ProLehman: Dick Fuld (Lehman CEO), Charlie Gasparino (CNBC), Doug Kass (Seabreeze Partners), Thomas Brown (Bankstocks.com)

Anti-Banks Anti-Lehman: Donald Kohn (FOMC), John Roque (Natixis), David Einhorn (Greenlight Capital), Jim Rogers, Yves Smith (Naked Capital), and little ole me.

>
Fear vs. Facts on Lehman
click for video

Note: We have a sell rating on LEHMAN, with a $20 target -- Charlie Gasparino misspoke -- we have no present short position with Lehman, nor do we think Lehman is a zero, like Bear Stearns.

Einhorn on Lehman
click for video

Parts I, Parts II, Parts III

Fed's Kohn on Banks
click for video

Fed Vice Chairman Donald Kohn says he expect "continued weak earnings and write-downs from banks in coming quarters, reports CNBC's Steve Liesman.

Disclosure: no position in any stock mentioned.

>

Previously:
Dirty Tricks at Lehman? (June 2008)
http://bigpicture.typepad.com/comments/2008/06/dirty-tricks-at.html

Financial Sector: Beware LEH, CIT (June 2008) http://bigpicture.typepad.com/comments/2008/06/financial-secto.html

More Financial Turmoil (June 2008)
http://bigpicture.typepad.com/comments/2008/06/more-financial.html

Dirty Tricks at Lehman?

Thursday, June 05, 2008 | 06:46 AM

in Corporate Management | Legal | Short Selling

Today's must read commentary: naked capitalism calls shenanigans on Lehman Brothers illegal leak of an insider memo to CNBC's Charlie Gasparino:

"On the issue of Lehman supposedly deleveraging (particularly to such a dramatic degree), The New York Times reported that Lehman had reduced its leverage from 31.7x to 25X via a $100 billion asset sale. Note even that claim demands more explanation. How was so much unloaded? What losses were taken? And (most probable) was this done the way recent disposals of leveraged loans have been accomplished, via part of the proceeds being financed? If so, the "sale" is far less meaningful than a true sale and involves the risk that the supposed buyer might try to put the asset back in the future (in this environment of high financial stress, do not underestimate the odds of extreme measures).

And of course, it's also intriguing (to put it way too politely) that the leak to the Times is considerably at odds with the "internal memo" that got into Gasparino's hands. 25x and 12x leverage are hugely different numbers.

Now to the tactics, which stink to high heaven. Why, pray tell, is Lehman resorting to leaks and whispers rather than the proper procedure of public disclosure via a press release?"

I usually love Charlie Gasparino's work, but at this point he has been fed more ~~disinformation~~ propaganda and inside info.

Regardless, leaking an internal memo with non-public, material financial information to CNBC is an SEC violation. Of course, the toothless tiger in charge of regulatory enforcement is too busy chasing down who spread what rumors about Bear Stearns (that turned out to be true) to be bothered with such obvious and blatant illegality.

More naked capitalism:

Don't tell me this may have been an unauthorized employee leak; if this memo was circulated broadly to employees, it was done with the full intent that word would get outside the firm. That happens predictably with mass employee communications. And if it was limited distribution, the recipients, as anyone who has passed a Series 7 exam ought to know, selective disclosure of material information is a big no no under SEC Rule FD.

Would someone please tell me how this could be leaked to a major news organization without an immediate SEC investigation being opened? Or is Cox & Co. to busy investigating David Einhorn to look into his?

Color me disgusted . . .

Disclosure: no position in any stock mentioned.

Sources:
Dirty Tricks at Lehman? (And a Defense of Shorts)
Yves Smith
naked capitalism, JUNE 5, 2008
http://www.nakedcapitalism.com/2008/06/dirty-tricks-at-lehman-and-defense-of.html

Video:
Future of Lehman
CNBC Wed. Jun. 4 2008 | 1:00 DT
http://www.cnbc.com/id/15840232?video=761190267

More Financial Turmoil

Wednesday, June 04, 2008 | 06:37 AM

in Corporate Management | Credit | Derivatives | M&A

For the past year, we have been advising investors to steer clear of the Finance sector. As we noted yesterday, Lehman was in the market buying shares as they fell 9%, according to the WSJ:

"Following an 8.1% drop Monday, Lehman shares slid 9.5% Tuesday. The latest decline came even though Lehman was buying back large amounts of its own shares. Tuesday in New York Stock Exchange trading, Lehman shares were down $3.22 at $30.61, 22% below their book value -- the measure of a company's net worth based on assets minus liabilities -- at the end of February."

Why a company in need of additional capital is out buying shares requires a little explanation for the uninitiated: Any deal for a capital infusion will be based on share price. The firm is likely seeking to shore up that price -- and a bit of confidence in management -- through open market purchases. Although this strategy reduces the total shareholders dilution (what % the new buyers get) in the long, run, it has potential to be very problematic.

Indeed, this strategy proved to be disastrous in the 1929 crash:

"Perhaps the most intriguing parallel, though, is the crude attempt at self-preservation made by the investment trusts in 1929 and the banks now.

In the great crash, investment trusts with vast cross-holdings in each other tried to stem their collapse by buying up their own stock in what the economist JK Galbraith in his book, The Great Crash 1929, described as an act of "fiscal self-immolation". At the time, "support of the stock of one's own company seemed a bold, imaginative and effective course," Galbraith wrote, but ultimately the trusts were just "swindling themselves".

The 1929 situation had as a key factor the Trusts cornering stocks, implementing short squeezes, aggressively plying rumors, and engaging in other unsavory trading situations. These came on top of more than a decade of stock gains. In the present case, the situation is based on highly leveraged financial companies, complex derivatives, and collapsing housing market.

So while many of the elements are very different, the one consistent parallel between the two periods is the excessive usage of leverage by banks and brokers.

And what has this leverage done for Lehman Brothers (LEH) this year? The FT looked into LEH's second quarter, and found huge losses:

Lehman Brothers lost $500m-$700m on certain hedging positions in the second quarter, contributing to what is expected to be a larger-than-anticipated loss that may lead the bank to raise more capital by selling a stake to an outside investor.

People close to the matter said Lehman had opened talks with potential investors including asset managers and Asian banks.

The NYT forecast an even bigger loss; $1billion in Q2. Regardless of actual size, these Q2 losses are the likely basis for the capital raise mentioned above.

The Times article also discusses David Einhorn's short position in Lehman:

"Mr. Einhorn, who runs a $6 billion hedge fund called Greenlight Capital, has been profiting from the Lehman’s growing pain. Critics say he is needlessly fanning fears about the precarious health of the financial industry at the very moment executives are struggling to stabilize their ailing companies. Many on Wall Street still wonder if hedge funds like Greenlight helped bring down Bear Stearns and spread false rumors about the bank, a possibility the Securities and Exchange Commission is investigating.

In an interview on Monday in his Midtown offices, Mr. Einhorn, fresh from his latest round of television appearances, said he was not out to tell Lehman Brothers how to fix its problems. He questioned how the company valued the assets on its books, and whether it was disclosing all the risks it faces. Investors have good reason to question banks: Worldwide, financial companies have suffered more than $380 billion in write-downs and credit-related losses in the last year, laying bare their shoddy risk management. Lehman has been singled out because of the large role it played in the mortgage market and its reluctance to disclose information about its assets compared with other Wall Street banks.

“Lehman has been one of the deniers,” Mr. Einhorn, 39, said.

The bottom line: We remain wary of the Financial sector, for reasons I have enunciated over the past year. There are likely more write downs coming, more capital raises and dilution -- and lower finacial share prices.

For those who believe the crisis is in its 9th inning, best of luck to you . . .

Previously
Financial Sector: Beware LEH, CIT (June 2008)
http://bigpicture.typepad.com/comments/2008/06/financial-secto.html

Sources:
Decision Time for Lehman
Balance-Sheet Woes Most Likely to Force Big Strategic Shift
PETER EAVIS and DAVID REILLY
WSJ, June 4, 2008
http://online.wsj.com/article/SB121255129479844233.html

Lehman hedges lose $500m to $700m
Ben White, Francesco Guerrera and Henny Sender in New York
FT: June 3 2008 23:37
http://www.ft.com/cms/s/0/f453e96c-31b0-11dd-b77c-0000779fd2ac.html

Banks' credit crisis solutions have echoes of 1929 Depression
Philip Aldrick
Telegraph, 1:30am BST 01/06/2008
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/01/cccrisis101.xml

Lehman Battles an Insurgent Investor
LOUISE STORY
NYT, June 4, 2008
http://www.nytimes.com/2008/06/04/business/04lehman.html

Related:
The Panglossian World of Finance
Daniel Cohen
VOX EU, 3 June 2008
http://www.voxeu.org/index.php?q=node/1197

Corporate vs Personal Income Taxes

Tuesday, June 03, 2008 | 03:30 PM

in Corporate Management | Dividends | Taxes and Policy

The Sunday NYTimes has an interesting commentary from Harvard prof Greg Mankiw on Corporate taxes:

Compared with other ways of funding the government, the corporate tax is particularly hard on economic growth. A C.B.O. report in 2005 concluded that the “distortions that the corporate income tax induces are large compared with the revenues that the tax generates.” Reducing these distortions would lead to better-paying jobs.

Of course, a corporate tax cut would affect the federal budget. And any change in tax policy has to be made against a background of a looming fiscal crisis, which threatens to unfold as baby boomers retire and start collecting Social Security and Medicare. In 2007, corporate taxes brought in $370 billion, representing 14 percent of federal revenue. Cutting the rate to 25 percent would seem to cost the Treasury about $100 billion a year.

Part of that revenue loss, however, would be recouped through other taxes. To the extent that shareholders would benefit, they would pay higher taxes on dividends, capital gains and withdrawals from their retirement accounts. To the extent that workers would benefit, they would pay higher payroll and income taxes. Increased economic growth would tend to raise tax revenue from all sources.

Mankiw suggests dropping the corporate tax rate, and making up the revenue short fall with a Pigou tax of 40 cents a gallon on gasoline. That has precisely zero chance of passing.

To give it some context, consider this excellent chart assembled by Time's Justin Fox:

Justin adds some caveats:

-Corporate income is taxed twice -- once as corporate income and once as either capital gains or dividend income (which are both counted under personal taxes)

-Economists teach that corporations are often able to pass on much of their tax burden to employees and/or customers.

-Relatively high corporate tax rates incentivize corporations to find ways to run their profits through lower-tax jurisdictions

-Corporations are just legal constructs owned and operated by people who, for the most part, pay taxes.

Sources:
A chart for the corporation-bashers among you
Justin Fox
Time, May 21, 2008 9:09
http://time-blog.com/curious_capitalist/2008/05/a_chart_for_the_corporationbas.html?xid=rss-curious

The Problem With the Corporate Tax
N. GREGORY MANKIW
NYT, June 1, 2008
http://www.nytimes.com/2008/06/01/business/01view.html

The Fall of Bear Stearns

Thursday, May 29, 2008 | 11:30 AM

in Corporate Management | Credit | Derivatives | Financial Press | Trading

If you haven't read the Kate Kelly's fantastic 3 part WSJ series about the Fall of Bear Stearns, you are missing out. (I cannot wait for the book!)

These are simply fascinating reading:

Part One: Missed Opportunities As the firm's fortunes spiraled downward, executives squabbled over raising capital and cutting its inventory of mortgages.

Part Two: Run on the Bank Executives believed they were about to turn a corner, but rumors and fear sent clients, trading partners and lenders fleeing.

Today: Deal or No Deal? The Fed pressured Bear Stearns to sell itself, but a misstep in the hastily drawn agreement nearly scuttled the deal.

Kudos to the WSJ editors for making the series available to the public.

Video:

Sources:
Lost Opportunities Haunt Final Days of Bear Stearns
KATE KELLY
WSJ May 27, 2008; Page A1
http://online.wsj.com/article/SB121184521826521301.html

Fear, Rumors Touched Off Fatal Run on Bear Stearns
KATE KELLY
WSJ, May 28, 2008; Page A1
http://online.wsj.com/article/SB121193290927324603.html

Bear Stearns Neared Collapse Twice in Frenzied Last Days
KATE KELLY
WSJ, May 29, 2008; Page A1
http://online.wsj.com/article/SB121202057232127889.html

Corporate Bailouts Through History

Tuesday, May 20, 2008 | 07:30 PM

in Corporate Management | Credit | Derivatives | Federal Reserve | Hedge Funds

I came across an interesting piece in BusinessWeek from December 2007 on one of my favorite subjects: Corporate Bailouts Through History.

It needs to be updated to include the Bear Stearns Bail Out, all of the Federal Reserve Lending to Financial firms, as well as whatever Housing Bailout the wizards in Washington come up with.

Sources:
Corporate Bailouts Through History
John Tozzi
http://images.businessweek.com/ss/07/12/1217_bailouts/index_01.htm

Bailouts: Not Just Corporate Welfare
John Tozzi
December 18, 2007, 12:01AM EST
http://www.businessweek.com/investor/content/dec2007/pi20071218_675946.htm

Fannie Mae's Home Prices Ex-Foreclosures

Thursday, May 08, 2008 | 06:59 AM

in Corporate Management | Data Analysis | Real Estate

Yesterday morning, we discussed a few fun Fannie Mae (FNM) factoids from their recent quarter and conference call.

Part of that discussion noted that Fannie's CEO sees 7-9% decrease in home prices in 2008 (previous estimate: 5 - 7%).

There's one small rub to that: As Kevin Depew notes at MV, Fannie Mae does not use foreclosed properties in its price index. Thus, FNM significantly understates home price declines.

Let's go to Kevin:

"The fine print at the bottom of the slide is important because it speaks to the use of the case-Shiller index versus Fannie Mae's own index upon which their price projections are based. According to Fannie Mae, because the Case-Shiller index is value-weighted, it places greater weight on higher cost metropolitan areas. Fair enough.

Using the Case-Shiller index methodology, Fannie Mae says its projections would move from a 7-9% home price decline for 2008 to 10-13%, and from 15-19% peak-to-trough to 20-25%. There's just one catch with those projections increases. They strip out the impact of foreclosure sales.

As Fannie Mae observes, "Foreclosure sales tend to depress the S&P/Case Shiller index relative to the Fannie Mae index."

Another awesome new indicator: In addition to Inflation ex-Inflation, we now can add Home prices ex-foreclosures.

Nice!

Source:
Fannie Mae Says: "Not So Fast, Mr. Smarty-Pants Case-Shiller Index Lover"
Kevin Depew
Minyanville, May 06, 2008 12:00 pm
http://www.minyanville.com/articles/fnm-housing-mortgage-economy-pep-ko/index/a/17042

Huge Project in the Works!

Sunday, May 04, 2008 | 04:15 PM

in Corporate Management | M&A | Politics | Psychology/Sentiment

I have been out of pocket a lot this week at meetings -- I just inked the deal on a huge new project. Details will be forthcoming soon, but I am very jazzed about it.

Hint: It involves Bear Stearns . . .

What Is Yahoo Actually Worth ?

Sunday, May 04, 2008 | 09:50 AM

in Corporate Management | M&A | Valuation

Here's a question worth pondering: What is Yahoo (YHOO) actually worth per share, both today and 3-5 years from now?

I expect Yahoo's stock will get nicely whacked tomorrow. Does this create an opportunity?

There are many ways to answer this question. The traditional balance sheet approach is so well covered, let me suggest something else. Its worth, at least from an M&A perspective, what someone else is willing to pay.

Microsoft (MSFT) believed Yahoo was worth $33, at least as a part of Microsoft. Wouldn't that imply the company has a value above the January 31 pre-bid price of $19 ?

Short answer: Maybe.

The key is whether there are any other bidders lurking put there.

Consider another high profile deal that failed to go through: GE's attempted takeover of Honewell (HON) back in 2001. You may recall that HON was in merger talks with United Technologies (UTX) when Jack Welch offered $55.39 a share, which topped the UTX' bid.

When the deal fell apart -- rejected by EC anti-trust rules -- the acquisition target dropped to the low $30s. By the market lows in fall 2002, it even kissed $20. Over the past 6 years, HON has gained better than 300%. I have been bullish on HON for quite some time, buying after the deal fell apart and holding on for many years; However, I recently sold out of a long held position in HON.

There are some similarities between GE/HON and MSFT/YHOO -- and one crucial difference: Another bidder. In the GE/HON deal, there was also another bidder -- United Technologies. I am less certain a friendly 3rd party bidder will show up to woo Yahoo!

>
Your thoughts?

Fed Opens Yahoo Lending Facility (YLF)

Sunday, May 04, 2008 | 07:06 AM

in Corporate Management | Federal Reserve | M&A | Web/Tech

When the Microsoft-Yahoo news came out last night, I suggested that "the Fed ought to kick in the additional $8 billion or so to make this happen."

Someone on the the Yahoo message boards of YHOO itself took the idea a step further:

"In response to recent events Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create Yahoo Lending Facility (YLF) to avoid significant stock market distruption and to support Yahoo! Inc shares. Yahoo! Inc and its authorized agents will be able to borrow from the facility to support stock price.

This facility will be available for business on Monday, May 5. It will be in place for at least six months and may be extended as conditions warrant. The interest rate charged on the credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

In addition, Yahoo! Inc shareholders who are unable to sell their shares at or above Friday, May 2 closing price, will be able to swap Yahoo! shares for the US Treasuries at the set price of $29.70 per share."

Fed opens Yahoo Lending Facility 3-May-08 11:58 pm

Hat tip: John Borchers

Previously:
Ballmer, Yang Agree to See Other People http://bigpicture.typepad.com/comments/2008/05/ballmer-yang-ag.html

Ballmer, Yang Agree to See Other People

Saturday, May 03, 2008 | 10:07 PM

in Corporate Management | Federal Reserve | M&A

Its not you, its me . . .

Is that it? After all that sturm und drang, the chase ends like this? Microsoft sweetened its offer to $33, knowing full well that Yahoo was going to stand firm at $37 a share, and reject the sweetened bid. Hence, Ballmer got his face saving way to walk without further humiliation.

Why am I not surprised? Two of the least sexy internet names end not with a bang but a thud. Could we have seen at last the end of the dinosaur mating dance?

My friend Paul at Infectious Greed observes:

"This has a been a risky and poorly managed affair from end-to-end. Both CEOs deserve immense blame -- Ballmer for vacillating; Yang for running a public company without the foremost regard for shareholders -- and they are likely to be the two people who suffer the most indignities (including possible termination) over the coming weeks and months."

Not a bad sentiment, but I doubt either board has the stones to fire their execs.

I have an idea for everybody involved: Why doesn't the Fed kick in the additional $8 billion or so to make this happen? I mean, isn't that the role of the central bank?

Source:
Microsoft Withdraws Its Bid for Yahoo
MIGUEL HELFT and ANDREW ROSS SORKIN
NYT, May 4, 2008
http://www.nytimes.com/2008/05/04/technology/04soft.html

Microsoft withdraws offer for Yahoo
Anupreeta Das
Yahoo Finance, 26 minutes ago
http://news.yahoo.com/s/nm/20080504/bs_nm/microsoft_yahoo_dc_12

Creating Fake Alpha

Monday, April 28, 2008 | 08:00 PM

in Corporate Management | Derivatives | Wages & Income

Saturday's discussion about the UBS report, including the post on banker's compensation, led to some intriguing email from people who must remain nameless because of their professional affiliations.

Included amongst the feedback was the phrase "Creating Fake Alpha," which I had first read in John Cassidy's Portfolio column earlier this month, titled The Banker's Bailout:

"Then there is the central and controversial issue of how to pay people who work for financial firms. In blowup after blowup, compensation schemes based on short-term performance have encouraged traders, division heads, and C.E.O.’s to act recklessly.

In the typical case, a trader or executive places a bet that pays off immediately—or soon enough to increase the individual’s bonus or stock-options value—but exposes the firm to long-term dangers.

Examples include Merrill’s decision to step up its production of mortgage securities just as the outlook for the real estate market darkened and Bear’s refusal to keep an adequate reserve of cash on hand. Earlier this year, Raghuram Rajan, a former chief economist at the International Monetary Fund, referred to such behavior as “creating fake alpha—appearing to create excess returns but in fact taking on hidden risks.”

One possible solution to this is to "force traders and senior executives to take a more long-term view." And the way you accomplish that is simple: Pay the traders and risk managers in stock or options that don’t vest for five or 10 years.

Perhaps when we look back at this era from a future vantage point, we will see that this was the last great era of finance (see today's WSJ: Is Finance's Economic Role Ebbing?).

I wonder if the bankers and financial engineers responsible for creating the subprime meltdown and the credit crunch may have finally killed the goose that laid the golden eggs . . .

~~~

What say ye?

Previously:
UBS $37B Write Down, Part II: Compensation
http://bigpicture.typepad.com/comments/2008/04/ubs-37b-write-d.html

Sources:
Analyzing Bear Stearns' Bailout
John Cassidy
Portfolio, Apr 14 2008
http://www.portfolio.com/views/columns/economics/2008/04/14/Analyzing-Bear-Stearns-Bailout

Is Finance's Economic Role Ebbing?
Sector May Make Up Smaller Part of GDP as Jobs Are Being Cut
JUSTIN LAHART
WSJ, April 28, 2008
http://online.wsj.com/article/SB120933096635747945.html

Related:
Switching boats in midstream to ride out credit storm
John Dizard
FT, August 14 2007 03:00
http://www.ft.com/cms/s/0/0739ecac-49fe-11dc-9ffe-0000779fd2ac.html

Bankers’ pay is deeply flawed
Raghuram Rajan
FT, January 8 2008 18:04
http://www.ft.com/cms/s/0/18895dea-be06-11dc-8bc9-0000779fd2ac.html

UBS $37B Write Down, Part II: Compensation

Saturday, April 26, 2008 | 11:26 AM

in Corporate Management | Derivatives | Wages & Income

Buried at the end of the report discussed earlier is the specific criticism of the financial compensation system in place at UBS for traders and the engineers of structured products.

The bigger question is how little their quaint little system differs from any other large bank or brokerage firm on Wall Street. Remind me to ask Johns Thain & Mack about that.

Excerpt:

6.3.8 Compensation

UBS has identified the following contributory factors related to compensation and incentives:

• Structural incentives to implement carry trades: The UBS compensation and incentivisation structure did not effectively differentiate between the creation of alpha (i.e., return in excess of a defined expectation) versus the creation of return based on a low cost of funding.

• Asymmetric risk / reward compensation: The compensation structure generally made little recognition of risk issues or adjustment for risk / other qualitative indicators (e.g. for Group Internal Audit ratings, operational risk indicators, compliance issues, etc.). For example, there were incentives for the CDO structuring desk to pursue concentrations in Mezzanine CDOs, which had a significantly higher fee structure (approximately 125-150 bp) than High-Grade CDOs (approximately 30-50 bp).

• Insufficient incentives to protect the UBS franchise long-term: Under UBS’ principles for compensation, deferred equity forms a component of compensation that generally increases with seniority. Essentially, bonuses were measured against gross revenue after personnel costs, with no formal account taken of the quality or sustainability of those earnings.

Gee, with that compensation structure in place, how could anything possibly go awry . . . ?

Previously:
Report on UBS' $37 Billion Writedown
http://bigpicture.typepad.com/comments/2008/04/report-on-ubs-3.html

Related:
Bankers’ pay is deeply flawed
Raghuram Rajan
FT, January 8 2008 18:04
http://www.ft.com/cms/s/0/18895dea-be06-11dc-8bc9-0000779fd2ac.html

Report on UBS' $37 Billion Writedown

Saturday, April 26, 2008 | 07:06 AM

in Corporate Manageme