A remedy for Football's unruly state Friday, March 28, 2008
There has been considerable press about the behaviour of footballers on the pitch in recent weeks and specifically their intimidatory attitude towards referees. As a keen football fan [yes, West Brom are a genuine football team thank you very much!], I'm very aware that some teams appear to have practised mob behaviour towards the ref for some time, but that the number of teams falling into this category has been growing.
A programme I watched last night featured Graham Poll, the former premiership referee who took early retirement but who is infamous for failing to realise he'd already shown a yellow card to a player in a World Cup semi-final and failed to send him off. The show, "This Week", is actually a political panel discussion, and was considering whether Society was becoming more "angry". Poll was asked to comment on whether Society had led to football's current state or whether football had played a part in influencing Society. He rightly responded, in my view, that it is a two way process.
Whilst it's not easy to fix Society's ills, it is much easier to address football's. My proposed remedies are not unique, namely
- borrowing from rugby, only allow the Captains to speak to the referee. Only a player summoned over by a referee may otherwise be present for a discussion. Non-compliance should result in both an immediate yellow card for any player breaching this rule and a 10 yard move forward of a free kick that has been awarded to the opposition for dissent.
- permit retrospective yellow/red card penalties to be applied to players following post-match reviews of a game i.e. if the referee missed an incident that warranted punishment
- a separate tally of yellow cards for dissent should be operated and clubs penalised with points deductions once a threshold has been reached. Demonstrating the importance of team discipline, it would create pressure from other players, managers, owners and fans for players to respect decisions awarded
This would hopefully eradicate the disgraceful scenes that are all too common and set a better example to .
Buzzword - an impressive online word processor Thursday, March 27, 2008
Buzzword is a slick online word processor that incorporates real-time collaboration and versioning facilities. Created by Virtual Ubiquity, which Adobe bought last year, it probably has the smartest UI of any online application and visually makes Google Docs look positive lame. In functionality terms, it is easily as good as Zoho's Writer albeit minus the offline synchronisation capabilities which gives Zoho the edge for me.
Buzzword operates cross-browser within the flash player and I've had no problems with it in either IE7 or Firefox so far. Best of all, it's free.
Source: WikipediaDespite my best effort to only use online apps and preferably ones that permit collaboration, there are certain times when I need to send docs to the unenlightened - you know the type, if it isn't a MS Word document they get flustered.
However, rather than have someone meddle with the document content, you often want to send them a pdf version of the content. Well, if you resent the expense of Adobe Acrobat, there are an increasing number of freeware pdf printer applications you can use on your desktop such as doPDF. It installs as a printer device and can be selected within applications as the destination for printing but whose output is a pdf.
Alternatively, you could sign-up for a Scribd account which permits you to upload content, share it in pdf like form within a browser plus enable it to be downloaded into a pdf e.g. upload a word document and then send out a public or private link from within Scribd to enable someone to view it in read-only format or download the same document in pdf form and email it to them.
Back in September 2007, I wrote about Zemanta who were winners at Seedcamp. Under the headline of "we do your homework", I suggested it was a tool for lazy people to write articles and hence a sure fire winner.
Sadly, at that time it was only available in Slovenian and so of little use to me. I subsequently learnt from Sean Park, who was one of the Seedcamp judges, that they had all nervously laughed when choosing Zemanta as they really had little idea if it worked since it was all in a foreign language!
Well Zemanta has now launched a Firefox add-in version of their service in English which can be used for Blogger, Wordpress and Typepad.
I had some difficulty installing the add-in and had to resort to saving the installation file to my desktop and then dragging it into the Firefox add-in window. Thereafter it has only operated intermittantly, not always appearing when launching the blog post window in Blogger, albeit this is an alpha version.
When operating, it is definitely easy to use and throws up links and tags for common/popular words which can be easily added to a blog post, as evidenced by the liberal sprinkling of links in this post. Similarly it also provides suggested pictures/photos and articles that may be related. In each case you have the option to review a link destination before adding it, albeit I suspect others will be lazy like me and hope that the links are both valid and appropriate - if you hit a porn site by following a link Zemanta suggested, I shall be accountable but shall pass on responsibility!
Do the tool results add to the blog post? - I'm unconvinced but if the explosion of links is helpful to a reader then great.
Does it save me time? - not really, as these are links I wouldn't have otherwise added and those served up appear to be for mainstream brands and phrases, rather than industry specific terms
Will I continue to use it - yes, as there is no downside I'm aware of as yet
Would I pay for it - nope
It is a considerable improvement on their Seedcamp offering and has been well engineered, but to me, it's not a must have app and I wouldn't miss it.
Techcrunch and others seem to like it, each gushing with praise.
I read with amusement the following from Bloomberg News
Merrill Lynch is likely to pick up a nice number of defectors from rival Bear Stearns. According to ML managing director Jeff Penney in a BN interview, his firm received 20 telephone calls from nearly two dozen hedge funds within days of the BS collapse.
You do the maths, albeit perhaps times are so tough that some funds are sharing telephone calls.
Labels: Hedge Funds
Over the last two years I've come across a handful of online services/applications that have sought to scour the web and discover articles/blog posts related to brands and companies. At first glance, Google Alerts provides a similar sort of function, but these offerings have sought to enhance their value in several ways
- the types of sources they include in their search i.e. reputation/trustworthiness
- the speed of their "news" discovery from the time of publication i.e. minimal latency
- smart tagging of the content to provide some structure to the information uncovered e.g. company ticker symbols
Most of the entrants into this field have targeted their offering towards financial services users, appreciating that this community attaches a high value to fast and reliable information discovery. As such, the potential revenue returns are high and the target market well defined for their sales efforts. I've previously commented on some of them - Market Clusters, Relegence and Monitor110.
At the simpler end, some of these appear to be glorified RSS readers but where content is filtered by keyword relevance. Some of these tools also provide stats on numbers of mentions, broken down by source type i.e. blog, online newspaper, company annoucement and may toss in trend information akin to Google Reader trends.
At the higher end, several of these have attempted to infer positive/negative sentiment in the sources, which is incredibly difficult to do but natural language technological advances supposedly enable good approximations to sentiment to be drawn from the text. As such, by aggregating the "information" about whether there is a positive/negative sentiment trend, perhaps weighted by the importance of the source e.g. my blog scoring a low weight and the Financial Times scoring a high weight, it is hoped to detect changes in market attitude.
Another one I recently came across is InfoNgen, which I would classify as being at the simpler end of the spectrum, but useful nonetheless, particularly for firms dipping their toe-in-the-water. Unusually they have a free version alongside their premium editions, but which gives you a flavour of its usefulness. Worth inspecting.
LinkedIn - revitalised Wednesday, March 26, 2008
Despite having used LinkedIn for a number of years and built-up a large number of connections, I confess it was not a site I regularly used other than to periodically synchronise contact details of my connections.
However, my own use of the site recently picked up as I sought to hook up with various companies and individuals in connection with an initiative I'm involved with. I was therefore pleasantly surprised and pleased with the raft of changes that have been introduced.
The "river of news" regarding who's connected with who and what they are doing is helpful, as is the groups feature, which is exposing many more potential connection opportunities than was previously the case. Whilst these mimic Facebook features, I consider them more powerful in LinkedIn than in Facebook. For instance, for me the scenario of Friend A connecting with person B had little context on Facebook and rarely prompted a conversation - whereas on LinkedIn it opens up wider possibilities and conversations e.g. Connection A is dealing with the IT Director of X, perhaps I can assist them with an introduction to the same role in Y or conversely perhaps they can introduce me to Company X. If only there was a "friend wheel" equivalent for LinkedIn!
I suspect that use of sites social network sites like Facebook have had knock-on benefits for LinkedIn in that they have raised awareness of its' usefulness. Additionally, I suspect that many people have quickly realised that they actually want to separate their business and social connections, as well as related revelations, and hence are making use of LinkedIn for professional contacts and Facebook for friends.
LinkedIn still needs to improve in many areas but I'm pleased they have finally begun the transition into being a useful business aid.
Disney channel website parental control is lame Tuesday, March 25, 2008
If you happen to be the parent of a young girl then it's almost inevitable you will have heard of Hannah Montana and High School Musical, the Disney sensations. Moreover, if you happen to have Disney via satellite or cable, you'll also be familiar with the endless loops of episodes dished up but still watched avidly by your kids.
Disney is a master at 360 degree packaging with stage, tv, merchandise and online outlets for your kids to immerse themselves in their favourite wholesome characters. Cross-referrals are especially well executed and when Hannah Montana's T-shirt competition was announced on the TV, my youngest daughter was straight over to the PC wanting to enter.
And then came the annoying bit - registration. Firstly, they want you to choose a user name but of course anything resembling a name a child can remember has already gone. Ten tries later and still no success in finding an unused name and so we resort to something impossibly long. Why don't they just suggest something to you?
Now for the pointless bit. The child is asked to enter their email address and their parent's email, so that their consent can be sought for the registration. Ok, so that is sensible but why then allow me to enter the same email address in both? Well, obviously some kids may not have email addresses and need to use their parent's email in order to proceed. But that also means that a child can enter their own address in both fields and circumvent the control.
Nice try but no cigar.
CDO fantasy - to the tune of Bohemian Rhapsody Thursday, March 20, 2008
This is absolutely superb - courtesy of an email sent into FT Alphaville
CDO fantasy - to the tune of Bohemian Rhapsody
Is this the real price?
Is this just fantasy?
No escape from reality
Open your eyes
And look at your buys and see.
I’m now a poor boy
Because I bought it high, watched it blow Rating high, value low Any way the Fed goes Doesn’t really matter to me, to me
Mama - just killed my fund
Quoted CDO’s instead
Pulled the trigger, now it’s dead
Mama - I had just begun
These CDO’s have blown it all away
Mama - oooh
I still wanna buy
I sometimes wish I’d never left Goldman at all.
I see a little silhouette of a Fed
Bernanke! Bernanke! Can you save the whole market?
Monolines and munis - very very frightening me!
Super senior, super senior
Super senior CDO - magnifico
I’m long of subprime, nobody loves me
He’s long of subprime CDO fantasy
Spare the margin call you monstrous PB!
Easy come easy go, will you let me go?
Peloton! No - we will not let you go - let him go Peloton! We will not let you go - let him go Peloton! We will not let you go - let me go Will not let you go - let me go (never) Never let you go - let me go Never let me go - ooo
No, no, no, no, no, no, no, -
Oh mama mia, mama mia, mama mia let me go S&P had the devil put aside for me For me, for me, for me
So you think you can fund me and spit in my eye?
And then margin call me and leave me to die Oh PB - can’t do this to me PB Just gotta get out - just gotta get right outta here
Ooh yeah, ooh yeah
No price really matters
Nothing really matters - no price really matters to me
Any way the Fed goes…..
When I first stumbled across Animoto last year I was delighted with the site for two reason
- it was easy to use and required no design expertise or programming skill
- the results were impressive
So when I read about Toufee, which claimed to be the easiest and fastest flash movie maker online, I thought it would be worth evaluating.
Ordinarily, if I want to put movies online I use Microsoft's free application, Window Movie Maker, to edit the video and add effects which I've always been happy with and offers a large range of output formats.
So looking at Toufee, my initial thoughts were that [despite a gawdy home page]
- the online application and UI was impressive
- the range of features and effects it provided was incredibly large
- this online app will definitely give people with no programming skills the ability to produce online flash movies easily that can be embedded anywhere and even run offline
Powerpoint has many animation and transformation tools to add effects, and many slide creators spend lots of time applying them to their slides. Unfortunately, you soon realise as a viewer that less is more in most cases and sometimes the creator has overshadowed the message content with gaudy effects [assuming the presentation had quality content at all!]. Even worse, given most people have seen every Powerpoint effect, they now appear tame and passée.
Hence, one can easily imagine the shabby results that will be created by most people. Indeed, the movie created in the Toufee demo looks tacky and a brief glance at the gallery of movies on the site, made by some of the 100,000+ users they claim, amplifies this point!
Unfortunately, there is no substitute for talent, creativity and design flair regardless of the tools - give me a block of marble, a hammer and chisel and you'd end up with a pile of rocks rather than a work of art, albeit it would probably get admitted to the Tate Modern based on the "tat" I saw in there recently.
So perhaps worth a try, but if you're thinking about using it to impress potential customers with your own home-cooked movie, I think you'd be better off getting the help of a designer. For the avoidance of doubt, let me stress that this is not a criticism of the site.
Toufee offers a 30 day free Trial means after which its $5 per month, but you do need to give your credit card details upfront.
Sex & the Investor - revisited Wednesday, March 19, 2008
I'd forgotten about the presentation I did below at Barcamp London Feb 06 until I got a email today telling me someone had marked it as a favourite on Slideshare.com. So, when I checked the site I was thrilled to see that it had now been viewed over 8900 times [thanks Mom]. Reviewing it for the first time in a long while, I was still happy with the content and believe it's still relevant to entrepreneurs seeking funding.
Hope you agree.
Bank runs for beginners.
Lesson 1. Bank runs are a direct result of a loss of confidence in a bank
Lesson 2. Confidence is affected by rumours
Lesson 3. Rumours may be true or false or in between
Lesson 4. False rumours may be started maliciously and/or for financial gain
Lesson 5. People can be seriously hurt by rumour
When false rumours may prompt a run on a bank with the chaos that brings i.e. bailouts, job losses, panic, the Bank of England gets very angry. The turbulence in HBOS shares on claims of liquidity issues and central bank emergency funding have been categorically denied by the Bank of England. In an unprecedented move, it has apparently been ringing press and TV newsroom to categorically set the record straight and demanding such stories stop.
In parallel the FSA has announced it is to hunt for anyone manipulating the market with such rumours in order to profit.
One has to hope that will kill the matter off. However, there will inevitably be many depositors who will make pre-cautions withdrawals and no doubt, HBOS branches will receive extra deliveries of cash tonight to ensure that the panic does not flare up again. Notably, it does place the Bank of England in a position that were problems to subsequently occur, it may stand accused of misleading the market and held financially liable. For that reason, of which it will be fully aware, you can take some comfort from its assertions/assurances.
FT Alphaville has a report that MF Global [where I once worked] has hiked its margin rates considerably. Under the heading "MF Global Reiterates Strong Liquidity Position (and tells clients to get lost)" it notes that
And when we say “hike” we mean a move, typically, from 25 per cent to 75 per cent or more. In fact, for UK small caps the requirement is now 90 per cent.
Those most notably affected are thousands of traders and speculators using CFDs, who have either had to deposit extra funds immediately, move their business elsewhere or liquidate their positions. And then there is MF’s own army of brokers - many of whom are on substantial commission arrangements and who have now lost much of their client base overnight.
According to well placed market sources, this has added “meaningfully” to some of the unexpected price swings seen across the London market in particular over the past 24 hours.
This is an interesting development for the following reasons:-
- it certainly provides the firm with added protection against market swings and potential impact from client defaults.
- in the case of CFDs, where the trades are backed off against the underlying equity and the related stock borrowed/lent to settle trades, it may partly reflect market conditions in the stock lending market, where collateral rates will have also increased to reflect price volatility.
- it places the firm at a competitive disadvantage to many of its rivals in space where margin, commission and interest rates are keenly negotiated by clients.
- it may bring in extra cash into the pot sourced from clients willing to pay the higher rates, but equally if clients do liquidate positions and move their business this will result in cash outflows.
- Multi-product clients may decide to move all their business away, even though only part of their activity is affected
- Client relationships will have been harmed given the disruptive nature of closing/moving positions. Likewise trust will be hit e.g. such a policy might be widened to other products and confidence in the firm if the move is perceived as a desperate measure
- The reduced activity in CFDs, where MF Global is a major player by volume if not value, will also reduce its stock lending business, cutting it out of some of the important flow as well as hurting any guaranteed income deals it has with lenders that provide stock it no longer needs.
- MF Global provides white label CFD services to other firms, and they will have to pass these hikes onto their clients too, with a knock-on business/reputation impact for them
UPDATE: For whatever reason, FTAlphaville have removed the blogpost, which is almost unheard of. Of course, the post is already floating across the internet via rss, and so it's still showing in my Google Reader. Either they got the story completely wrong or someone didn't like its' tone. Meanwhile, CityIndex has also raised its' margin requirements to 10% on FTSE100 and 20% on FTSE250, but which suggest that collateral requirements in the stock lending market aren't high enough to warrant the increases by MF Global that FT Alphaville reported.
The Economist Leader column reports this week that China consumes half of the world's pork.
Imagine how much bread, butter and brown sauce you'd need to get through that.
The panic in financial market is causing violent swings in prices. At the top and bottom of these, apparently even cautious investors are starting to re-enter the market to take advantage of the overshoot and comparative value implied.
For instance, the price of a 5 year Credit Default Swap on iTraxx Europe hit than 160 basis points this week. This means anybody selling protection on £10m would earn £160,000 a year. Of course, you face the potential of paying out £10m were the index constituents to default. However, if you believe that prices are very frothy and will return to levels consistent with the past, then you could close you CDS position out as prices fall i.e. you receive £160k today but if you can cover this risk in a month's time for say £140,000, then you have a clear £20k profit.
Similarly, the credit spreads on some banks such as HBOS and Lehmans, were at levels typically associated with Nigeria. In comparative value terms, does that make sense?
Martin Wolf, The FT columnist, offers a helpful example from two distinguished academics, Dean Foster at the Wharton School of the University of Pennsylvania and Peyton Young of Oxford university and the Brookings Institution on Hedge Funds.
They start by asking us to consider a rare event – that the stock market will fall by 20 per cent over the next 12 months, for example. They assume, too, that the options market prices this risk correctly, say at one in 10. An option costs $0.1 and pays out $1.
Now imagine that we set up a hedge fund with $100m from investors on the normal terms of 2 per cent management fees and 20 per cent of the return above a benchmark. We put our $100m in Treasury bills yielding 4 per cent. We also sell 100m covered options on the event [i.e. payout is covered by the value of Treasury bills], which nets us $10m. We put this $10m, too, in Treasury bills, which allows us to sell another 10m options. This nets another $1m. Then we go on holiday.
There is a 90 per cent chance that this bet will pay off in the first year. The fund then grosses $11m on the sale of the options, plus 4 per cent interest on the $110m in Treasury bills, for a handsome 15.4 per cent return [$11m options premium + $4.4m interest]. Our investors are delighted. Assume our benchmark was 4 per cent. We then earn $2m in management fees, plus 20 per cent of $11.4m [$15.4m less $4m assumed min return], which amounts to over $4m gross. Whatever subsequently happens, we need never give this money back.
The chances are nearly 60 per cent that the bad event will not occur over five years. Since the fund is compounding at a rate of 11.4 per cent a year after fees, we will make well over $20m even if no new money is attracted into this apparently stellar enterprise. In the long run, however, the bad event is highly likely to occur. Since we have made huge profits, our investors have paid us handsomely for the near certainty of losing them money.
Now all you need to do is raise $100m and pray the options don't ever payout. But if they do, hey, it's not your capital that will be lost and you can keep your past fees. RESULT!
Labels: Hedge Funds
The Accelerator Group says no thanks to newbies Tuesday, March 18, 2008
I was a little shocked to read the following comment from Robin Klein on The Accelerator Group's (TAG) blog today
"Funding business plans from first time entrepreneurs just won't happen anymore!"
As I commented in response, I'm assuming this just means TAG. Otherwise, if applied universally, then entrepreneurs will soon be an extinct species given that people cannot move between zero and two/three ventures. Of course, Robin may be including folks who've tagged along in management roles with founders in his eligible for funding category.
I can understand why TAG might use this filter, but entrepreneurs repeating previous success is also not a given. Whilst second time round entrepreneurs may have learnt lessons [from failure or success], you can also buy-in experience in support of a great proposition.
TAG have done incredibly well with their formula and have great relationships with the larger VCs, as well as having invested time in community initiatives. However this sends a dispiriting message to new entrepreneurs and undermines efforts of groups like Seedcamp, Y-Combinator etc who advocate that good ideas from quality people can get funding.
UPDATE : Robin responded
"sorry. Wasn't clear enough. My point was that just funding a 'business plan' ie a powerpoint plan with a 3year blue-sky financial model won't happen. Of course, first time entrepreneurs who bootstrap and build something, demonstrate consumer or trade engagement are always going to be of great interest."
That makes more sense.
According to CNN, the NewYork Fed has urged Wall Street firms to fend off attacks on Lehman Brothers, which is the next firm in the line of fire from rumours.
It claims that other banks' prime brokerage departments were 'under strict instructions not to do or say anything in the market that could damage Lehman.
Yet is anyone comforted by a "no comment" response?
Of course, the situation is exacerbated by the limited availability of white knights, noted here, of which everyone is aware. Other than the US Govt and possibly Bank of America, where can an institution turn to for a domestic injection of bail-out support? Might the protectionist elements in the USA have to swallow their pride and seek foreign assistance, assuming such support could be marshalled quickly?
The Wall Street Journal has an excellent chronology of events leading up to the Bear Stearns takeover here. The piece highlights the pivotal role played by the US Treasury Secretary, Hank Paulson, in the affair. It's hard to think of anyone better qualified to hold that role and to orchestrate such matters given his former role as CEO of Goldman Sachs. His incredibly insight into Wall Street and the respect he commands amongst his former peers made him a natural leader in this crisis, something not automatically granted to a Treasury Secretary.
There is some discussion in a number of financial blogs and online papers regarding the opportunity for Bear Stearns shareholders not to vote for the deal, but there is universal acknowledgement that no alternates appear to exist plus JP Morgan now has an option on 20% of the stock which could frustrate other buyers. Moreover, it is more politically more palatable for a US bank to be the buyer than, say, a sovereign wealth fund or its' nominee.
There is also much comment regarding the pain to be borne by Bear Stearns staff - not only do they face losing their jobs at a time when hiring elsewhere has effectively dried up, but many will have been historically rewarded with stock and/or options in the bank, whose value has collapsed.
Ooops, perhaps Bear Stearns wasn't worthless Monday, March 17, 2008
Alea points out that the market value of JP Morgan has gone up by $11bn since buying Bear Stearns - almost the previous book value of Bear Stearns. Certainly more than the $236m it paid.
As I suggested last week here, firms like MF Global, where I used to work, were certain to fall under suspicion that they too would be encountering difficulties in the current climate. Today, the firm lost as much as 80 per cent of its value on rumours of financial difficulties. This comes on top of the falls resulting from a loss of $141m attributable to unauthorised trading in February.
At 27 Feb 2008, the shares were trading at $29.24 and today went as low as $3.64.
One of the few large brokers not to be owned by a bank, MF Global intermediates between its' customers and the Exchanges. As a generality, the firm does not take proprietary positions, but does remain exposed to counterparty and liquidity risk in these turbulent times.
As a major player, MF Global's client base will be split between those with long open interest positions and those with short i.e. some clients will be losing money in the market, but others will be profiting. The key challenge is therefore to manage the cash flows between the various parties, as I well recall from my role as Director of Treasury for the firm.
Exchanges can demand intra-day margin calls which have to be settled immediately - failure to so do can result in the firm being suspended from further trading until their balance falls back within headroom or calls have been settled. The consequences of this are so material that an Exchange will always be the first priority in allocating cash, assuming stock collateral isn't readily available. Often stock collateral cannot be moved sufficiently quickly to meet calls or the right "type" is not on hand.
Profiting clients may demand immediate repayment of their funds, especially if they have any concerns about the Broker. Conversely clients losing money may be slower in settling losses, despite intra-day calls being made on them. It is this timing difference between inflows and outflows has to be funded either from internal cash resources or from bank borrowings e.g. MF Global issued a statement it had a committed and used credit line of $1.4bn. In addition, it also denied claims that Joe Lewis, the investor who lost $1.16bn on his stake in Bear Stearns, was a client - the implication of the rumour being his broker would face substantial losses on his account.
Sadly, any doubts about the ability of a broker or its customers to settle margin calls, will normally prompt a "run" on the firm, regardless of the facts, even from segregated customers whose funds are held separately from the bank accounts of the company [albeit segregation in practice in the market has some notable weakness in terms of timing differences i.e. you segregate cash today in respect of the balances as at last night.
MF Global was not alone in being affected. Lehman was down 34% and ICAP 16%. Unfortunately, as it was hit hardest so MF Global has captured all the financial headlines which will exacerbate worries amongst clients. Moreover the wording of company statements that it "is very well capitalised" and has "sufficient funding to conduct our business in normal course" will not allay fears - if you'd noticed, Bear Stearns was well capitalised and these are not normal markets.
Unsurprisingly, other firms are seeking to disassociate themselves from any connection with MF Global eg Penson Worldwide which only adds to the gloom and fear.
Client/counterparty reaction in the coming days will determine the fate of the firm. As is the case for almost every firm, if these groups panic and pull funds in size, then MF Global will collapse - the firm is not in the category of "too big to fail" despite its chunky portion of business on derivatives exchanges, notwithstanding that the Exchanges and regulators would certainly try to organise an orderly transfer of business.
UPDATE: And now a class action is being launched against MF Global on behalf of investors as a result of the unauthorised trading loss, according to CNN.
Since 1862 the Mutilated Currency Division of the Bureau of Engraving and Printing has pieced together partially destroyed American currency. So long as 51% of a currency note remains and can be proved genuine, the US Govt will refund its full value. In 2006 the currency forensics handled about 20,000 cases and sent out cheques worth $66m.
Given the mutilation of the dollar's value recently, one wonders if this US Government department will be facing an avalanche of work from the currency markets or is it the case that there's less than 51% left?
Most of my reading of newspapers I do online, the Economist being a notable exception. Whilst I might flick through a paper left on a train, I rarely buy a newspaper during the week with only infrequent purchases at weekends.
Whilst there is something delightful about flicking the pages and reading unexpected topics that you might not have "clicked" to online, I do enjoy the opportunity to read around a story that interests me in one online source by drawing on wider sources. However, I acknowledge that I will miss stories that might have been of interest simply because of online layouts. Indeed, I've often thought it a pity that newspapers don't publish their content online in newspaper layout, in parallel to that they use today. On the front page of the website, you could be offered the option to switch between online and newsprint formats. This should have a trivial impact on costs given that all newspapers are created within DTP environments in the modern era and rendering the newsprint format to the web should be straightforward, even if as a flash output ala Scribd.
Today served up a delight therefore when I stumbled on PressDisplay.com which serves up newspaper output from 500 newspapers in 70 countries in 37 languages. As well as delivering the content though, you can see thumbnails of the papers similar to a pdf, but also audio of the text. Much of the content requires a subscription to read in full [charged by the underlying titles one presumes], but as a free user you can see the headlines of all the titles and read two articles from every paper daily. Whilst it doesn't have all the titles you may want, it's still an impressive inventory.
Similar to Google news, it also manufactures a "front page" and consolidates similar stories from multiple sources. Impressive site with a clear business model, albeit looking at the titles I wonder if a user might simply navigate to the underlying newspaper website and avoid the charges levied.
In Hollywood catastrophe movies, it's often only the heroes that are privy to the news that the earth is about to explode or that a new ice age is starting tomorrow.
The banking crisis is headline news and whilst the earth isn't going to explode, economic conditions are rapidly worsening. Banks are refusing to lend to each other, even overnight, at the moment and central banks are becoming pivotal players in the markets, almost acting as central counterparty in an effort to dampen the havoc.
Do most people understand the gravity of the situation - I doubt it and for understandable reasons. After all, to most people the banking system somehow just works and provided you can get a mortgage and use your ATM card, what else is there to know? Sadly, the fear in the banking community is going to hit everyone. Here's some examples of how
- Mortgages. These are considered toxic by banks, concerned about failing house prices undermining the collateral values they have. Consequently, banks are withdrawing from making offers. This is going to hit anyone looking for a mortgage or to re-finance their existing one. It will both reduce the spending power and number of buyers in the market, thereby creating even more downward pressure on housess. Additionally, it will result in increased mortgage payments which will erode disposal incomes and make people feel much worse off.
- Jobs. The UK finance sector employs about 20% of workers according the Wall Street Journal. These tend to be better paid jobs. Reduced bonuses and job losses will hit confidence and spending in the economy. Direct and indirect tax revenues will suffer, further limiting the Government's ability to "invest/spend".
- Commodities. Investors are trying to find "safe havens" and despite an anticipated slowdown (or recession) which would normally reduce demand, commodity prices are being driven up by investors. This in turn will push up prices of household goods on top of the recent increases faced by individuals for foodstuff and energy items.
- Trade. Banks unwrite trade via the provision of trade finance to buyers and sellers. When banks are jittery about each other, they will decline to accept "collateral" from each other and thereby hit international trade.
- Funding. Banks are looking to shrink their lending and hoard cash [return of cash rather than return on cash]. As such, similar to mortgage lending, banks are concerned about commercial lending and will be seeking to scale back loans to fund companies. At the same time, the markets are proving unwelcoming to new commercial paper. Consequently, firms will find themselves struggling to borrow to fund existing operations, let alone expansion. This has a direct impact on jobs.
The shock-waves from this crisis will reverberate widely and not be contained within the banking sector. Be warned.
The volatility in the indices in the last 6 months has offered smart traders the opportunity to make some stellar returns. Whilst the trend has been down, there have been a considerable number of trend reversals.
With the Bear Stearns deal done at a 93 per cent discount to Friday’s closing price, you can only surmise that Bear Stearns management felt it had no alternate course of action available to it. Whilst the Fed engineered/forced the deal, one either has to conclude that JP Morgan were terrified in taking the deal on unless it was so cheap as to cover as yet undiscovered horrors, or they were being incredibly opportunistic and decided to play hard ball as the only buyer at the table.
Leaving aside the impact this has on perceptions of JP Morgan's own ability to absorb Bear Stearns [confidence virus - does this move make them stronger or weaker?], it will also exacerbate concerns about the balance sheets of other banks. If Bear Stearns had so little of value on its balance sheet, surely similar banks must be facing the same challenges?
Lehman Brothers announces first-quarter results this week, after warning 5% of its' workforce were to be laid off and arranging a three-year unsecured credit line of $2bn from 40 banks last Friday.
With the announcement that JP Morgan is picking up Bear Stearns in a fire sale for a trivial $236m, aided by $30bn of funding from the Fed, several investors will be nursing some big losses given the $2 dollar share exchange this equates to. Bear Stearns shares had been trading on Friday at $30 dollars after sharp falls during the week, meaning the deal was at a 93 per cent discount to Friday’s closing price and had traded at $169 in Jan 07.
One is Joe Lewis, the British billionaire who, along with Daniel Levy, controls Tottenham Hotspur football club. He invested $860m for a 7 per cent stake in Bear Stearns in September 07. At the time he was reportedly worth $2.5bn.
A second is CITIC Securities. Last October, they and Bear Stearns announced a strategic alliance in a cross-shareholding deal involving investments of at least one billion dollars and plans to forge a banking joint venture in Asia. The deal was being re-negotiated in February following 50% falls in the share price of Bear Stearns. Citic’s stake was expected to be increased to 9.9 per cent of Bear Stearns. The US investment bank’s stake in Citic was expected to eventually be lifted to as much as 7.5 per cent, according to a report from China’s official Xinhua news agency at the time.
I'm still checking whether they are still a shareholder, but at the end of June 07, Putnam Investment Management was listed as Bear's largest institutional holder, with 6pc of Bear's shares.
Without the JP Morgan deal, Bear Stearns was a dead man walking and so shareholders will struggle to argue they could have done better than they have, despite the awful losses they have suffered.
Labels: bear stearns
Twitter - yet to hit the banking/finance world Friday, March 14, 2008
Despite earnest demands that Twitter has broken out of geekdom into the wider world, given the storms surrounding the activities in credit markets this is the amount of attention it grabbed in Twitter since the service launched, reported by Twittervolume i.e. hardly any traffic.
It was a well-worn quote of scorn that Britain was a nation of shopkeepers.
The Wall Street Journal has now corrected the record, “No large country is more dependent on the movement of foreign money through its banks: some $2.4 trillion flowed in and out of the UK in 2006, an amount equivalent to the country’s entire annual economic output”. It goes onto highlight that “the financial sector accounts for more than one-fifth of all UK jobs”. The comparable figure from the US, home to the subprime crisis is just 6%.
So when the UK Chancellor suggests we will avoid a recession despite facing a global banking and credit crisis, I wonder what happy pills he is taking.
The Price of Everything has a great quote
Return of capital trounces return on capital when the financial markets have become essentially unhinged. Preservation of capital – in real terms – becomes the primary objective. In this world, cash alone does not do the job. It needs to be bolstered by high quality credit, ideally of unimpeachable quality – but try finding that in an environment where ‘AAA’ no longer means what it used to.
People are more worried about loss of capital than the returns they can get right now. Even with a price of 1250bp i.e. 12.5% for a one year CDS (credit protection) on Bear Stearns there are no takers.
Seth Godin has posted an excerpt from Dan Kennedy's new book and Dan's thoughts on record label executives looking at changing a light bulb.
First of all, before we change anything, is the light bulb really burned out? Maybe we just need to breathe some life into it; repackage it, maybe the light bulb could do a duet with somebody (Sheryl Crow? Tim McGraw?) in hopes of getting some crossover appeal, maybe it could be in a beer commercial, maybe we could get it out on the road with a brighter light bulb. The other thing to think about is that this summer, Honda is rolling out a 100 Million dollar campaign for a new car aimed at thirty-somethings who consider themselves adventurous/spontaneous but can't really afford something like a luxury S.U.V. and it might be a perfect campaign to tie this light bulb into, at least it would be the perfect demographic, in terms of age.
Also, and this is just an idea: what if we found out what video games are being released in the third quarter and maybe pitched the idea of having our light bulb make an appearance in the video game at some certain level of completion; like, you get to a dark cave, let's say, if it's an adventure game, and if you have enough points you can get the light bulb - and it would be our light bulb, obviously - and then it's easier to see in the cave. The other thing is this: worst-case scenario the light bulb is, in fact, burned out. Is that really the end of the world? I mean, maybe that's actually of more value to us in the long run: Picture this for voice over: "The light bulb is dead. . . but the legend lives on. . . re-released, re-mastered, revealed. . . the light bulb. . . IN STORES NOW." It almost makes more sense than taking the time changing it, plus, if it's dead we can sell it without dealing with it, you know what I mean? No demands from it, no hotels, no road expense, no delays in the project from its end, etc. But, like I said, I'm just thinking off the top of my head here, just brainstorming, and none of this is written in stone. But the first thing we should do is figure out how we want to handle this, because the light bulb's manager is a total nightmare and we're going to have to take a meeting and listen to him sooner or later, and we should know what our plan is before we sit down with him. And let me tell you right now that the first thing out of his mouth is going to be, "This light bulb should be the brightest light bulb in the world, and it could be the brightest light bulb in the world, but you need to support the light bulb, you need to give the light bulb TV ads, you need to be more active in giving the light bulb tour support, we need to have some promotion from your end!" and on and on. And in that meeting, if you're in it, the only answer from our side should be that we're obviously very excited to be working with the light bulb, that we don't think it needs to be changed, that the only problem is people haven't seen how bright the light bulb could be, and our plan is to do everything we can to make this light bulb happen.
I'll send out an email to everyone before the meeting to remind people of our position on this, but the bottom line is we don't have the budgets right now, and basically we need to see something happening with the light bulb before we go throwing good money after bad, but obviously we can't have the light bulb's manager hearing that. I can tell you all that I'm personally very excited to be working with the light bulb, I think it will light up very brightly, and we're not going to stop working the light bulb, in whatever ways budgets will permit, until it does, in fact, light up very brightly. . . the light bulb is a very big priority for us from the top of the company to the bottom. Period. We can talk more about this when I am back from Barbados next week, and I'm going to need everybody's help on this. I know we can do it, but we need everybody working hard.
Confidence underpins business. Whenever you transact with someone, you demonstrate confidence that they can satisfy their end of the deal e.g. Amazon will deliver the book you ordered online and for which you gave your card details; the butcher is selling you fresh meat.
When confidence is lost, you stop doing business with that person/company and usually share that news with others.
In financial markets, loss of confidence about firms solvency is a primary contributor to the current paralysis - will this firm be able to pay me back or settle any trade I do with them? This is exacerbated by the viral nature of confidence. The demise of Carlyle Capital is now causing worries about the solvency of Bear Stearns, understood to be one of its prime brokers. Amplified by rumours and fears, this knock-on effect [systemic loss of confidence] is unconstrained.
In Bear Stearns case, solvency concerns exist because it is believed they will have seized collateral in the form of mortgage backed securities. Since this have become highly illiquid, so they cannot be easily converted to cash and will sit as idle assets. This is precisely why the Fed moved to offer the asset exchange facility, albeit I doubt they will publish which firms used it and in what size given the potential impact on confidence this may have - the use of such a facility may imply desperation and was the reason the run on Northern Rock began.
Elsewhere the move by the Chicago Mercantile Exchange ["CME"] to raise the margin limits for transacting five- and 10-year Treasury futures and currencies will have risk teams and dealers speculating on who will be hit by this drain on cash. Hence, CME will ask its' members for more margin, who in turn will demand higher margin from their customers. If clients can't meet these calls, they will either have to forcibly close positions and/or sell collateral, hoping that this will cover potential losses. Consequently, brokers like MF Global will be closely scrutinised/monitored in case any of their clients appears to be struggling that may have potential knock-on effects.
At the same time, the "generous" credit lines some hedge funds will have enjoyed will have been slashed by their brokers, reducing their trading capacity and requiring them to adjust portfolios i.e. trade, in smaller increments within the lower headroom they have. Combined with counterparty concerns, this has an effect on the depth of the market and the ability to trade in size [reference to the quantity of shares/units]. Trading in size matters, because if you can't trade in large quantities, then it becomes even harder to sell blocks assets at all or at least without triggering sizeable price falls.
Loss of confidence happens far faster than gains occur, so expect recovery to take a long time.
UPDATE: Just hours after writing this post, Bear Stearns shares collapsed by over 50% and it was forced to arranged emergency funding via JP Morgan with the New York Fed. Alan Schwartz, Bear Stearns CEO said in a statement that the bank’s liquidity had ”significantly deteriorated” in the last 24 hours as counterparties and clients rushed to close positions with the bank and withdraw funds. JP Morgan is provide back-to-back finance as an intermediary between the Fed and Bear Stearns, because technically Bear does not have access to the discount window. JP Morgan, notably, stressed it was just facilitating the deal and providing lending on identical terms to those of the Fed - it wouldn't wish to catch the confidence virus by association! It is hard to see a stand-alone future for Bear Stearns given the market-wide fear of trading with the Bank given its' evident insolvency.
This influence of this blog is astounding. Having only written about mark to market accounting yesterday with this piece, Steven Bensinger, AIG’s chief financial officer, has stepped into the limelight with AIG being the first company publicly to air a proposal to move away from “fair value” accounting [mark to market].
Joking aside, under AIG’s proposal, which has been presented to regulators and policymakers, companies and their auditors would estimate the maximum losses they were likely to incur over time and only recognise these in their profits. All other unrealised losses would be recorded on the balance sheet but would not affect profits. In AIG’s case, this method would have reduced the impact of the $11bn writedown on fourth-quarter results to $900m.
Besinger is reported to have said AIG’s proposed change could bolster financial institutions’ confidence and help thaw the current freeze in credit markets.
So the plan is to write down the assets on the balance sheet but tuck the away the adjustment in a balance sheet "revaluation reserve", out of the spotlight. Suddenly the apparent "health" of companies would be transformed and confidence restored to markets.
As I described here the mark to market policy forces companies to recognise losses even when they have no intention of selling assets at the current prices. However, decisions can change just as easily as prices, hence at the balance sheet date there may be no intention to sell but, a month later, a new decision may be reached. Hence the scope for manipulation increases.
Imagine the following scenario:
- Management buy a bond trading at discount of 20% to par. They declare at the outset that the bond is to be held to maturity in 10 years time.
- The bond initially falls in value to a discount of 25%. At the balance sheet date Management re-affirm that [having fallen in value] they have no intention to sell and no P&L adjustment is made
- The bond then sharply rises in value to par, despite having 10 years to mature. Management then decide to sell the bond to realise the cash early and recognise the triumph of their investment skills in the P&L.
Certainly, many private investors take the view that you don't lose money until you sell because your cash balance isn't affected until then and thereby end up kidding themselves that they are no worse off when prices fall. Yet is staggering for the CFO of a major financial institution to believe that sophisticated investors will not re-introduce such accounting adjustments when evaluating the company [I concede that some accounting stunts do appear to fool investors]. However, it wouldn't be the first time that policy makers adopt an idea allowing an artificial and brighter view of reality to be presented.
I think there is a simpler test to apply. Looked at from the viewpoint of AIG insurance [general or life] customers, would they prefer to know that the assets that were covering their policies and which might have to be sold to pay out claims, had dramatically fallen in value and as such may impair AIG's ability to payout?
How the FA Cup creates unnecessary pain for IT managers Thursday, March 13, 2008
Making your IT department endure unnecessary pain would seem like a reasonable idea to many users seeking retribution for their computer experiences.
One recipe for this but which may to rebound on you [and your customers] is to follow these steps:
- create conditions in which your IT system will have a sharp spike in activity
- ensure the activity will far exceed any system capacity you have or would reasonably need at any other time
- avoid any measures which might level the activity load out
- make sure the end users are encouraged to keep bombarding the systems with repeated requests, perhaps by offering them an emotional/valuable reward if they are lucky enough to log in, and telling them to ignore any messages designed to discourage them
This morning, for instance, the sale of West Brom's FA Cup semi final tickets go on sale online to season ticket holders, who will have an exclusive window of 4 days to get their tickets before the eligibility criteria is widened. They are guaranteed to get a ticket and allowance was made for people to buy groups of tickets together. Hence, there should have been less panic other than where you got to sit and at what price. Made no difference - the site was inevitably under strain from the high volume of log-ins being attempted.
Result - the customers will be unhappy and criticise the "lack of preparedness" of the site when it was inevitable it would be hit with high volumes. The club will challenge the supplier about it readiness, and the supplier's management will question its' IT team. They in turn will complain about "lack of resources" and no one ends up happy with the situation.
Whilst the service provider, Tickets.com, will be familiar with this scenario [they also handle Chelsea FC's ticketing], it is immensely costly to carry capacity for such occasional spikes and no one really wants to pay to have this idle capacity.
Is there a better solution I can suggest to mitigate the problem? No solution is perfect but a few options include
- open the "doors" in the early hours of the morning. Naturally some people will not be deterred but it will undoubtedly thin the queue since with a guaranteed ticket more people will be happy to log in when they wake in the morning rather than disturb their sleep
- sell the ticket in tranches by price band, highest price first. Since not everyone will want the highest prices, sell these first and clear that portion of the market with any left over rolled over to include with the next tranche. Tapering of this sort also helps sell the highest price tickets to those willing/able to pay the price eg I might be able to afford £55 but if I can buy at £35 then I might do and thereby deprive someone of a ticket unable to afford £55.
- allow people to submit their interest online and in advance by price band [prioritise which bands you want], and then randomly allocate the tickets within those price bands such that time of submission is not a factor
- worst case, buy on-demand computer processing capacity that scales to handle 24,000+ simultaneous applications
Warren Buffett recently warned his investors that, under mark-to-market rules, the funds he runs may encounter volatile earnings on trades that ultimately are safe, since they intend to hold the investments until maturity rather than trade them.
Presently, anyone capable of making long term investments and ignoring current price volatility can find some attractive opportunities. For instance, the imploding Carlyle Capital's portfolio consisted exclusively of $21.7 billion of triple-AAA mortgage backed securities issued by Fannie Mae and Freddie Mac. They are considered to have the implied guarantee of the U.S. government and pay par at maturity. However, because Carlyle Capital finds itself unable to meet margin calls from lenders, the fund is being liquidated and assets sold, with these assets likely to realise much less than par.
Few banks or funds want to buy these assets in the current market as they can't be easily recycled as collateral, except at punitive haircut rates. Hence prices have slumped and concerns about price volatility is discouraging any buying by those who have to report short-term earnings that include mark-to-market adjustments.
Mark-to-market has the key advantage of not allowing firms to hide worthless assets using historic costs, as was the case in the 1990s, and illustrates the approximately realisable value of the investments.
However, provided you believe that these assets will redeem at par, which is likely thanks to an implicit US Federal Guarantee, then buying these assets at a material discount to par locks in a profit, albeit the cashflow is some years hence. Should you need to realise the cash early, you may take a hit, and likewise you may miss out on other more profitable opportunities by trading short term volatility by putting your cash into a "sit and wait" asset.
Setting aside Keynes' famous morbid but accurate comment that in the long run we're all dead, these are opportune times for anyone presently sitting on cash who can afford to take a long term position.
Locking the Mutual Funds door because of uncertainty Wednesday, March 12, 2008
Back in June, before the credit crunch took hold, I was talking with CIO of one of London's leading Fund of Hedge Fund firms about the issues I saw with hedge fund investors only being able to trade back with the manager. Specifically when you only have one counterparty with whom to trade, that counterparty can control the price, the terms of trade or simply refuse to trade. He dismissed these as theoretical problems, pointing out they had no problems redeeming funds whenever they choose.
Obviously 6 months on and the experience of many investors is very different. Many bond and property funds have suspended redemptions leaving investors unable to sell and exit their investment. Such suspensions have often been attributable to the inability of the fund to quickly realise sufficient cash to meet withdrawal requests either because they cannot find buyers or the price at which they would be forced to sell would be materially damaging to remaining investors in the funds.
However, another scenario exists which is cited by ING in suspending redemptions in two funds yesterday was that they couldn't price the fund in the absence of reliable market prices i.e. when no one is trading, there is no reference price for you to value fund holdings and thereby arrive at a "share/unit" price for the fund. Whilst a "guess" could be made of holding value, a price that was subsequently shown to be materially wrong would either affect the sellers or remaining investors and potentially open the managers to litigation.
A simple example to illustrate this:
- A fund has 1,000 shares in issue and owns one bond which had been valued at £500 plus cash of £500. As such each share is worth £1. There are two investors in the fund each with 500 shares.
- In the absence of trading, the fund cannot find a reliable price to value the bond and so it guesses the price is still £500, being the most recent price it could find.
- One of the investors asks to redeem its shares. The calculated value of the fund is still £1,000 and so the price is therefore calculated at £1 [for simplicity I am ignoring accrued income/charges and other factors affecting value/price]. The exiting investor receives £500 in cash and the fund now only holds a bond.
- The next day a trade in the market determines that the value of the bond has actually fallen to £250. Had this been reflected in the previous day's valuation, the fund would have only been worth £750 and the exiting investor would have received £375 for their shares. The remaining investor complains that they are suffering a loss of £125 that actually should have been borne by the exiting investor and sues the manager.
Leaving aside current market conditions, a similar situation could have historically arisen when a large fund investor wished to redeem. The prices achieved when quickly liquidating a large portfolio of assets to fund such a redemption are likely to be lower than trading small quantities - termed market impact, it is a reflection of few things including supply v demand conditions; the knowledge that there is a large "forced" seller; and the concern that the seller is exiting in a hurry because of something they "know". Consequently, a manager could impose a large redemption penalty [price = assumed fund value less a discount of say 25% to allow for market impact]. However, there may be such uncertainty about the prices that will be achieved that even a 25% discount may be insufficient and so it is considered safer to refuse to redeem. Alternatively, a manager could insist that the redemption be staged over an extended period to allow for an orderly wind down of a fund.
Yesterday's pronouncements by a global consortium of central banks demonstrated how serious the current liquidity drought is.
The US Fed has further relaxed it's market intervention policies and to offered to accept triple-A rated private label mortgage backed securities (MBS) as collateral in exchange for lending primary dealers up to $200bn in Treasury securities for 28 days at a time.
The following example should helps explain how this helps
- Bank "X" funds purchases of securities by a hedge fund and receives mortgage backed securities [MBS] as collateral which the hedge fund owns. Lets assume they receive $112 of MBS for $95 of cash. Bank X will charge interest on the cash loan [the owner of the MBS continues to receive the income from that asset from the MBS issuer]
- Ordinarily Bank X would seek to replenish its cash by either lending or pledging the MBS to other market participants, but usually on improved terms eg $112 of MBS generates $101+ of cash. This can happen because the bank is considered a better credit risk than a hedge fund and so less collateral is demanded. There are other ways the same assets can raise funds but we'll leave that for now. This "excess" cash can now be used by the bank in its' lending operations and generate extra income [difference between the rate it will pay to the lender on $101 and the rate it will charge to others for that money].
- However, because banks have lost confidence in each other and iner the MBS assets, these assets can't be easily recycled and hence Bank X struggles to raise additional cash to recycle.
- Under the new arrangements, Bank X can now swap $112 of MBS with the Fed and receive say $105 of US Treasuries [the haircut being applied by the Fed isn't clear]. These $105 of US Treasuries can now be offered by Bank X to others as collateral and cash raised to recycle in the system eg $102.
Notably, this move doesn't transfer ownership of the credit risk of MBS, which an outright purchase of the MBS by the Fed would do. This remains with the hedge fund in the example above. As I discussed here, falls in the price of MBS assets related to a loss of confidence that the MBS issuer can repay its' loans or make repayments as a result of losses of the underlying mortgages will hit the hedge fund and begin a vicious spiral. It is for this reason that commentators are wondering whether the Fed might ultimately need to actually begin buying the MBS, at which point the Fed [read US Govt] would bear the credit risk and shift lending from the private to public sector.
Liquidity pool for Auction Rate Securities is running dry Tuesday, March 11, 2008
For many years, Auction Rate Securities ("ARS") have been a competitor of money funds by virtue of their apparent liquidity and higher rates. ARS are municipal bonds, corporate bonds, and preferred stocks whose rates, or dividend yields, reset through "Dutch auctions, which typically happen every 7, 28, or 30 days.
Investors enter a blind competitive bid process via a broker to set the rate on the securities, with the lowest rate to clear the market applying for the next period. Investors can elect to
- hold existing positions regardless of the rate determined
- sell them regardless of the rate
- re-bid on existing holdings, which will be automatically sold if they bid too high
- buy holdings via the auction
However, you can only liquidate your existing holdings if there are buyers in the auctions. When they aren't, as is currently the case, then you are forced to hold the assets. Of course, if you don't need the cash, the good news is that when the market fails to clear and determine a rate, the issuer of the ARS is normally required to pay a punitive rate specified at issue [this may be an absolute rate of say 20% or a reference rate e.g. LIBOR + 800bp]. Naturally not good news for the issuer though who can find itself hit with a huge hike in interest costs. To illustrate The Port Authority of New York and New Jersey, ended up paying 20% rather than 4% on their loan – costing them an extra $300,000 a week.
Depending upon their view of conditions and the terms of issue, issuer could redeem the bonds and re-finance them, but it's not obvious where such financing will come from in some cases. Bloomberg reports that New York plans to sell $448 million to refinance debt, including auction-rate securities. The Port Authority of New York and New Jersey is refinancing $700 million of auction-rate debt after interest costs jumped as high as 20 percent. The California Statewide Communities Development Authority may offer as much as $10 billion of notes.
Banks with stretched balance sheets are unwilling to act as buyer of last resort in these auctions, nor are they legally obligated to make a market in ARS.
From recollection, US money market funds cannot own the bonds. Thus, the biggest investors in auction-rate securities are individuals and corporations, some of whom are now insisting they were mis-sold the investment as "cash equivalents" by brokers - queue more litigation.
One group hard hit are VC-backed companies, which invested the cash they got from VCs in these securities, pending use. For me, this demonstrates dumbness on the part of the VCs affected as they evidently took little interest in how cash was being used - "the good news is the cash burn rate is low, but did we mention the mattress we used is burning?". Is it wise to leave cash investment to inexperienced firms? The result is that these early stage companies now find themselves strapped for cash.
SEC's Division of Corporation Finance has had to remind US corporations who made considerable use of these instruments to properly classify them. "Auction rate securities are not cash or cash equivalents -- they are investments," emphasising that impairments of the securities should make auditors give them a second look.
Continuing my recent theme on banks demanding extra margin, these news clips from Bloomberg illustrate the double whammy being felt by hedge funds
- On Feb. 24, London-based Peloton Partners LLP gave up a ``night and day'' effort to stave off demands from banks, including Goldman Sachs Group Inc. and UBS AG, for as much as 25 percent collateral for securities that once required 10 percent, according to investors in the fund. Peloton, run by former Goldman partners Ron Beller and Geoff Grant, liquidated the $1.8 billion ABS Fund, its largest.
- Banks usually limit their risk on repos by lending less than the value of the securities used as collateral. Tequesta was able to borrow $95 on $100 worth of AAA rated jumbo prime mortgages in early 2007, meaning the bank took a $5, or 5 percent so-called haircut. By last month, the amount required had risen to as much as 30 percent
- For AAA rated residential mortgage backed securities, banks have raised haircuts 10-fold in the past year to 20 percent, according to estimates from Citigroup credit analyst Hans Peter Lorenzen in London.
- On AAA asset-backed securities, banks are demanding a 15 percent haircut, up from 3 percent last summer. Corporate bond haircuts have gone to 10 percent from 5 percent, bankers said.
- At least one bank has raised Treasury haircuts, which range from 0.25 percent to 3 percent, depending on the length of the loan and the creditworthiness of the borrower, said bankers, who declined to be identified. They said they wouldn't be surprised if the practice becomes more widespread, not because they expect the U.S. government to default, but rather because there have been bigger price swings in the Treasury market, which affects value.
- Christopher Cruden, CEO of Insch Capital Management said. "Prime brokers are there to do business, not be your friend."
As Gordon Gekko said in the film Wall Street "If you want a friend, get a dog".
As shown above, collateral haircuts vary by asset type which is reflective of several factors including price volatility, asset liquidity and potential of asset default. So to illustrate the double whammy, if you have borrowed $95 dollars to buy a bond for $100, [extra being $5 of fund money] the deemed collateral haircut is 5%. If the bond falls in value to $95, you would either have to repay part of the loan or add/substitute collateral.
However, because of the sharp falls in value of the bond which have also hit the fund valuation, the banks now increases the collateral haircut on such bonds to 15%. If similar bonds were used, it would now require bonds valued at $112 to cover a $95 loan. Alternatively the fund could reduce it's borrowings to $81 by repaying part of the loan. In either case, it has to fund the difference from its' own resources but such funds rarely have idle balances on which to draw. So the banks sell the collateral and thus prompt the fund's demise.
You buy a house for $100k, with a 95% mortgage. When the house falls in value the bank asks you to either repay some of the mortgage or provide it with more security e.g. parental guarantee. When you can do neither, despite you being up to date with interest, they decide to avoid possible future losses and demand immediate repayment. With the deterioration in the housing market you find yourself unable to remortgage on the same terms and so are forced to sell your home.
Peloton Partners is moving out of its plush London Soho offices, and is looking for tenants quickly to stem further losses. The firm’s three lead partners lost a total of $117 million they had invested in the fallen Peloton ABS Fund, which collapsed last week after failing to meet margin calls.
Labels: Hedge Funds
With the turbulence in the markets and credit markets in particular, money funds have found themselves awash with cash from investors seeking a home for their cash during the storm.
Money funds are mutual funds that normally carry a triple AAA rating, whose portfolios are made up of short-term financial assets with high liquidity (Treasury Bills, Commercial Paper etc). InvestorWords quotes
The main goal is the preservation of principal, accompanied by modest dividends. The fund's Net Asset Value remains a constant value ($1/£1 etc) per share to simplify accounting, but the interest rate does fluctuate. Money market funds are very liquid investments, and therefore are often used by financial institutions to store money that is not currently invested. Although money market mutual funds are among the safest types of mutual funds, it still is possible for money market funds to fail, but it is unlikely. In fact, the biggest risk involved in investing in money market funds is the risk that inflation will outpace the funds' returns, thereby eroding the purchasing power of the investor's money.
The emphasis is mine, since this point has been under stress for some time.
Sold to both retail and corporate investors across a range of currencies, the marketing of such funds has traditionally focussed upon five things namely:
- their rating, usually AAA
- their liquidity, normally with daily access
- ease of use
- low risk, diversified holdings versus concentration of risk by holding a bank deposit
- wholesale market rates offered, which are normally higher than rates offered to bank customers
Obviously investor confidence is of paramount importance especially when competing against bank deposits and loss of capital value would come as a major shock to many investors. Mindful of this, a number of funds have been bailed out by their managers to maintain the capital protection illusion. Back in December, the FT reported that more than 10 North American banks and fund managers have collectively injected $3bn into their money market and cash funds since October to stem losses. It added that not all bail-outs have been made public but more were believed to be being drawn up and that the extent of losses is not yet known.
It takes only a tiny loss to push a fund's value below 99.5% and given that such funds have to mark their asset to market, the continued downward pressure on assets prices of even US Federal backed paper will challenge the pretence. When this happens, some investors may panic causing a "run" on such funds.
In common with banks, such funds also tend to borrow short-term and buy long-term paper whilst maintaining sufficient liquidity to meet investor redemptions. However, in the event of higher than foreseen redemptions, the lack of liquidity in the markets could result in funds either having realise cash by selling assets cheap, thereby incurring losses or suspend redemptions. This latter outcome is like a bank shutting its' doors but it has happened with several money fund managers.
You may think banks would be delighted to see their "competitors" struggle. Not so, since many of them are the managers of such funds having seen the benefits of a large chunk of existing business moving off-balance [removing any capital requirement] whilst generating broadly the same returns.
So the challenge is this - as fund balances swell from inflows, managers have to find more investment outlets. In doing so, they have to be more cautious than most given the imperative of preserving capital and having access to liquidity. Yet finding large assets pools matching this profile in the current climate will be immensely challenging. As a consequence, rates offered may have to be tempered, and whilst high inflow levels might allow for that, managers will still feel the need to competitively price their offering.
Mistakes will be inevitably made in these stormy waters. So will the sea defences hold or might urgent and rapid bailing out of these "safe harbours" be necessary or will the scenes around the South of England yesterday be repeated and the harbour walls be breached? Right now, there are many senior executives probably praying for survival.
UPDATE: Financial News has the following report
Legg Mason has provided support to one of its cash funds with a holding in Cheyne Finance to prevent its investment in the structured investment vehicle from dragging the fund down.
Officials at Legg Mason declined to reveal the size of the fund's holding in Cheyne Finance. In December, Deloitte & Touche—acting as receivers for the vehicle—revealed it had agreed to sell the $7bn portfolio to a new vehicle managed by investment bank Goldman Sachs.
Legg Mason has provided $1.57bn of support to a variety of its money funds, according to analysts at investment bank Keefe, Bruyette & Woods, including posting $440m of cash collateral and the direct purchase of $181m of securities.
In November last year, the firm signed letters of credit worth $238m to keep the high credit ratings on two of its money market funds that had a total exposure of $670m to asset-backed commercial paper issued by structured investment vehicles. In October, it invested $100m in another liquidity fund managed by a subsidiary "in order to provide additional liquidity support to the fund."
Exposure to structured investment vehicles has affected a range of money market funds, forcing some asset managers to spend millions of dollars support them in order to avoid the stigma of "breaking the buck"—where an investor receives less than a dollar for each dollar they originally invested in the fund.
Asset managers Northern Trust, Bank of America, Wachovia, Credit Suisse Asset Management, Janus Capital and Morgan Stanley Investment Management have all faced charges or arranged lines of credit related to keeping their money market funds' value at par.
We're going to Wembley, my knees have gone all trembley! Monday, March 10, 2008
Sorry, but I just can't help but share my elation that West Brom are going to Wembley to play in an FA Cup Semi-Final. With the competition wide open, following the astonishing exit of Manchester United and Chelsea in the last round, every team stands a reasonable chance of lifting the trophy.
West Brom last won the FA Cup 40 years ago this year. Only one side has ever won promotion and the FA Cup in the same season - and that was Albion in 1931.
Having been to Wembley last year for the playoff final that West Brom lost to Derby, it is amazing to be going back so soon.
Slight panic after winning last night's game was that my youngest daughter's birthday is scheduled for the same day as the semi - fortunately she is a big West Brom fan too, so the party is getting moved! After all you have a birthday every year, but we haven't been in the semis since 1982.
C'mon you baggies.
Rectel is a non-subscription outgoing call recording service that can be used by anyone at any time. Just pick up the phone and dial 0871 900 9000 and you will be given a PIN and asked to enter the phone number you want to call. Rectel then records your conversation ready for you to download on your PC. Calls to their number are charged at 10ppm inc VAT and this is how the service is funded.
Whilst their website suggests it is not illegal in the UK to record a phone conversation for your own use and you don't have to tell the other party that you are recording the call, I'm not sure what restrictions apply and to me it obviously makes sense to tell the other person so that you are recording the call so that you are not restricted in how you can use it.
This service has widespread application and whilst skype users etc could record calls easily enough for free, for the mass market dealing with large corporate call centres, this could prove immensely useful assuming the cost is not too prohibitive in the call centre queuing system hell.
I am indebted to Hawkeye for pointing this service out to me.
WriteToMyBlog Friday, March 07, 2008
I have chums who write several blogs, amongst which would be say a family related one, a subject specific blog and a work focussed one. However, running these can be incredibly cumbersome if you have to log in and out different services/accounts. Moreover, if one post is to be used on several of the blog eg intersection of subject and work blog, then it is a case of cut and paste.
However, a much better approach is to use a service like WriteToMyBlog which was created by Mark Ascroft. It allows a single post to be submitted to one or more blogs simultaneously. Very feature rich, it has great wysiwyg post writing/editing facilities that are much better than many mainstream services eg insert and manage tables. You can also handcraft your post in html if you wish.
The service is free to use and doesn't insist on any sign-up, albeit it's convenient for regular users to do so as it will save the details of all of your blog account, thereby having to enter them each time.
I got to know Mark last year as we are both cricket fans and chatted via skype about the England v Australia games during the matches - he is an Australian living in Australia. He created the service in his spare time and did an excellent job in my view.
Even if you only have one blog you maintain, give it a try and let me know what you think.