Saturday, May 31, 2008

At Bear, an Apology Is Met With Silence -

At Bear, an Apology Is Met With Silence -
"The tally in support of the merger was 84 percent, Bear Stearns said....Inside the building, however, the mood was somber, if not tearful...The new entity will be much leaner....bout 7,500 Bear Stearns bankers have lost their jobs, along with as many as 3,500 employees of JPMorgan.

and later:

"I have no anger, only regret,” Mr. Cayne said...."I personally apologize. I feel an enormous amount of pain and management feels an enormous amount of pain.”

The audience of Bear employees, directors and investors, many of whom Mr. Cayne has known for years and who lost large parts of their savings and fortunes, received his remarks in dead silence."


Friday, May 30, 2008

Study Casts Doubt on Key Rate -


Suppose you have two measures of something. One that is market driven (observable prices) whereas the other is based off reported data. Usually the two move together. However, when they diverge, someone must ask why and which is more correct.

That is essentially what the WSJ did in the following article. They look at LIBOR and teh credit spread to gauge the level of uncertainity in the market. Sure enough, the two usually move together, but not always.

Study Casts Doubt on Key Rate -
"...beginning in late January, as fears grew about possible bank failures, the two measures began to diverge, with reported Libor rates failing to reflect rising default-insurance costs, the Journal analysis shows. The gap between the two measures was wider for Citigroup, Germany's WestLB, the United Kingdom's HBOS, J.P. Morgan Chase & Co. and Switzerland's UBS than for the other 11 banks. One possible explanation for the gap is that banks understated their borrowing rates."
Much of the paper is based on the fact that LIBOR is based BORROWING rates as reported by banks. This method of LIBOR calculation is not what I thought was done, so I learned somethig here. I always thought this was calculated by the rate banks were willing to lend at not what they were borrowing at. The two could have different numbers if the banks have an incentive to report lower rates for borrowing to assure the market their financial soundness.

How different cultures deal with free loaders

From the WSJ's Science Journal -
"In the most sweeping global study yet of cooperaton, a team of experimental economists tested university students in 15 countries to see how people contribute to joint ventures and what happens to them when they don't. The European research team discovered startling differences in how groups around the world react when punishment is handed out for antisocial behavior."
Another look in:
"Among students in the U.S., Switzerland, China and the U.K., those identified as freeloaders most often took their punishment as a spur to contribute more generously. But in Oman, Saudi Arabia, Turkey, Greece and Russia, the freeloaders more often struck back, retaliating against those who punished them...."
The actual article is here.

Charges of Insider Trading for a Wall Street Luminary -

Charges of Insider Trading for a Wall Street Luminary -
"Dr. Marshall, a retired professor at St. John’s University and a fixture on the Wall Street lecture circuit, was accused by the Securities and Exchange Commission in March of passing inside information about a multibillion-dollar corporate takeover to a professor at Pace University. The Pace professor, Alan L. Tucker, made more than $1 million trading on the tips in 2007, according to the S.E.C. The Justice Department has filed criminal charges"
While this was first reported back in March, the NY Times article now has nmany more details. Definitely one to use in class.

Thursday, May 29, 2008

Bears Last Day on Earth - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times

Bears Last Day on Earth - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times:
"Bear Stearns shareholders are all but certain to approve the sale of the securities firm to JPMorgan in a vote Thursday morning. Bear will most likely be immediately merged out of existence as a public company. The Bear Stearns name will all but disappear, according to a report in Crain’s New York. To avoid the appearance of grave-dancing, J.P. Morgan will wait several weeks before etching its name on Bear’s headquarters on Madison Avenue, Crain’s said.

The Deal Professor takes the opportunity to consider what Bear’s downfall says about moral hazard, systemic risk and corporate governance."

Fear, Rumors Touched Off Fatal Run on Bear Stearns -

Fear, Rumors Touched Off Fatal Run on Bear Stearns -
"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.
Part Three: Deal or No Deal? The Fed pressured Bear Stearns to sell itself, but a misstep in the hastily drawn agreement nearly scuttled the deal."

Wow. Possibly the best series of articles I have seen in the WSJ in years. One Look-in:
""Do you have any idea what is going on?" Mr. Minikes asked, cutting off his boss. "Our cash is flying out the door. Our clients are leaving us."

It was the beginning of a frantic 72 hours that would bring the Wall Street firm to its knees and threaten the stability of the global financial system. Interviews with more than two dozen current and former Bear Stearns executives, directors, traders and others involved show how quickly a company that took 85 years to build could unravel."

Monday, May 26, 2008 Exclusive Exclusive: "
Credit-default swaps are derivatives, meaning they're financial contracts that don't contain any actual assets. Their value is based on the worth of underlying loans and bonds. Swaps are similar to insurance policies -- with two key differences.

Unlike with traditional insurance, no agency monitors the seller of a swap contract to be certain it has the money to cover debt defaults. In addition, swap buyers don't need to actually own the asset they want to protect.

It's as if many investors could buy insurance on the same multimillion-dollar home they didn't own and then collect on its full value if the house burned down

Friday, May 23, 2008

Yahoo Nominates Existing Board -

Although the stakes are lower, this may be more exciting than the presidential election!

Yahoo Nominates Existing Board -
"Yahoo nominated 9 of its 10 existing directors for re-election to the company’s board on Thursday, setting the stage for a showdown with dissident shareholders at its annual shareholder meeting."

Tuesday, May 20, 2008

Court Upholds Tax Exemptions for Municipal Bonds - New York Times

Court Upholds Tax Exemptions for Municipal Bonds - New York Times:
"The Supreme Court on Monday upheld the preferential tax break that nearly all states give their residents who invest in bonds issued by the state and its municipalities. By a vote of 7 to 2, the justices rejected the argument that a state engages in unconstitutional discrimination against interstate commerce by exempting the interest on its bonds from residents’ taxable income while taxing the interest earned on the bonds of other state"

Monday, May 19, 2008

Five Basics for Building a Solid Financial Future - New York Times

Five Basics for Building a Solid Financial Future - New York Times:
"“In Defense of Food” that provides clarity amid the bounty of choices on supermarket shelves: “Eat food. Not too much. Mostly plants.”

Boiling down investing is a similar exercise: Index (mostly). Save a ton. Reallocate infrequently.
Good advice.

The rise of Islamic finance | Islamic Finance and Banking

The rise of Islamic finance | Islamic Finance and Banking: "
Finance that complies with Shariah, or Islamic law, is still a niche within the ethical investing niche. In all, there are at least $500bn worth of Islamic finance assets worldwide. That's not much in terms of global banking - US banks alone hold about $12.7 trillion in assets.

But the industry's growth is eye-catching: Islamic banking has expanded by more than 10% annually over the past decade, according to Standard & Poor's. It's grabbing the attention of some of the biggest banks in the world and changing how they do business."

The story continues...Microsoft and Yahoo

From U.S.:
"Microsoft Corp., the software maker that scrapped a $47.5 billion bid for Yahoo! Inc. this month, may forge a partnership with the Internet company on search advertising to challenge Google Inc.

Microsoft, which abandoned its takeover attempts May 3, said yesterday that it's exploring a transaction with Yahoo and may renew attempts to buy the entire company. The two may combine units that sell ads that run next to Internet search results, said Morningstar Inc. analyst Toan Tran.

Billionaire investor Carl Icahn is pressuring Yahoo to ally itself with Microsoft to compete with Google"
From a teaching perspective, this one just gets better and better. Stay tuned.

Friday, May 16, 2008

Debating the CBS-CNET Deal - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times

Debating the CBS-CNET Deal - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times
"CBS’s $11.50-per-share deal for CNET seems expensive by at least two measures. Its 45 percent premium is unusually high, and Mr. Bazinet of Citi calculates that the price is 18 times CNET’s projected 2008 Ebitda, above the multiples recently paid for Bankrate (12 times Ebitda) and WebMD (14 times)....And on the question of price, CBS said it believes that the deal will have an internal rate of return of 13 percent and will not have any effect on its dividend, which it just increased last quarter."

Given the weeks and weeks we spend on valuation and is close cousin capital budgeting, I thought my students might like to see some of the things are actually used ;)

Thursday, May 15, 2008

Text of Icahn’s Letter to Yahoo Board - New York Times

This is good. Yet another case of "this will be used in at least some classes!"

Text of Icahn’s Letter to Yahoo Board - New York Times:
"It is irresponsible to hide behind management’s more than overly optimistic financial forecasts. It is unconscionable that you have not allowed your shareholders to choose to accept an offer that represented a 72% premium over Yahoo’s closing price of $19.18 on the day before the initial Microsoft offer. I and many of your shareholders strongly believe that a combination between Yahoo and Microsoft would form a dynamic company"

Does anyone know of anyone writing a case on this? I would like to but don't want to reinvent the wheel.

FT Alphaville » Blog Archive » More than you (may) need to know about commodities hedging

This one will definitely be used in class. From the Financial Times.

How will it be used in class? For instance, the story starts out saying more are hedging now after prices have risen (like closing the barn door after horses have escaped?). It also talks about how much and what type of hedging is currently being done.

FT Alphaville » Blog Archive » More than you (may) need to know about commodities hedging:
"Airlines and other transportation companies are much more active than other energy commodities consumers when it comes to hedging using financial instruments, with nearly 65 per cent of their total exposure hedged in this way. In comparison, the typical industrial company uses financial instruments to hedge just over 40 per cent of its exposure, and utilities hedge an average 48 per cent.

In carrying out their financial hedging strategies, slightly more than 70 per cent of the survey participants said they use OTC swaps. Just over half use OTC options and roughly a third use structured derivatives. Fifty-eight per cent of the companies also say they actively trade physical products with dealers.

Across all industries, hedging strategies vary widely in terms of sophistication and approach, notes Greenwich. Many participants in the 2008 survey said they have no actual hedging policies at all or carry out their hedging through a largely subjective process. Others, especially airlines and oil companies, use advanced formulaic strategies to hedge individual commodities exposures and make strategic decisions about hedging policy at the board level."

Foreclosures take an emotional toll on homeowners -

We often talk about emotions affecting finance, this reminds us that the causation goes both ways. Folks it is just money. Definitely not worth killing yourself over as some in article have done.

Foreclosures take an emotional toll on homeowners -
"One in seven homeowners worry that they won't be able to make their mortgage payments on time over the next six months, according to an April Associated Press-AOL Money & Finance poll, and more than one-quarter fear their home will decline in value during the next two years.

ComPsych says financial concerns are now the top issue the firm's counselors are hearing in calls from clients. Calls about financial worries have surged 20% over last year; those related to mortgage problems have doubled.....

'The problem affects the whole spectrum, not just people losing their homes,' says LeslieBeth Wish, a psychologist and social worker in Sarasota, Fla. 'The stress exacerbates what is already there. It brings to the surface problems that were often already there, like marital problems.

Icahn Is Said to Weigh a Proxy Fight at Yahoo - New York Times

Maybe it is not over? Icahn is reported to own 50 million shares (over $1 Billion worth).

Icahn Is Said to Weigh a Proxy Fight at Yahoo - New York Times:
"Carl C. Icahn, the billionaire investor and activist shareholder, is considering a proxy fight for seats on the Yahoo board in hopes of pushing the company to restart talks to sell itself to Microsoft, people who have held discussions with him said on Tuesday"
Supposedly Microsoft is not interested.

"He has also inquired at Microsoft, through various friends, whether he could help bring that company back to the negotiating table, these people said. He has received little encouragement, these people said, because Microsoft has insisted that it has “moved on.”"

The stock is up quite a bit on the news, so it's either idle speculation or there may be something there.

Tuesday, May 13, 2008

Real estate market is also pretty tough to beat!

It appears beating the market in a risk adjusted basis may be almost as difficult in Real Estate as it is in the financial markets.

Penn State Live - Study: Only select group of property fund managers outperform market:
"...'Maintaining consistently high levels of alpha is incredibly difficult for most fund managers to achieve, however, one feature that we did note is that mangers using a value strategy appeared better placed to deliver high alpha in subsequent periods.'

Mitchell adds: 'Doing things differently from, instead of better than, your peers seems to be the key. It will be interesting to see how the 'beta' investors' strategies evolve in a world where market exposure can potentially be attained cheaply through property derivatives.'

While the researchers examined property funds in the U.K., Bond says he would expect the results to be similar in the United States."

The full paper is available here.

Monday, May 12, 2008

A look at the housing crisis

NPR's This American Life: : had a very interesting audio look at what caused the problems and how the problems spread to impact investment banks and other Wall Street investors.

This American Life:
"A special program about the housing crisis. We explain it all to you. What does the housing crisis have to do with the collapse of the investment bank Bear Stearns? Why did banks make half-million dollar loans to people without jobs or income?"

Thanks to Nate O for pointing this out to me.

Wednesday, May 07, 2008

Jeffrey Sachs on the credit crisis, climate change and overpopulation - Telegraph

Jeffrey Sachs on the credit crisis, climate change and overpopulation - Telegraph:
"Poverty and a billion starving people in Africa? Whisked away like dust. Overpopulation and water shortages? Waft, waft. Global warming and climate change? A little brush and they're gone.

It would all seem rather utopian did Sachs not share that Clinton/Blair-style knack of making almost anything seem completely do-able. Unlike so many economists, who tend dismally to explain why things will fail and why good intentions almost invariably go to waste; the Columbia man is Professor Optimism."
Long term readers will remember I have long been a fan Sach's ability to see the big picture. He has his detractors for sure, but he is one of the biggest players in the world economic forum.

Monday, May 05, 2008

Buybacks seem to deter takeovers.

Newswise Business News | Researcher Finds Good Management, Open Market Stock Buy-backs Deter Takeover Attempts:
"Firms that buy their stock back on the open market are seen as more efficient and more sensitive to shareholder interests,” said Matt Billett, professor of finance in the Tippie College of Business. “It’s a sign of shareholder-friendly management.”

Billett recently studied more than 23,000 U.S. companies to determine whether open market share repurchases deter takeovers. What he and his co-author found was evidence that, for the first time, verified the conventional wisdom that, indeed, they do.

“While tender offers have been shown to act as an effective defense in the midst of takeover battles, open market repurchases may deter unwanted bids, pre-empting would-be acquirers from bidding in the first place,” Billett said"
Very interesting. Will definitely find its was into class. A working paper version of the actual paper is here.

Saturday, May 03, 2008

Is it over? Microsoft pulls bid

From the NY Times:
"Microsoft said Saturday that it was abandoning its blockbuster bid to
acquire Yahoo after it raised its offer by $5 billion but Yahoo rejected it as
still too low.....

“Despite our best efforts, including raising our bid by roughly $5 billion,
Yahoo has not moved toward accepting our offer,” Mr. Ballmer said in a
statement. “After careful consideration, we believe the economics demanded by
Yahoo do not make sense for us, and it is in the best interests of Microsoft
stockholders, employees and other stakeholders to withdraw our
proposal.”....The breakdown in the talks is likely to send Yahoo’s
shares plunging, and Mr. Yang and his team will have to decide how to placate

Stay Tuned

Higher Offer by Microsoft Brings Yahoo to Table - New York Times

Higher Offer by Microsoft Brings Yahoo to Table - New York Times:
"According to the people involved in the talks, Microsoft suggested it was willing to pay more than $33 a share. Yahoo is still holding out for at least $37 a share, these people said. These people were not authorized to speak publicly because the negotiations were confidential."
Will it work? Who knows, but the article does include this forecast:
"But a deal was still far from certain. A person involved in the discussions said the chances of a friendly deal being reached were “still no better than 50-50.”"

Friday, May 02, 2008

Junk Bonds, Mortgages and Milken - New York Times

There is almost no chance of me not posting an article on Milken. While far from perfect, the US economy still owes him a large debt for his role in the creation of active public debt markets for low and unrated firms. What it did was to help force management to look out for shareholders, else face the consequences of a possible takeover.

Junk Bonds, Mortgages and Milken - New York Times:
"Critics who compare the subprime debacle to the bubble in high-yield, high-risk corporate bonds that Drexel helped inflate two decades ago are “people who don’t understand markets very well,” Mr. Milken said. He suggests that “their rationale is that both types of financial instruments are risky.”

And he says junk bonds, or those rated below investment grade, “have little in common with mispriced subprime mortgages,” which he says are the real culprits."

Yeah I know, insider trading changed the way history will look at him, but we should not forget his contributions. (no one is all good or all bad.)

The Midas of Misery

Whether you call them value investors, or contrarians, vultures, or just good opportunists, some people do make money (and lots of it) in down times.

The Midas of Misery:
"Falcone is a Midas of Misery. With $19 billion—nearly 760 times the grubstake he started out with seven years ago—he is snapping up troubled assets in bankruptcy, shorting distressed bonds, and using huge stock positions to agitate for change at underperforming companies. His holdings read like a who's who of market castoffs: media companies, utilities, and steelmakers. Last year Harbinger netted $11 billion, thanks in large part to Falcone's gutsy bet against all things subprime. His personal windfall of $1.7 billion made him one of the highest-paid hedge fund managers in 2007."

Thanks to Carrie M for pointing this one out to me.