Madoff's former secretary reveals financier's private side | Business | guardian.co.uk

No real finance content but interesting background:

Madoff's former secretary reveals financier's private side | Business | guardian.co.uk:

"In an interview with NBC television today, Squillari, who used to sit just yards from Madoff's office, said she believed the 71-year-old was withholding information from the authorities in order to protect accomplices: "I believe that yes, he is protecting people

....in the weeks running up to his arrest in December, Madoff began obsessively taking his blood pressure every 15 minutes and would lie on the floor with his arms outstretched, complaining of back problems. Squillari told bemused colleagues, 'He seems to be in a coma.'

On the evening of 10 December, just hours after confessing to his two sons that his business was fraudulent, Madoff turned up to a staff Christmas party with his wife, Ruth, looking calm and exchanging stories about their grandchildren with friends.

'You wouldn't have thought they had a care in the world,' says Squillari"

Financial turmoil in the cycling world!

WOW! Ok, so I am very biased on this. I get about 40 tweets a day from Team Astana members. So when there is talk that the Giro may be the team's the last race, I get scared.

Boulder Report » Blog Archive » Giro d’Italia 2009: Is This Team Astana’s Last Race?:

"...In the original Vinokourov deal, seven co-sponsors collaborated to support Astana, named for the country’s capital. The sponsors paid regular installments to the federation, which then bankrolled the team....

Membership, of course, has responsibilities along with privileges, including the posting of a guarantee of 25 percent of rider and staff salaries (or 975,000 Swiss francs, whichever is larger) to an escrow account held by the UCI, and annual audits by Ernst and Young, the UCI’s independent accounting firm. In the event that a team’s riders go unpaid for a certain amount of time, the escrow account can be tapped to cover the shortfall. But the UCI also reserves the right to suspend or withdraw racing licenses for such financial difficulties.

And that appears to be precisely what is happening.

According to sports.kz, only three of the eight original sponsors have paid....The reasons are not firmly known but, it’s assumed that the financial crisis and, particularly, the collapse in commodities prices in late 2008 are partly to blame. Kazakhstan is a resource-intensive economy and many of the sponsors rely on revenues from oil, natural gas and mining, three sectors that were hit with incredible speed and ferocity by the recession....According to sources within the federation, sports.kz reported that the UCI has already drawn Astana’s $2 million bank guarantee reserve down to nothing."

Yikes!

Now what? The article (which while great for the biking crowd may a bit much for those looking for finance, suggests that if the funding collapses, look for Lance to lead a group of investors to launch their own team. (Maybe Nike?). But regardless, it would APPEAR the team would be allowed to bring the big names to the Tour. Stay tuned.


UPDATE 5/7/2009: Lance complains about lack of transparency and brief discussion of what LiveStrong can and can not do. From ESPN.

A look at Executive Compensation

This semester we really had to rush through executive compensation (market conditions took up quite a bit of class time), so I want to make my classes (and by extension others) aware of some of the debate on CEO pay. So a special post on CEO pay.

First yes CEO pay is high and getting higher over time. But I really do not want to address that to much bust to say that the level of pay appears to be closely tied to firm size and I will ignore level of pay since I am not sure it matters as much as the popular press claims. For a nice review try Jensen, Murphy, and Wruck 2004 or this by BusinessKnowhow 2007.

An important paper that I do want to point out is from Jared Harris that suggests that despite of good intentions (I will give boards the benefit of the doubt), that stock options might actually make agency costs worst:

"At best, incentive compensation has an ambiguous relationship with firm performance that can reward executives for luck (Bertrand & Mullainathan, 2001), or encourage CEOs to manage their personal reputations rather than their organizations (March, 1984). Research indicates that current forms of managerial incentive pay do not effectively align the incentives of managers and shareholders; indeed, a number of studies have had difficulty showing any positive link between executive incentive pay and improved performance of the firm (e.g., Mishra, McConaughy, & Gobeli, 2000; Murphy, 1999), and some work suggests that high CEO incentive pay or perquisites may in fact decrease firm performance (Blasi & Kruse, 2003; Core, Holthausen, & Larcker, 1999; Yermack, 2006).

As a corollary to these troubling results about the disconnect between incentive pay and firm performance, it also appears that incentive alignment does little to alleviate concerns about malfeasance and self-dealing. While incentive pay is traditionally seen as an alternative to monitoring as a way to prevent managerial misconduct (Tosi, Katz, & Gomez-Mejia, 1997; Zajac & Westphal, 1994), empirical results do little to confirm the claim that malfeasance is reduced. Indeed, recent research (Harris & Bromiley, 2007) investigates whether large potential payoffs for managers – contrary to classically formulated incentive theory – do not supply an adequate incentive for the good management practices that scholars typically suppose, but rather provide an enticement to cheat, commit fraud, or otherwise cook the books in an attempt to fabricate the levels of corporate performance that will trigger the payoff."

Supposing for a moment that CEO pay is a problem for more than just jealousy reasons, what can be done? It appears that regulation and increased transparency may not work as well as more active shareholders. Two papers to back this claim.

First that active institutional shareholders do keep pay LEVELS lower. From 2003.

"Hartzell and Starks find that as institutional ownership goes up, the
firm is more likely to use pay for performance plans. Additionally, the
level of CEO pay tends to go down. These findings suggest that
institutional investors make better monitors than ordinary investors do.
Possibly more convincing however, (since it solves the endogenity
problem which is that is the institutional investors may select which
stocks that pay for performance and pay managers less) is their analysis
that finds as managerial ownership goes up, pay goes down relative to
control groups in the periods that follow."

and then the article suggesting regulation and transparency do not lower pay levels

SSRN-How Much Sunlight Does it Take to Disinfect a Boardroom? A Short History of Executive Compensation Regulation by Ian Dew-Becker:

"This paper reviews the history of executive compensation disclosure and other government policies affecting CEO pay, and as well surveys the literature on the effects of these policies. Disclosure has increased nearly uniformly since 1933. A number of other regulations, including special taxes on CEO pay and rules regarding votes on some pay packages have also been introduced, particularly in the last 20 years. However, there is little solid evidence that any of these policies have had any substantial impact on pay. Policy changes have likely helped drive the move towards more use of stock options, but there is no conclusive evidence on how policy has otherwise affected the level or composition of pay"

Hedge Fund Manager Strikes Back at Obama - DealBook Blog - NYTimes.com

Wow. Hard hitting letter by Clifford S. Asness of AQR Capital Management opposing Obama's comments attacking hedge funds in the wake of the Chrysler bankruptcy. Much good. My favorite part:

Hedge Fund Manager Strikes Back at Obama - DealBook Blog - NYTimes.com:

"...it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money... but if they give away their clients’ money to share in the “sacrifice”, they are stealing....That’s how the system works"

Warren Buffett Answers Your Questions - DealBook Blog - NYTimes.com

From the NY Times:

Warren Buffett Answers Your Questions - DealBook Blog - NYTimes.com:

"“For most newspapers in the United States, we would not buy them at any price,” said Mr. Buffett, whose company owns a large stake in The Washington Post Company. He added that he sees the possibility of “nearly unending losses” for newspaper companies. Mr. Munger called the industry’s decline “a national tragedy” and said that “what replaces it will not be as desirable as what we are losing.”"

I agree there is something very relaxing about reading a paper, but for speed, ease, and capacity, the web is #1 for a reason.

Swine flu meet Money and Banking

Predicting Flu With the Aid of (George) Washington - NYTimes.com:

"The best way to track the spread of swine flu across the United States in the coming weeks may be to imagine it riding a dollar bill."

The model is based on the "Where’s George?" that you probably have seen stamped on dollar bills. It "

was started more than 10 years ago by Hank Eskin, a programmer who marked each dollar bill he received with a note asking its next owner to enter its serial number and a ZIP code into the Web site, just for the fun of seeing how far and fast bills traveled. By 2006, the site had the histories of 100 million bills."

Great use of the data! Hope it is right. It predicts a fairly slow spread.

Interestingly the virus can live on money for 10 days, so be sure to wash hands after touching money! (Which is what I tell cashiers at the Park and Shop all the time!)

Weekly Wisdom Roundup #26 (Links You Don’t Want To Miss) | Simoleon Sense

Weekly Wisdom Roundup #26 (Links You Don’t Want To Miss) | Simoleon Sense:

ALWAYS a weekly read! Good stuff.

"Simoleon Sense presents business issues through an interdisciplinary lens, integrating research on:

* Value Investing
* Behavioral Finance
* Neuroeconomics
* Psychology
* Economics
* Venture Capital & Private Equity"

Bill Hammond's presentation to my classes

Bill Hammond spoke to my class last week on careers in insurance and risk management. It was very good. If you only want audio of it, that is available here. If you want to see the powerpoint slides, they are available here.



Watch Bill Hammond's presentation at SBU School of Business in Educational & How-To | View More Free Videos Online at Veoh.com

Jack Kemp in His Own Words - WSJ.com

As a former Buffalo Bills' QB, Jack Kemp was in the news locally all the time. He was a great guy and the country is poorer for his passing this weekend.

The many WSJ op-ed pieces he wrote stand as a testament to his intelligence and economics.

Jack Kemp in His Own Words - WSJ.com:

"Congressman Jack Kemp died Saturday at age 73. The following are excerpts from his many op-eds for The Wall Street Journal:

[one of his last ones]

In my opinion, people of all colors and income levels don't hate the rich. They want to get rich. They're more interested in generating wealth than they are in redistributing wealth. They want to own property, educate their children and build a nest egg that can be passed on to their heirs. Unfortunately, some aren't able to access the same ladder of opportunity that is so readily available to the majority. . . .

By giving people access to capital and allowing them to take ownership of assets, entrepreneurship will be encouraged and the cycle of poverty can begin to be broken. All persons should have the opportunity to go as high as their merit and determination can carry them."

Will time-tested 'Sell in May' stocks strategy work in this recession? - Salt Lake Tribune

Will time-tested 'Sell in May' stocks strategy work in this recession? - Salt Lake Tribune:

"A time-tested strategy that calls for investors to 'sell in May and go away' might sound awfully tempting this year.

...Simplistic as it sounds, the approach has produced reliable results with reduced risk for decades. Since 1950, the Dow Jones industrial average has produced an average gain of 7.3 percent from November through April versus a scant 0.1 percent from May through October."

I have to admit that calendar anomalies always annoy me. They have to be mere random coincidences, right? They make no sense given everyone has a calendar and are therefore predictable. Thus, even if they were found through rigorous data mining to exist, they should instantly go away as soon as announced.

And yet they seemingly continue to exist. Indeed there is an academic controversy on this. To wit, in 2001 Jaceobsen and Bouman document the anomaly internationally:

"The 'Sell in May' effect tends to be particularly strong in European countries and is robust over time. Sample evidence, for instance, shows that in the UK the effect has been noticeable since 1694. While we have examined a number of possible explanations, none of these appears to convincingly explain the puzzle. "

But then in 2004, I thought had been Maberly and Piercet explained it away using dummy variables for outliers (LTCM and October 1987), but then again in 2005 Jacobsen, Mamun, and Visaltanachoti examine it (this time looking at individual stocks as opposed to indicies) and found it still lived on:

"We study the interaction between this anomaly - known as the Halloween effect - and the January effect and other well-known anomalous findings on portfolios formed on Size, Dividend Yield, Book to Market ratios, Earnings Price ratios and Cash Flow Price ratios in equally but also value weighted portfolios for the US market. Our main findings are that contrary to the January effect, the Halloween effect seems a market wide phenomenon unrelated to these well-known anomalies. All portfolios in our study show higher average winter returns than summer returns. In most portfolios this difference is statistically and economically significant."

Southwest Airlines and hedging from WSJ

Article - WSJ.com:

"Southwest Airlines Corp. (LUV), the airline industry's most aggressive fuel hedger, remains committed to hedging to lock in future fuel prices, Laura Wright, chief financial officer, told Dow Jones Newswires.

Amid today's volatile oil prices, Southwest has placed new hedges this year using only call options. 'That's our favorite way to hedge,' she said, because it offers protection against rising prices, but allows the company to pay market rates if prices remain low.

'We used call options a lot in the late 1990s, but then they got too expensive' as oil prices rose, Wright said. 'In the last two years, we used a lot more collars,' which combine options contracts, providing protection from falling prices but less upside protection if prices rise. 'We've always used simple methods of hedging, a combination of options, collars and swaps,' she said."

Just this past week a group in my MBA class did a case on Southwest's hedging, so for all of you in class, this should be nothing but review!

Buffett Dismisses Stress Tests for Assessing Banks (Update1) - Bloomberg.com

Buffett Dismisses Stress Tests for Assessing Banks (Update1) - Bloomberg.com:

"Berkshire Hathaway Inc. Chairman Warren Buffett dismissed the importance of the government’s stress tests of major U.S. financial institutions in helping him assess banks he invested in.

“I think I know their future, frankly, better than somebody that comes in to take a look,” Buffett said before the start of Omaha, Nebraska-based Berkshire’s annual shareholder meeting today. “They may be using more of a checklist type approach.”"

True, UNLESS, they get better information (as in non public information).

Stock Repurchases: Theory and Evidence by Jim Hsieh, Qinghai Wang

SSRN-Stock Repurchases: Theory and Evidence by Jim Hsieh, Qinghai Wang:

From the abstract:

"...article surveys the theoretical and empirical studies on share repurchases. Share repurchases have surpassed cash dividends and become the dominant form of corporate payouts since the last decade. This study provides a brief description of five major types of share repurchases and considers the motives that influence firms’ repurchase decisions. Specifically, we examine regulatory and tax considerations, agency costs of free cash flows, signaling and undervaluation, capital structure, takeover deterrence, and employee stock options. The review indicates that the existing literature provides ample support for several of these motivations while others merit further investigation."

and a fast look-in from the paper:

"Firms can buy back their shares through five different mechanisms: (1) fixed-price tender offers, (2) Dutch-auction tender offers, (3) open-market share repurchases, (4) transferable put-rights distributions, and (5) targeted stock repurchases."

Cite: Hsieh, Jim and Wang, Qinghai,Stock Repurchases: Theory and Evidence(April 2009). Available at SSRN: http://ssrn.com/abstract=1395943

This one will fit perfectly into any corporate finance class! It will be required reading for next semester in my classes.

Why Bankruptcy is needed (from the WSJ)

Obama did a good impersonation of Mr. Thompson or Wesley Mouch as he harped against bond investors and hedge fund managers (the industrialists from Atlas Shrugged), but such political name calling is not what is needed and indeed quite scary. (why scary? He is essentially asking the funds to forgo returns they deserve to pick an alternative that makes them worse off. This is not a recipe for success.)

Chrysler Goes to Court - WSJ.com:

"'I don't stand with those who held out when everyone else is making sacrifices,' Mr. Obama nonetheless declared, blaming what he called 'a small group of speculators' for the car maker's Chapter 11 filing."

The WSJ points out that this political/populist view is exactly why bankruptcy is needed:

"President Obama's broadside against bankers yesterday illustrates better than any argument ever could that bankruptcy court, and not the political arena, is where Chrysler belongs. Yesterday's filing isn't the end of the U.S. auto industry, or even necessarily of Chrysler, and it offers the best chance to protect all parties under the rule of law"