Wednesday, August 29, 2007

Five Things You Must Know About the Fed - University - The Finance Professor - BAC - C

Taking or teaching a Money and Banking course? Or just interested in learning more about how the Fed works, the's new site has a nice review of what the role of the Fed now is.

Five Things You Must Know About the Fed - University:
"The Fed is responsible for much more than determining the fed funds rates. According to the Fed's own publication entitled The Federal Reserve System Purposes & Functions, 9th Edition (June 2005), the Fed 'is the central bank of the United States' and was started by Congress 'to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded."

Monday, August 27, 2007

SSRN-Motivating Innovation by Gustavo Manso

I was actually looking for another paper by Manso on step up bonds when I found this one. It is pretty cool and very intuitive (you can't punish failures if you want people to take chances).

SSRN-Motivating Innovation by Gustavo Manso:
"...incentive schemes that motivate exploration are fundamentally different from standard pay-for-performance incentive schemes used to induce effort. The optimal compensation scheme that motivates exploration exhibits substantial tolerance (or even reward) for failure and reward for long-term success. Moreover, even though the principal can terminate the agent, inefficient continuation may be optimal to motivate exploration, since the threat of termination may prevent the agent from exploring new untested approaches. Finally, commitment to a long-term compensation plan and timely feedback on performance are essential ingredients to motivate exploration. The institution of tenure, debtor-friendly bankruptcy laws, and golden parachutes are examples of schemes that protect the agent when failure occurs and thereby encourage exploration."
This also has some implications for grading presentations and papers, but before I get into that, I better head to class.

Manso, Gustavo, "Motivating Innovation" (January 2, 2006). AFA 2007 Chicago Meetings Paper Available at SSRN:

Shorting Cramer - Barron's Online

You all know my take on Cramer--he is a really smart guy and great marketer, but whether he can beat the market or not is very much in doubt. (And please do not tell me he did and therefore he can--past performance does not guarantee future performance...survivorship bias....etc.)

But that said, many people do think the world of him so I was especially interested when a former student texted me the following:

Shorting Cramer - Barron's Online:
"Cramer, by all accounts, had a stellar career as a hedge-fund manager. And he is held out by CNBC as the guy who can help viewers make big money. But a comprehensive and careful review of his stock picks by Barron's finds that his picks haven't beaten the market. Over the past two years, viewers holding Cramer's stocks would be up 12% while the Dow rose 22% and the S&P 500 16%, according to a record of 1,300 of the CNBC star's Buy recommendations compiled by, a Website run by a retired stock analyst and loyal Cramer-watcher. We also looked at a database of Cramer's Mad Money picks maintained by his Website, It covers only the past six months, but includes an astounding 3,458 stocks -- Buys mainly, punctuated by some Sells. These picks were flat to down in relation to the market. Count commissions and you would have been much better off in an index fund that simply tracks the market."
3,458 picks? Wow. Talk about transaction costs.

Wednesday, August 22, 2007

Really it's ok, everyone is doing it

Top four banks tap Fed discount window - Yahoo! News:
"Citigroup , Bank of America and other top banks took the rare step of borrowing $2 billion from the U.S. Federal Reserve on Wednesday, in a bid to reassure markets and remove the stigma associated with getting financing from the central bank.... Borrowing money directly from the Fed has historically been seen as a sign of weakness, but Bank of America, JPMorgan Chase & Co, and Wachovia Corp said they did it for the sake of the financial system. All four banks emphasized they have access to other, cheaper funds."

Tuesday, August 21, 2007

20 timeless money rules - Be humble (1) - Money Magazine

These are good.

20 timeless money rules - Money Magazine:
"Money Magazine collected the best advice from some of the smartest investors (and other people) who have ever lived."

Saturday, August 18, 2007

U of R remembers one of its teachers

More on the sad and tragic death of Mike Barclay: - U of R remembers one of its teachers:
"Barclay came to the University of Rochester fresh out of Stanford University in 1985. We learned he was one of the world's top financial economists and finance professors. He'd won eleven teaching awards. Ranked by Business Week magazine as one of the top 12 professors in the United States. His colleagues say he was as passionate about flying as we was about teaching... And will be sorely missed."

Friday, August 17, 2007

Dell, Admitting Managers Inflated Sales Reports, Will Restate Income - New York Times

Dell, Admitting Managers Inflated Sales Reports, Will Restate Income - New York Times:
"The senior management of Dell regularly falsified quarterly returns from 2003 through 2006 to create the appearance that the company had met sales targets, the computer maker disclosed Thursday. The accounting misconduct also resulted in inflated earnings, so the company will restate its net income for the period by $50 million to $150 million, it said. The disclosures came after a yearlong internal probe. The Securities and Exchange Commission is also investigating the company’s behavior."
While classes have not started yet here at SBU, I am sure this will be talked about in class.

Some suggested ways of bringing it into the classroom:
  • Why might a manager want to do this?
  • What can be done to prevent it? Lower the likelihood?
  • Do incentive based pay plans (be it accounting-based or market-based) increase the likelihood of such behavior? Do the benefits of these plans outweigh the problems?
  • How might an auditor find such problems?
  • Are there red flags for an investor that would suggest earnings management?

The profession lost one of my favorite professors today

A friend just emailed me with the horrible news that Michael Barclay was killed today in a plane crash. I took him for several classes and can say he was one of my favorite teachers I ever had.

From the Rochester Business Journal:
"Michael Barclay, a member of the Simon Graduate School of Business finance faculty at the University of Rochester for more than two decades, died Thursday in a seaplane crash between Empire Boulevard and Irondequoit Bay in Penfield, school officials said. The crash also claimed the life of another area resident, according to news reports. “All of us at the Simon School are deeply saddened to learn of this tragic accident,” said Dean Mark Zupan...."

Tuesday, August 14, 2007

Adelphia's Rigases Report to Prison -

Adelphia's Rigases Report to Prison -
"After fighting one of the nation's largest corporate fraud cases, former Adelphia Communications executives John and Timothy Rigas reported Monday to a federal prison in North Carolina. Adelphia founder John Rigas and his son Tim, the company's former chief financial officer, were convicted in 2004 on multiple charges of securities fraud, conspiracy to commit bank fraud and bank fraud, but had remained free while their appeals navigated the court system. In June, U.S. District Judge Leonard Sand rescinded the order allowing them to remain free, giving the father and son until Aug. 13 to report to prison."
For some past coverage of the Adelphia case click here.

A look at Bear and Goldman Worldwide:
"When Bear Stearns's two funds, High-Grade Structured Credit Strategies and High-Grade Structured Credit Strategies Enhanced Leverage, nosedived in June, the company tried to forestall a total collapse by halting withdrawals and unloading securities to meet lenders' demand for more collateral. That strategy failed, and Bear Stearns was forced to bail out one of the funds with a $1.6 billion loan. Investors in the other fund were wiped out. Goldman took a different course of action. When assets in the firm's Global Equity Opportunities hedge fund dropped by 28 percent this month, Goldman yesterday pumped in $2 billion of fresh capital and raised $1 billion more from investors"
Thanks to the NY Times' Dealbook for pointing out this article!

Monday, August 13, 2007

The Insiders Aren’t So Bearish, After All - New York Times

The Insiders Aren’t So Bearish, After All - New York Times:
"Professor Seyhun argues, insider sales need to be weighed according to whether they occur immediately after the exercise of an option. In unpublished research, he has done just that. And he has taken into account other factors he has found to be important in interpreting insider behavior. These include the type of insider who made the transaction, the size of the transaction, and whether it occurred in the context of a rising or falling stock price..."

Friday, August 10, 2007

Deloitte to Pay $167.5M in Adelphia Case - Auditing -

Deloitte to Pay $167.5M in Adelphia Case - Auditing -
"Deloitte & Touche has agreed to pay $167.5 million to settle a case with a trust that was formed after Adelphia Communications Corp. collapsed in 2002. The news comes just as former Adelphia CFO Timothy Rigas and his father, Adelphia founder John Rigas, head to federal prison."

Thursday, August 09, 2007

Is it spreading?

I feel like I did when SARS was the big scare or watching Bird Flue outbreaks? I guess that is why they call it contagion!

BNP Paribas Freezes 3 Funds - New York Times:
"France's biggest listed bank, BNP Paribas , froze 1.6 billion euros ($2.2 billion) worth of funds on Thursday, citing the U.S. subprime mortgage sector woes that have rattled financial markets worldwide.

The frozen funds amount to less than 0.5 percent of funds under management for the eurozone's second biggest bank by value, but later in the day a separate European fund valued at 750 million euros was frozen too, and a Dutch bank pulled its planned new listing after suffering subprime losses."
and from The Financial Times:

"The yen spiked higher on Thursday as BNP Paribas became the latest bank to warn of problems related to the US subprime mortgage market.

The French bank said it had decided to suspend redemptions from three of its funds because of what it called a “complete evaporation of liquidity” in certain market segments of the US securitisation market.

The new sent shockwaves through the markets as banks raced for cash, sending overnight rates soaring and prompting the European Central Bank to inject funds into the system to ease liquidity concerns. The Federal Reserve followed suit later... "
Marketwatch on the Fed open market activity
" Federal Reserve carried out a $12 billion one-day repurchase agreement, on top of an earlier $12 billion 14-day repo."
Which is exactly what they should be doing. Even Cramer would likely be happy (or at least happier, he also wants a discount rate cut).

Wednesday, August 08, 2007

Is Cramer right? Yes and no

While his rampage was funny, was Cramer's message correct? Is there a liquidity problem? Is it getting worse?

I obviously do not know (and as Cramer points out Academics don't know things like this), but did have a few people contact me about it and there is some evidence that things are getting bad, but not Armageddon bad as Cramer claimed).

But here are some articles that suggest things are at least getting a tad dry (as in opposite of liquid).

NY Times DealBook:
"Just a few weeks ago, selling the debt used to fund leveraged buyouts was a piece of cake. Now, it borders on the impossible. As a result, many of the investment banks that agreed to finance these deals are on the hook to make the loans themselves — at least until buyers and sellers can settle on a price and the debt can be resold.
Interesting factoid: Goldman is holding over $71 Billion of this debt, Bear less than $20 B.

One more? Ok. On CNBC Bill "Please don't call me Eeyore" Gross who manages PIMCO's Total Return bond fund gives his view that the lack of liquidity could have a severe negative impact on the economy.
"He points to the static U.S. household survey of employment and July auto sales figures as "indicative of prior periods preceding recessions.""
But as of yet the sky is not falling (or shaking as Gross called it an 8.o on the Richter Scale!).

For instance, while the banks have large positions (although relatively small as a total percentage of firm value), the articles only partially suggest that these investment bankers are not without their defenses. For instance, they are almost assuredly hedging this exposure. How? One way is with a relatively new credit index. From Forbes:
"The leveraged loan market is not the only sector of the fixed-income market where the investment banks shrewdly created an index that would help them hedge against one of their most profitable but risky businesses--the issuance of asset-backed securities like the mortgage bonds used to finance the subprime housing market.In early 2006 a small number of firms ...formed the ABX index (a credit default swap of asset-backed mortgages) of 30 most liquid mortgage-backed bonds. The savviest players like Deutsche Bank (which reportedly made $250 million) and several hedge funds on both sides of the Atlantic began shorting that ABX index in early 2006 at par. It now sells at 35, implying that the value of those mortgage-backed bonds and others of their ilk have lost 65% of their value, a potential loss in the tens of billions of dollars."
Moreover, today we got good news as the primary market still functioned very well as there were several large issues that went off without a hitch. From TheStreet.
"..10-issue high-grade bond calendar is a test of the market on many levels. First, 10 issues in one day is about as much as the syndicate desks and portfolio managers can handle, says one manager. He says the deals thus far are going relatively well.."
President Bush added his view that there was enough liquidity:
"President George Bush said that despite fear of a credit crunch, the US financial system is resilient enough to withstand recent volatility in the financial markets.

'There is a lot of liquidity in our system,' Bush said in a group interview with financial reporters after meeting with his top economic advisers at the Treasury Department.

And finally, investors got their two cents in and drove up equities (for instance Bear is up about 20% in just over 2 days!) from a low near 100 to an intra day high of over $120.

S&P Launches U.S. Commercial Real Estate Indices Developed with Schwab

Worried about a lack of liquidity impacting real estate? Once again financial innovation allows a way of hedging this risk.

S&P Launches U.S. Commercial Real Estate Indices Developed with Schwab:
"Expanding its widely followed suite of investable real estate indices, Standard & Poor's announced today the launch of the S&P/GRA Commercial Real Estate Indices (SPCREX). The indices measure the change in commercial real estate prices by property sector and geographic region, and are designed to be a reliable and consistent benchmark for commercial real estate prices in the United States."

Bankdating leads to conviction

NY Times:
"Jurors in Federal District Court in San Francisco convicted the former chief executive of Brocade Communications Systems, Gregory L. Reyes, 44, on 10 counts of conspiracy and fraud.The verdict ended a five-week trial in which Mr. Reyes was accused of intentionally changing the grant dates for hundreds of stock option awards without disclosing the move to investors."
As a Met's fan, the headline petrified me (Reyes Convicted). As I dove into the article, I was at least relieved that it was not this Reyes (and even a bit vindicated as I have been arguing for months that backdating was a big deal (if for no other reason it provides another look into the firm and its governance) and seemingly few others agreed.). Obviously expect more prosecution after this.

Tuesday, August 07, 2007

SSRN-Has New York Become Less Competitive in Global Markets? Evaluating Foreign Listing Choices over Time by Craig Doidge, George Karolyi, René Stulz

NY still has it! That is the conclusion of a new working paper by Doidge, Karolyi, and Stulz. They find that while fewer firms are cross listing on the NYSE, it is not due to increased regulation.

SSRN-Has New York Become Less Competitive in Global Markets? Evaluating Foreign Listing Choices over Time by Craig Doidge, George Karolyi, René Stulz:

From the abstract:
"This decline in cross-listings is explained by changes in firm characteristics rather than by changes in the benefits of cross-listing. We show that, after controlling for firm characteristics, there is no deficit in cross-listing counts on U.S. exchanges related to SOX. Investigating the valuation differential between listed and nonlisted firms (the “cross-listing premium”) from 1990 to 2005, we find that there is a significant premium for U.S. exchange listings every year, that the premium has not fallen significantly in recent years, that it persists when allowing for unobservable firm characteristics, and that there is a permanent premium"
A look-in:
"There is a governance benefit from cross-listing on a U.S. exchange because listing reduces controlling shareholders’ ability to extract private benefits from the corporations they control (see, e.g., Doidge, 2004, for empirical evidence).Some controlling shareholders are willing to bear the cost of better governance because it enables them to raise capital on better terms to fund their firm’s growth opportunities. Consequently, controlling shareholders trade off the cost of cross-listing, defined by the improved governance systems which reduce their private benefits, against the benefit of cross-listing, captured by their ability to fund growth opportunities on better terms. Only firms for which the benefit more than offsets the cost will list in the U.S. As a result, U.S. cross-listed firms are worth more because they have better growth opportunities and better governance."
Of course this runs counter to previous work and may not be the last word, but it is the most recent word.


Doidge, Craig Andrew, Karolyi, George Andrew and Stulz, René M., "Has New York Become Less Competitive in Global Markets? Evaluating Foreign Listing Choices over Time" (July 2007). Fisher College of Business Working Paper No. 2007-03-012 Available at SSRN:

Monday, August 06, 2007

Catching up, Looking around.

Yeah it is time to try to clear my desktop again, so here are some of the interesting articles I have been meaning to mention:

From the NY Times DealBook:

A "Jerk Premium"?
"Daniel Gross of Slate has an additional theory: Part of the price — possibly as much as a billion dollars, he estimates — was simply the amount that Mr. Murdoch had to pay to compensate for his off-putting reputation. Mr. Gross’s story summarizes the concept more bluntly with this headline: “The Jerk Premium.”"
When it comes to mergers, are highly rated investment banking firms worth it?
"...It turns out that if you look at the stock market performance of companies that made acquisitions in recent years, having Goldman Sachs or Morgan Stanley in your corner may not always have been the best choice according to an exhaustive new analysis by Capital IQ, a unit of Standard & Poor’s...."
While I am pretty sure three years of data can hardly be called "exhaustive", but it is interesting. BTW, as a side note to this one, several Bona grads work as Investment Bankers at Deutsch Bank, so it is worthwhile to note this particular quote:
"Deutsche Bank...has advised on deals in which buyers appear to have wildly outperformed others in their sector."
Over at Bear Stearns the news just keeps coming. Last week it was reported that a third fund was in trouble. As a result Bear told investors they could not redeem shares right now. Then for his Nero imitation (he was reportedly away at a bridge championship as the turmoil boiled), Co-president and co-COO Warren Swartz was let go. Bonaventure Grad Samuel Molinaro Jr. takes on the responsibilities of COO in addition to his current role of chief financial officer. wishes a Happy 5th Birthday to Sarbanes-Oxley. However, as they also point out that accounting regulation may be getting too complex: "many members blame the growing number of restatements — 10 percent of public companies restated their financials in 2006, a number of them said — on the complexity in the current U.S. financial reporting system in the United States."

In a week where Bear Stearns continues to have troubles based off of the mortgage market, American Home Mortgage essentially shut down and filed for bankruptcy, CBS' s Market Watch worries that....
"...the turmoil in the markets in the past few weeks be the precursor of a full-blown credit crunch that could force the U.S. and global economies into a recession?"
Which while true, pretty could be taken from any business news report at any time in recorded history. I confess I read it since the headline included a Katrina reference. But alas, it is fun and easy to report. That said, of course the sky could be falling. Which brings us to Jim Cramer.
I think the guy is smart and a great showman. But come on. This is a bit extreme. Indeed it will make us totally forget Howard Dean's tame meltdown.

Want another video? This is awesome. It is a look back at and the powerpoint slides that Mark Cuban used during their IPO which took place 9 years ago.

I was surprised by this one. Robert Nardelli (yeah the guy who used to run Home Depot) was named the new head of Chrysler.

The XM-Sirius possible merger is still very murky (will be be approved? will it be allowed?) but at least we now know where the Archbishop of NY Edward Egan stands on the issue. He is for the merger. I know I will sleep better now.

More on a religious note, MSNBC just reaffirms what we all know but act as if we don't: namely that money can not buy happiness.
"We ultimately get satisfaction from our relations with family and friends, the love we give or receive, the meaning we find in work, service, religion or hobbies."
And finally a link with almost no finance content, Tyler at the Marginal Revolution (one of my favorite econ blogs), writes on Twinkies. Really. I am glad I do not eat them!

Ok, time for me to get to work. :( School starts soon. Too soon!

BTW if you get a chance, check out the newly redone website! It is where most of my time has been going of late.

Sunday, August 05, 2007

Money: The Dollar's Depths, Explained - US News and World Report

USNews and World Report has an interesting "interview" with Columbia Business School Finance Professor
Robert Hodrick on the dollar and forex.

Money: The Dollar's Depths, Explained - US News and World Report:
"...the U.S. current account deficit is about $800 billion a year, which means every business day we buy in excess of $3 billion of foreign goods and services more than foreigners buy here.

US NEWS: Which also means that every day, foreigners invest $3 billion in the U.S. economy.

Right. And our asset prices, interest rates, exchange rates, and stock prices adjust continuously to make this happen."

Be sure to read PAGE TWO--it is better than page one.

Saturday, August 04, 2007

Free Money Finance: Warren Buffet Recommends Index Funds

Free Money Finance does its normal wonderful job on commenting on Buffet's comments on Index funds!

Free Money Finance: Warren Buffet Recommends Index Funds

BTW in this Buffet is also saying that Hedge Funds are not all they are cracked up to be either.

More fall out from Bear Stearns

Bear Stearns preparing to oust president: WSJ | News | Market News | Reuters:
"Bear Stearns Cos....whose shares slumped on Friday, is preparing to oust Warren Spector, one of its two presidents and its co-chief operating officer, the Wall Street Journal reported on Saturday."

Friday, August 03, 2007

How Murdoch will act at the Wall Street Journal from Greenslade

I love reading the Wall Street Journal. Thus, it has been with largely silent concern that I have watched from a far the takeover by Robert Murdoch. Of course Murdoch has no incentive to ruin the paper, but my worry is that rather than ruin it, he will change it. Make it more mainstream etc. (even more than a liberal-conservative worry, I can see the paper being "dumbed down" to sell more papers. Thus, the Guardian's following quote (actually from the NY Times) is quite appropriate:
How Murdoch will act at the Wall Street Journal from Greenslade: "To that end, I think this remark, by David Carr in the New York Times, reflects the attitude of the overwhelming majority of WSJ readers: 'I will continue to read the Wall Street Journal expecting the best, but keeping an eye out for the worst.'"

Thursday, August 02, 2007

Higher Deductibles Sting Homeowners - MarketWatch

While the person who sent this to me wanted me to criticize it, I can not find anything wrong with it. Indeed it seems a good way to keep premiums down.

Higher Deductibles Sting Homeowners - MarketWatch:
"...more insurers change how they calculate deductibles, especially for damage caused by windstorms and other natural events. The newer method of figuring deductibles is based on a percentage of the insured value of your home -- typically between 1% and 5%, and even higher in earthquake zones. With home prices having soared in many areas in recent years, this often works out to be far more costly to the homeowner than the traditional flat-dollar method of figuring deductibles, by which you pay the first $1,000 or so of home repairs"
Speaking of insurance, did you see that the insurance companies won again on appeal in teh case of flood damage from Katrina.

From the Washington Post:
"Hurricane Katrina victims whose homes and businesses were destroyed when floodwaters breached levees in the 2005 storm cannot recover money from their insurance companies for the damages, a federal appeals court ruled Thursday.
Sad, and I feel awful for the victims, but not very unexpected.

What’s My House Worth? And Now? - New York Times

Info overload?

What’s My House Worth? And Now? - New York Times:
"In June, for instance, more than 39 million people visited the 20 most popular real estate Web sites, a 22.4 percent increase in visitors over the same period in the previous year, according to Nielsen/NetRatings Inc. Not only that, but a lot of those people are becoming addicted. At, for instance, 44 percent of the site’s users visited five or more times in June, and 25 percent of them 10 or more times, according to a spokeswoman for the site."