Thursday, April 30, 2009

Bank of America Chief Ousted as Chairman -

The trend to separate CEO and Chair of the board position continues with the highly publicized case of Ken Lewis losing his chairman position.

Bank of America Chief Ousted as Chairman -
"Mr. Lewis, who helped build Bank of America into the nation’s largest bank, was stripped of his chairman’s title.... At a contentious annual general meeting, angry investors held him accountable for what they view as a series of missteps that forced the once-mighty bank to accept not one but two government bailouts.

For Mr. Lewis, the bad news arrived shortly before 6 p.m., after a gathering that seemed to captivate much of Charlotte, where Bank of America’s soaring headquarters punctuates the skyline.

While Mr. Lewis remains chief executive — the board expressed its unanimous support for him — many inside and outside the bank wonder if he can hang on. Mr. Lewis confronts daunting challenges, and many of his investors are losing patience. Even after receiving billions of taxpayer dollars, some analysts say, the bank may still need to raise more to shore up its weakened finances."

Chrysler to File for Bankruptcy -

Will GM bondholders follow their lead?

Chrysler to File for Bankruptcy -
"Chrysler, one of the three pillars of the American auto industry, will file for bankruptcy today after last-minute negotiations between the government and the automaker's creditors broke down last night, an Obama administration official said.

U.S. officials had offered Chrysler's secured lenders $2.25 billion in cash if they would agree to writedown the $6.9 billion in secured debt that the company owed. But a small group of hedge funds refused the 11th-hour deal, forcing an imminent bankruptcy."

Longer horizon, more risk. An interview with Robert Stambaugh

Remember the Pasto and Stambaugh paper mentioned earlier in the month?

From "Now the Long run looks riskier too"
"Applying Bayesian techniques, the professors found that reversion to the mean isn’t powerful enough to overcome the growing uncertainty caused by other factors as the holding period grows....""
Now co-Author Robert Stambaugh offers more insights on the paper in an interview with Knowledge@Wharton:

Why Stock-price Volatility Should Never Be a Surprise, Even in the Long Run - Knowledge@Wharton:
"Robert Stambaugh: Generally when we think about volatility in the stock market, we think about the value of the market fluctuating, typically around some sort of trend or long-term expected rate of return. Our work makes the point that uncertainty about that trend itself adds to the uncertainty that investors face...uncertainty about the trend itself becomes more important the further into the future you project investment outcomes. So our paper basically makes the point that to an investor with a long horizon, stocks actually are riskier per period.That is, the rate at which risk grows over the horizon such that it makes the investment riskier over the long run.This is basically in contrast to what we think of as more conventional wisdom that says over the long run, fluctuations in the stock market will to some degree cancel each other out and should be perceived by them much like volatility --"

Good stuff!

Wednesday, April 29, 2009

Swine flu fear catching fast in weak world economy - Yahoo! Finance

What will the economic impact of swine flu be? While it is WAY too early to say, it will have a negative impact. If the World Bank's study can be trusted, the impact may be less than I would have anticipated.

Swine flu fear catching fast in weak world economy - Yahoo! Finance:
"A report by the World Bank, updated last year, estimated that a severe pandemic -- like the Spanish flu outbreak in 1918 that killed between 40 million and 100 million people -- would cause a nearly 5 percent drop in global economic activity, costing the world about $3.1 trillion.

'Even a mild pandemic has significant consequences for global economic output,' a pair of Australian researchers wrote in a 2006 report cited by the World Bank."
That said, it is way too early to know and there are many variables we just do not know yet (how virulent will it be, how much it will spread, how fast it will spread).

What does a dollar a year salary mean?

Many 'No-Pay' CEOs Actually Were Richly Compensated, Study Finds |
"When a corporate chief executive voluntarily forgoes a salary or takes $1 a year in pay, it’s largely symbolic in many cases, according to a report released by The Corporate Library.

In 41 companies where the chief executive had either no base salary or a salary of $1 for the year, as well as no cash bonus, 21 received some form of “all other compensation” payment, the study—of 2008 proxy filings—released Friday, April 17, found. And the 18 executives who voluntary went without base salary had a combined total of nearly $6 billion in company stock alone."
NOTE the correction from last night's class. Qualitatively nothing changes. The $6 billion figure respresents stock holdings of the 18 executives. Which is not a problem as far as I can see, but the article makes it seem like a bad thing.

Condé Nast Closes Portfolio Magazine -

Condé Nast Closes Portfolio Magazine -
"Portfolio, the ambitious, glossy business magazine from Condé Nast Publications, closed Monday after just two years. Joanne Lipman, editor in chief, and Tom Wallace, editorial director of Condé Nast, met with editorial staff members and announced that the magazine and its Web site,, were shutting down, effective immediately.

Most of the $100 million pledged toward the start-up is gone, sunk into the very expensive printing, paper, marketing and editorial costs that go with creating a magazine, especially one published by Condé Nast."

This makes me sad. It was one of my favorites.

Tuesday, April 28, 2009

U.S. tells Citi, Bank of America to boost capital - report - Apr. 28, 2009

From the NY Times:
"...the new worry is that this latest effort to instill confidence may undermine it instead.When the stress test was first conceived, it was never clear whether the results would be made public. But within days of the government’s announcing the test, lawyers inside the banks started to point out that, ahem, this may be material information, which means by law they have to disclose it to shareholders."

So I guess it is a good thing FERPA does not hold for banks! Which brings us to this piece from CNN:

U.S. tells Citi, Bank of America to boost capital - report - Apr. 28, 2009:
"Government regulators have told Bank of America Corp. and Citigroup Inc. that the banks need to increase their capital reserves based on preliminary 'stress test' results, according to a report published Tuesday.

The capital shortfall at Bank of America could amount to billions of dollars, the Wall Street Journal said, citing people familiar with the situation."
That said there already seem to be some questions and concerns about the test itself.

Let's hope they really stress-tested things.

TARP Cop Sees Unstressful Bank Tests -
"The adverse scenario used to test the health of the 19 largest U.S. banks is 'disturbingly close' to current economic conditions, sparking a concern that there might need to be a second 'stress test,' a U.S. financial bailout fund watchdog said on Monday.
Given that things seem to rebounding the "disturbingly close" is troubling even if based purely on speculations since in the same article,
"Elizabeth Warren, who chairs the Congressional Oversight Panel for the Troubled Asset Relief Program, said the test may in actuality be rigorous, but the government's recent document describing the test's methodology lacked critical details.
As a teaching point: when running simulations, scenario analysis, or sensitivity analysis, always be sure to test the limits. Remember, "Bad" is "Bad", not just "not good".

Monday, April 27, 2009

GM's proposal would give bondholders next to nothing -

GM's proposal would give bondholders next to nothing -
"General Motors' (GM) bond-exchange proposal Monday will play out as high drama this month. It's a showdown between unhappy bondholders and the company's willing-to-file-for-bankruptcy new CEO. And it could get bumpy.

On Monday, GM told bondholders they're about to get next to nothing — about 10% equity in the company — for the about $27 billion they lent GM.

By contrast, the U.S. Treasury would get a 50% stake and a GM promise to pay back half of the $20 billion in loan"
and from Business Week:
"GM /style>wants its bondholders to take 225 new shares of the company for every $1,000 in bond value. GM will also pay the interest. That adds up to at most 5¢ on the dollar for the debt, says Barclays (BCS) analyst Brian Johnson. That's what could make it a tough sell...

If bondholders refuse the offer, they will be betting that they can get more than 5¢ on the dollar in cash from a bankruptcy judge....

There is one other catch. Some bondholders own credit default swaps, which amount to an insurance policy on GM bonds that pay in full if the company goes bankrupt. Tim Backshall of Credit Derivatives Research says that there are contracts backing an estimated $2.7 billion in bonds on the market. If those contract holders all hold bonds, it won't take too many more bondholders to refuse the deal and send GM to bankruptcy.

A note to all of my classes: be prepared to talk about this one! At the bare minimum I will ask you if you were a bondholder, would you accept the offer or would you force bankruptcy and why.

The Merger Fund: The 'Poor Man's Hedge Fund'? -

The Merger Fund: The 'Poor Man's Hedge Fund'? -
"If you really want to diversify, you need to spread your money across a variety of funds investing in different asset classes, managers and strategies, from bonds to absolute return strategies to, say, precious metals or covered call funds. The Merger Fund is completely specialized, and that's the appeal of the thing.

'We're all merger arbitrage,' says manager Roy Behrens. 'That's all we do here.'

That means they try to profit from shares involved in takeover deals. After all, deals are complex: Regulators can block them, boards and shareholders can revolt, rivals can jump into the fray. Merger arbitrage specialists comb the possibilities and the share prices for opportunities."

Interesting piece. Talks about correlation, arbitrage, diversification, market efficiency, and more.

Busy day...probably no posting

Sorry for the lack of posting this past few days.

Had a BonaResponds local service weekend (3 days of community service) and have a alum on campus as a guest speaker today.

Will get back to more normal routine either tomorrow or later today..

Thursday, April 23, 2009

Yahoo to close GeoCities, other services in revamp

Oops, that merger did not work out too well.

The Associated Press: Yahoo to close GeoCities, other services in revamp:
"Yahoo Inc. said Thursday it plans to close GeoCities, a Web site publishing and hosting service it bought in May 1999 at the height of the dot-com boom for around $3 billion in stock."
So the next time you decide to invest $3 billion for a stock with revenues of under $20 million (revenues, not earnings!), you might want to remember this one.

Long Term Capital Management a look back from an Insider

Wow! Great presentation! It is Eric Rosenfeld (one of the players of LTCM) speaking to Zvi Bodie's class on Long Term Capital Management Ten Years Later.

This is a DEFINITE must see. I just sat transfixed (must confess it totally changed what I had planned on doing all morning) for over an hour. I have read the books and case studies, watched a Trillion Dollar Bet, and have thought about it for hundreds of hours in classes over the years. That said, I still learned things from it. You will too.

Thanks Zvi!

GM won’t make debt payment, bankruptcy ‘probable’ - The Business Journal of Milwaukee:

GM won’t make debt payment, bankruptcy ‘probable’ - The Business Journal of Milwaukee::
"General Motors Corp. won't make its $1 billion debt payment on June 1, and it is looking for a debt-for-equity exchange or court protection to lower its debt.

GM chief financial officer Ray Young said a trip to bankruptcy court is “probable,” the Wall Street Journal reported. GM is trying to reduce its $28 billion debt load."
And in other GM news Bloomberg is reporting that GM workers may have a bit more time to enjoy the summer than they had hoped:
" General Motors Corp., contending with a 49 percent decline in U.S. sales this year, will idle 15 North American assembly plants for at least a week from mid-May through July, a person familiar with the plans said. The shutdown, similar to its shuttering of factories in December, January and February, is meant to control excess inventory of unsold models on dealer lots"
GM stock price from Yahoo Finance.

Wednesday, April 22, 2009

Freddie Mac Executive Found Dead -

Freddie Mac Executive Found Dead -
"David B. Kellermann, the acting chief financial officer of the troubled mortgage giant Freddie Mac, was found dead Wednesday morning at his home in Northern Virginia.....

Mr. Kellermann, 41, had been Freddie Mac’s chief financial officer since September. He was named to the position when the federal government seized the company and ousted its top executives last fall. In recent weeks, according to neighbors and company officials, Mr. Kellermann had received a bonus of about $800,000. Such bonuses...caused some controversy earlier this month, and some lawmakers called for them to be rescinded.

According to neighbors, Mr. Kellermann hired a private security firm after reporters came to his house to ask about his bonus."

Sad. Sad. Sad.

FinanceClass: What your interviewers are likely reading

FinanceClass: What your interviewers are likely reading

Not technically finance, but I really like the post, so this is from my FinanceClass Blog. It has a bunch of videos of popular books that are changing the ways that people are thinking about issues.

I put it together to help my students prepare for interviews, but I personally found the videos fascinating, and I bet you will to. (Definitely click on the Charlie Rose Interview with Jim Collins.

FinanceClass: What your interviewers are likely reading

Tuesday, April 21, 2009

Pay Rule Led Chrysler to Spurn Loan, Agency Says -

Talk about bittersweet feelings.

Pay Rule Led Chrysler to Spurn Loan, Agency Says -
"Top officials at Chrysler Financial turned away a government loan because executives didn't want to abide by new federal limits on pay, according to new findings by a federal watchdog agency.

The government had offered a $750 million loan earlier this month as part of its efforts to prop up the ailing auto industry, including Chrysler, which is racing to avoid bankruptcy. Chrysler Financial is a major lender to Chrysler dealerships and customers"
From Bloomberg:
"The finance company failed to get its top 25 executives to sign compensation waivers and the loan request was denied, according to the report from the special inspector general for the TARP....The finance company said in a statement last week that it had adequate capital and didn’t need the additional money. A person familiar with the talks said stipulations on the loan were too onerous.
But fear not, there are already reports that Chrysler (not Chrysler Financial) will be getting $500 million more to get them through until the possible deal with Fiat. Stay tuned.

From CNN:
"The administration in March set aside up to $500 million to help Chrysler get through April, according to a report on oversight of corporate bailout funds prepared by the Treasury Department inspector general."

Accounting games, what are they good for?

Accounting games, what are they good for? Absolutely nothing :) (to be sung to the old War What Is It Good For? song.)

Dealbook - Bank Profits Appear Out of Thin Air -
"With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped); Citigroup pulled the same trick.

Bank of America sold its shares in China Construction Bank to book a big one-time profit, but Ken Lewis heralded the results as “a testament to the value and breadth of the franchise.”

Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them."
My only observations:

1. It is encouraging that the market could see through this which is consistent with the view, long held by adherents to semi-strong form efficiency adherents, that accounting games with depreciation, inventory, etc don't matter since investors can see through them.

2. It is further proof that managers and accounting numbers should never be taken at face value.

3. Why would managers play the games you ask? Maybe agency problem (suppose they are paid based off of earnings) or a seemingly costless attempt to signal something other than reality (it would be fascinating-albeit very difficult-to see how their future earnings or words are interpreted by the market).

What Obama's pledge to cut $100 million really means - Apr. 20, 2009

I heard this on the radio before I saw it. I was sure I had heard it wrong. The announcer had to have misspoke. I mean, $100 million? that is nothing. But that is what it was. So here goes:

From CNN: What Obama's pledge to cut $100 million really means - Apr. 20, 2009:
"In essence the president has asked government agencies to trim the equivalent of .003% of the federal budget."
To put this in perspective, suppose that I spend $100 on groceries a week. After a .003% cut I would be cutting back to $99.997 a week. Or in other words over the course of an entire year (52 weeks) of grocery shopping I would save 16 cents!

Put another way:

Monday, April 20, 2009

Oracle Agrees to Acquire Sun Microsystems -

This week in my classes we are looking at the "Market for Corporate Control." The central part of which is the merger and acquisition market. Thus, I should be sending thank-you cards to Sun and Oracle for the following which will make class that much more interesting:

Oracle Agrees to Acquire Sun Microsystems -
"The Oracle Corporation, the technology information company, announced Monday that it would acquire a rival, Sun Microsystems, for $9.50 a share, or about $7.4 billion.

The agreement with Oracle came about two weeks after I.B.M. ended its talks with Sun. The Sun board balked at that deal after I.B.M. lowered its offer to $9.40 a share from $10. Still, Monday’s deal represented a 42 percent premium over Sun’s closing price of $6.69 on Friday."
Sun Microsystem CEO Jonathan Schwartz wrote the following about the deal:
"So today we take another step forward in our journey, but along a different path - by announcing that this weekend, our board of directors and I approved the acquisition of Sun Microsystems by the Oracle Corporation for $9.50/share in cash. All members of the board present at the meeting to review the transaction voted for it with enthusiasm, and the transaction stands to utterly transform the marketplace - bringing together two companies with a long history of working together to create a newly unified vision of the future....To me, this proposed acquisition totally redefines the industry,"

Sunday, April 19, 2009

The Undesireable Effects of Banning Short Sales by Advanced Trading

From the blog:

The Undesireable Effects of Banning Short Sales by Advanced Trading:
" of short-selling activities by... Abraham Lioui, entitled 'The Undesirable Effects of Banning Short Sales,' calls into question both the reasons for the decision to ban short selling and the prejudices that weigh on those who short.

Among the consequences of the ban:

* Market volatility rose sharply because there was no clarity on the reasons behind the measure.
* The impact of the ban on market volatility was greater than the impact of the financial crisis.
* Share prices deviated yet more from their fundamental value.
* The risk/return possibilities of investors worsened.
* The desired effect on market trends has not been achieved (no reduction of the negative skewness of returns is being observed) and there is no evidence of the possible impact of this measure on extreme market movements."
Many of these points have been mentioned here before in the Bris 2008 piece, but still worth reading.

One of the interesting points in the paper were that the short-sale ban did not affect most of the "shorts":
"According to recently published data (for the United States in particular), a large majority of short sellers are market makers who are hedging their bets on the options markets. They were not affected by the ban, which means that those who were using options to take synthetic short positions continued to do so. The others involved in short selling are mainly hedge funds."
The author concludes with as a result of the short-sale ban there was a
"....rise in idiosyncratic risk and thus of the noise in the markets. As a consequence, share prices deviate yet more from their fundamental value. Finally, the desired effect on market
trends has not been achieved (no reduction of the negative skewness of returns is
being observed) and there is no evidence of the possible impact of this measure on
extreme market movements. What is clear is that stock market indices now have
components that are subject to different rules, differences that make them even less
representative and relevant."
What could have been done?
"...rather than opting for this facile response, greater efforts to democratise this market and to
increase its transparency should perhaps have been made."
The entire paper is available here.

Saturday, April 18, 2009

Venture Capital Investments Plunge 61% Amid Frozen IPO Market -

Venture Capital Investments Plunge 61% Amid Frozen IPO Market -
"U.S. venture capital investments fell 61 percent to $3 billion in the first quarter, the lowest level in 12 years, as the financial crisis chased away funding for technology and clean-energy deals.

Funding of clean technology -- coming off a surge of investments in 2007 and 2008 -- plunged 87 percent, the National Venture Capital Association said today. Total venture investments dropped 47 percent from the previous three months.

The freeze in initial public offerings kept startups from getting funding because investors weren’t sure how they would earn a return,"

Thursday, April 16, 2009

New sentiment indicator? Forget Skirt lengths, watch collars?

Trying to gauge market sentiment is a challenge. But that does not mean people don't keep trying. From measurements based off of skirt lengths, to closed end fund discounts, to the VIX we just keep trying. The newest candidate is Credit Suisse's so-called "Fear Barometer" out which is based on collars (as in the option position not what is at the top of a shirt).

From Fear of a Recovery -
"...the Credit Suisse Fear Barometer, which measures fear by pricing a zero-cost collar -- selling a 10% out-of-the-money Standard & Poor's 500 index call that expires in three months and spending the entire proceeds to buy an index call -- helps prove the point.

The Credit Suisse barometer recently registered 13.67, suggesting that upside call premiums are rather expensive."
Writing at SeekingAlpha "Babak" questions is usefulness suggesting its small range is not informative and then more tellingly showing charts (from Bloomberg) of the VIX, the S&P, and the new CS Fear Index which seemingly have little relation, he concludes:
"Useless sentiment indicators abound out there and they keep being calculated and disseminated like zombies. Looks to me like the CSFB is a prime candidate for the round filing cabinet - even before it arrived! - which is some kind of record"

Madoff's Mets tickets being sold on eBay | News for Dallas, Texas | Dallas Morning News | Dallas Business News

Madoff's Mets tickets being sold on eBay | News for Dallas, Texas | Dallas Morning News | Dallas Business News:
"The trustee liquidating Bernard L. Madoff Investment Securities LLC won court approval to sell New York Mets season tickets held by the defunct money management firm in an online auction.

Irving Picard has already begun selling the tickets for April Mets games, and the two tickets for the first home game Monday sold for $7,500 on eBay Inc.'s auction site.

U.S. Bankruptcy Judge Burton Lifland in New York said Tuesday that he would sign an order allowing the sale of the remaining season tickets."

While it does not identify then, I guess these are the seats?

Who would have thought returns to investors in the Madoff case being tied to whether the Mets won games or not? And of course the Mets owners who amoung those who lost money with Madoff.

IPOs back in the news.

Are IPOs back? Rosetta Stone continued its IPO which is just the fourth of the year and THIRD this month! Heat wave.

Rosetta Stone: IPO Market Continues Activity -- Seeking Alpha:
"Rosetta Stone (RST) IPO pricing at $18, above the expected range of $15 - 17, raising $112.5 million."
From the WSJ:
"Foreign language software specialist Rosetta Stone Inc. (RST) sold its initial public offering at $18 a share Wednesday, the first IPO to price above its expected range in nearly a year.

The company, scheduled to begin trading Thursday on the New York Stock Exchange under the symbol RST....

It's the first IPO to price above its range since industrial pump and valve company Colfax Corp. went public in May 2008.....

Rosetta's pricing makes April the busiest month for IPOs in the U.S. since July, when three deals hit the market. Since August, there have only been five IPOs, with three so far in April.
Just for perspective, from 1960 to 2005, April averaged 26 IPOs (median 23) according to Jay Ritter's Data.

Tuesday, April 14, 2009

Corporate Governance: Separating the CEO and the Chairman Roles

The D & O Diary does a great tackles the issue of separating the CEO and Chairman positions. Corporate Governance: Separating the CEO and the Chairman Roles : The D & O Diary:
"A growing chorus of voices is calling for public companies to make the separation of the Chairman and CEO functions the default governance structure. This movement, which may have the support of the new SEC Chair, appears likely to lead to some type of 'adapt or explain' approach. Increasing evidence that the companies where the CEOs also act as board Chair are likelier to have 'certain troubling governance characteristics' will likely encourage shareholder interest in the initiative as well."

"The Millstein Center’s March 30, 2009 press release (here) reports that while in the U.k. only 5% of the FTSE 350 companies combine the chairman and CEO roles, over 60% of the S&P 500 companies have boards that are chaired by their CEOs"

" noted by the Chairmen’s Forum report, that "the overwhelming majority of financial institutions had combined roles before the current crisis erupted" – including, among others, Bear Stearns, Lehman Brothers, Citigroup, Washington Mutual and Wachovia.

On the other hand, there may be limits to how much can be expected or discerned from this single governance trait. As the Chairmen’s Forum’s report also notes, "splitting the role of chairman and CEO does not guarantee the application of independent oversight,"

The piece does cite research from the Corporate Library that argues that separation of the two positions is good for a number of reasons (but noticeably absent is stock performance).

From the Corporate Library press release:
"March 25, 2009 – A new study from The Corporate Library, an independent corporate governance and executive compensation research firm, found that companies whose chief executive officers (CEOs) also serve as Chair of the Board are more likely to have certain troubling governance characteristics than companies where the roles are separated. The study is the result of an analysis of the board leadership structure at more than 3,000 North American companies.

The governance features in question, all of which have been associated with board entrenchment
or lessened oversight of management, include:
• relatively long CEO tenures;
• fewer board meetings per year;
• classified board structures; and
• the presence of executive committees, which are typically given the power to act on
behalf of the entire board, potentially allowing for a concentration of power among a few
board members."
While there are obvious conflicts with having the same person perform each role, there may be good reasons for having a single CEO/Chair. But before the baby is thrown out with the bath water, it is important to see both sides.

The separation of CEO and Board Chair has been an issue for over a decade (see this 1996 paper by Dahya, Loni, and Power finding that separation results in positive stock price reaction).

Both sides agree that incentive conflicts can exist when the same person is the both the CEO and Chairman of the board, but there what the sides disagree with are whether these conflicts are enough to outweigh potential benefits of the roles each being played by same person.

For instance from the FinanceProfessor summary of a 2004 paper paper by Brickley, Coles, and Jarrell,
"Notably the paper posits the view that the CEO has valuable inside information and he may be better able to use that in both roles. Further that firms use the multiple title to phase in and phase out new CEOs. Conclude that there are good points of having a single person in charge of both positions."
and from a Knowledge@Wharton 2004 article entitled "Splitting up the Roles of CEO and Chairman: Reform or Red Herring?
"...Michael Useem, director of Wharton’s Center for Leadership and Change Management, says a few statistical studies have compared companies where two persons hold the CEO and chair positions with companies where one person holds both posts. This research, which also took into account other factors that can affect financial performance, shows that whether a company does or does not separate the CEO and chairperson titles “has no bearing on corporate financial performance,” he notes."
And while clearly these papers are 5 years old now and the trend is noticeably towards separation, the evidence is still not so overwhelming in either direction as to be certain. Would I encourage separation? Yes. But making it mandatory (or even making firms explain why they are not separating the two) seems to be a case of regulation going too far.

Quote of the day

Quote of the day:

"If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy.

- Yu Yongding, one of the Chinese government's top monetary economists, discussing why China took the rare step of selling US Treasuries in the first two months of the year. The saying is originally attributed to John Maynard Keynes."
Thanks to @Lura_Forcum for originally tweeting this.

The Unbearable Lightness of Nassim Taleb —A Response To Taleb’s 10 Item List | Simoleon Sense

Ok, I confess, I am a fan of Taleb. But that said, seeing his flaws is valuable as well so it was with special interest I read the following from Simoleon Sense:

The Unbearable Lightness of Nassim Taleb —A Response To Taleb’s 10 Item List | Simoleon Sense: "
Davi writes an interesting article titled “The Unbearable Lightness Of Nassim Taleb”. So, in the spirit of intellectual debate I present you with this counterpoint to Taleb’s 10 principles for a black swan proof world."
And from the Brave New World by Charles Davi (that Simoleon Sense points to) comes one of the funniest lines I have heard in a while.:
"Taleb fails to meet even the lowest of standard for a statement on regulatory policy. "Counter-balance complexity with simplicity" might be an acceptable policy position for Deepak Chopra. But it is certainly unacceptable for an economist."

Monday, April 13, 2009

Video on the 1929 Stock Market Crash

Good video on the 1929 Stock market crash.

BTW just showed the Trillion Dollar bet in class last week. The audio of this and that are very similar!

Treasury Is Said to Warn G.M. of Bankruptcy Risk -

Treasury Is Said to Warn G.M. of Bankruptcy Risk -
"The Treasury Department is directing General Motors to lay the groundwork for a bankruptcy filing by a June 1 deadline, despite G.M.’s public contention that it could still reorganize outside court, people with knowledge of the plans said during the weekend"
and later:
"The preparations are aimed at assuring a G.M. bankruptcy filing is ready should the company be unable to reach agreement with bondholders to exchange roughly $28 billion in debt into equity in G.M. and with the United Automobile Workers union, which has balked at granting concessions without sacrifices from bondholders."
and one last look in:
" potential outcome in which the “good G.M.” enters and exits bankruptcy protection in as little as two weeks, using $5 billion to $7 billion in federal financing...The rest of G.M. may require as much as $70 billion in government financing, and possibly more to resolve the health care obligations and the liquidation of the factories.... "
The question we have been talking about in class is why is it that GM has any equity value? WIth its bonds trading at less than 20 cents on the dollar, its pensioners in line to get paid, and bankruptcy looking more and more likely, we could see zero on this one.

Sunday, April 12, 2009

With Finance Disgraced, Which Career Will Be King? -

With Finance Disgraced, Which Career Will Be King? -
"Big shifts in the flow of talent can ripple through the nation and the economy for decades with lasting effect. The engineers of the Depression built everything from inter-city roads to the Hoover Dam, while the Sputnik-inspired scientists would go on, often with research funding from the Pentagon, to create the building-block innovations behind modern computing and the Internet. Today, the financial crisis and the economic downturn are likely to alter drastically the career paths of future years. The contours of the shift are still in flux.....

What will the new map of talent flow look like? It’s early, but based on graduate school applications this spring, enrollment in undergraduate courses, preliminary job-placement results at schools, and the anecdotal accounts of students and professors, a new pattern of occupational choice seems to be emerging. Public service, government, the sciences and even teaching look to be winners, while fewer shiny, young minds are embarking on careers in finance and business consulting."

It will be interesting to see how this plays out. Will finance remain on top? My guess is yes. but it will take a few years. Very anecdotally, finance seems to be getting more majors for next year at SBU.

Saturday, April 11, 2009

Mutual Funds: 10 questions to test your IQ

AZCentral (The Arizona Republic) has a pretty good mutual fund quiz.

Mutual Funds: 10 questions to test your IQ:
" funds remain a cornerstone of retirement planning. But they're widely misunderstood, and investing ignorance can really cost you. So can you tell a fund expense ratio from a turnover ratio? What about an open-end fund from a closed-end? Try this quiz, and check out the answers at bottom:"

Thursday, April 09, 2009

Top 50 Economics Blogs — Bankling

The new rankings from are out (not exactly the BCS, but....) and's blog is #24!!!

Top 50 Economics Blogs — Bankling:
"A light-hearted perspective on economics from an assistant professor at the St. Bonaventure University School of Business."
Well technically I teach finance and am an associate now, but who cares? Yeah I know, top 24 is not the best but I will take it and say THANKS!!

BTW look at the whole list. Some very good ones are included. I am honored to be included in their company.

Wall Street's Highest Earners -

Wall Street's Highest Earners -

A look at hedge fund pay. It staggers my imagination.
"The $10.3 billion in pay for the 20 highest earners was down 45% from 2007 and 22% from 2006"
But not all were down. Take for instance James Simons:
"James Simons, who runs Renaissance Technologies..., tops our list with earnings of $2.8 billion in 2008, even though two of his three funds were down for the year. The exception was his Medallion fund, which grew a staggering 84%, even after deducting its steep fees--44% of profits and 5% of assets (the industry standards are 20% and 2%)....

Simons, a former Defense Department code-breaker and mathematics professor at the State University of New York at Stony Brook, uses complex quantitative models to identify companies that are misvalued. He made $1.3 billion from his estimated 40% share of the company's fees and $1.6 billion on the appreciation of his own investments within the funds he manages"

US finance pundit Cramer a 'buffoon' says leading economist Roubini | Business |

Fresh off his "battle" with Jon Stewart, Jim Cramer is now "fighting" with Nouriel Roubini.

US finance pundit Cramer a 'buffoon' says leading economist Roubini | Business |
"Roubini, a New York University professor who famously forecast a dire world recession as far back as 2006, has taken exception to remarks on a blog by Cramer that he is 'intoxicated' with his own 'prescience and vision' and is refusing to see green shoots of recovery in the financial markets.

'Cramer is a buffoon,' said Roubini. 'He was one of those who called six times in a row for this bear market rally to be a bull market rally and he got it wrong.'

The confrontation pits two of the financial world's biggest egos against each other...."

Wednesday, April 08, 2009

Google and the Temptations of Being Cash-Rich - DealBook Blog -

Several years ago Eric and crew at CyberLibris asked me for a list of my all time favorite finance papers. I could not find a link to it now but I do know that well in the top five was Michael Jensen's 1986 free cash flow paper. It was one of the first academic papers I read when I got to Rochester for my MBA and it immediately clicked. It later became the premise of my PHD dissertation and I use the ideas to this day in class.

In short, Jensen's Free Cash flow paper says that if firms have free cash flow (my dissertation and many other papers since have also looked at high levels of cash) tend to waste it by investing in negative NPV projects.

It appears that the analysts at Sanford C. Bernstein agree!

From the NY Times's DealBlog:

Google and the Temptations of Being Cash-Rich - DealBook Blog -
"Analysts at Sanford C. Bernstein are making their views on the subject unmistakably clear...(deleted stuff on Twitter)... said that Google and other successful Internet companies would generally be doing their investors a favor if they returned their cash to shareholders rather than using it to buy unprofitable start-ups.

The analysts argue that Internet companies have a bad track record when it comes to acquiring “pre-business-model” companies like Twitter, a popular microblogging service that has yet to produce profits — or even revenues. The Web is littered with examples of promising but ultimately value-destroying acquisitions, they wrote in a note to clients, citing deals like AOL’s $4.2 billion acquisition of Netscape and eBay’s $4.1 billion acquisition of Skype."
and later:
"It is worth noting that Google’s chief executive, Eric Schmidt, recently said his company doesn’t expect to be active in making acquisitions. In addition, Google paid for YouTube, the video-sharing service, with stock, not cash.

Even so, the analysts at Sanford Bernstein said they think Google should consider giving, say, $20 billion of its cash pile back to shareholders in a one-time dividend of about $60 a share."

Which fits the free cash flow story perfectly.

I guess it should be noted that the SIMM class that I teach does own a few shares of Google. Not sure how it is relevant , but I remember that as part of the SeekingAlpha agreement, I was supposed to list it.

Nissan removes cars from McAllister's Miss. lot - NFL - Yahoo! Sports

With the economy struggling, versions of this are playing out many times around the country, but given it is Deuce McAllister, I thought more would be interested in this specific case.

Nissan removes cars from McAllister's Miss. lot - NFL - Yahoo! Sports:
"Nissan began removing vehicles Tuesday from a dealership owned by former New Orleans Saints running back Deuce McAllister.

About 20 cars and trucks were loaded on tractor-trailers even as McAllister said in an interview that he is seeking investors to help pull the dealership out of bankruptcy....

McAllister filed for Chapter 11 bankruptcy protection last month after Nissan Motor Acceptance Corp. said in a federal civil suit that the free agent owed nearly $7 million, mostly in unsold vehicles still sitting on his lot.

The 30-year-old is the sole owner of the dealership, one of two he owns in Mississippi’s capital city."
Chapter 11 bankruptcy is for reorganization. From Wikipedia:
"Chapter 11 is a chapter of the United States Bankruptcy Code, which permits reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to any business, whether organized as a corporation or sole proprietorship, and to individuals, although it is most prominently used by corporate entities."

Monday, April 06, 2009

SSRN-So What Orders Do Informed Traders Use? Evidence from Quarterly Earnings Announcements by Hsiao-Fen Yang

I love when two ideas are in direct competition and are testable. For instance, suppose you have information that you want to trade on. If you trade too aggressively you will move the market (and if it is inside information get caught!). On the other hand, if you wait too long, the information is released to the public and your advantage is gone.

A new working paper by Hsiao-Fen Yang looks at this and finds evidence that seems to sugest that informed traders are sneaky at first, but as the information release date gets closer, they get more aggressive. Which is a really cool story.

Here is some from the abstract:

SSRN-So What Orders Do Informed Traders Use? Evidence from Quarterly Earnings Announcements by Hsiao-Fen Yang:
"Because informed traders expect their information advantage will disappear after the announcements, this information event provides a unique opportunity to test whether informed traders become more impatient and use more aggressive orders when the announcement is approaching. Our results show that when the information will be released soon but there is still enough time for the execution (from day -10 to day -6), informed investors use small orders and limit orders to trade stealthily and reduce price risk. Within five days right before the announcements, informed investors trade more aggressively. They start using large market orders to ensure the execution...."

Ok, so this is just an abstract, so it may or may not be a good paper, but I will take the chance given the author has done quite a bit of work in the market-microstructure field and it is a nice intuitive story. Unfortunately I have not seen the paper. I will email the author and update this link if I find a version online.

Nearly 97 percent of HSBC rights issue taken up - BusinessWeek

Just in time to serve as a perfect example of what we do in class is relevant, HSBC announced it had completed a rights issue.

(A rights issue is a way of selling new equity by giving existing shareholders the right to buy new shares at a reduced price. These rights are generally transferable which means they can be sold to someone else who will buy the new shares.)

From BusinessWeek:
"Stockholders have purchased nearly 97 percent of new shares offered under a rights issue, HSBC PLC said Sunday, raising nearly $18 billion (12 billion pounds) for the London-based bank."
And from the BBC:
"The $17.7bn (£12.5bn) by HSBC raised makes this the largest rights issue in UK corporate history.

The take-up was not a big surprise because the shares were being offered at 245p each, but were trading on the London Stock Exchange at 435p each"

And from the NY Times:
"HSBC said it expected to place the remaining 3.4 percent of the offering on Monday but any unsold shares would be acquired by its underwriters...."

We just covered rights issues in class, so this will be of special interest to my MBA students!

Sunday, April 05, 2009

Strategies - Now the Long Run Looks Riskier, Too, for Investors -

First from the NY Times: Strategies - Now the Long Run Looks Riskier, Too, for Investors -
"...despite downturns like the one we’ve endured recently, stocks over periods of 30 or more years have almost always outperformed other asset classes. And numerous studies have found that the stock market’s long-term returns have tended to fall within a surprisingly narrow range.

But those studies were based on the stock market’s past performance, which, famously, provides no guarantee of future performance. New research, using different statistical techniques aimed at capturing the uncertainty of future returns, suggests that the market may be much riskier than many investors have understood....


One example of such a force, Professor Stambaugh said, is global warming. Its impact on the economy over the next 12 months is likely to be quite small, he said. But expand the horizon to the next several decades, and the possible effects of global warming range from negligible to catastrophic.


Applying Bayesian techniques, the professors found that reversion to the mean isn’t powerful enough to overcome the growing uncertainty caused by other factors as the holding period grows...."

The new study, which began circulating last month as a working paper, is titled “Are Stocks Really Less Volatile in the Long Run?”"
The paper is by Lubos Pasto and Robert Stambaugh:

"Conventional wisdom views stocks as less volatile over long horizons than over short horizons due to mean reversion induced by return predictability. In contrast, we find stocks are substantially more volatile over long horizons from an investor's perspective. This perspective recognizes that parameters are uncertain, even with two centuries of data, and that observable predictors imperfectly deliver the conditional expected return. We decompose return variance into five components, which include mean reversion and various uncertainties faced by the investor. Although mean reversion makes a strong negative contribution to long-horizon variance, it is more than offset by the other components. Using a predictive system, we estimate annualized 30-year variance to be nearly 1.5 times the 1-year variance. "

Pastor, Lubos and Stambaugh, Robert F.,Are Stocks Really Less Volatile in the Long Run?(February 17, 2009). Available at SSRN:

Friday, April 03, 2009

Selling forwards for sporting events | Blogs |

Felix Salmon writing for Reuters has a fascinating look at how the NCAA and other major sporting events could increase their profits based off a pricing model that relies on options and/or forward sales.

Felix Salmon » Blog Archive » Selling forwards for sporting events | Blogs |:
"Preethika Sainam of Indiana University, along with two colleagues from Chapel Hill, has an interesting paper suggesting that sports organizations shouldn’t sell tickets to big sporting events, like the finals of the Final Four, where the teams who will be playing are unknown. Instead, they say, they should sell options to buy tickets at a certain price once it’s known who’s going to be playing. This system, they say, will raise more money in ticket sales, will make fans happier, and will reduce scalping.

The interesting thing is that reading between the lines of the paper, it seems that selling options is actually the second-best solution to these problems. The best solution would be to replace some (but not all) of the tickets with team-specific forwards, which expire worthless if that team doesn’t make the finals. That would allow the “team-oriented” fans to buy forwards rather than tickets which they might not want if their team fails to make it to the finals; it would allow “game-oriented” fans to buy tickets to the finals just like they can right now; it would mean that many more tickets could be sold in total (for the final match-up, you can sell 32 times as many forwards as there are seats)...."
Here is the abstract of the actual paper Consumer Options: Theory and an Empirical Application to a Sports Market by Sainam, Balasubramanian, and Bayus:
"We introduce the concept of consumer options and empirically validate it in the context of event ticket pricing. We demonstrate that consumer options can protect consumers from the downside related to uncertain outcomes, and enhance seller profits by enabling superior market segmentation and increasing consumer willingness to pay. We examine ticket pricing in sports markets where there is uncertainty about the teams that will play in a final event (e.g., the NCAA Final Four basketball tournament). Fans who want to attend the game after knowing which teams will play are often disappointed because tickets typically sell out in advance. We propose that a fan can buy an option on a ticket before this uncertainty is resolved. Later she can decide about exercising the option. We present a simple analytical model of consumer options in this setting. We then empirically demonstrate that profits under options can exceed those from (a) advance selling, and (b) pricing after uncertainty is resolved. Our analysis and findings lay a foundation for future work on consumer options in marketing. "
Think of how many different things could be priced this way! For instance, not sure if you need a rental car or not, plane ticket, hotel room, and even if you want to attend one school or another. Or bandwidth, power, etc. (although correlations make some of these really messy) Wow. Exciting stuff!

Cite: Sainam, Preethika, Balasubramanian, Sridhar and Bayus, Barry L.,Consumer Options: Theory and an Empirical Application to a Sports Market(February 1, 2009). Available at SSRN:

HT to Lura_Forcum for the tweet that alerted me to this.

SSRN-The Actuarial Balance of the Pay-as-You-Go Pension System: 'American' Model versus 'Swedish' Model by Carlos Vidal-Meliá, María Del Carmen Boado-Penas

In whatever language you say it, transparency is good. Here it is on transparency in pension accounting.

SSRN-The Actuarial Balance of the Pay-as-You-Go Pension System: 'American' Model versus 'Swedish' Model by Carlos Vidal-Meliá, María Del Carmen Boado-Penas:
"The main conclusion reached is that making it mandatory for the actuarial balance to be drawn up every year would force politicians to be a lot more careful about what they say and encourage them to avoid the use of populism in pensions. Contributors and pensioners, on the other hand, would have a reliable way of measuring to what degree the promises made to them regarding payment of their pensions are actually kept."
Of course incentives matter in all things and politicians do not want transparency since they cannot make as many promises in its presence, so reform has been slow in coming.

Note: This paper is in Spanish--if you are like me and need help with translation, I used Google's translation. It was far from perfect (Not only did some sentences not make sense, but also you have to copy and paste about a million times), but worked.

Note to self: relearn Spanish!
Here is a link to it.

SSRN-Chinese Bond Markets - An Introduction by Index and Portfolio Services, Standard & Poor's

Standard and Poor's has a very short but informative primer out on the Chinese Bond market. It is full of things I sure did not know about the bond market.

SSRN-Chinese Bond Markets - An Introduction by Index and Portfolio Services, Standard & Poor's:
"While foreign investors have flocked to Chinese equities because of performance and correlation considerations, there is relatively less awareness of Chinese bond markets. This paper serves as an introduction to structure, trading venues, investor base and performance of Chinese bond markets for outside investors.

After more than a quarter century of development, Chinese bond markets have evolved into a RMB 15 trillion (more than USD 2 trillion) market across a broad variety of credit, maturity and investor profiles.

The market has a multi-layered structure, comprised of the national interbank market, the exchange market and bank counters, with the interbank market being the dominant trading venue.

Foreign institutional investors can invest in Chinese bonds by seeking regulator approval for QFII quota or access to the interbank market....

Over the five years ending 2008, the Chinese bonds in aggregate returned 8.1% annually in USD terms as measured by S&P/CITIC Composite Bond Index, a rate higher than those of U.S. and European bonds. RMB appreciation was a key return"

Standard & Poor's, Index and Portfolio Services, ,Chinese Bond Markets - An Introduction(March 31, 2009). Available at SSRN:

Harvard Begins Case Study as Tainted MBAs Reveal Damaged Brand -

Interesting. My classes sure have changed. I would imagine most professors have changed what they are teaching. It would be fun to see the case study that results and their changes.

Harvard Begins Case Study as Tainted MBAs Reveal Damaged Brand -
"Harvard Business School, stung by criticism that it hasn’t prepared alumni to cope with the economic meltdown, will dissect its performance using a practice it employs to examine corporations in crisis.

A task writing a case study to scrutinize whether the school is failing to teach students to understand and manage risk in the current environment, according to Paul Healy, co-chair of the panel....Harvard Business School’s 219 professors will tackle the case...and may use the discussion to propose curriculum changes."

Thursday, April 02, 2009

Subprime Suit Accuses KPMG of Negligence - Accounting -

Well we all knew that lawsuits would begin soon. Here we go:

Subprime Suit Accuses KPMG of Negligence - Accounting -
"Two complaints filed in federal courts yesterday claim that KPMG auditors were complicit in allowing 'aggressive accounting' to occur under their watch at New Century Financial, the mortgage lender that collapsed two years ago at the beginning of the subprime-mortgage mess.

The plaintiff, a New Century trustee, alleges that misstated financial reports were filed with the audit firm's rubber stamp because of its partners' fears of losing the lender's business. 'KPMG acted as a cheerleader for management, not the public interest,' one of the complaints says. The trustee further accuses the firm of 'reckless and grossly negligent audits.'


"In the new lawsuit, KPMG LLP is accused of not giving credence to lower-level employees' concerns about their client's accounting flaws. In 2005, for instance, a partner was said to have "silenced" one of the firm's specialists who had questioned New Century's "incorrect accounting practice." The partner allegedly said, "I am very disappointed we are still discussing this.... The client thinks we are done. All we are going to do is piss everybody off." Dan Ginsburg, KPMG LLP spokesman, says any claims that the firm gave in to its client's demands "is unsupportable."

FASB Eases Fair-Value Rules Amid Lawmaker Pressure (Update1) -

FASB Eases Fair-Value Rules Amid Lawmaker Pressure (Update1) -
"The Financial Accounting Standards Board, pressured by U.S. lawmakers and financial companies, voted to relax fair-value rules....The changes to so-called mark-to-market accounting allow companies to use “significant” judgment when gauging the price of some investments on their books, including mortgage-backed securities. Analysts say the measure may reduce banks’ writedowns and boost their first-quarter net income by 20 percent or more"
Former SEC chairperson Arthur Levitt who "along with former SEC head William Donaldson, of the Investors’ Working Group, a non-partisan panel formed to recommend improvements to regulation of U.S. financial markets. " disagreed with the decision:
"Fair-value “provides the kind of transparency essential to restoring public confidence in U.S. markets,” and "The group is deeply concerned about the apparent FASB succumbing to political pressures, which prevent U.S. investors from understanding the true obligations of U.S. financial institutions"
What is at stake? Forgetting cynicism, we can assume that both sides want true values reflected. The difference is in what is "true". Levitt and others believe that market prices should be used while the banks believe that markets are not giving "fair values" right now and that their own models give a truer value.
"Wells Fargo and other banks argue the rule doesn’t make sense when trading has dried up because it forces companies to write down assets to fire-sale prices.

By letting banks use internal models instead of market prices and allowing them to take into account the cash flow of securities, FASB’s changes could raise bank industry earnings by 20 percent, according to Robert Willens, a former managing director at Lehman Brothers Holdings Inc. who runs his own tax and accounting advisory firm in New York."

Neither market values nor valuation models are always going to be right, but I have to side with Levitt and say that the objective market values are better.

Why? Because those making the subjective valuations may have an incentive to inflate the values. Consider this example. In my life outside of academia I help out at my family's grocery stores. What if rather than writing down old lettuce, I keep them on the books because I want to keep earnings up (at least temporarily) so that I get a bonus, can cash out stock options, or the like. The lettuce is still bad, whether I say it is good or not. But to the outside investor, they can no longer tell.


From the IASB joined in the criticism of FASB:

" "As distasteful as it is, we've got to recognise that there is a crisis on and we can't totally ignore what another standard-setter is doing," said a board member at the meeting in London. But other members, most notably James Leisenring, argued that FASB was proposing to allow companies to "ignore" the traded price of a financial instrument in favour of using internal models.

In the end, the IASB issued a "request for views" about FASB's proposals. This rarely used document is unusually broad and asks parties what they think of the proposals, with no formal implications for what the IASB's next steps should be. The IASB's document is read as a thinly veiled critique of how FASB's hand was forced by US politicians. It cautions that "attempting accelerated efforts in complex areas" can have "unintended consequences and undermine investor confidence in financial reporting.""

Airlines Return to Hedging -

According to the WSJ, airlines are making a switch from futures to options for their hedging programs.

Airlines Return to Hedging -
"..oil prices are starting to rebound, creating a quandary for the industry. If the airlines dive back into hedging, they could end up overpaying once again should oil prices fall back. Remaining unhedged would leave airlines exposed should the recent rally extend into a price spike.

The answer, some airlines say, is to hedge their bets on how to hedge. Carriers are relying increasingly on instruments that reduce the burden of rising oil prices, but leave open the option of purchasing fuel at market rates should costs fall back. These derivatives have greater upfront costs, but airlines are unlikely to see a repeat of the massive charges they reported in their fourth quarters from hedging programs gone wrong."
and later
" The airline is using a mechanism known as a call option, which grants it the right to buy oil futures at $60 a barrel, even if their value has risen above that level. The options are pricier than other hedging instruments, but still allow an airline to take advantage of cheaper fuel when oil prices fall.
Excusing the article appears it was written for an introductory finance class, it is interesting to see the switch to options. It is surprising that futures were used as much as they were when they create an obligation to lose if prices move against your hedge. Or as you learn in any finance class: options hedge the moves against you while allowing you to participate in moves that are in your favor. The disadvantage is that they often are not as liquid and have higher transaction costs.

Wednesday, April 01, 2009

SSRN-What Do Subprime Securitization Contracts Actually Say About Loan Modification? Preliminary Results and Implications by John Hunt

Interesting! John Hunt reviews some actual contracts and finds they rarely strictly forbid loan modifications.

SSRN-What Do Subprime Securitization Contracts Actually Say About Loan Modification? Preliminary Results and Implications by John Hunt:
"A review of pooling and servicing agreements from large subprime securitization programs in 2006 reveals that about 10% of the contract ban loan modifications altogether. The other 90% do not seem to forbid win-win loan modifications (defined as modifications that benefit the borrower and increase the present value of cash flows to the trust), although their terms are open-ended enough that reluctance to make such modifications is understandable. If the subprime universe as a whole looks similar to the contracts we have reviewed to date, mass clarification of contracts rather than mass abrogation either through special legislation or through the creation of a special bankruptcy process may be appropriate."

That said, wouldn't it sort be assumed that you can't modify it, but it is not in writing, so ???

SSRN-Peer Firms in Relative Performance Evaluation by Ana Albuquerque

Financial theory suggests that CEO compensation should be based on relative performance.

Why? It captures what financeprofessors like to call external shocks (for the rest of you this means that things that are beyond the control of manager). For instance if you are paid by stock, for better or worse you are at least partially at the mercy of the stock market. So essentially the peer group is a control group.

Surprisingly the empirical literature has found mixed results when examining how well this works. That seemingly has changed with a new paper by Ana Albuquerque. She suggests the the reason that previous researchers have used the wrong peer groups.

SSRN-Peer Firms in Relative Performance Evaluation by Ana Albuquerque:

From the abstract:
"External shocks and flexibility in responding to the shocks are functions of, for example, the firm's technology, the complexity of the organization, and the ability to access external credit, which depend on firm size. When peers are composed of similar industry-size firms, evidence is consistent with the use of RPE in CEO compensation."
A later look in:
"...difficulty in defining the ideal peer group. Such a group should include firms that are similar along several characteristics (e.g., industry, size, diversification, and financial constraints). Yet considering all such characteristics simultaneously is not practical because it could result in peer groups composed of too few firms, which would be too noisy to filter external shocks. In this paper, I show that industry and firm size capture many of these characteristics. When peer groups consist of firms within the same industry and size quartile, my empirical results show systematic evidence supporting RPE usage in CEO pay."
and to compare this to previous work in the field:
"To compare with previous studies,I test whether RPE is used when measuring peer performance with two common peer group definitions, namely, the S&P 500 index and firms within the same industry. I fail to find consistent evidence of RPE usage with either peer definition"
Good stuff. Interesting.

Albuquerque, Ana M.,Peer Firms in Relative Performance Evaluation(March 26, 2009). Available at SSRN: