Monday, March 31, 2008

New newsletter worth reading!

A friend of mine (Steve Horan) is working on this. Figured it was worth sending out to everyone.

Private Wealth - March 2008: "Welcome to the inaugural issue of the Private Wealth Management Newsletter, created to serve the needs of the growing number of our members who are serving private clients."

My favorite article in this first issue is :

"The Emerging New Model for Wealth Management
Zvi Bodie, PhD, and Paula Hogan, CFA

Consumers face very different challenges today in planning for lifetime financial security from what they did previous generations ago. The wealth management paradigm is transitioning from the Markowitz mean–variance perspective to the life-cycle theory of saving and investing worldview, with many implications for wealth management practice."

Saturday, March 29, 2008

Aftershocks at Bear Stearns

Aftershocks at Bear Stearns:
"In a week it was all gone: Bear Stearns' (BSC) reputation, culture, identity; the savings of many of its 14,000 employees; and possibly their jobs, too. 'The speed of the collapse was traumatic,' says one banker who has worked at Bear for a decade. 'People aren't jumping out of windows,' he says. 'But we are all kind of anxious.'

A year ago Bear Stearns was worth about $20billion....On Mar.24, JPMorgan, under fire for unseemly opportunism, quintupled the offer to $10 a share, or $1.2 billion.....A comedown of such magnitude would be traumatic for any organization. But Bear Stearns was a Wall Street outlier. Although the country's fifth-largest investment bank, Bear still considered itself the scrappy underdog. A former chief executive, Ace Greenberg, liked to say Bear hired people who were poor, smart, and had a deep desire to become rich. It was a place of sharp elbows, but if you succeeded you were part of a family....Within the next couple of weeks, people expect the layoffs at Bear to begin. ""
I do know quite a few people at Bear and my heart goes out to you. Good luck. Stay positive. Things will work out for you. May not be what you had thought a few weeks ago, but who knows, maybe you will like things better.

Friday, March 28, 2008

SSRN-Technical Trading Revisited: Persistence Tests, Transaction Costs, and False Discoveries by Pierre Bajgrowicz, Olivier Scaillet

Does technical analysis work or not? Technical Trading Revisited: Persistence Tests, Transaction Costs, and False Discoveries by Pierre Bajgrowicz, Olivier Scaillet:

While the topic has been widely studied (indeed it has many times been tossed aside and scorned by academics), there are just enough papers that finds it works (see Lo, Mamaysky and Wang (2000)) that when coupled with the continual use of technical analysis, the effectiveness remains in debate.

Bajgrowicz and Scaillet examine this interesting question and find the answer is No and especially after transaction costs are included.

From their paper:
"...revisit the apparent historical success of technical trading rules on daily prices of the Dow Jones index. First, we use the False Discovery Rate as a new approach to data snooping. The advantage of the FDR over existing methods is that it is more powerful and not restricted only to the best rule in the sample. Second, we perform persistence tests and conclude that an investor would not have been able to select ex ante the future best-performing rules. Finally, we show that the performance fully disappears once transaction costs are taken into account."

Cite: Bajgrowicz, Pierre and Scaillet , O., "Technical Trading Revisited: Persistence Tests, Transaction Costs, and False Discoveries" (January 1, 2008). Swiss Finance Institute Research Paper No. 05-08 Available at SSRN:

Tuesday, March 25, 2008

Justice Dept. Approves XM Merger With Sirius - New York Times

Whatever happened to ____? You know those stories that just seem to drag on and on and on....this may take the cake. The XM Sirius Merger is once again back in the news for the third straight semester!

Justice Dept. Approves XM Merger With Sirius - New York Times: "
"The Justice Department gave the merger of two rival radio networks, XM and Sirius, a marriage that would create a de facto monopoly in satellite services now used by more than 17 million subscribers....The Justice Department’s antitrust division approved the merger after determining that prices were not likely to rise, in part because of competition from other program sources, like high-definition radio as well as iPods and other MP3 players that can be connected to home or car audio systems."
But lest you think you have heard the end of it, this still has to be approved by the Federal Communications and it seems like it is still far from a done deal:
"F.C.C. officials have offered conflicting signs on whether the commission would approve the merger.

The commission’s chairman, Kevin J. Martin, was quoted last week as saying that “I haven’t figured out what I think we should do on it yet.”"

This serves as a good reminder why horizontal deals can be difficult to get approved. This deal was first announced back in February of 2007.

The Incentive to 'Bet the Farm': CEO Compensation and Major Investments by Gavin Smith, Peter Swan

In prepping for my MBA 610 (Corporate Finance) class where we examine executive pay and how it impacts agency costs, I found this article by Gavin Smith and Peter Swan.

SSRN-The Incentive to 'Bet the Farm': CEO Compensation and Major Investments:

Swim and Swan look at firms that do major investments and those that do not. They find that the way the CEO is paid does influence the investment behavior of the firms.

From the abstract:
"CEO incentives with option-based asymmetric payoffs greatly increase the likelihood that a firm will increase risk by undertaking both major real investments and acquisitions. In contrast, equity-based incentives that induce upside and downside symmetric payoffs are associated with fewer major acquisitions and neither encourages nor discourages real investments. Fixed pay is associated with low likelihood of major investments and a poorer prognosis.
When option-incentivized CEOs use equity for funding real investment decisions they have the best combination of incentives and funding source"

Which is really cool. It may not be the most ground breaking paper I have ever seen, but it definitely is worth the read! (If nothing else, read the 8 page introduction! In fact, if you are in my class, you should definitely do so :) )

Cite: Smith, Gavin and Swan, Peter L., "The Incentive to 'Bet the Farm': CEO Compensation and Major Investments" (23 February, 2008). Available at SSRN:

Monday, March 24, 2008

Catching up-Newletter style

Catching up.

There is just not enough time in the day to do all I want to do. So given that it is break (we go back tomorrow) I will try to clear a few of the articles I wanted to mention as well as give you some book ideas and some random thoughts that I wanted to put out there as well.

* NCAA March Madness is a learning/teaching opportunity to discuss the relative effectiveness of stock picking vs. passive investing. Why pick upsets? Because it is fun. Boring but generally better strategy? Pick favorites. From Forbes two years ago.

* Recently JP Morgan officials asked their competitors to not hire Bear brokers away. Uh, ok. Of course he can say it, but why would anyone listen? If it works, I suggest that the professional sports teams try the same strategy when it comes to losing free agents.

* Implied Volatility (even with its acknowledged increase with the increased leverage that accompanies stock price declines) might resolve the issue of what happened to Andersen audited firms better than just using stock prices. This issue, which I hadn’t thought about in quite a while, was brought back into the spotlight (flashlight? Lol) by a new paper by Nelson, Price and Rountree that finds that Andersen audited firms were concentrated in industries that all went down and that Andersen's reputation may not have been to blame. Oh yeah, here is a bad paper that does use implied volatility to get around this problem somewhat.

* Insider trading does not pay. Even when it is a group of finance professors (at least former finance professors) doing it. From the SEC:

"The SEC's complaint alleges that Marshall received detailed and current information regarding the highly confidential ISE-Eurex merger talks, and tipped Tucker and Larson. According to the complaint, Tucker and Larson then purchased ISE securities resulting in illegal profits totaling approximately $1.1 million and $31,000, respectively."

* I have been reading several books that are either finance oriented or at least have valuable financial lessons:

Predictably Irrational by Dan Ariely. Great for class examples of Behavioral Finance. And really fun read. I think it is better than Freakonomics (sorry Steve).

Gatekeepers: the Professions and Corporate Governance by John Coffee Jr. Almost perfect for my corporate governance recap that I do in my corporate finance classes.

Men of Fire: Ristening to this one. Yeah it is about the US Civil War, but it again shows how misaligned incentives and poor management can make a huge difference. Even in war, agency costs matter!

* We just got a Bloomberg machine. I'd be really interested to hear how some of you use it for class.

* And finally a request. If you are from the Buffalo area, we’d love to have your help in the first ever BonaResponds Buffalo Service Day. It is this Saturday! While BonaResponds has built its name on trips to the Gulf Coast, it is also very active locally and has contributed approximately a quarter of a million dollars of services since August 2006 (which is after our “big” trip) with virtually no University Funding. BonaResponds is open to everyone and a whole lot of fun in addition to doing much good. So if you are local come on out and volunteer! (if you are not local but want to help you can always donate or better yet meet us for our next trip).

American Stock Exchange and Delta Hedging

If you have ever taken a derivatives class (or even in some upper level corporate or investment classes) you probably are familiar with the "Greeks" and in particular Delta which is the change in value given a small change in the underlying asset price.

Interestingly, the American Stock Exchange now wants to allow Delta Hedging to be used more freely in offsetting option risks.

Self-Regulatory Organizations; American Stock Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Create a Delta Hedging Exemption From Equity Options Position Lim: "
"The exemptions for hedged positions generally require a one-to-one hedge (i.e., one stock option contract must be hedged by the number of shares covered by the options contract, typically 100 shares). In practice, however, many firms do not hedge their options positions in this way. Rather, these firms engage in what is known as 'delta hedging,' which varies the number of shares of the underlying security used to hedge an options position based upon the relative sensitivity of the value of the option contract to a change in the price of the underlying security. /7/ The Amex believes that delta hedging is widely accepted for net capital and risk management purposes."

JP Morgan and Bear to have a new price???

From the NY Times:
"The sweetened offer is intended to win over stockholders who vowed to fight the original fire-sale deal, struck only a week ago at the behest of the Federal Reserve and Treasury Department.Under the terms being discussed, JPMorgan would pay $10 a share in stock for Bear, up from the initial offer of $2...."
From CNN/Money:
" Under the revised terms, JPMorgan will buy 95 million new shares of Bear, giving it 39.5% of the troubled broker and a big leg up in getting shareholder approval to approve the takeover. Further, Bear Stearns' board members - including Chairman James Cayne, who was said to be shopping for a better deal - agreed to support the deal. The board controls about 5%, giving the bank almost 45% approval.

Why was the deal being redone? In part because os so called "mistakes". For more you will want to read
the section by the "Deal Professor" that examines some of the errors that came about in the initial deal.

Bank of New York's Michael Woolfolk Discusses The Dollar - Features and Interviews -

Bank of New York's Michael Woolfolk Discusses The Dollar - Features and Interviews -
"Michael Woolfolk, senior currency strategist for The Bank of New York Mellon, examines the forces pushing the dollar lower....

Woolfolk: I think that it is primarily an interest rate story, but we can’t be that simplistic about it. It’s also a growth rate story....We’re going to be seeing roughly about zero percent growth perhaps in the first half of this year. Europe will see something on the order of 1.5 percent growth. So even though Europe is slowing on a relative basis, they’re still growing faster than us.

We’re having difficulty attracting foreign investment into our stock and bond market currently, which also is undermining the dollar."
Have to admit a bias in this one. Many of the people I went to school with read the blog and if there is one thing I know, it is that they all have been wondering where is Michael J. Woolfolk. Well, Mark found this! A must watch. ;) (yes it is a video!)

Saturday, March 22, 2008

Wall Street takes advantage of emergency Fed lending program - Mar. 20, 2008

Interesting story from CNN/Money

Wall Street takes advantage of emergency Fed lending program - Mar. 20, 2008:
"...Wall Street investment companies are taking advantage of the Federal Reserve's unprecedented offer to secure emergency loans, the central bank reported Thursday....Those large firms averaged $13.4 billion in daily borrowing over the past week from the new lending facility....This mechanism, similar to one available for commercial banks for years, got under way Monday and will continue for at least six months. It was the broadest use of the Fed's lending authority since the 1930s"

Friday, March 21, 2008

MBAs bearish on Bear job offers - Mar. 21, 2008

I know at least one of my students is a tad concerned ;)

MBAs bearish on Bear job offers - Mar. 21, 2008: "
Bear Stearns' meltdown and pending sale to JPMorgan Chase has left dozens of aspiring Masters of the Universe in the lurch. The recruiting season for investment banking positions - both full time and internships - ended months ago, back when Bear's stock traded for quite a bit more than the price of a venti mocha latte at Starbucks.

So what happens to those unlucky students who accepted positions at the now-defunct Bear Stearns? Will they get jobs at JPMorgan, or should they start learning how to make Frappuccinos?

Some career services directors aren't optimistic"
The same is true for those who work there. Everyone is in a holding pattern. Good luck to you all!

Can’t Grasp Credit Crisis? Join the Club - New York Times

Can’t Grasp Credit Crisis? Join the Club - New York Times:
"It has been going on for seven months now, and many people probably feel as if they should understand it. But they don’t, not really....I’m here to urge you not to feel sheepish. This may not be entirely comforting, but your confusion is shared by many people who are in the middle of the crisis.

“We’re exposing parts of the capital markets that most of us had never heard of,” Ethan Harris, a top Lehman Brothers economist, said last week. Robert Rubin, the former Treasury secretary and current Citigroup executive, has said that he hadn’t heard of “liquidity puts,”....
Liquidity puts are much like other forms of putable debt without all of the limitations as to when the debt is putable. (By the way the BEST explanation of liquidity puts, indeed much of the whole issue with off balance sheet debt in general is at Seeking Alpha from back in November)

Just one more thing on liquidity puts. has an example of their Liquidity Put Agreement online. Note this key point in their exposition of it:
"Thus, even if interest rates rise and the value of the securities fall, the issuer will always be able to put the securities back to the Provider at par, eliminating the need to mark the portfolio to market"
Which is why when the write-downs did occur they were for large amounts (I think, I will ask some accountants on this and the off-balance sheet treatment mentioned in the Seeking Alpha piece).

But I digress, back to the original NY Times article:
"As is often the case with innovations, though, there was soon too much of a good thing... The mortgages were then sliced into pieces and bundled into investments, often known as collateralized debt obligations, or C.D.O.’s....Once bundled, different types of mortgages could be sold to different groups of investors. Investors then goosed their returns through leverage, the oldest strategy around. They made $100 million bets with only $1 million of their own money and $99 million in debt. If the value of the investment rose to just $101 million, the investors would double their money"

The NY Times article good. Definitely recommend and especially if you have a final that might have essay questions before too long ;)

Thursday, March 20, 2008

Why is Bear selling for more than the offer price?

Several people have asked why Bear is selling at so much over the JP Morgan offer price. I guess this is the best explanation I have seen.

Short version: Creditors want to assure the deal is approved, so they are buying shares in order to vote them.

Hedging the Bear Stearns Deal - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times:
"The creditor buys Bear shares and a put at the price. Creditor then sells a call to pay for most (but probably not all) of the put. Creditor waits for the record date of the Bear shareholder vote so it can vote. It votes yes. Immediately thereafter the creditor sells its shares.

For a small sum (hedge) the creditor has now done its part to help the Bear deal go through despite the protests of Bear’s shareholders. And the creditor receives 100 cents on the dollar assuming JPMorgan makes good on the creditor’s debts.

Is this possible? It is not only possible, according to market reports, this is what is occurring and why Bear’s shares are trading at $6 a share."

SEC's Bear Stearns Probe Zeroes In on 'Put' Trades -

SEC's Bear Stearns Probe Zeroes In on 'Put' Trades -
"The Securities and Exchange Commission is investigating the events leading up to the collapse of Bear Stearns Cos., specifically a surge in options contracts betting that the investment bank's share price would drop precipitously, according to people familiar with the matter....

The unusual trading in Bear's options began as early as March 7 and escalated through the following week....
Last week, the number of open put options leaped from 167,439 at the open of trading on Monday to 465,820 by the following Monday. That compares with open put contracts on Bear Stearns hovering around 155,000 the previous week, according to data from Schaeffer's Investment Research Inc., an options-research firm in Cincinnati.

"Betting on a 57% decrease in Bear Stearns stock in nine days is very unusual," said Todd Salamone, senior vice president of research at Schaeffer's Investment Research."

This is really not much to go on as many believed there could be trouble, but still I guess few (if anyone) expected this large of drop.

BTW there is also an investigation into the words of Bear executives prior to the collapse. From the NY Times:

"According to the Associated Press, the S.E.C.’s enforcement arm has sent a letter to JPMorgan Chase, which has offered to buy Bear Stearns, discussing “investigations and potential future inquiries into conduct and statements by Bear Stearns” before the takeover was announced."

Wednesday, March 19, 2008

More news on Jim Cramer

I have never been a big fan of him (my thought has always been is that he is really smart and a great marketer), but this probably has gone too far. Does anyone really believe he didn't say "sell" last week because he was afraid to cause a run on the bank? Mmm...maybe...better to 'fess' up and admit your mistake. This is not your finest hour.

But anyways, here is his response after Bear had fallen.

By the way, thanks to a few readers who correctly pointed out that whoever is writing at Daily Show must have read Fooled by Randomness (or at least came to the same conclusion on their own). The suggested name for the new show (No Matter how well I do over the next ten years, I still won't make up all the money I lost with Bear) while poorly named from a marketing point of view, is the exact point Taleb's Randomness book begins off with.

Visa's IPO

You probably have seen the headlines that Visa went public in largest IPO ever. Here are two interesting looks at it

From the San Francisco Chronicle--Visa draws high card:
"Visa's underwriters got commitments from buyers to take 406 million shares at $44 per share, raising $17.9 billion, by far the largest IPO ever carried out in the United States."
The NY Times looks at how much Investment Bankers will make on the deal:
" ...the offering will generate a windfall for Visa’s thousands of member banks, which own the company. JPMorgan Chase is expected to reap about $1.25 billion, while Citigroup and Wells Fargo are likely to receive several hundred million dollars each."
Forbes focuses on what the money will be used for:
"The credit-card processing company plans to use roughly $10.2 billion in proceeds to redeem shares held by selling stakeholders and has reserved $3 billion to cover litigation costs. The company has been involved in several major suits with competitors and disgruntled card users.

Remaining proceeds will be used for general corporate purposes."

Tuesday, March 18, 2008

John Stewart on Bear and Financial Problems

Forget the politics, just enjoy. And no matter what you do, watch the section on Cramer at about 5 minutes is hilarious!! LOL...

Video one:

Video two (on Bear)

Yahoo pushing for higher price? Worldwide:
"Yahoo! Inc., owner of the most- visited U.S. Web site, said sales will climb at least 19 percent in each of the next two years, justifying its refusal of a $44.6 billion takeover offer from Microsoft Corp.

The stock climbed the most since Microsoft's $31-a-share bid on Feb. 1 after Yahoo said sales growth goals for 2009 and 2010 are higher than analysts estimate. That deserves ``a significant acquisition premium'' offer, Yahoo said."

Monday, March 17, 2008

CME to buy Nymex for $100-share, or $9.3 billion - MarketWatch

From CNN/Money:
"CME Group Inc. agreed to buy Nymex Holdings Inc. for about $9.5 billion in cash and stock Monday. The deal is worth just over $100 per Nymex share, and will combine the operators of the Chicago and New York futures exchanges.CME also operates the Chicago Board of Trade"
CME to buy Nymex for $100-share, or $9.3 billion - MarketWatch:
"Both companies' boards have approved the terms. The deal is subject to a number of other conditions, including regulatory clearances and approval by holders of both CME and Nymex.

Having taken the finance club to each in the past 5 months, this one will definitely merit a class discussion.

Eliot Spitzer and the Price-Placebo Effect -

Really, this has finance implications.

Shankar Vedantam - Eliot Spitzer and the Price-Placebo Effect - "
Spitzer's poor moral, political and legal judgment is beyond question, but on the delicate question of whether Kristen was 'worth it,' a host of unusual studies suggest the governor probably got his money's worth. The question, as it turns out, has little to do with either Kristen or prostitution, and nearly everything to do with Spitzer himself.

Specifically, an area of Spitzer's brain known as the medial orbitofrontal cortex.

This part of the brain makes judgments about pleasure, and intriguing new research has found that the price people pay for something can subtly and unconsciously change how much pleasure they derive from it. The medial orbitofrontal cortex research suggests that, contrary to conventional wisdom, people who buy something at a discount may unconsciously derive less satisfaction than people who pay full price, or a premium, for the very same thing.
Which is similar to the finding on wine we saw earlier this semester.

JP Morgan Pays $2 a Share for Bear Stearns - New York Times

JP Morgan Pays $2 a Share for Bear Stearns - New York Times:
"In a shocking deal reached on Sunday to save Bear Stearns, JPMorgan Chase agreed to pay a mere $2 a share to buy all of Bear — less than one-tenth the firm’s market price on Friday....

JPMorgan is buying Bear, which has 14,000 employees, for a third the price at which the smaller firm went public in 1985. Only a year ago, Bear’s shares sold for $170. The sale price includes Bear Stearns’s soaring Madison Avenue headquarters....

When the Federal Reserve helped plan a bailout in 1998 of Long Term Capital Management, the hedge fund, Bear Stearns proudly refused to join the effort....

The cut-price deal for Bear Stearns reflects deep misgivings about its future and the enormous obligations that JPMorgan is assuming in guaranteeing the firm’s obligations. In an unusual move, the Fed will provide financing for the transaction, including support for as much as $30 billion of Bear Stearns’s “less-liquid assets.”

Double wow. What else can I say? Tomorrow is going to be VERY interesting.

Sunday, March 16, 2008

More on the historic Fed move Worldwide:
"Federal Reserve Chairman Ben S. Bernanke is being forced to throw out four decades of monetary history by a financial system choking on miscalculated risks and a deepening recession.

Bernanke and the four Fed governors voted yesterday to become creditors to Bear Stearns Cos., a securities firm that isn't a bank, by invoking a law that hasn't been used since the 1960s. Three days earlier, the Fed said it would swap Treasury notes on its balance sheet for privately issued mortgage-backed securities held by Wall Street firms.

``It's a re-drawing of the relationship of the Federal Reserve with the rest of the financial system"
There is no doubt this will be talked about in classes for years.

Saturday, March 15, 2008 Worldwide Worldwide:
"Bear Stearns Co. executives realized late afternoon of March 13 that the firm wouldn't be able to withstand what was effectively a ``run on the bank,'' the Wall Street Journal reported, citing unidentified people familiar with the events.

At about 4:30 p.m. local time that day Chief Executive Officer Alan Schwartz became ``convinced'' Bear Stearns was facing a ``desperate situation'' after securities firms began insisting on cash instead of accepting collateral and hedge funds started withdrawing cash, the newspaper said.

Bear Stearns and officials from the Securities and Exchange Commission told the Federal Reserve on a conference call at 7:30 p.m. that the bank had lost ``far more'' of its liquidity that day."
The article then reports that a 5 AM conference call eventually let to the bail out by 7AM.

Bloomberg has several interesting articles on the Bear situation and the historic proportions this is. This one is a definite must read for any money and banking or Financial Institutions class! It is on the precedence breaking Fed move.

The more things change, the more they stay the same

The news of JP Morgan coming to the rescue of Bear Stearns reminded many of a similar story from back on '07, as in 1907 when the James Pierpont Morgan (yes that JP Morgan) helped organize a bailout of bank during the 1907 Financial Panic.

Educate Yourself - J.P. Morgan - Savior -- The Panic of 1907:
"This week we continue our discussion of the Panic of 1907 and the man who, single-handedly, turned things around, J.P. Morgan."

Friday, March 14, 2008

Wow! Look out for the Bear!

Short version: Bear Stearns seems to be in a bunch of trouble. Not only has their liquidity disappeared, but other firms are reluctant to do business with them. This has led the Fed and JP Morgan to at least temporarily bail out the firm.

From the NY Times:

"The news from Bear Stearns came after the bank had insisted for days that its finances were in adequate shape. But the situation rapidly changed.

“Our liquidity position in the last 24 hours had significantly deteriorated,” Bear’s chief executive, Alan Schwartz, said in a statement. “We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations....So far, that confidence has been elusive. Bear Stearns’s stock price was down nearly 40 percent, to $34.68 a share, after falling as low as $26.85, its lowest level in nearly a decade. Shares of JPMorgan lost 4 percent."

From CNN Money:
"Bear Stearns Cos.' (BSC) troubles graduated from problematic to crisis size in the past week as fellow banks and customers went from worry about profit declines stemming from its large mortgage exposure to fear about the firm's sheer ability to fund its businesses.

With Bear Stearns now making history as the first investment bank to require a Federal Reserve bailout, indirectly through J.P. Morgan Chase & Co. (JPM), its problems are far from over.

"Once this happens, no one will deal with them," said Joseph Rizzi, a veteran banker who focuses on risk-management. He equated the crisis of confidence to the one that caused Barings Bank to collapse after its massive trading scandal. "The remaining franchise value, customers and employees, will evaporate," he said....

"I am sure the Fed will evoke the too-big-to-fail doctrine to engineer an orderly transition," banker Rizzi said."

From another Money/CNN Fortune article:
"But Molinaro also admitted that Bear Stearns was in dire straits Thursday night, after some firms that trade with it - fearful about rumors of a liquidity squeeze at Bear Stearns - "no longer wanted to provide financing."

That comment shows that Bear Stearns is dealing with a classic run-on-the-bank. The firm's short-term creditors refused to lend the firm any more money via the extension of overnight loans, and simultaneously demanded repayment of outstanding debt. The one-two punch overwhelmed Bear's cash position, forcing it to seek help. Had the Fed not stepped in, it appears doubtful Bear could have operated today."

(Molinaro is btw a SBU grad)

``We are facing a potential black hole for all financial markets,'' said Neil MacKinnon, chief economist at London-based hedge fund ECU Group, which manages $2 billion in assets. ``This is being labeled as perhaps the worst financial and banking crisis since the Great Depression. While that sounds fairly apocalyptic, I think it is a realistic assessment of what is happening at the moment.''"
Not surprisingly, this panic led to a flight to quality. From Reuters:
"U.S. Treasury debt prices surged on Friday after news that J.P. Morgan Chase and the New York Federal Reserve pumped emergency funds into cash-squeezed investment bank Bear Stearns, triggering a sharp drop in U.S. stock prices. More than ever, financial markets were fraught with concern about systemic risks that could have wide-ranging effects on a vulnerable world economy."
Wow this came on quickly. With apologies to Kenny Chesney, Don't blink. I had meetings most of the day today, when I got out I had 3 text messages and two voice mails about this story.

Monday, March 10, 2008

Can You Beat the Market? It’s a $100 Billion Question - New York Times

Ken French has done it again! Definitely a superstar! From the NY Times:

Can You Beat the Market? It’s a $100 Billion Question - New York Times:
"INVESTORS collectively spend around $100 billion a year trying to beat the stock market. That’s the finding of a rigorous effort to measure the total costs of Americans’ efforts to surpass the returns they would have received by simply holding a stock index fund. The huge price tag helps explain why beating a buy-and-hold strategy is so difficult."
and later:
"...despite many developments that greatly reduced the cost of trading, like deeply discounted brokerage commissions, a narrowing in bid-asked spreads, and a big reduction in front-end loads, or sales charges, paid to mutual fund companies...the portion of stocks’ aggregate market capitalization spent on trying to beat the market has stayed remarkably constant, near 0.67 percent."
WOW! An instant classic! I^3!

I am still looking for a link to the actual working paper, if anyone knows where it is please let me know :)
But did find out that he also is a cyclist.

Wednesday, March 05, 2008

NYU Stern Finance Professor's New Research Shows Most Actively Managed Currency Funds Fail to Outperform a New Benchmark

NYU Stern Finance Professor's New Research Shows Most Actively Managed Currency Funds Fail to Outperform a New Benchmark:
"Do most currency fund managers deserve their high fees? According to a new study by NYU Stern Finance Professor Richard Levich and co-author Momtchil Pojarliev, Head of Currencies at Hermes Investment Management, the answer is no. Their study is the first to challenge conventional wisdom that professional currency hedge fund managers earn very large returns and that the appropriate benchmark is zero. Arguing that the appropriate benchmark is not zero, but rather the realized return on several easily replicated currency strategies (Carry, Trend, Value and Volatility), Professor Levich and Mr. Pojarliev find that just as equity fund indexes tend to outperform mutual fund managers, a collection of currency return indices outperforms most currency fund managers"
" A copy of their study is available at"

Tuesday, March 04, 2008

The Buffalo News: Business: Adelphia headquarters building sells for $3.6 million

The Buffalo News: Business: Adelphia headquarters building sells for $3.6 million:
"The former Adelphia Communications headquarters building in Coudersport, Pa., has been sold via Internet auction for the second time in five months.

The lavishly built, five-year-old building received a high bid of $3.6 million in the online real estate auction. LFC Group of Companies, the California auction firm handling the sale, anticipates finalizing the sale this week....The four-story Adelphia building cost nearly $30 million to construct, and is considered the jewel of now-defunct cable television empire’s real estate portfolio."
That they are getting only pennies on the dollar is not surprising. Indeed, it is often the case. It will be interesting to see what goes in the building that is located so far from any major city or employment center.

Coincidentally (or not lol), today also the Supreme Court rejected an appeal that was intended to allow the Rigases another trial.

From the Denver Business Journal.

"The U.S. Supreme Court refused Monday to hear an appeal by John Rigas... and his son Timothy of their fraud convictions.

The elder Rigas has been sentenced to 15 years in prison. Timothy Rigas, who was Adelphia's executive vice president and CFO, is serving 20 years."

Monday, March 03, 2008

Warren Buffett's Derivative Positions

Kirzner Fervor: Warren Buffett's Derivative Positions:
"Berkshire Hathaway recently released its chairman's letter to the shareholders. Chairman Warren Buffett, opposed to many of the absurd and overlevered uses of derivatives, has used derivative positions over several years to take large positions. The most recent letter describes their current contracts which are divided among writing credit default swaps and puts on equity indices and leftover currency positions."
What timing! We just did a case study on Buffett today and watched a clip from his video with Bill Gates. I definitely recommend reading the article (as well as watching the video).

thanks to Kirzner Fervor for this link!

Black Scholes Pricing Model - National Business News -

Black Scholes Pricing Model - National Business News -
"The model is based on the assumption that a trader can suck all the risk out of the market by taking a short position and increasing that position as the market falls, thus protecting against losses, no matter how steep. Nearly every employee stock-ownership plan uses Black-Scholes as its guiding principle. A pension-fund manager sitting on billions of U.S. equities and fearful of a crash needn't call a Wall Street broker and buy a put option—an option to sell at a set price, limiting potential losses—on the S&P 500. Managers can create put options for themselves, cheaply, by shorting the S&P as it falls, and thus, in theory, be free of all market risk."
Brett sent me this. It is not ground breaking, but is definitely worth a read.