Saturday, April 26, 2008

The Rights Issue - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times

Partially as a result of the lack of liquidity and reduced equity sales, firms are turning to rights issues.

The Rights Issue - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times:
"Rights issues are all the rage. The Royal Bank of Scotland just announced a nearly $24 billion rights offering to shore up its capital base. And last week, Blockbuster made a $1.35 billion all-cash offer to buy Circuit City, part of which would be financed by a rights offering.

....Rights offerings are commonplace in Europe, unlike in the United States....In a typical rights offering, a publicly traded company issues rights to a company’s existing shareholders to buy a number of shares of the company at a discount to the market price within a certain amount of time. The rights are often transferable and trade on the stock market during this take-up period. Shareholders have an incentive to exercise the rights or otherwise be diluted by the issuance of new equity. This dilution can be partially offset if the rights can be sold instead of simply exercised."

IPO cancellations

With market volatility high and liquidity low many firms are pulling their equity sales. From the NY Times' Deal Book.
A Tale of Two Public Offerings - Mergers, Acquisitions, Venture Capital, Hedge Funds
"At $24 billion, the volume of new issuances in the United States actually doubled in the first quarter from a year earlier. But if you exclude the gargantuan stock sale from Visa, the total value in the first quarter was about $4.6 billion, down 62 percent from last is scaring a lot of companies from going public. A total of 83 companies withdrew their initial public offerings this year and another 24 have delayed share sales, according to Ernst and Young."

One of the more interesting insider trading cases in a while

It may not compare to this one (indeed it is hard to imagine one that would), it is definitely an easier story to tell in class and pretty good!

Brother, Can You Spare a Tip? - Law -
"According to the complaint....Stummer allegedly sneaked into the brother-in-law's bedroom office and, without permission, accessed his brother-in-law's computer. By correctly guessing the password, Stummer deceptively gained unauthorized access to the private equity firm's computer network and read several confidential and nonpublic emails relating to the Ryan transaction, according to the SEC.

The SEC's complaint also alleged that Stummer used the information to buy 5,500 shares....Shortly following the public announcement of the acquisition of Ryan's on July 25, Stummer sold his entire position at a total profit of $22,351.17.

Without admitting to or denying the commission's allegations, Stummer agreed to a judgment requires him to pay $46,386.66, representing the disgorgement of his illegal trading profits, prejudgment interest, and a civil penalty in an amount equal to the profits"

Feds: Adelphia Fraud Victims Can Ask for Their Money Back - Law -

A fast Adelphia update

Feds: Adelphia Fraud Victims Can Ask for Their Money Back - Law - "
U.S. attorney for the Southern District of New York, announced that victims of the securities fraud committed at Adelphia Communications can ask the U.S. Attorney General to recover parts of their financial losses that were directly caused by the fraud....The older and younger Rigases were originally sentenced to 15 and 20 years in prison, respectively. They will be re-sentenced on May 7, 2008 "

Bank Accounting Standards in Mexico: A Layman's Guide to Changes 10 Years after the 1995 Bank Crisis — HBS Working Knowledge

Bank Accounting Standards in Mexico: A Layman's Guide to Changes 10 Years after the 1995 Bank Crisis — HBS Working Knowledge:
"Mexico was the first emerging market compelled to reformulate the financial reporting of its banks as a result of a financial crisis. In the last decade, Mexico has undergone a process of internationalization of its banking industry. Today, more than 80 percent of the equity of Mexican banks belongs to internationally active bank corporations. This internationalization demands more transparent regulation, including standardized accounting rules and better disclosure of information. The case of Mexico can therefore serve as an example of the relevance of these changes, as well as of their scope and limitations. This paper attempts to clarify the nature and structure of the new accounting standards, and explains how they have affected financial statements and their interpretation."

Cool article from Harvard Business School's Working Knowledge. We talk about the Mexican crisis in Corporate finance classes on a regular basis. This would be very useful for international finance or a Financial Institutions class.

Executive Pay: The Bottom Line for Those at the Top - The New York Times

The NY Times has a very interesting look at CEO pay at 200 large firms.

Executive Pay: The Bottom Line for Those at the Top - The New York Times:
"Executive Pay: The Bottom Line for Those at the Top

Compensation and accumulated wealth of 200 chief executives for large public companies that filed proxies for last year by March 28."
Another site on CEO pay that we often use in class is that from the AFL-CIO. True it is biased, but a wealth of stats. A look in:
"The chief executive of a Standard & Poor's 500 company made, on average, $14.2 million in total compensation in 2007, according to preliminary data from The Corporate Library"

You don't want to start any blasphemous rumors

Depeche Mode had it right! You really " don't want to start any blasphemous rumors..."

S.E.C. Accuses Trader of Spreading Rumors - New York Times:
"In what the Securities and Exchange Commission said was its first rumormongering case, a former securities trader settled accusations Thursday that he had spread false rumors to profit from a pending merger.

The trader, Paul S. Berliner, then employed by the Schottenfeld Group, an investment firm, agreed to pay a $130,000 fine, return $26,129 in profit that he had made, and agreed to be barred from working at any brokerage firm. He settled the charges without admitting or denying the allegations.

The S.E.C. said the charges were related to the proposed buyout of Alliance Data Systems, a credit card processor, by the Blackstone Group, a deal that eventually fell through as a result of unrelated events."

Friday, April 25, 2008

Regulators Back Away From Changes to Commodity Hedging - New York Times

Regulators Back Away From Changes to Commodity Hedging - New York Times:
"All the farm industry speakers expressed concern about whether banks, in the midst of a tight credit market, would continue to provide the farm industry with the credit it needs to meet the higher costs of maintaining their hedge positions.

The commission was told about a “very solid” grain elevator in Kansas that lined up a $15 million line of credit last fall to finance margin calls on its hedged positions and has just learned that it will actually need $80 million in credit for this season."

Given it is coming up on finals, I bet an interesting question would be to draw the payoff diagrams that the grain elevator likely has.

Thursday, April 24, 2008

Delta, Northwest Post Losses As Fuel Costs Rise

One of the more popular things we have been doing in class this past year has been to allow each group to pick at least one of their own cases. Thus we will be looking at the Delta-Northwest merger. So in light of this, some required reading for my classes.

Delta, Northwest Post Losses As Fuel Costs Rise:
"Delta Chief Financial Officer Edward Bastian said that the airline has moved quickly to address higher fuel prices by cutting U.S. capacity and controlling costs. Those steps offset more than 50% of the fuel-price impact.

'However, we clearly need to do more,' he added, noting that the merger with Northwest will eventually generate more than $1 billion in annual savings and revenue gains.

Delta Chief Executive Richard Anderson and his counterpart at Northwest, Doug Steenland, both said during conference calls Wednesday that the estimate on synergies is likely to go higher.

Tech Beat Microsoft and Yahoo Russian Roulette - BusinessWeek

Game theory is always one of the more mathematical modeled issues, so when you get a chance to see an easy one, you grap it, here is just such an analysis:

Tech Beat Microsoft and Yahoo Russian Roulette - BusinessWeek:
"Yahoo and Microsoft have also done their best to increase the others cost and risk of delaying. This month, Microsoft set a three week deadline, set to expire April 26, for Yahoo to begin negotiating. Otherwise, Ballmer would move ahead with plans for a proxy fight, including nominating a new Yahoo board of directors likely to approve an even lower Microsoft bid. The move is intended to make Yahoo shareholders more nervous about waiting for a better bid, and thus more likely to either push for the deal or sell their stock in anticipation of a lower bid, weakening the company’s financial position. “I think Microsoft is wise in trying a first-and-final strategy,” says Robert Hansen, senior associate dean at Dartmouth’s Tuck School of Business who studies game theories applications in business. “That’s a good strategy, if the target believes you are committed to it.”"

Thursday, April 17, 2008

Male sex hormone may affect stock trades - Yahoo! News

Male sex hormone may affect stock trades - Yahoo! News:
"The hormone that drives male aggression and sexual interest also seems able to boost short term success at finance. But what seems to start out well can turn bad, with elevated testosterone levels over several days possibly leading to irrational risk-taking, according to researchers at the University of Cambridge in England."
and from USA Today on the same paper:
"Coates said he worked as a Wall Street trader during the bubble in the 1990s when millions of dollars were invested in new Internet companies, many of which later collapsed.

He said trader behavior he observed didn't make sense in terms of economic or game theory, "everyone seemed to be on a drug."

Even in airport bars the crowd would be ignoring baseball to watch and cheer financial reports on television, Coates said."

This seems to fit the fast driving study of a month or so ago. Also in doing some research for this, I stumbled upon this article on porn and finance which I will refrain from commenting on until I look at it (I meant the paper!!! ;) )

Mergers in the Air? Microsoft/Yahoo and Delta/Northwest - Knowledge@Wharton

Knowledge@Wharton has a nice recap of both major takeover deals in the news right now:

Mergers in the Air? Microsoft/Yahoo and Delta/Northwest - Knowledge@Wharton:
"The ongoing takeover battle between Microsoft and Yahoo has taken several surprising turns over the past few weeks. After rejecting Microsoft's unsolicited $44.6 billion offer in late February, Yahoo has announced a two-week ad testing program with its main search rival, Google, and has reportedly entertained a possible merger with Time Warner's AOL. Meanwhile, Microsoft was rumored to be considering News Corp. as a possible ally in acquiring Yahoo."
There is also a video interview to see.

Saturday, April 12, 2008

Milton Friedman's Free to Choose 1990

Ok, so this may or may not be really finance, but the line between economics and finance is pretty arbitrary, so I am including this one. It is from PBS's 1990 series Free to Choose.

Friday, April 11, 2008

SSRN-Where Does it Go? Spending by the Financially Constrained by Shawn Allen Cole, John Thompson, Peter Tufano

You know the old saying "Don't judge anyone until you walk a mile in their shoes"? Well, this might be a good example. As it is tax time, there are many commercials for tax advance loans and the like. These are almost always such a bad deal financially I struggle with why anyone would use them. Cole, Thompson, and Tufano may have at least part of the answer: they need the money.

SSRN-Where Does it Go? Spending by the Financially Constrained by Shawn Allen Cole, John Thompson, Peter Tufano:
"Those selecting earlier settlement options pay higher fees and interest, therefore revealing the level of credit constraints or impatience. We find that more credit constrained or impatient individuals spend their monies more quickly. The mix of cash and merchant transactions is similar between more and less constrained groups. Finally, the primary merchant uses of refunds are to pay for necessities (grocery stores, gas stations, etc.), and the fraction of the refund spending devoted to these necessities is higher for those with greater revealed credit constraints."
So if we focus on the last sentence, I guess the need for food and basic necessities trumps financial theory.

A conversation with George Soros - Charlie Rose

So are you feeling pretty good about things? Upbeat about it being a short recession? You might want to watch this video from Charlie Rose.

A conversation with George Soros - Charlie Rose:
"A conversation with George Soros, Chairman, Soros Fund Management."

While I am not going to play Eeyore, some of his comments were disturbing enough to merit serious thought. I do not like his view that massive government (Central Banks especially) intervention is going to be needed, even if I do acknowledge it is a definite possibility.

Closet Indexing By Mutual Funds: Worse Than We Thought? - Seeking Alpha

Seeking Alpha has an important article on ETFs being held within mutual funds.

Closet Indexing By Mutual Funds: Worse Than We Thought? - Seeking Alpha: ". is extraordinary how many traditional long-only mutual funds hold ETFs, either to equitize their cash or to get the market return and then just layer on fees. You may not see the ETFs held during the reporting periods, but certainly inside those periods."
One more look-in which sums up the issue:
"First, "'s not inherently wrong for mutual fund managers to equitize cash with ETFs. Depending on a manager's investment discipline and conditions in the relevant asset class, it can be perfectly sensible to combine a set of active opportunities and ETFs for portfolio completion....

But Keenan's remarks reveal a couple serious -- and potentially related -- problems:

(1) reporting-period manipulation designed to conceal the fact that managers are equitizing assets using ETFs and

(2) the cynical laziness of earning market returns and layering on active-management fees."

The part about the funds not holding the ETFs during reporting periods is example 1,734,651 of an agency cost. Specifically this "window dressing" increases costs merely to make it look like the managers are somehow adding value.

Good stuff as always. SeekingAlpha is well worth a look.

Use of brain-boosting drugs reported in survey -

Well, clearly I have never done this!!!

Use of brain-boosting drugs reported in survey -
"One in five respondents to a new survey in the journal Nature say they've used drugs to boost their brain power."

SSRN-Sell Side School Ties by Andrea Frazzini, Christopher Malloy, Lauren Cohen

Score another one for REG FD. Frazzini, Malloy, and Cohen have a working paper out that looks at whether an analyst with school ties to company gets better information than one with no ties. Their finding? The ties seemed to matter in a pre-FD days, but not since.

SSRN-Sell Side School Ties by Andrea Frazzini, Christopher Malloy, Lauren Cohen:
"...find evidence that analysts outperform on their stock recommendations when they have an educational link to the company. A simple portfolio strategy of going long the buy recommendations with school ties and going short buy recommendations without ties earns returns of 5.40% per year. We test whether Regulation FD, targeted at impeding selective disclosure, constrained the use of direct access to senior management. We find a large effect: pre-Reg FD the return premium from school ties was 8.16% per year, while post-Reg FD the return premium is nearly zero and insignificant"
Cite: Frazzini, Andrea, Malloy, Christopher J. and Cohen, Lauren, "Sell Side School Ties" (February 20, 2008). Harvard Business School Finance Working Paper No. 08-074 Available at SSRN:

Thursday, April 10, 2008

SSRN-Investor Inattention and the Underreaction to Stock Recommendations by Roger Loh

Talk about a fascinating article! Short version: event studies for stocks that are forgotten and out of the limelight show that the information content of a stock recommendation takes longer to "get in the price".

SSRN-Investor Inattention and the Underreaction to Stock Recommendations by Roger Loh:
"recommendation drift of firms with low prior turnover is more than double in magnitude compared to that of firms with high prior turnover. Additional proxies for attention, such as analyst coverage, institutional ownership, the amount of distracting news in a day, or a measure of residual turnover that controls for liquidity and uncertainty, produce similar results. Volume reactions around the recommendation event show that investors fail to react promptly to recommendations on low attention stocks. Together, the evidence suggests that investor inattention is a plausible explanation for investors' underreaction to stock recommendations."

Good stuff! Definitely recommend reading.

Tuesday, April 08, 2008

Video killed the radio star

Video Killed the radio star, and maybe the class room star too.

With so many online videos to choose, from here are some cool finance videos that will liven the classroom. I would definitely recommend buying the actual video whenever possible. They are all very good!

In the 20th year of the movie Wall Street, it only seems fitting to give a short clip from the movie. Here is "The Greed Speech." Most know of the speech, not everyone knows it is based on an actual commencement address by Ivan Boesky.

A six minute excerpt of Larry the Liquidator's speech from Other People's Money.

Next, a clip from Trading Places (Eddie Murphy's movie) that is great to show the traditional (and quickly dying) trading pits. (can also be used to show how short positions work.)

A clip from A Trillion Dollar bet

A clip from Barbarians at the Gate (PS READ THE BOOK!, it is better ;))

Online Videos by

At Last, Buffett’s Key to Success - New York Times

Want to start a discussion that will sure to cause trouble? Here we go:

At Last, Buffett’s Key to Success - New York Times:
"Patience and good decision-making help set women apart here.”

As a result, women’s portfolios on average gain 1.4 percent more than men’s, according to a study cited by Ms. DiCosmo. Single women’s portfolios do 2.3 percent better than single men’s. The study, “Boys Will Be Boys: Gender, Overconfidence and Common Stock Investment,” was published in 2001 by Brad M. Barber, a finance professor at the University of California, Davis, and Terrance Odean, now a professor of banking and finance at the Haas School of Business at the University of California, Berkeley ("

Yahoo Rejects Microsoft Bid Again - New York Times

Yet another Yahoo-Microsoft update.

Yahoo Rejects Microsoft Bid Again - New York Times:
"The company was responding to a letter from Microsoft that threatened to lower the price of its buyout offer and take it directly to Yahoo shareholders....

Our board’s view of your proposal has not changed,” Yahoo said in letter to Mr. Ballmer....“We continue to believe that your proposal is not in the best interests of Yahoo and our stockholders. Contrary to statements in your letter, stockholders representing a significant portion of our outstanding shares have indicated to us that your proposal substantially undervalues Yahoo. Furthermore, as a result of the decrease in your own stock price, the value of your proposal today is significantly lower than it was when you made your initial proposal.”"
And a video from the Associated Press:

Monday, April 07, 2008

Trillion Dollar Bet

I am sure many of you have seen the old NOVA special on Long Term Capital Management called the Trillion Dollar Bet. I have shown it in class before, but it is a tad too long. This abbreviated version is on Google Video.

Friday, April 04, 2008

FRB: Testimony--Bernanke, Developments in the Financial Markets--April 3, 2008

Bernanke and others testified today in front of Congress about the troubles in recent months in the credit markets. a few highlights from the transcript.

FRB: Testimony--Bernanke, Developments in the Financial Markets--April 3, 2008: "
Well-functioning financial markets are essential for the efficacy of monetary policy and, indeed, for economic growth and stability. Consistent with its role as the nation's central bank, the Federal Reserve has taken a number of steps in recent weeks to improve market liquidity and market functioning. These actions include reducing the cost and increasing the allowable term of discount window credit to commercial banks; increasing the size of our Term Auction Facility, through which credit is auctioned to depository institutions; initiating a Term Securities Lending Facility, which allows primary dealers to swap less-liquid mortgage backed securities for more-liquid Treasury securities; and creating the Primary Dealer Credit Facility, which is similar to the discount window but accessible to primary dealers."
And later:

".... on March 13, Bear Stearns advised the Federal Reserve and other government agencies that its liquidity position had significantly deteriorated and that it would have to file for bankruptcy the next day unless alternative sources of funds became available.

This news raised difficult questions of public policy. Normally, the market sorts out which companies survive and which fail, and that is as it should be. However, the issues raised here extended well beyond the fate of one company....The company's failure could also have cast doubt on the financial positions of some of Bear Stearns' thousands of counterparties and perhaps of companies with similar businesses. Given the exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain."

Here is a video of some of the testimony:

Thursday, April 03, 2008

Could an economic lesson from Sweden work in the U.S.? -

Want something to worry about? try this one on for size:

Could an economic lesson from Sweden work in the U.S.? -

"The Swedish and American crises share many traits....Happily, despite economic conditions that were far worse than in the USA today — and unlike a similar episode in Japan — Sweden quickly recovered.

Yet, it did so in a manner that would be highly controversial in the United States. Sweden used taxpayer money — and lots of it — to rebuild its wounded banks.....Sweden's successful crisis management may offer a road map for U.S. officials. But the Swedish cleanup wasn't cheap. It cost the public an estimated 6% of annual economic output; an equivalent bill for the U.S. today would be nearly $850 billion."

Later in the same article, regular contributor Edward Kane gets in the act:
"Edward Kane, a Boston College finance professor, says the Fed's decision to facilitate the sale by backing $29 billion worth of Bear Stearns' assets is the first sign of what amounts to a government takeover of the financial system. 'They've implicitly provided guarantees to any number of these firms. There is a nationalization (occurring). It is implicit and unacknowledged,' says Kane"
Ok, Yoga breath.

Wednesday, April 02, 2008

Great primer on Derivatives!

Of Knock-ins, Knock-outs & KIKOs:
"There are a hundred ways in which derivative products can be structured. Ranju Sarkar spoke to experts to bring you a primer on derivatives.

One look-in: "
Interest rate swaps: In interest rate swaps, you are addressing only the interest rate part of the loan. If a company takes a view that the interest rates are going to be higher and if it has borrowed in floating rate, say linked to the LIBOR (London Inter Bank Rate), then it could do an interest rate swap—it pays a fixed rate and receives a floating rate from the bank."
Good stuff. Great for class!

Tuesday, April 01, 2008

Microsoft Unlikely to Raise Yahoo Offer -

Update on this story (which did happen to be an essay question on the first MBA test ;))
Microsoft Unlikely to Raise Yahoo Offer - "Microsoft Corp. is preparing to lay a long siege.

Two months after Microsoft made its $44.6 billion offer to acquire Yahoo Inc., the software maker has no plans to raise its bid, people close to the company say.

Such pronouncements are standard in deal negotiations but people close to Microsoft insist the stance isn't posturing. While speculation has swirled that Microsoft was poised to raise its bid, Microsoft is instead biding its time."

UBS Writes Down Billion; Chairman to Leave - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times

The story continues:

UBS Writes Down Billion; Chairman to Leave - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times:
"UBS, the largest Swiss bank, said on Tuesday that it would write down another $19 billion related to “U.S. real estate and related structured credit positions” ...The news came as Deutsche Bank, the biggest German lender, said Tuesday that it expected a first-quarter loss of about $3.9 billion on write-downs of United States real estate loans and assets. Global banks have now written down more than $200 billion of soured loans in the market debacle that began last summer with the implosion of the American subprime mortgage market."
The article goes on to say that UBS will raise $15 billion in a rights issue.

Somewhat surprisingly, investors took this as news that the worst was behind and when coupled with Treasury Secretary Paulson's plans to improve liquidity, bank stocks climbed. From Yahoo:
"News of massive writedowns at two major European banks paradoxically sent shares soaring Tuesday, as many investors took the typically negative announcements as a signal to buy into the battered sector."
and later:
"The sector's revival was also aided by signs that U.S. Treasury Secretary Hank Paulson and central bankers are considering radical strategies to boost liquidity.

Banks are hoarding cash in case they need it and as concern lingers about counterparty risk....

"For a long time we've been worried about moral hazard ... we're now past that point, what we're trying to do now is save the banking system, and the price that banks will pay is tougher regulation going forward.""

Update: the stock market rose 3.2% on the news.

"U.S. stocks on Tuesday celebrated the start of a new quarter, rallying as Lehman Brothers Holdings Inc.'s equity offer drew a warm reception, fueling the Dow to its 8th-biggest point jump ever."

(gee, these stories really do bring into play many of the topics covered in class. Who knows, this might make a great essay ;).