Dealbook - A Bonfire Returns as Heartburn - NYTimes.com

The NY Times has a gloom and doom article on the future of Wall Street one year after Blackstone went public. It is through eyes of Tom Wolfe the author of Bonfire of the Vanities.

Dealbook - A Bonfire Returns as Heartburn - NYTimes.com:

"Blackstones stock has gone nowhere but down since it went public, dropping nearly 50 percent from its high the day it started trading. But thats the least of it.

The once mighty Wall Street investment banks have been brought to their knees, sending out pink slips to more than 83,000 employees worldwide, racking up billions of dollars in losses as a results of their foolish forays into subprime mortgages. Bear Stearns all but went out of business before being saved. Some hedge funds have gone belly up.

Those lords of private equity, many of which were preparing to follow Blackstone into the public markets, have been put on semipermanent hiatus...."

As Mr. Wolfe nicely put it, It sounds like even the firms that arent in trouble are in trouble."

To me what makes the article interesting is not the historical look back over the past 12 months, but the potentially prophetic look ahead:

"Wall Street is in for a radical makeover. Fewer people, lower margins, lower risk, lower compensation and ultimately, fewer talented people. It is likely to change the culture of an industry that for nearly a century has been the money center of the world. There would be a lot of firms leaving New York if it wasnt for lunch, Mr. Wolfe said"

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[Source: FinanceProfessor.com]

Bear Stearns managers indicted; emails could be smoking gun - MarketWatch

Obviously many have been watching the recent arrests of former Bear hedge fund managers Matthew Tannin and Ralph Cioffi. My first reaction was that they were being made scape goats so I was somewhat surprised when I saw this article that suggests there may be a case.

Bear Stearns managers indicted; emails could be smoking gun - MarketWatch:

"'If we believe the [collateralized-debt obligation report] is anywhere close to accurate I think we should close the funds now,' wrote Tannin, according to the indictment. 'The reason for this is that if [the CDO report] is correct then the entire subprime market is toast. If AAA bonds are systematically downgraded then there is simply no way for us to make money -- ever. ... Caution would lead us to conclude the [CDO report] is right -- and we're in bad bad shape.'

But Tannin, Cioffi and other high-ranking Bear Stearns executives met with investors April 25 and assured them the funds had plenty of liquidity to survive any upcoming pressure."

Ouch. But is this just speculation? The whole thing is conditioned n an "if". Maybe they concluded that things were not as bad as suspected prior to the April 25th meeting? Would not want to be a juror on this one, it could go a while. Stay tuned.

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[Source: FinanceProfessor.com]

Banking: Still a top priority in a fast-changing world

FT.com / In depth - Banking: Still a top priority in a fast-changing world:

"Steve Kaplan, professor of entrepreneurship and finance at the University of Chicago Graduate School of Business...uses the snappy acronym CFIMITYM cashflow is more important than your mother and points out that the subprime market crashed and burned because investors had bought something that had less cashflow than they thought there was.

As for the school, it does not teach the latest and greatest fad but feels it is more important to give a thorough understanding of the essentials of economics and finance, for both entry and higher-level financial training."

Whenever a professor the caliber of Kaplan is mentioned in a article that focuses on teaching finance, it is clear that it must be "blogged".

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[Source: FinanceProfessor.com]

Are you a stock or a bond? - The Wealthy Boomer

Interesting angle on personal finance.

Are you a stock or a bond? - The Wealthy Boomer:

"...Your human capital is "bond-like" in nature if you're a salaried employee with a Defined Benefit pension plan.... On the other hand, the human capital of an entrepreneur or investment banker is more like a stock.the implications for personal finances are clear. If you're a 'bond' you might want to balance your human capital by adding more stocks to your growing financial capital. If on the other hand you're a 'stock,' you might consider adding more bonds to your financial capital to offset the risk you take in your day to day work.

Many of us are not 100% a stock or 100% a bond; we are a blend"

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[Source: FinanceProfessor.com]

Strategies - The Perils of Investing Too Close to Home - NYTimes.com

Well we knew of home COUNTRY bias, but home STATE bias? Apparently. That is the latest from Korniotis and Kumar.

Strategies - The Perils of Investing Too Close to Home - NYTimes.com: "

Americans tend to put a disproportionate share of their money into shares of companies based in their own states, new research has shown, and that bias that can be exploited by sophisticated traders.

These insights come from Long Georgia, Short Colorado? The Geography of Return Predictability, a study by George M. Korniotis, an economist on the staff of the board of governors of the Federal Reserve, and Alok Kumar, an assistant professor of finance at the University of Texas, Austin."

The actual paper can be found on SSRN.

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[Source: FinanceProfessor.com]

Sirius-XM: It's about time - Jun. 16, 2008

Might the deal finally get approved? From CNN:
Sirius-XM: It's about time - Jun. 16, 2008:

"The two companies announced their merger nearly 16 months ago. Shareholders approved it in November. Many customers have been eagerly awaiting the chance to sign up for one package that would give it Sirius and XM programming.....And the Department of Justice gave the deal its blessing almost three months ago. So the only hang-up for the merger is a green light from the Federal Communications Commission....According to several published reports today, FCC chairman Kevin Martin has indicated that he would support the deal. The next step is for Martin to call for the remaining members of the FCC to vote on it this week."

From the NY Times:

"If the deal is approved, it would be a major reversal of the commissions rules, the Post noted: The F.C.C. gave licenses to XM and Sirius in 1997 on the condition that the two satellite companies never merge.

Consumer groups have expressed concern that the merger would allow the combined entity to raise prices." "

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[Source: FinanceProfessor.com]

Offer Says, This Buds for InBev - NYTimes.com

This Buds for InBev - NYTimes.com:

"Anheuser-Busch, which responded to InBevs bid by saying it would review the proposal, has been exploring ways to thwart InBevs $46.4 billion takeover offer. Busch is based in St. Louis. Anheuser-Busch, the maker of Budweiser, owns 50 percent of Grupo Modelo, the brewer of Corona, and might try to make itself too expensive to take over by purchasing the remaining half....,"

In response to this plan, InBev has asked Bud to refrain from any further acquisitions:

"It is our strong belief that no alternative transaction that you could effectuate would create more value for your shareholders, said Carlos Brito, the chief executive of InBev, in a letter Sunday to August Busch IV, chief executive of Anheuser-Busch, according to a statement."

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[Source: FinanceProfessor.com]

Dealbook - CSX Grasping at Straws to End Battle - NYTimes.com

Yeah this one will definitely make it to class! Fighting a proxy vote, CSX management has turned it political. How? By making it a matter of national defense. Uh, yeah. And for good reason, you never know when the British (where the hedge funds are located) are going to launch a surprise attack to get the return of Fort Niagara.

A few highlights from the NY Times:

Dealbook - CSX Grasping at Straws to End Battle - NYTimes.com:

"CSX has managed to turn a proxy contest for 5 of 12 board seats (it is hardly a takeover, at least not yet) into a debate about national security."

"The column writes itself: CSX delayed its annual meeting without first telling its shareholders and then moved the meeting to a rail yard in the middle of nowhere...."

"Two of the six senators who sent the letter ....receiving $5,000 each this year....[the] chairwoman of the House subcommittee with jurisdiction over the rail industry, has been particularly vocal in trying to prevent TCI from getting on CSXs board. She has received $38,750 since 1989, including $5,000 in the 2008 election cycle, from CSX....And CSX gave $25,000 to Edward Waters College, in Jacksonville, her alma mater. And then CSXs chief executive, Michael J. Ward, personally donated another $1 million to Edward Waters College"

Yep. It will make class as a great example of how management can fight takeovers and proxy votes even if it hurts shareholders.

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[Source: FinanceProfessor.com]

ETFs dominate Canada Cup -- and a looming threat to Canada's mutual funds - The Wealthy Boomer

ETFs dominate Canada Cup -- and a looming threat to Canada's mutual funds - The Wealthy Boomer:

"Seif said ETFs are popular because they're good for investors: 'They provide the ability to get exposure to the market and use them in multiple ways, whether for asset allocation or as a complement to stocks or active managers.'

Near the end of the session Seif took a direct shot at traditional mutual funds: 'High-fee index-hugging general mutual funds charging 2.5% a year that underperform the market just don't cut it any more. That's the reality.'"

I am always surprised that some still pay mutual funds such high fees for performance that mirrors (or worse) indexed performance.

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[Source: FinanceProfessor.com]

Charges of Insider Trading for a Wall Street Luminary - NYTimes.com

Charges of Insider Trading for a Wall Street Luminary - NYTimes.com:

"Dr. Marshall, a retired professor at St. Johns University and a fixture on the Wall Street lecture circuit, was accused by the Securities and Exchange Commission in March of passing inside information about a multibillion-dollar corporate takeover to a professor at Pace University. The Pace professor, Alan L. Tucker, made more than $1 million trading on the tips in 2007, according to the S.E.C. The Justice Department has filed criminal charges"

While this was first reported back in March, the NY Times article now has nmany more details. Definitely one to use in class.

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[Source: FinanceProfessor.com]

How different cultures deal with free loaders

From the WSJ's Science Journal - WSJ.com:

"In the most sweeping global study yet of cooperaton, a team of experimental economists tested university students in 15 countries to see how people contribute to joint ventures and what happens to them when they don't. The European research team discovered startling differences in how groups around the world react when punishment is handed out for antisocial behavior."

Another look in:

"Among students in the U.S., Switzerland, China and the U.K., those identified as freeloaders most often took their punishment as a spur to contribute more generously. But in Oman, Saudi Arabia, Turkey, Greece and Russia, the freeloaders more often struck back, retaliating against those who punished them...."

The actual article is here.

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[Source: FinanceProfessor.com]

Fear, Rumors Touched Off Fatal Run on Bear Stearns - WSJ.com

Fear, Rumors Touched Off Fatal Run on Bear Stearns - WSJ.com:

"Part One: Missed Opportunities As the firm's fortunes spiraled downward, executives squabbled over raising capital and cutting its inventory of mortgages.
Part Two: Run on the Bank Executives believed they were about to turn a corner, but rumors and fear sent clients, trading partners and lenders fleeing.
Part Three: Deal or No Deal? The Fed pressured Bear Stearns to sell itself, but a misstep in the hastily drawn agreement nearly scuttled the deal."

Wow. Possibly the best series of articles I have seen in the WSJ in years. One Look-in:

""Do you have any idea what is going on?" Mr. Minikes asked, cutting off his boss. "Our cash is flying out the door. Our clients are leaving us."

It was the beginning of a frantic 72 hours that would bring the Wall Street firm to its knees and threaten the stability of the global financial system. Interviews with more than two dozen current and former Bear Stearns executives, directors, traders and others involved show how quickly a company that took 85 years to build could unravel."

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[Source: FinanceProfessor.com]

At Bear, an Apology Is Met With Silence - NYTimes.com

At Bear, an Apology Is Met With Silence - NYTimes.com:

"The tally in support of the merger was 84 percent, Bear Stearns said....Inside the building, however, the mood was somber, if not tearful...The new entity will be much leaner....bout 7,500 Bear Stearns bankers have lost their jobs, along with as many as 3,500 employees of JPMorgan.

and later:

"I have no anger, only regret, Mr. Cayne said...."I personally apologize. I feel an enormous amount of pain and management feels an enormous amount of pain.

The audience of Bear employees, directors and investors, many of whom Mr. Cayne has known for years and who lost large parts of their savings and fortunes, received his remarks in dead silence."

Wow.

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[Source: FinanceProfessor.com]

Study Casts Doubt on Key Rate - WSJ.com

Interesting...

Suppose you have two measures of something. One that is market driven (observable prices) whereas the other is based off reported data. Usually the two move together. However, when they diverge, someone must ask why and which is more correct.

That is essentially what the WSJ did in the following article. They look at LIBOR and teh credit spread to gauge the level of uncertainity in the market. Sure enough, the two usually move together, but not always.

Study Casts Doubt on Key Rate - WSJ.com:

"...beginning in late January, as fears grew about possible bank failures, the two measures began to diverge, with reported Libor rates failing to reflect rising default-insurance costs, the Journal analysis shows. The gap between the two measures was wider for Citigroup, Germany's WestLB, the United Kingdom's HBOS, J.P. Morgan Chase & Co. and Switzerland's UBS than for the other 11 banks. One possible explanation for the gap is that banks understated their borrowing rates."

Much of the paper is based on the fact that LIBOR is based BORROWING rates as reported by banks. This method of LIBOR calculation is not what I thought was done, so I learned somethig here. I always thought this was calculated by the rate banks were willing to lend at not what they were borrowing at. The two could have different numbers if the banks have an incentive to report lower rates for borrowing to assure the market their financial soundness.

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[Source: FinanceProfessor.com]

Bears Last Day on Earth - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times

Bears Last Day on Earth - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times:

"Bear Stearns shareholders are all but certain to approve the sale of the securities firm to JPMorgan in a vote Thursday morning. Bear will most likely be immediately merged out of existence as a public company. The Bear Stearns name will all but disappear, according to a report in Crains New York. To avoid the appearance of grave-dancing, J.P. Morgan will wait several weeks before etching its name on Bears headquarters on Madison Avenue, Crains said.

The Deal Professor takes the opportunity to consider what Bears downfall says about moral hazard, systemic risk and corporate governance."

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[Source: FinanceProfessor.com]