A look around and updates on several topics

A relatively quick look around at quite a few topics:

BusinessWeek has an interesting article that touches on Front Running, Proprietary Trading, and regulation. A look-in:

" In most cases, however, front-running is vexingly hard to prove. "It's a gray world," says New York University professor Lawrence J. White. "But cooperating to protect high prices and fees is where regulators and plaintiffs are ready to pounce.""

The Corpus Christi CallerTimes has an article by H. Swint Friday on what traditionally has been called "Lifestage" funds:

"...This new mutual fund product is the "Target Retirement Date Fund." These funds often are mutual funds that invest in other funds within the fund family (fund of funds) to construct a portfolio most appropriate for a person planning to retire at a certain date"

Writing for Street.com, Scott Rothbout looks at 5 hedging technigues. The five include pairing, shorting, ETFs futures, and options.

Bear Stearns named Jeff Lane to head their Asset management unit.

Squirrels seemingly exhibit increasing risk aversion, from the Washington Post:

"Using...simulations, the researchers considered ...One animal spends lots of time exploring to find the best food and habitat, investing in future reproductive success. The other explores more superficially and quickly, a strategy that emphasizes current reproduction.

The simulation showed that the thorough explorer, who expects to have a good chance to reproduce later, would behave in a more risk-averse way. The superficial explorer, living more for the moment, would behave more boldly....

The more an individual has to lose, the more risk averse it should be.""

BBC reports on the growing competition between Hong Kong and Shanghai....DealBook Reports that in the first 6 months mergers and Acquisitions were over one Trillion Dollars which was a new 6 month record...and also on potential changes in tax code effecting hedge funds.

BTW: I made some changes to the FinanceProfessor.com site. Check it out. Also the "Shared-Items" are pretty cool!

More on Bear, Regulation, and transparency

Mark Gilbert writing for Bloomberg has a well done piece on the implications of the hedge fund problems at Bear Stearns.

Bloomberg.com: Opinion:
Two lookins:

"The most stunning aspect of the demise of two hedge funds belonging to Bear Stearns Cos. is the almost total absence of transparency surrounding the bailout.

The debacle may finally provoke regulators, who have long suspected that buying derivatives is akin to running through a fireworks factory with a lighted blowtorch in each hand."

And later:

"The unraveling of the Bear Stearns hedge funds has pulled back one corner of the curtain shielding the activities of hedge funds and their investments in derivatives, giving a glimpse of who is on the hook if the bets sour.

It seems that the skin in the game isn't from other hedge funds, Asian central banks, or widows and orphans. Instead, step forward the usual Wall Street suspects: Merrill Lynch & Co., Lehman Brothers Holdings Inc., Bank of America Corp. and their investment-banking peers."

Definitely read the whole thing. It is good.

Going to jail for a while..

Since it now seems that the Rigases will actually serve jail time for their roles in the Adelphia scandal, I thought it would be a good time to mention a very cool paper by Karpoff, Lee, and Martin that is forthcoming in the Journal of Financial Economics on what happens to managers who “cook the books”.

Short version? They burn.

Longer version: Karpoff, Lee, and Martin look at over 2000 (2,206 for those who want more precision) cases of SEC or Department of Justice “enforcement actions for financial misrepresentation” from the late 1970s to September 2006. They find that those managers who were responsible did have a price to pay above and beyond the drop in the value of their stock holdings (and options I would add!).

The price varies predictably with severity of crime and strength of governance, BUT overall it is quite clear the managers do pay a personal penalty. It starts with loss of employment--an amazing “93% lose their job by the end of the regulatory enforcement period” with more than fifty percent of those being fired.

But the fun does not stop there! Over a quarter are also charged criminally with about three quarters of those “[having] pled guilty or convicted.” If that is their fate, then on average they guilty party is “sentenced to an average of 4.3 years in jail and 3 years of probation.”

Morale: Contrary to what many people believe those at the top do pay the price for their indiscretions. Which reminds, me, did you see Paris Hilton was released from jail?

Note: While I quote the authors and use the term "cooking the books," I hope this does not confuse the reader with their JFQA paper on cooking books. This current paper (while similar to the other work) is entitled The Consequences to Managers of Financial Misrepresentation Here is a link to a working paper version of the paper since the JFE version is not available online.

Bear Stearns taps managers to save hedge fund - Yahoo! News

Updates:

Bear Stearns taps managers to save hedge fund - Yahoo! News:

"Bear Stearns Cos. Inc. said on Tuesday it does not plan to bail out the High-Grade Structured Credit Strategies Enhanced Leverage Fund, the second of two struggling hedge funds.

Instead it will provide $1.6 billion of financing to save its High-Grade Structured Credit Strategies Fund. Days earlier the bank had said it would provide up to $3.2 billion in financing."

Also

" Bear Stearns Asset Management CEO Richard Marin is taking a stronger role in managing its two troubled hedge funds and tapped mortgage unit head Thomas Marano to save one of the funds"

Humor from the Onion

I have not been able to verify this, but if The Onion is reporting it, it has to be true ;)

Greenspan Comes Out Of Retirement For One More Interest Rate Hike

WASHINGTON, DC—Confirming a rumor that first appeared in March on the FDIC Fan Forum message board, former Federal Reserve chairman Alan...

Management in Europe | Pay slips | Economist.com

Management in Europe | Pay slips | Economist.com

Nice article on CEO pay from the Economist. The nutshell:

"The secret to sensible pay is transparency and a shareholder vote, along with all the negotiation that surrounds it....Ideally, the debate over executive pay will shift from the purely moral plane to the pragmatic one, where it really belongs. Investors and workers want their companies to generate prosperity. Pay is a tool to help that happen. Governments should not blunt it."

Call for papers

NABET: "

The Northeastern Association of Business, Economics and Technology invites papers for presentation at its Annual Meeting to be held on October 25th and 26th at the Days Inn, State College, PA."

Hey it is State College! :)

Senate Report on Amaranth Advisors

Given the news of Bear Stearns' hedge fund troubles, it is ironically coincidentally that the Senate's report on the collapse of Amaranth Advisors was released today.

A look around at some of the reporting:

From NY Times' Dealbook:

"After a nine-month investigation, a bipartisan Senate subcommittee is expected to issue a report Monday detailing how a single hedge fund, Amaranth Advisors , dominated the North American natural gas market last year, causing high prices and extreme volatility that ultimately led to the company’s stunning collapse."

From CNNMoney:

"U.S. regulators were powerless to stop "excessive speculation" by Amaranth Advisors LLC because the giant hedge fund exploited an unregulated electronic exchange to "dominate" and "distort" natural gas markets in 2006, a U.S. Senate panel said....U.S. regulators were powerless to stop "excessive speculation" by Amaranth Advisors LLC because the giant hedge fund exploited an unregulated electronic exchange to "dominate" and "distort" natural gas markets in 2006, a U.S. Senate panel said."

From the Houston Chronicle:

"The hedge fund at times last year controlled 40 percent or more of the natural gas contracts traded on the New York Mercantile Exchange, and as much as 75 percent in one month, according to the 135-page report by the Senate's permanent subcommittee on investigations....In order to avoid trading limits it faced on the New York Mercantile Exchange, Amaranth shifted its activity to the InterContinental Exchange Inc., an Atlanta-based electronic futures exchange that is free from such constraints, the report found."

And from Bloomberg:

"The report also calls for closing the so-called Enron loophole, which allowed Amaranth to do more business on electronic trading systems such as Intercontinental Exchange Inc. after being forced to reduce its positions on the New York Mercantile Exchange, where benchmark gas futures trade.

``Amaranth did not manipulate the market, and nothing in the subcommittee's report concludes otherwise,'' Dan Webb, an attorney representing Amaranth, said in an e-mailed statement. Webb said the firm agreed with a minority staff opinion in the report that Amaranth was responding to market changes rather than influencing prices."

Forbes reports that Shane Lee (the trader who took much of the criticism on the Senate report), contents that he was not to blame:

"Lee said natural gas prices were driven primarily by weather and demand for fuel. Trading would only have an impact on prices in the "extreme short term," he said."

The ICE (the Intercontinental Exchange) also has a response to the Senate Report. After (correctly) saying that many things drive prices and stressing the Friedman view that speculators (if profitable) reduce volatility, the ICE takes issue with much of the report and reminds everyone that they have improved reporting:

“With great respect for the work of the Staff, we believe that the Report does not fully reflect the level of oversight that now exists in the natural gas markets today,” said ICE Chairman and CEO Jeffrey C. Sprecher. “We are pleased to have already implemented, since the end of 2006, a large trader reporting system related to Henry Hub natural gas markets."

So what is next? The troubles at Bear Stearns will almost assuredly add volume to the calls for more regulations.


BTW why is the Senate Report on a Homeland Security website?

Look who is in the news--Myron Scholes

Bloomberg.com: Japan:

"Myron Scholes, who won a Nobel prize for developing the model used to value options, is seeking a license to advise Japanese pension funds after opening an office in the country.

``We have an application in to Japanese regulators for a discretionary fund management license to enable us to allocate pension fund money in our fund or other alternative investments,'' Scholes, 65, said in an interview in Tokyo yesterday."

Bear lends $3.2b to its troubled hedge fund

In what will no doubt be talked about in finance classes for years to come, the big news story today is that Bear Stearns has agreed to lend $3.2 Billion (about 25% (I did not verify this reported number) of its overall capital) to one of its troubled hedge funds.

First the reports:

Bear Stearns to Bail Out Troubled Fund - New York Times:

"Bear Stearns, the investment bank, said today that it would provide a secured loan of up to $3.2 billion to one of two troubled hedge funds operated by its asset-management business, in an effort to placate lenders and investors.

The move comes two weeks after banks that lent billions to the hedge fund, the Bear Stearns High-Grade Structured Credit Fund, demanded that it put up more money to make up for the losses in its portfolio of complex and hard-to-sell mortgage-related securities."

From Bloomberg:

"The funds speculated in highly-rated CDOs -- securities backed by bonds, loans, derivatives and other CDOs -- that were hurt in March and April as defaults on subprime mortgages to people with poor or limited credit histories increased. The fund also lost on opposite bets against home-loan bonds, which backed many of its CDOs.

As the funds faltered, Merrill [and others] sought to protect itself by seizing the assets that were used as collateral for its loans."

But had very limited success as there were few willing to buy at the prices being asked.

Keep it simple: So what happened? In as simple of terms possible, the hedge funds borrowed to buy "bonds" that subsequently went down in value. The collateral for this debt was the the bonds. Hence some borrowers demanded repayment and tried to sell the assets to raise cash. Fearing a fire sale Bear agreed to lend the fund $3.2 Billion to the fund in order to give it time to sell assets or for them to recover.

Is it catchy? The real question of course is whether this will lead to a contagion problem where other firms get in trouble and the possibly lead to a melt down. While it is impossible to say so soon, early guesses are that the problem is not very contagious and any major meltdown is highly unlikely. Why? For one thing almost everyone who has been paying any attention in the past few weeks(months?) has seen it coming.

If you think back to Long Term Capital Management, this was the big issue there as well and led to the Fed arranged bail out of that troubled fund. In many ways, the same thing will likely happen now. Assets will be sold in a more orderly fashion and in due time the fund will be closed.

Yes the risk does still exist (and always will), but it does not appear to be a catastrophic event this time. For one, there are many more hedge funds and private equity investments. thus, through diversification, the impact will be less. Moreover, while highly levered, first reports have leverage less than at LTCM.

What risk is Bear taking on in extending the loan? According to Bear CFO Sam Molinaro (who incidentally is an SBU grad) not much since the assets pledged against the loan are worth more than the loan. (Which of course is hard to say with certainty as evidenced by ML's difficulty in selling off the $850M in assets and getting bids as low as 30 cents on the dollar.

So what will happen? Most likely the funds will sell off their assets and eventually be shut down. But the loan from Bear will give the funds time to do so in an orderly fashion and not at 30 cents on the dollar the WSJ reported this morning that some universities were bidding for the debt.

Cadbury expects to sell U.S. beverages unit, plans 7,500 job cuts - MarketWatch

Not sure what to teach? Looking for a good (free case study)? Here you go. This would make a GREAT classroom discussion for a corporate finance class.

Cadbury expects to sell U.S. beverages unit, plans 7,500 job cuts - MarketWatch:

"Cadbury Schweppes said Tuesday that it sees a sale of its U.S. beverage unit, rather than a demerger, as the most likely option as the world's biggest confectioner also announced plans to cut 15% of its work force -- some 7,500 jobs -- in an efficiency drive."

It has a bit of everything from projecting cash flows, to tax implications of various break up alternatives, to shareholder activism, to the role of private equity investors, to stakeholder interests, and it involves brand names that we know.

CEO's words haunt Whole Foods deal

TheDeal.com - CEO's words haunt Whole Foods deal:

"Court documents released Tuesday, June 19, capture Whole Foods Market Inc.'s CEO John Mackey urging his board to snap up rival Wild Oats Markets Inc. to eliminate any threat from a rival natural foods company.... The FTC's complaint states that 'Mackey bluntly advised his board of directors of the purpose of this acquisition: 'By buying [Wild Oats] we will … avoid nasty price wars...."

Uh, oh. This one is not going to make the deal easier to defend. But it may not be a deal breaker yet either. Of course, price wars will be eliminated (and prices will likely rise--this idea that market power reduces price competition is fairly well established (see Pragar and Hannan 1998), BUT it does not mean there is not enough competition for Whole Foods and Wild Oats to be merged. Stay tuned.

BTW speaking of horizontal mergers and the difficulty of being approved, XM and Sirius were back in the news recently. Another one that I would have let go.

SSRN-Earnings Forecast Performance and Financial Analyst Turnover During Mergers by Joanna Wu, Amy Zang

SSRN-Earnings Forecast Performance and Financial Analyst Turnover During Mergers by Joanna Wu, Amy Zang:

Super short version: Following mergers, turnover is likely to be a non-linear function of job performance. Specifically, following mergers both poor and good performers are more likely to leave.

Longer version:

Wu and Zang examine analyst turnover and

"...document a U-shaped relation between earnings forecast accuracy and analyst turnover surrounding mergers, i.e., top forecast performers also experience high turnover. We study mergers in the financial industry from 1994 to 2004 when significant consolidation within the industry created considerable analyst turnover. We document that even with the myriad of factors impacting analyst turnover during mergers, analyst performance in forecasting accounting earnings is by far the most influential."

A few interesting tidbits from the paper:

1. Consistent with predictions (and previous studies) analysts who perform poorly are replaced more often.

2. However, unlike previous research, the authors also document higher turnover for good analysts (good predictors of future earnings) following mergers

Why? As the authors state:

"A worker’s productivity is a function of various factors, one of which is his/her firm-specific human capital that reflects the skills and knowledge peculiar to the firm (Parsons, 1972), or a particular combination of various skills that the firm especially values (Lazear, 2003). Mergers likely destroy part of the firm-specific human capital for the financial analysts involved, which combined with some of the other merger-related factors such as culture clashes as discussed later, lead to potential reduction in productivity"

In less formal language: the analyst had done well historically as a result of many factors, suddenly had these factors shaken up in the merger. This shakeup makes it more likely for the analyst to leave. (Of course the fact that the analyst has a good track record also means (s)he has more job alternatives which would also lead to higher turnover.)

This alone is interesting. Then consider further implications of of mergers on the overall labor market. For instance:

"[The] findings speak to the literature on how mergers impact the labor force. Existing studies on top executive turnovers following mergers have tied target CEO turnover to poor target performance and support the disciplinary role of corporate takeovers (e.g., Martin and McConnell, 1991). Our evidence suggests that mergers likely also lead to a brain drain in the broader workforce."

Which deserves a WOW!


Cite: Wu, Joanna Shuang and Zang, Amy Y., "Earnings Forecast Performance and Financial Analyst Turnover During Mergers" (March 2007). Simon School Working Paper No. FR07-01 Available at SSRN: http://ssrn.com/abstract=973750

Not stictly finance, but I will bend the rules for such a good cause!

Roswell Park Alliance Foundation:

Ok, so it is not a hurricane or tornado, but more people die from cancer than all the hurricanes and tornadoes combined! We can help make a small dent in this by helping the Cancer society. Money will be used to find a cure and to help those with cancer.

Here's the deal: I will ride 100k (62+ miles) if you donate!

It is this week however, so do it now. Donate here.

Thanks!

CEOs' worth increases even when poor acquisitions are made

CEOs' worth increases even when poor acquisitions are made:

"Following an acquisition of another company, chief executive officers' compensation levels usually increase, even when the purchase turns out to be unprofitable, according to researchers at the University of Washington and University of British Columbia. That's because while a bad merger can decrease the value of a company's stock and options, CEOs typically acquire new stock options once the deal goes through, thus making up for any financial losses suffered as a result of the buy.

'There are major personal financial gains to be made by CEOs after any merger or acquisition so even if it ends up being a financial loss, shareholders suffer but CEOs nearly always come out ahead financially,' says Jarrad Harford, an associate professor of finance and business economics at the UW Business School and co-author of the study."

The paper, which is in the Journal of Finance, is of course very good. I read it a few years ago in working paper format--her is a copy of the paper.

Dinosaurs are alive, on Wall Street - MarketWatch

After the 1980s everyone thought conglomerates (like dinosaurs) were dead. But as David Weidner points out, today's private equity firms are essentially conglomerates.

Dinosaurs are alive, on Wall Street - MarketWatch:

"Private equity companies are ...buying into every industry, including those where they have little or no experience in managing. TA Associates began a technology focused firm, ...now has investments in financial services, healthcare and consumer companies like Americhoice and Eastern Mountain Sports. 'Blackstone Group which will offer a stake to the public next week, owns or has investments in more than 100 companies, including such diverse businesses as Cadbury Schweppes, Celanese, Deutsche Telekom, Extended Stay America, Freedom Communications, Freescale Semiconductor and Universal Orlando."

So what has changed? One thing is management. Rather than have a single person in charge across multiple industries, the private equity firms are overseeing the firms much like a super-active investor (which is what they are trying to be). This also reduces the importance of transparency (a reason often cited as a cause of the diversification discount). Another difference is that many of these investments are seemingly more temporary in nature: fix things up and then sell them in an IPO.

But in spite of their differences, there are enough similarities to make the claim that todays private equity firms are the evolution of yesterday's conglomerate (which is exactly what Weidner does).


BTW We talked about this in class this spring, but it was not as nearly as interesting as this piece that talks about the return of the dinosaurs!

Thanks Mark!

Back to blogging!

Ok, I needed a break! lol...took a few days off (much riding and running) and am now getting back to finance :)

So a few news stories of note:

1. Yahoo has been under criticism for executive pay. About a third of shareholders refused to vote for all of management's board recommendations. (Stay tuned, this one may not be done.)

2. If you ever get thinking that people (including managers) are not REMMs you might consider the case of Dow Jones. The company is a target of a takeover attempt, and all of a sudden managers get new golden parachute plans.

3. Salaries at the top mean very little, but I was surprised at how little they matter! From the China Post:

"Of the 386 Standard & Poor's 500 CEOs whose companies reported under the Securities and Exchange Commission's expanded disclosure requirements this year, salary accounted for only 9.5 percent of total pay. For the 11 CEOs in the group who earned more than US$30 million (euro22.47 million), salary was just 2.7 percent of total pay."

4. In an update to a case we did in class this year, "A Milan judge has ordered Citigroup, UBS, Morgan Stanley and Deutsche Bank to stand trial for market-rigging in connection with dairy firm Parmalat's collapse, judicial sources said."

5. USA Today has an interesting piece that looks at how politics, and not economics, often leads to trade deals. The article centers on possible consequences of trade barriers with China.

6. The IPO that everyone is seemingly talking about is Blackstone. It will be interesting to watch. Also be sure to check if retail investors get much of a stake. From Forbes.

7. Knowledge@Wharton provides a good article on those in or near retirement and give an interesting factoid:

"Home equity typically makes up more than 60% of individuals' net worth, according to Wharton real estate professor Todd Sinai and finance professor Nicholas Souleles."

The finance reading I did do over the past few days has been the Journal of Applied Finance. In fact a "hats off" to the editors of the Journal of Applied Finance is most definitely due. The most recent issue is flat out great. I really enjoyed it. (FTR they have many of the articles still online in their Forthcoming section. Take a look and then subscribe. Well worth it!)

Benefiting from Irrational Investors — HBS Working Knowledge

Behavioral Finance—Benefiting from Irrational Investors — HBS Working Knowledge:
Quoting Malcom Baker of Harvard:

"'At the foundation of finance is the idea that investors and managers act rationally, so that capital market prices reflect fundamentals and managers respond to incentives in predictable ways,'...But investors don't act like computers in financial models. Behavioral finance replaces these idealized decision makers with real and imperfect people who have social, cognitive, and emotional biases. My work focuses on how the resulting inefficiencies in the capital markets can create opportunities for investment managers and firms.'"

Big or small? Which is better?

Do you live in an area where politicians fight to attract new large firms to the area? Or have you read that small firms have been the main job creators over the past few decades?

If you said yes to either, then you should read The Role of Small and Large Business in Economic Development by Kelly Edmiston of the KC Fed.

A few look-ins:

* " The attribution of the bulk of new job creation to small business arises largely from relatively large job loses at large firms, not to especially robust job creation at small firms....

* "...from the perspective of society at large, aggressive courting of large firms can distort rational behavior, causing a waste of economic resources....While welfare in the winning region may improve (but not necessarily), welfare for the larger community encompassing the region will suffer."

* "The overarching question is whether promoting entrepreneurship and small business makes sense in an economic development strategy. The article concludes it probably does but with some caveats...."

*"...on average, large businesses offer better jobs than small businesses in terms of both compensation and stability....little convincing evidence to suggest that small businesses have an edge over larger businesses in innovation.""

Interesting and thought provoking.

Read the entire thing: The Role of Small and Large Business in Economic Development

(BTW I reordered the look-ins slightly, but did not change meanings.)

FTC to try to block grocer's acquisition

FTC to try to block grocer's acquisition:

"Natural foods grocer Wild Oats Market Inc. said Tuesday that federal regulators will file a lawsuit to prevent its acquisition by competitor Whole Foods Market Inc...Whole Foods has said the FTC is considering trying to prevent the sale from being completed over concerns over anticompetitive effects."

That is sort of surprising to me. First of all it is saying that Natural and Organic grocers are a different market than other grocers. Which is clearly not the case (don't believe me? Price an organic item too high and see everyone go to the non organic variety!).

Secondly, with the widespread adoption of "organic" products by national producers (see Hunts, Kraft, etc.), it is unclear whether the "natural and organic" grocers will have the market to themselves.

Few fast posts

I never seem to have enough time in the day but didn't want people to think I dropped off teh face of the earth! So here are a few note worthy posts of recent days:


Science Daily reports an interesting finding:

"...according to a new study in this month's Journal of Personality and Social Psychology, published by the American Psychological Association (APA), repeated exposure to one person's viewpoint can have almost as much influence as exposure to shared opinions from multiple people. This finding shows that hearing an opinion multiple times increases the recipient's sense of familiarity and in some cases gives a listener a false sense that an opinion is more widespread then it actually is."

Which may explain some financial decisions.

BizCoach, citing a paper by Becker-Blease and Sohl reports that while women do get less "angel financing" it is largely because of the type of businesses that many women start and they tend to ask for money less often:

" "We found that women entrepreneurs submitted an average of nine percent of proposals received by our angel groups during the sample," he said. "Indeed, of the proposals received, both women and men had an equal chance of receiving funding (about a 14 percent chance)."

Warren Buffett a white knight? maybe. That is the report from many sources on the attempted takeover by Robert Murdoch of Dow Jones (including the WSJ). From the Guardian:

"The union's call to Mr Buffett may have be in vain, however. The legendary investor and multi-billionaire said just recently it was "very, very unlikely" that he would bid for Dow Jones, either as a personal investment or together with his company Berkshire Hathaway."

Financial Engineering News has an interesting piece on electric deregulation with a focus in NY State that suggests unless New York City does something soon, it could be the center of brown outs in the years ahead. Among the MANY highlights:

"...even if one understands commodity pricing, electricity is a very special type of commodity and obeys rules different even than other those of other commodities, due to its special feature of being considered to be absolutely essential....if the price of electricity spikes on a hot summer weekday afternoon in New York City, even if consumers are aware of the spike, their refrigerators will cycle as normal, their air conditioning will still be on and office buildings will not shut off either their air conditioning nor shut down their elevators, the subways will continue to run, etc. And moreover, with the current system, the consumers of electricity are blissfully unaware of price spikes in real time."

InsideBayArea demonstrates why managers prefer cash to shares via the tale of a entrepreneur who thought he had $40million only to have the options shrink in value before the shares could be sold:

"We were acting as if we had $40 million," he recalls of the giddiness he and his wife felt at being that rich. "We bought an airplane, started building a 10,000-square-foot house, gave away to charity, bought houses for relatives."

But the stock was on "lock up" for a year after the options were exercised, a common requirement used to retain management. By the time the lock up expired, the stock market had crashed. Wiener was able to sell the stock for about $1 a share, producing a vastly smaller sum than $40 million.

"We didn't have the money to pay taxes," he said. "We didn't even have money to pay our mortgage."

Tax law recognizes stock options as earned income on the exercise date. So, Wiener owed taxes on $40 million"

And finally the story that may have the most lasting consequences. It appears that there is now a exact model to price American options! It is by Song Ping Zhu, a mathematician from Australia's university of Wollongong. The article is forthcoming in the Quantitative Finance.


Thanks to MoneyScience for pointing several of these out to me!
BTW did a really fun 100K+ (turned into about 75 miles for me) bike ride this past weekend. It was first "longish" one of year.