The Street Purcell Is Paving - Forbes.com
Given how much has been written on the troubles at Morgan Stanley, it is interesting to see a new angle. Forbes writes that the firm is suffering as many of the firm's stars are leaving and looking for work elsewhere.
Two key points to to take from it
1. Intangible assets can often walk away, so be careful (this has repercussions not only to management scandals, but also capital structure, risk taking, etc. To keep their talent, Morgan will have to pay more.
2. Financial firms often do disappear as a result of managerical problems. (see EF Hutton, Drexel, Kidder Peabody, and others)
Quick highlights:
* "Generally when managements come under pressure, the human capital exodus is the precursor of a preordained demise," said Michael Holland, once a Morgan banker and now head of Holland & Co. "And it's almost all attributable to the actions or inactions of top management. Hubris is normally a part of it. I can't think of any case when it wasn't hubris." "
*"Few Wall Street powerhouses, once they began losing their top talent, have ever managed to regain their former independent glory."
*"Not only have individual bankers fled, but headhunters have told Forbes.com that they're beginning to target entire departments for their next big raids"
Wednesday, May 04, 2005
Shareholder group opposes Icahn
We just covered corporate governance and the difficulty of those opposed to management being elected to the board of directors in class. So Carl Ichan's attempt to win a seat on the Blockbuster Board is perfectly timed to encourage maximum learning ;)
Shareholder group opposes Icahn - Entertainment and Leisure - Retail - Services/Consulting - Media - Company Announcements - Newsmakers: "Considered a key recommendation for voting shareholders, ISS said the billionaire Icahn lacks expertise in media that the Blockbuster board needs. Moreover, the firm said, a yes vote for him and his co-nominees might hamper the re-election of Chief Executive John Antioco to the board. ISS says it wants Antioco to remain.
Icahn last week nominated himself and two entertainment industry veterans: Edward Bleier, a former Warner Bros. executive, and Strauss Zelnick, a former head of BMG Entertainment. ISS accepted Icahn's recommendation on Bleier and Zelnick, but said the billionaire should not be appointed.
ISS said the video giant's board 'could benefit from the extensive media experience of [Bleier and Zelnick], in light of the significant market challenges the company currently faces.'"
Shareholder group opposes Icahn - Entertainment and Leisure - Retail - Services/Consulting - Media - Company Announcements - Newsmakers: "Considered a key recommendation for voting shareholders, ISS said the billionaire Icahn lacks expertise in media that the Blockbuster board needs. Moreover, the firm said, a yes vote for him and his co-nominees might hamper the re-election of Chief Executive John Antioco to the board. ISS says it wants Antioco to remain.
Icahn last week nominated himself and two entertainment industry veterans: Edward Bleier, a former Warner Bros. executive, and Strauss Zelnick, a former head of BMG Entertainment. ISS accepted Icahn's recommendation on Bleier and Zelnick, but said the billionaire should not be appointed.
ISS said the video giant's board 'could benefit from the extensive media experience of [Bleier and Zelnick], in light of the significant market challenges the company currently faces.'"
Monday, May 02, 2005
Increased Transparency in security issuance!
HURRAY!!! Finally it seems that there will be increased transparency in security issue process. This should reduce information asymmetries and result in less negative market reactions to SEOs and less IPO underpricing.
From Investment Dealers' Digest:
*"The Wall Street equity underwriting process, which sets prices and allocations when companies go to market to raise capital, may seem arcane and obscure to outsiders. But thanks to enhanced technological tools, it's now possible to go behind the curtain-demystifying the process...."
*"Issuers are clearly driving the trend. "One of the ways you ensure that there is an even playing field out there, and that the actual price discovery is fair, is to give issuers transparency," says John Heskett, vp of finance at the newly public Huntsman Corp. "And that's what we asked underwriters to do for us."
*"The lure of a view into a book build is not something all Wall Street firms are crowing over. In fact, it is a key example in the fight over deploying enhanced technology. On one hand, an issuer like Huntsman was aware of all the circumstances during the road show, not just those an underwriter might discuss while tossing irrelevant items aside. Conversely, being up-to-date may lead issuers to question why they're paying underwriters such a hefty fee."
Read the entire article here. It is by
From Investment Dealers' Digest:
*"The Wall Street equity underwriting process, which sets prices and allocations when companies go to market to raise capital, may seem arcane and obscure to outsiders. But thanks to enhanced technological tools, it's now possible to go behind the curtain-demystifying the process...."
*"Issuers are clearly driving the trend. "One of the ways you ensure that there is an even playing field out there, and that the actual price discovery is fair, is to give issuers transparency," says John Heskett, vp of finance at the newly public Huntsman Corp. "And that's what we asked underwriters to do for us."
*"The lure of a view into a book build is not something all Wall Street firms are crowing over. In fact, it is a key example in the fight over deploying enhanced technology. On one hand, an issuer like Huntsman was aware of all the circumstances during the road show, not just those an underwriter might discuss while tossing irrelevant items aside. Conversely, being up-to-date may lead issuers to question why they're paying underwriters such a hefty fee."
Read the entire article here. It is by
Two Plus Two Equals What?
Both the NY Times and the Washington Post have interesting articles on the NYSE-Archipelago and Nasdaq-Instinet Deals.
Two Plus Two Equals What?:
Highlights:
* "Former SEC chairman Arthur Levitt said he thought the NYSE's new structure would improve the independence of its regulatory arm, not weaken it, by fully removing it from any influence by brokerage and trading firms.
'By breaking up the clublike atmosphere of the member organization and becoming a more democratic, publicly owned company, you take a great step toward more disclosure and greater investor protection,' he said."
*"What will it mean if the NYSE floor, the symbolic home of American capitalism, source of millions of photos depicting traders in the throes of euphoria and the depths of despair, goes away? Won't something be lost forever?
"The NYSE has always been baseball, motherhood and apple pie all rolled into one," said Bradley of American Century Investment, an opponent of human traders working on a floor to handle stock transactions. "But it's not really the NYSE that is the envy of the world," he said. "It's the capital-raising process in this country that is the envy of the world."
And there are plenty of people who believe there will continue to be a role for human traders on the floor for years to come, especially in volatile and thinly traded stocks. "We will see a lot more electronic trading and automation in stocks where there is no need for an intermediary," said Sauter of Vanguard. "But where I do see the need for the traditional floor model is for less liquid stocks with wider [fluctuations in price] where you want someone who will take risks and make a market in those stocks. The combination of the two models is really exactly what you want.""
The NY Times questions Goldman Sach's role in the NYSE deal:
"Goldman, you'll recall, is an adviser to both companies, an investor in Archipelago and a Big Board specialist - conflicts so blatant that they are almost laughable.
Of course, it is easy to blame Goldman Sachs for not recusing itself from at least one side of the deal, something it should have done if for no other reason than to avoid the appearance of a conflict "
Two Plus Two Equals What?:
Highlights:
* "Former SEC chairman Arthur Levitt said he thought the NYSE's new structure would improve the independence of its regulatory arm, not weaken it, by fully removing it from any influence by brokerage and trading firms.
'By breaking up the clublike atmosphere of the member organization and becoming a more democratic, publicly owned company, you take a great step toward more disclosure and greater investor protection,' he said."
*"What will it mean if the NYSE floor, the symbolic home of American capitalism, source of millions of photos depicting traders in the throes of euphoria and the depths of despair, goes away? Won't something be lost forever?
"The NYSE has always been baseball, motherhood and apple pie all rolled into one," said Bradley of American Century Investment, an opponent of human traders working on a floor to handle stock transactions. "But it's not really the NYSE that is the envy of the world," he said. "It's the capital-raising process in this country that is the envy of the world."
And there are plenty of people who believe there will continue to be a role for human traders on the floor for years to come, especially in volatile and thinly traded stocks. "We will see a lot more electronic trading and automation in stocks where there is no need for an intermediary," said Sauter of Vanguard. "But where I do see the need for the traditional floor model is for less liquid stocks with wider [fluctuations in price] where you want someone who will take risks and make a market in those stocks. The combination of the two models is really exactly what you want.""
The NY Times questions Goldman Sach's role in the NYSE deal:
"Goldman, you'll recall, is an adviser to both companies, an investor in Archipelago and a Big Board specialist - conflicts so blatant that they are almost laughable.
Of course, it is easy to blame Goldman Sachs for not recusing itself from at least one side of the deal, something it should have done if for no other reason than to avoid the appearance of a conflict "
'The World Is Flat': The Wealth of Yet More Nations
The New York Times > Books > Sunday Book Review > 'The World Is Flat': The Wealth of Yet More Nations
I got to see much of Friedman's 3 hour interview on C-Span. It was very interesting! I Highly recommend it!
A few of the highlights from Today's NY Times Book Review by Fareed Zakaria:
*"The metaphor of a flat world, used by Friedman to describe the next phase of globalization, is ingenious. It came to him after hearing an Indian software executive explain how the world's economic playing field was being leveled. For a variety of reasons, what economists call ''barriers to entry'' are being destroyed; today an individual or company anywhere can collaborate or compete globally. Bill Gates explains the meaning of this transformation best. Thirty years ago, he tells Friedman, if you had to choose between being born a genius in Mumbai or Shanghai and an average person in Poughkeepsie, you would have chosen Poughkeepsie because your chances of living a prosperous and fulfilled life were much greater there. ''Now,'' Gates says, ''I would rather be a genius born in China than an average guy born in Poughkeepsie.''"
*"What created the flat world? Friedman stresses technological forces. Paradoxically, the dot-com bubble played a crucial role. Telecommunications companies like Global Crossing had hundreds of millions of dollars of cash -- given to them by gullible investors -- and they used it to pursue incredibly ambitious plans to ''wire the world,'' laying fiber-optic cable across the ocean floors, connecting Bangalore, Bangkok and Beijing to the advanced industrial countries. This excess supply of connectivity meant that the costs of phone calls, Internet connections and data transmission declined dramatically -- so dramatically that many of the companies that laid these cables went bankrupt. But the deed was done, the world was wired. Today it costs about as much to connect to Guangdong as it does New Jersey."
*"People in advanced countries have to find ways to move up the value chain, to have special skills that create superior products for which they can charge extra."
*"points to the dramatic erosion of America's science and technology base, which has been masked in recent decades by another aspect of globalization. America now imports foreigners to do the scientific work that its citizens no longer want to do or even know how to do. Nearly one in five scientists and engineers in the United States is an immigrant, and 51 percent of doctorates in engineering go to foreigners. America's soaring health care costs are increasingly a burden in a global race, particularly since American industry is especially disadvantaged on this issue. An American carmaker pays about $6,000 per worker for health care."
READ IT! Or better yet Risten to it :)
A few other sources of info on this book:
ThomasLFriedman.com
I got to see much of Friedman's 3 hour interview on C-Span. It was very interesting! I Highly recommend it!
A few of the highlights from Today's NY Times Book Review by Fareed Zakaria:
*"The metaphor of a flat world, used by Friedman to describe the next phase of globalization, is ingenious. It came to him after hearing an Indian software executive explain how the world's economic playing field was being leveled. For a variety of reasons, what economists call ''barriers to entry'' are being destroyed; today an individual or company anywhere can collaborate or compete globally. Bill Gates explains the meaning of this transformation best. Thirty years ago, he tells Friedman, if you had to choose between being born a genius in Mumbai or Shanghai and an average person in Poughkeepsie, you would have chosen Poughkeepsie because your chances of living a prosperous and fulfilled life were much greater there. ''Now,'' Gates says, ''I would rather be a genius born in China than an average guy born in Poughkeepsie.''"
*"What created the flat world? Friedman stresses technological forces. Paradoxically, the dot-com bubble played a crucial role. Telecommunications companies like Global Crossing had hundreds of millions of dollars of cash -- given to them by gullible investors -- and they used it to pursue incredibly ambitious plans to ''wire the world,'' laying fiber-optic cable across the ocean floors, connecting Bangalore, Bangkok and Beijing to the advanced industrial countries. This excess supply of connectivity meant that the costs of phone calls, Internet connections and data transmission declined dramatically -- so dramatically that many of the companies that laid these cables went bankrupt. But the deed was done, the world was wired. Today it costs about as much to connect to Guangdong as it does New Jersey."
*"People in advanced countries have to find ways to move up the value chain, to have special skills that create superior products for which they can charge extra."
*"points to the dramatic erosion of America's science and technology base, which has been masked in recent decades by another aspect of globalization. America now imports foreigners to do the scientific work that its citizens no longer want to do or even know how to do. Nearly one in five scientists and engineers in the United States is an immigrant, and 51 percent of doctorates in engineering go to foreigners. America's soaring health care costs are increasingly a burden in a global race, particularly since American industry is especially disadvantaged on this issue. An American carmaker pays about $6,000 per worker for health care."
READ IT! Or better yet Risten to it :)
A few other sources of info on this book:
ThomasLFriedman.com
Sunday, May 01, 2005
Susan Schmidt Bies on corporate and personal finance
Fed Governor Susan Schmidt Bies gave an interesting speech on trends in both corporate and personal finance. She also called for increased financial education.
A few highlights:
*"The improvement in corporate balance sheets in the past few years has been substantial. Most noteworthy are the gains achieved in balance sheet liquidity. Firms have taken advantage of low long-term interest rates to pay down short-term debt with longer-maturity debt. At the same time, firms have built up their cash positions to extraordinary levels. At the end of last year, the ratio of cash and equivalents to short-term debt at nonfinancial corporations stood at about twice its average level since the 1950s."
To which I would ask, I wonder if Jensen's Free Cash flow problem has slackened (pun intended) with increased monitoring by more active boards. Interesting research question.
* "In the household sector, some analysts have expressed concern about the rapid growth in household debt in recent years and the decline in the household saving rate. They fear that households have become overextended and will need to rein in their spending to keep their debt burdens under control. My view is considerably more sanguine. Although pockets of financial stress exist among households, the sector as a whole appears to be in good shape."
As evidence she points out that debt to net worth is in better shape than debt to income due to rising equity and real estate markets.
* "
hence the need for FinanceProfessor ;)
Definitely recommended reading!!!
As an aside, this speech took place at Canisus college! Shame on you Katie for not letting me know! ;)
A few highlights:
*"The improvement in corporate balance sheets in the past few years has been substantial. Most noteworthy are the gains achieved in balance sheet liquidity. Firms have taken advantage of low long-term interest rates to pay down short-term debt with longer-maturity debt. At the same time, firms have built up their cash positions to extraordinary levels. At the end of last year, the ratio of cash and equivalents to short-term debt at nonfinancial corporations stood at about twice its average level since the 1950s."
To which I would ask, I wonder if Jensen's Free Cash flow problem has slackened (pun intended) with increased monitoring by more active boards. Interesting research question.
* "In the household sector, some analysts have expressed concern about the rapid growth in household debt in recent years and the decline in the household saving rate. They fear that households have become overextended and will need to rein in their spending to keep their debt burdens under control. My view is considerably more sanguine. Although pockets of financial stress exist among households, the sector as a whole appears to be in good shape."
As evidence she points out that debt to net worth is in better shape than debt to income due to rising equity and real estate markets.
* "
College graduates preparing to enter the labor force will soon assume a new level of responsibility for managing their finances. Personal financial management includes the strategic use of both credit and savings to enhance asset accumulation and financial well being. Just as the choices that students have made regarding their education play a vital role in determining career opportunities, the decisions they make and behaviors they establish regarding financial management in the coming years will also impact future opportunities and their ability to capitalize on them.
Compared to a generation ago, the financial marketplace of today is significantly more complex. There is now an extensive range of consumer financial products and services, and providers of these goods and services."hence the need for FinanceProfessor ;)
Definitely recommended reading!!!
As an aside, this speech took place at Canisus college! Shame on you Katie for not letting me know! ;)
Friday, April 29, 2005
Plagiarism Resource Site Windows Software Page
End of semesters often mean term papers. Here are a few source of anti-plagirism software that might make your job a tad easier.
From the University of Virginia Plagiarism Resource Site Windows Software Page
From the University of Washington
Another site that discusses many free sources for both teacher and student.
This is not to say I have had a problem lately, but it is always better to be prepared for these things.
My note to students: always give credit to those sources you use!
From the University of Virginia Plagiarism Resource Site Windows Software Page
From the University of Washington
Another site that discusses many free sources for both teacher and student.
This is not to say I have had a problem lately, but it is always better to be prepared for these things.
My note to students: always give credit to those sources you use!
NYSE, Nasdaq mergers seen changing landscape
NYSE, Nasdaq mergers seen changing landscape - Banks - Financial - Financial Services - IPOs - M&A - Markets/Exchanges - Market News
A follow-up on last week's the announcements of the NYSE and NAsdaq.
"By Steve Gelsi, MarketWatch
Last Update: 2:30 PM ET April 28, 2005
NEW YORK (MarketWatch) -- With the financial markets business weighing the New York Stock Exchange's planned $3 billion combination with Archipelago, as well as the Nasdaq's pending $1.9 billion purchase of Instinet, specialty companies and many others are reassessing their roles in an increasingly electronic trading world."
Short version: much change is on the horizon. Indeed the future of the trading floor is by no means a foregone conclusion.
Some highlights:
* "You're looking at an environment where everything is in play," said Chris Nagy, managing director of order routing for Ameritrade (AMTD: news, chart, profile) . "Everyone is posturing to be a leader in this new market structure.""
*"The Nasdaq and the NYSE will finally catch up to innovation in the industry after electronic communication networks and other players led the way in recent years"
*"Meanwhile, the fate of the NYSE-Archipelago deal is under fire as board member Kenneth Langone attempts to pick up support for a rival plan to buy the Big Board. See full story"
*"Ingrid Werner, professor of the Fisher School of Business at Ohio State University, said questions remain about the role of NYSE's two surviving independent specialist firms...[and added] Overall, the NYSE's move illustrates the advantages of demutualization to increase transparency, raise capital for technological improvements and increase the speed the process for future changes, according to Werner."
Read the entire article here.
Thanks MarkP for the heads up on this one!
A follow-up on last week's the announcements of the NYSE and NAsdaq.
"By Steve Gelsi, MarketWatch
Last Update: 2:30 PM ET April 28, 2005
NEW YORK (MarketWatch) -- With the financial markets business weighing the New York Stock Exchange's planned $3 billion combination with Archipelago, as well as the Nasdaq's pending $1.9 billion purchase of Instinet, specialty companies and many others are reassessing their roles in an increasingly electronic trading world."
Short version: much change is on the horizon. Indeed the future of the trading floor is by no means a foregone conclusion.
Some highlights:
* "You're looking at an environment where everything is in play," said Chris Nagy, managing director of order routing for Ameritrade (AMTD: news, chart, profile) . "Everyone is posturing to be a leader in this new market structure.""
*"The Nasdaq and the NYSE will finally catch up to innovation in the industry after electronic communication networks and other players led the way in recent years"
*"Meanwhile, the fate of the NYSE-Archipelago deal is under fire as board member Kenneth Langone attempts to pick up support for a rival plan to buy the Big Board. See full story"
*"Ingrid Werner, professor of the Fisher School of Business at Ohio State University, said questions remain about the role of NYSE's two surviving independent specialist firms...[and added] Overall, the NYSE's move illustrates the advantages of demutualization to increase transparency, raise capital for technological improvements and increase the speed the process for future changes, according to Werner."
Read the entire article here.
Thanks MarkP for the heads up on this one!
Thursday, April 28, 2005
NPR : Post-Scandal Regulations Boost Accounting Industry
For the accountants among us :)
NPR : Post-Scandal Regulations Boost Accounting Industry: "All Things Considered, April 27, 2005 "The accounting scandals of the past few years produced a regulatory crackdown known as Sarbanes-Oxley, which has made audits much tougher and restricted who can be on a company board. Many companies hate the new rules, but they've been a boon for the accounting industry. "
NPR : Post-Scandal Regulations Boost Accounting Industry: "All Things Considered, April 27, 2005 "The accounting scandals of the past few years produced a regulatory crackdown known as Sarbanes-Oxley, which has made audits much tougher and restricted who can be on a company board. Many companies hate the new rules, but they've been a boon for the accounting industry. "
Wednesday, April 27, 2005
Economist.com | Environmental economics
Economist.com | Environmental economics
As Matt S. points out: "IRR and NPV pop up in the strangest of places." Actually not strange at all! Just in areas where the average non-finance person would not expect them.
Short version: NPV and IRR can (and should) be used to evaluate environmental decisions as well. the problem however is that these costs and especially benefits are often difficult to quantify.
Slightly longer version:
The World Bank (at least since 1991) has used NPV and IRR to study the environmental impact of its decisions. While finding the true cost and benefit of environmental questions is notoriously difficult, it is something that must be done.
From "A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects" by Silva and Pagiola. (Take a look at the boxes for nice summaries!)
Thanks for the heads up on this one Matt! (BTW Matt is a former JMU student who is about to take off on a several month around the world adventure!)
As Matt S. points out: "IRR and NPV pop up in the strangest of places." Actually not strange at all! Just in areas where the average non-finance person would not expect them.
Short version: NPV and IRR can (and should) be used to evaluate environmental decisions as well. the problem however is that these costs and especially benefits are often difficult to quantify.
Slightly longer version:
The World Bank (at least since 1991) has used NPV and IRR to study the environmental impact of its decisions. While finding the true cost and benefit of environmental questions is notoriously difficult, it is something that must be done.
From "A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects" by Silva and Pagiola. (Take a look at the boxes for nice summaries!)
"If a project activity causes environmental damage, that damage needs to be included in the economic analysis of the project together with the activity’s benefits and any other damages. To do otherwise would be to make the activity appear artificially more attractive than it is. Likewise, if additional costs are incurred to avoid such damage, those costs need to be included in the project costs considered in the economic analysis."From the Economist article:
"The turning point for this way of looking at things was in 1997. In that year, the city government of New York realised that changing agricultural practices meant it would need to act to preserve the quality of the city's drinking water. One way to have done this would have been to install new water-filtration plants, but that would have cost $4 billion-6 billion up front, together with annual running costs of $250m. Instead, the government is paying to preserve the rural nature of the Catskill Mountains from which New York gets most of its water. It is spending $250m on buying land to prevent development, and paying farmers $100m a year to minimise water pollution."Actually I am including this in the blog not because it is new per se, but because
- it is so interesting and thought provoking
- it could be used to motivate those who are less inclined towards finance to see the importance of NPV and IRR calculations--indeed I plan on using it in my Finance 301 class in the fall!
- if all of the environmental costs and benefits were included, the world would be a better place.
Thanks for the heads up on this one Matt! (BTW Matt is a former JMU student who is about to take off on a several month around the world adventure!)
Texas Finance Festival
From Michael Jensen:
"In cooperation with Baylor University, FEN announces
the 2005 7th Annual Texas Finance Festival abstracting journal.
This abstracting journal, available to all subscribers at no charge,
contains abstracts of the festival papers with links to the
full text in the SSRN eLibrary."
"HOW TO SUBSCRIBE You can subscribe to the 7th Annual Texas Finance
Festival abstracting journal by clicking on the following link:
http://hq.ssrn.com/jourInvite.cfm?link=texas-finance-festival-2005"
"ABOUT 7TH ANNUAL TEXAS FINANCE FESTIVAL ABSTRACTS
The purpose of this abstracting journal is to provide
a data warehouse for all abstracts and papers presented at
the festival and to facilitate their distribution to the financial
profession as a whole. Abstracts of the papers will also be published
in subject-specific journals within the FEN Network and,
where appropriate, in the journals of our sister networks."
Conference URL:
http://business.baylor.edu/J_Martin/TFF2002/INDEX.html
"ABOUT 7TH ANNUAL TEXAS FINANCE FESTIVAL ABSTRACTS &
PAPERS AT SSRN The following URL will allow you to browse all FEN 7th
Annual Texas Finance Festival Abstracts in the SSRN database as
they are submitted. You may wish to bookmark it in your
browser.
http://www.ssrn.com/link/texas-finance-festival-2005.html "
Michael C. Jensen
Adelphia, Deloitte, and the Rigases all agree to make payments
Deloitte Settles Adelphia Case for $50 Million - - CFO.com
Well there is some closure at least. After about 3 years, the Adelphia case may be over! In a move seen as both an attempt to stay out of Jail and to clear the way for a pending takeover, the Rigases, Adelphia itself, and the former Auditors all agreed to pay into a fund to help compensate victims of the fraud.
The Rigases agreed to turn over about $1.5 Billion of assets to Adelphia which in turn will pay about half ($715 million) into the fund. Additionally Deloitte agreed to pay $50 million (including a $25 Million fine) for not catching the fraud and for insufficient safeguards against the fraud.
Some of the highlights of the case:
From CFO.com
"The Rigas family, which founded the now-bankrupt cable giant, will forfeit 95 percent of its assets — totaling more than $1.5 billion — under a settlement with the U.S. Attorney's office for the Southern District of New York and the SEC. Those assets — including cable systems valued at $700 million to $900 million and bonds valued at $567 million — will be turned over to Adelphia. Upon emerging from bankruptcy, the company will then pay $715 million to create a fund to compensate victims of the fraud, according to the commission."
From the Boston Globe:
"The settlement should help clear the way for Adelphia's acquisition by Comcast Corp. and Time Warner Inc., the two largest US cable television companies, said Sanford C. Bernstein & Co. analyst Craig Moffett. Comcast and Time Warner said last week they would buy Adelphia for $17.6 billion in cash and stock, the biggest transaction in the industry in two years."
From CNN:
"Deloitte, one of the Big Four accounting firms, will pay a penalty of $25 million and another $25 million in a related administrative proceeding, the SEC said. The total will go into "a fund to compensate victims of Adelphia's fraud," it said."
From Marketwatch:
""What is especially troubling here is that Deloitte recognized the risk of fraud posed by this client at the outset," said Mark K. Schonfeld, director of the SEC's Northeast Regional Office, in a statement."
From the NYPost:
"Members of the Rigas clan, led by 80-year-old patriarch John Rigas were accused of siphoning more than $2.4 billion from the company to spend freely on real estate and other investments.
The elder Rigas and his son Timothy, 48, the ex-CFO, were convicted last summer of fraud and conspiracy and will be sentenced June 1. They could get leniency due to the pact,"
From the NY Times:
"In turning over their assets to Adelphia, the Rigases are giving up virtually all of their holdings. The settlement would leave the Rigases with about $79 million in assets."
And finally, here is what NPR had to say about it.
For those of you outside of the local area, Adelphia was headquartered in Coudersport PA (about 45 minutes from St. Bonaventure). Due to local interest (the Rigas were generous donors to SBU), Carol Fischer and I wrote 2 cases on Adelphia back in 2002 and 2003. Each was published but to be honest I can not remember where. I think one was under the name Philippe at Bquest and one was in the Journal of Accounting and Finance. It was more accounting based, but unfortunately I can not find an online version of it.
I do have a working copy version (before an editor told us to change the name) of the Finance oriented casethat I currently am using in my MBA classes.
Here are powerpoint slides from a presentation we put on based off of the paper.
Well there is some closure at least. After about 3 years, the Adelphia case may be over! In a move seen as both an attempt to stay out of Jail and to clear the way for a pending takeover, the Rigases, Adelphia itself, and the former Auditors all agreed to pay into a fund to help compensate victims of the fraud.
The Rigases agreed to turn over about $1.5 Billion of assets to Adelphia which in turn will pay about half ($715 million) into the fund. Additionally Deloitte agreed to pay $50 million (including a $25 Million fine) for not catching the fraud and for insufficient safeguards against the fraud.
Some of the highlights of the case:
From CFO.com
"The Rigas family, which founded the now-bankrupt cable giant, will forfeit 95 percent of its assets — totaling more than $1.5 billion — under a settlement with the U.S. Attorney's office for the Southern District of New York and the SEC. Those assets — including cable systems valued at $700 million to $900 million and bonds valued at $567 million — will be turned over to Adelphia. Upon emerging from bankruptcy, the company will then pay $715 million to create a fund to compensate victims of the fraud, according to the commission."
From the Boston Globe:
"The settlement should help clear the way for Adelphia's acquisition by Comcast Corp. and Time Warner Inc., the two largest US cable television companies, said Sanford C. Bernstein & Co. analyst Craig Moffett. Comcast and Time Warner said last week they would buy Adelphia for $17.6 billion in cash and stock, the biggest transaction in the industry in two years."
From CNN:
"Deloitte, one of the Big Four accounting firms, will pay a penalty of $25 million and another $25 million in a related administrative proceeding, the SEC said. The total will go into "a fund to compensate victims of Adelphia's fraud," it said."
From Marketwatch:
""What is especially troubling here is that Deloitte recognized the risk of fraud posed by this client at the outset," said Mark K. Schonfeld, director of the SEC's Northeast Regional Office, in a statement."
From the NYPost:
"Members of the Rigas clan, led by 80-year-old patriarch John Rigas were accused of siphoning more than $2.4 billion from the company to spend freely on real estate and other investments.
The elder Rigas and his son Timothy, 48, the ex-CFO, were convicted last summer of fraud and conspiracy and will be sentenced June 1. They could get leniency due to the pact,"
From the NY Times:
"In turning over their assets to Adelphia, the Rigases are giving up virtually all of their holdings. The settlement would leave the Rigases with about $79 million in assets."
And finally, here is what NPR had to say about it.
For those of you outside of the local area, Adelphia was headquartered in Coudersport PA (about 45 minutes from St. Bonaventure). Due to local interest (the Rigas were generous donors to SBU), Carol Fischer and I wrote 2 cases on Adelphia back in 2002 and 2003. Each was published but to be honest I can not remember where. I think one was under the name Philippe at Bquest and one was in the Journal of Accounting and Finance. It was more accounting based, but unfortunately I can not find an online version of it.
I do have a working copy version (before an editor told us to change the name) of the Finance oriented casethat I currently am using in my MBA classes.
Here are powerpoint slides from a presentation we put on based off of the paper.
Monday, April 25, 2005
What is the expected return on options? Zero? RF rate? Or something else?
FEN has a great article on some of the limitations of Black-Scholes World! It is by Ross Miller and it is definitely worth your time!!! It is both thought provoking and funny at once. A great combo!!!
Be Careful What You Model
A few quick highlights:
* "You have in your hand (or on your screen) an at-the-money call option with a year until it expires. Because you are in BSW, you know exactly what that option is worth at the present moment in time. Consider this: What is your expected rate of return on the option between now and the option’s expiration in one year?
An easy question, right? Think some more.
The typical profit-and-loss diagram for options, popularly known as the “hockey-stick,” assumes that the funds invested in options earn a zero return regardless of the time until expiration. According to this diagram, the absolute return from an option is simply the terminal payoff minus the current cost. The possibility that one might require a positive return to compensate for the opportunity cost of funds used to finance the option is either ignored for the sake of pedagogical simplicity or relegated to a footnote.
Zero is clearly the wrong answer, so what about the risk-free rate? That was the nearly unanimous answer to my informal, nonscientific survey and it is what Paul Wilmott appears to be saying (if I understand his notation) on the top of page 34 of the first volume of his magnum opus on quantitative finance.
This answer might be defensible, but it is not what BSW’s creators had in mind"
*The strange world in which every asset earns the risk-free rate of return for the life of the option is not Black-Scholes World, but a universe that I will dub Cox-Ross World (CRW) after the two economists, John Cox and Stephen Ross, who colonized this world in their 1976 Journal of Financial Economics article. (Cox and Ross explicitly refer to their theoretical construct as a “world.”) CRW is a degenerate neighborhood of Black-Scholes World in which risk-neutrality rules. What Cox and Ross recommend (and what Black and Scholes allude to in an unpublished early draft of their famous article) is that when you have a messy option it usually pays to visit CRW to find its value."
*"Take the collapse in spreads on risky debt. In a risk-neutral world, yield spreads are just wide enough to cover the expected capital losses from adverse credit events. While unquestionably much of the tightening over the past few years has come from good news on the credit front, there appears to be more going on – vanishing risk premia."
* "It is natural to wonder whether all of this is just another recipe for disaster whipped up in the financial engineers’ kitchens. Unfounded assumptions of option replicability (portfolio insurance in 1987) and market liquidity (LTCM in 1998) turned out to have a destabilizing effect on financial markets"
GOOD STUFF!
Be Careful What You Model
A few quick highlights:
* "You have in your hand (or on your screen) an at-the-money call option with a year until it expires. Because you are in BSW, you know exactly what that option is worth at the present moment in time. Consider this: What is your expected rate of return on the option between now and the option’s expiration in one year?
An easy question, right? Think some more.
The typical profit-and-loss diagram for options, popularly known as the “hockey-stick,” assumes that the funds invested in options earn a zero return regardless of the time until expiration. According to this diagram, the absolute return from an option is simply the terminal payoff minus the current cost. The possibility that one might require a positive return to compensate for the opportunity cost of funds used to finance the option is either ignored for the sake of pedagogical simplicity or relegated to a footnote.
Zero is clearly the wrong answer, so what about the risk-free rate? That was the nearly unanimous answer to my informal, nonscientific survey and it is what Paul Wilmott appears to be saying (if I understand his notation) on the top of page 34 of the first volume of his magnum opus on quantitative finance.
This answer might be defensible, but it is not what BSW’s creators had in mind"
*The strange world in which every asset earns the risk-free rate of return for the life of the option is not Black-Scholes World, but a universe that I will dub Cox-Ross World (CRW) after the two economists, John Cox and Stephen Ross, who colonized this world in their 1976 Journal of Financial Economics article. (Cox and Ross explicitly refer to their theoretical construct as a “world.”) CRW is a degenerate neighborhood of Black-Scholes World in which risk-neutrality rules. What Cox and Ross recommend (and what Black and Scholes allude to in an unpublished early draft of their famous article) is that when you have a messy option it usually pays to visit CRW to find its value."
*"Take the collapse in spreads on risky debt. In a risk-neutral world, yield spreads are just wide enough to cover the expected capital losses from adverse credit events. While unquestionably much of the tightening over the past few years has come from good news on the credit front, there appears to be more going on – vanishing risk premia."
* "It is natural to wonder whether all of this is just another recipe for disaster whipped up in the financial engineers’ kitchens. Unfounded assumptions of option replicability (portfolio insurance in 1987) and market liquidity (LTCM in 1998) turned out to have a destabilizing effect on financial markets"
GOOD STUFF!
Friday, April 22, 2005
Nasdaq finalizes acquisition of Instinet
The market consolidation continues with the Nasdaq and Instinet finalizing their widely rumored deal on the heels of the NYSE Archipelago deal.
From Reuters (the previous majority owner of Instinet):
" As a condition of the deal, Reuters will sell Instinet's electronic trading network to Nasdaq."
Latest News and Financial Information | Reuters.com
From Bloomberg:
" Chicago-based Archipelago, the third-largest electronic market for U.S. stocks, had a 23.5 percent share of trading in Nasdaq-listed stocks in the first quarter. Instinet, which is scheduled to report first-quarter results on Monday, has had about 25 percent. Both electronic exchanges and electronic trading systems known as ECNs can trade Nasdaq stocks.
``Competition from ECNs and other electronic trading platforms has significantly reduced our market share in executions in Nasdaq-listed securities,'' Nasdaq said in a recent SEC filing. "
From Reuters (the previous majority owner of Instinet):
" As a condition of the deal, Reuters will sell Instinet's electronic trading network to Nasdaq."
Latest News and Financial Information | Reuters.com
From Bloomberg:
" Chicago-based Archipelago, the third-largest electronic market for U.S. stocks, had a 23.5 percent share of trading in Nasdaq-listed stocks in the first quarter. Instinet, which is scheduled to report first-quarter results on Monday, has had about 25 percent. Both electronic exchanges and electronic trading systems known as ECNs can trade Nasdaq stocks.
``Competition from ECNs and other electronic trading platforms has significantly reduced our market share in executions in Nasdaq-listed securities,'' Nasdaq said in a recent SEC filing. "
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