Byrne's Eye View

Carl Icahn is blogging. Finally, Mark Cuban is no longer the richest blogger.

Note that Equity Private is even more excited than I am.

Goldman and Deloitte & Touche have a unique solution to the Cheyne Capital liquidation conundrum: they're turning the notorious failed SIV into... another SIV.

Goldman Sachs Group Inc. and receivers Deloitte & Touche LLP agreed to auction some of the assets of a $7 billion investment vehicle set up by hedge fund Cheyne Capital Management (UK) LLP, in a model that may be used to wind down similar credit funds.

Deloitte will sell a portion of the assets of SIV Portfolio Plc, previously known as Cheyne Finance Plc, said Neville Kahn, a receiver at Deloitte in London. The auction will set the price at which any unsold assets would be transferred to a new company set up by Goldman. The new company will then issue notes backed by the assets, Kahn said.

It's amazing how ingrained these instincts are. Even after the last half of 2007 and the first half of 2008, these guys can't look twice at a distressed asset without wanting to securitize it. Even if it's already securitized, and only distressed because of that.

Rest assured, they're on it: they passed a $15 billion subsidy for investing in bubbles. It's good to know that the people who are still earning money will be fined for their dastardly prudence along the way.

Paul Graham says you weren't meant to have a boss. A few days later, the founders of another startup he backed sell out to new publicly-traded bosses.

A week or so later, Steven Levy offers his unique insights:

Auctomatic's story was particularly compelling. Oxford grads Kulveer and Harjeet had pitched Y Combinator as a sort of a Craigslist for college kids, expanding a Web site they'd begun in England. They called the company Boso ("Buy Online Sell Online"), unaware of the clownish connotations that word would have in the States.

Good point, Mr. Levy! Nobody could ever build a valuable online brand with a company name that implied stupidity or ignorance -- what kind of yahoo would think otherwise?

The New York Times reports that companies have more cash on hand than they have since the 60's and wonders what happened to all that debt. Two observations:

In the table they included with the article, it's astounding to see how overblown everyone's fear of leverage was in the 1980's. Leverage declined throughout! And apparently 1998 was a great year for getting rid of cash, and piling on debt -- it's the only year that sticks out as an aberration rather than part of a trend.

On the other hand, one reason companies are less leveraged could be that the leveragable ones are going private faster. One of the advantages of public equities is that you don't need fixed cashflow because you haven't promised investors fixed income. Perhaps the companies that can consistently report EBIDTA minus capex of within 5% of where it was last quarter are all owned by Blackstone and Cerberus. The best evidence for this would be to look at volatility of EBIDTA (not earnings -- too easy to fudge) compared to cash on hand for the average public company. We'd probably see wilder swings even though the economy is not so swingin'.

Goldman Sachs, along with J. P. Morgan, Deutsche Bank, Citadel Investment Group, and others, is funding a shadowy, nameless consortium that will not even disclose who, if anyone, is running it. I guess in a world where subprimes aren't an easy short and LBOs can't raise $20 billion overnight, they have to be sinister on a smaller budget.

After a couple days of persistently collapsing stock prices, MF Global (remember them? They touted the wheat market on Tuesday and lost $141 million in the wheat market on Wedensday) has bounced back, up about 13% so far this morning.

And here's why: every conceivable insider has been buying shares in the mid teens. Their recent filings list shows no fewer than sixteen sets of transactions -- their CEO alone bought about $800,000 worth in a single day. Good news: the executives believe in the company. Bad news: 1) how did they have that much extra money lying around, and 2) a few days after the company lost more than 10% of its equity due to a single trader, did their CEO really have nothing better to do than make 30 separate trades in his company's stock?

I don't have an MBA (or a BA, for that matter), but it still strikes me as weird that United Technologies is buying Diebold, and for 66% above market value at that. Who wants to own a company that millions of people consider the main actor in a coup?

I would expect the opposite trend to be true: don't companies spin off divisions with bad reputations, and try to buy out tiny companies that make shareholders smile? BP did it with their 'greenwashing' campaign, in which they spent more money rebranding themselves as a green power company than they did investing in green power assets.

I'm just left asking what the United Technologies board was thinking -- my best guess:

United Technologies Corp., the maker of Otis elevators and Chubb security systems, said today it offered to buy Diebold Inc. for $2.63 billion, taking its bid public after the automated-teller machine maker's board declined to discuss a combination for two years.

This probably started out as someone's good idea five years ago, and it's since acquired consultants and bankers and committees and research reports and enough momentum to be unstoppable, however foolish it may actually be.

The Berkshire-Hathaway Annual Chairman's Letter is out. Highlights include:

• Buffett tying his five-decade record for due diligence: he bought Coca-Cola fifty years after buying six-packs of Coke and selling them individually, and now he's purchased Marmon fifty years after a bizarre tax-arbitrage deal that involved exchanging stock certificates for cocoa bean futures.


• More derivatives trading: Buffett sold 15-20 year puts on stock indices, and has made money betting on the Brazilian Real over the US Dollar.


• All successors are selected. I wonder what the CEO market would say about that.

Yesterday's WSJ had a brief article on the Minneapolis Grain Exchange, which is going pretty crazy -- wheat prices are up about 350%, volume (in contracts traded) is up almost 50%, and prices for seats on the exchange are soaring. Just in case the stock market hadn't noticed yet, I looked up every brokerage I could think of to see if any had a major presence in Minneapolis, and might end up owning a chunk of the exchange if it went public or was sold to CME.

The closest I could find was MF Global, whose head of commodity research was heavily quoted in the article. MF, unfortunately, was too big a company for the wheat thing to be anything but a blip. Or so I thought. This has to be the best market-timing in history: on Wednesday morning, the Journal publishes an article about how great the wheat market is doing. It cites exactly one public company as a major player in the market. That very morning, someone at the company loses $141.5 million trading wheat.

A fund partially owned by Merrill Lynch now owns a large part of Merrill Lynch. So let's say Merrill reports a good quarter, so the fund's fees go up, so Merrill's next quarter improves, so... I still don't see how anyone can avoid this feedback loop once the level of cross-ownership is high enough.

A while ago, I suggested that banks employ an 'ombudstrader', who would make the financial decisions the bank suggested, and whose own financial circumstances would illustrate just how wise those calls were. This isn't that, but it's a start: Bank of America's chief investment strategist has become one of their traders. I can almost believe that this isn't a cynical ploy to gain investors' trust, because most of the people who listen to sell-side analysts and 'strategists' are probably not the ones who track hirings and firings at investment banks.

In this otherwise decent essay on the end of the glossy annual report (blame Sarbox), I find:

In general, Stenitzer thinks annual reports should always contain financial highlights with percentage changes, an 11-year financial history because it allows investors to cal­culate a 10-year compound annual growth rate, some breakouts for the segments within divisions of the company, and forward-looking informa­tion that really gives a sense of what management thinks. Yet in the Sarbanes-Oxley era, such candor is increasingly rare.

Eleven years of history are crucial, because a ten-year earnings-growth history is the best. Sound familiar?

Nigel Tufnel: The numbers all go to eleven. Look, right across the board, eleven, eleven, eleven and...

Marty DiBergi: Oh, I see. And most amps go up to ten?

Nigel Tufnel: Exactly.

Marty DiBergi: Does that mean it's louder? Is it any louder?

Nigel Tufnel: Well, it's one louder, isn't it? It's not ten. You see, most blokes, you know, will be playing at ten. You're on ten here, all the way up, all the way up, all the way up, you're on ten on your guitar. Where can you go from there? Where?

Marty DiBergi: I don't know.

Nigel Tufnel: Nowhere. Exactly. What we do is, if we need that extra push over the cliff, you know what we do?

Marty DiBergi: Put it up to eleven.

Nigel Tufnel: Eleven. Exactly. One louder.

Marty DiBergi: Why don't you just make ten louder and make ten be the top number and make that a little louder?

Nigel Tufnel: [pause] These go to eleven.

Michael Lewis tries to analyze Goldman's giant subprime bet (helpfully, he ignores other companies that made similar bets, so he can write a story about how Goldman was unique rather than uncommon). Really, I don't see what's special about this situation, other than the scale: if everyone agreed that there was a 95% probability that mortgages would pay off, we'd either see 95% of traders make a little money or 5% make a lot of money.

But what's crazy about Lewis is not that he has to be dishonest to tell the story he has in mind: it's that his story is so dull. According to Lewis, the problem with Goldman Sachs is that a company with 30,000 people, most hired for their smarts, don't all agree all the time.

Alan Greenspan has joined Paulson & Co., which made an insane amount of money recently betting on a collapse in mortgage prices. He probably won't end up with the same net worth as Mr. Paulson, though.

Zimbabwe's inflation rate is still pretty high. I wonder if their economic plan is to reach a Keynesian Singularity: full employment because it takes so much labor to keep the printing presses running fast enough.

The WSJ reports possibly imaginary rumors that Warren Buffett is buying or reinsuring bond insurers. I have no idea if it's true or not -- if there were a prediction market, I'd be selling this at 10%, buying at 1%, and watching with interest in between.

But what's annoying about this is that the article's argument is, roughly, 1) Warren Buffett buys things nobody else is willing to buy, and 2) nobody else is willing to buy bond insurers. I can think of a few situations over the last few years when nobody -- including Buffett -- was buying. Airlines, Internet Incubators, Enron, Worldcom, Tyco, steel, homebuilders, subprime lenders, etc. And in none of those situations did Buffett end up buying so much as a single share.

This kind of article is a cheap shot -- or a free call. Nobody is going to remember someone for being the 99th person to say "Buffett is buying!" and be wrong, but almost any financial journalist would love to be the one in a hundred who says that and happens to be right.

Bloomberg says SIVs may be over, forever. That because asset-backed paper was backed by bad assets this year, that kind of capital structure will never, ever be used again.

I'm guessing this is what people said about high-yield bonds financing LBOs in about 1991.

When a supermodel starts playing the currencies market specifically to bet against the US dollar, it sounds to me like the crash has gone too far.

A while ago, I wrote about the dangers of 'recursive' markets: imagine a betting market that quantifies someone's trustworthiness. Now imagine a dispute that gets resolved by comparing someone's trustworthiness numbers. And now imagine how the results of that dispute affect the market. Suddenly, having a low trust-metric lowers one's trust metric, and vice-versa, to the point that noisy markets or a large bid-ask spread can turn someone into a presumed liar just because past market moves correlate with future changes in market fundamentals.

It happened. There's a rumor that a major presidential candidate has done something sexually scandalous (Dennis Mangan wonders what it could possibly be). James Miller suggests that it's Obama, because his estimated odds of winning are lower than one would expect. In other words, a partial reputation futures market is being used to determine a candidate's actual reputation: Obama must be doing poorly in real life because he's doing poorly in the market -- thus he should do worse (and thus, and thus, etc.).

Prediction markets are strange: they make market inefficiencies more efficient.

This Washington Post article on illegal timber smuggling in China is notable for what it doesn't say: that since nobody owns the trees that are being cut down, everyone has an incentive to cut them down as quickly as possible.

For a more reasonable perspective, consider Doctor Suess.

I panicked this morning when I saw an earlier version of this article with the headline "Mexico City Evicts 15,000 Traders." Fortunately, these are the traders selling snacks and trinkets, not stocks and bonds. But this part of the article confused me:

The president of one street vendors' union, Alejandra Barrios, criticised the government, saying: "They are not thinking about the fact that these people don't have jobs. What do they think these people will do?"

First of all, worst union representative ever: "You fail to consider the fact that everyone I represent is, basically, a panhandler who produces litter." Second: a union? For street peddlers? Aren't these guys all self-employed? What kind of negotiating power do they have? And for that matter, why would they negotiate wages when they could work on commission? This is probably the purest sales job in the world -- offer something that's almost certainly worthless to a bunch of harried American tourists*, and see how much you can wheedle them into paying for it. What does a union offer these guys?

Terracycle is allegedly the first startup with a negative ecological footprint. I seriously doubt it. I'm sure Craigslist has a lower footprint -- think of all the trees that haven't been chopped down, because it's so cheap to put an ad online instead.

But even Craigslist loses to Ford. Pre-Ford, most roads were knee-deep in horse effluvia. Now the worst we worry about is sever asthma and maybe apocalyptic global warming (which might have happened from horse methane, anyway).

Terracycle is impressive, but they're only the first company to achieve what they have if you use some really bad accounting.

There's now an index tracking African stocks. The most interesting part of this article is that Africa is increasing exports to China.

I can't find any member list for the index, though this offers an exciting -- and almost certainly fictional -- datum:

The continent has consistently had equity markets that have delivered significant dollar returns. These are typically in excess of 100% per annum, as highlighted in our recent report, Africa 1.01 - Unlocking Investment Potential. This stellar performance has, to a large extent, passed unnoticed. But recent, high-profile IPO's, especially in Nigeria have led to a significant increase in investor appetite.

Q: Did you know there was a Boston Stock Exchange?

A: There is. But not for long.

I don't get it. When they were private, stock exchanges competed by buying better technology and offering more services. Now that they're public, they just buy one another out. Is there any other business in which every single member is in play?

Another private equity company forming a vehicle to buy distressed debt. I like how much of the bubble-bust lifecycle they're part of now. It's sustainable, Green investing, in a very meta sense.

Next bubble, they should buy MSNBC on the way up, to keep on hyping -- and then start a joint venture with Sarbanes, Oxley, and Grant's Interest Rate Observer to frown those overpriced deals back down.

The NYT wrings its poor little hands over greedy colleges and ivory tower ivy leaguers. But this article leaves some unanswered questions. The thesis is that colleges don't operate in the interests of students -- who are one interest group, in addition to teachers/researchers and alumni. But the weird part is the implication that schools are somehow treating students as revenue sources instead of receptive young minds.

It takes a very receptive mind, indeed, to swallow without question the idea that a nonprofit institution is going to cheat people out of money -- in order to save that money for research and scholarships.

Are you going to the Lipper HedgeWorld Conference? Informed sources tell me today is my last chance to register.

Fidelity is launching a new hedge fund, which makes no sense. Hedge funds have been hot for nearly two decades now, so it's strange that one of the largest asset managers in the world would wait to jump in until they were a legitimate, $1 trillion+ industry.[1]

My theory about the timing: the Johnsons are one of a few families (I think there are two or three others) who built billion-dollar fortunes in mutual funds. And every Forbes 400 list shows more hedge fund managers creeping up in the rankings. So last week, when the new list came out, the snapped: Soros was fine, because he's given up on really running his fund, and most other fund managers are in the bottom 200 or so names on the list - -but at this rate, Steve Cohen is going to pass the Johnsons in net worth in just a few years, and, Boston Brahmins that they are, I'm sure they're appalled at the idea that the person who made the most money being a responsible steward over other people's assets is mostly in the news for paying $8 million for a rotting shark.

The days of the gunslinging hedge funds are largely gone,

Barry H. Colvin, chief operating officer of Tremont Advisers Inc., 2002.

Thanks to BusinessWeek's wonderful archives, the days of mining old articles for hilariously bad predictions will never end.

Barclays has launched a synthetic currency with an interest rate of zero. Interestingly, "Barclays Capital plans for the EBU to be used as a funding currency, much like the low-yielding yen and Swiss franc. However, it says the currency was not designed for speculative or short-term trading. The composition of the EBU will be adjusted each month by an independent board." How soon until someone breaks it?

Apparently they can report blowout earnings even though their star trader has left.

My long-term thesis is that Goldman can't compete for compensation with hedge funds, so they're doomed to second-rate talent. I still think it's true. Who will get a bigger bonus this year -- the guy at Goldman who decided to short mortgages, or the guy at Paulson who did the same?

I'm once again glad I read The Panic of 1907, because I'm not surprised that the bank run starts after the bailout.

Still confused. But not surprised.

Apple's $100 iPhone rebate is good for anything in the store -- except music. I can't think of any decent reason for this, but two slimy excuses come to mind: music is a low-margin product they use to sell iPods, and if they buy something in person at the Apple Store, they're likely to buy much more.

One of the best performing funds of the year is Paulson & Co.'s family of merger arbitrage and credit derivative fund. They're up triple digits thanks to bets against subprimes -- which doesn't help much, because plenty of equally smart folks are down by vast amounts, too. But this interview from a few years ago is worth reading. Especially:

Ninety percent of the times, those temporary fears are overblown, the issue is favorably resolved, the spread comes back in, and the deal closes. Our reaction would depend on our evaluation of the risk, the size of our position, and the potential downside. Generally, while it is important to reduce exposure or close out the deal if the risk is serious, it is equally important not to panic.

I wonder how much new money he's getting from former Tykhe and Pirate Capital investors.

A few days after solemnly stashing the bailout bucket, the Governor of the Bank of England, "Swervin'" Mervyn King, has bailed out a highly leveraged home lender.

Credibility is an asset. He's liquidating it to prop up a subprime lender. How did this guy end up running a major financial institution?

Oh well. I probably should have known; the broker who arranged the deal worked for Bear.

Pimco is starting a new distressed debt fund ($), which will raise $2 billion. Which brings the total money in distressed debt to $25 billion -- which is a surprise, given that there's only $24 billion of distressed debt out there. Either everyone is holding lots of cash (I've heard that they're half in cash, on average -- distressed debt investing is all about the ambush), they're lying, or someone's going to lose a lot of money in this market.

Hellasious has more on CDS pricing, equity valuation, and where all our volatility went. Read it.

China is embracing private equity. In case you forgot that they're a communist country at heart, the right to buy companies with debt rather than equity is 1) something you have to ask for, and 2) something only two companies can have. This is actually reasonable news, because private equity types have to at least be aware of boring things like earnings and cash flow -- it's one thing to pay 100X earnings for a steel company, and hope to flip it in a few days for more; it's another thing entirely when that entails paying lawyers, bankers, bondholders, and bribes.

So it's bullish for China, but probably only for the Chinese stocks that really need it -- the ones that have been ignored in favor of entertaining, state-backed banks, whose balance sheets have all the obscurantism and reliability of The Da Vinci Code.

Japan's Prime Minister resigned -- sending "nerd" stocks up as much as 71% on speculation that the new prime minister will like comic books. Oddly, this hasn't been reflected in American stocks: Topps and 4Kids aren't up. Topps is involved in a takeover fight, which might explain it -- but 4Kids would seem like an ideal candidate. Maybe there's an international arbitrage opportunity here.

There's a great thread on Nuclear Phynance about "Dumb things heard on the trading floor." It's evolved into "Clever things said by people who've been to the trading floor." Example:

her: "So, that was quite funny, but that's not what you really do for a living. I want to know what you really do."

moi: "Sigh... very well... I work in the exciting world of finance."

her: (obviously disappointed): "Oh... that sounds really boring."

moi: "On the contrary... it's highly entertaining, most of the time."

her: "How so?"

moi: "Imagine a circus. Except that in this circus, all the clowns are in the audience. And they are not laughing."

her: "Haha... I suppose that would be quite funny."

moi: "It is, especially if you consider that the menagerie is filled with a bunch of wolves who are laughing at the audience."

her: "Cute... Oh I bet you are one of those laughing wolves, aren't you?"

moi: "No. I'm the guy that runs around the tent and pulls out all the stakes when everybody is inside."

Etc. This is quant humor. Almost as good as a viola joke.

And from another thread:

Most casino games have payoff functions that are more complicated than a typical derivative contract. The underlying is a stochastic process, and can be described by a set of random variables in both cases. And as a quant, you are basically either the girl serving free drinks or the guy on stage getting mauled by a tiger.

Via Mangan's: a major factor in predicting states' bond ratings is their immigrants per capita.

This is somewhat intuitive, since immigrants tend to be poorer than the population they join (which is why they immigrate, naturally) -- but I'd be interested in the longer-term correlation between, say, bond ratings and average number of generations spent in the country. It's pretty easy to argue that poor immigrants are a liability in the short term, but I suspect that we'll have a fiscal policy (and immigration policy) long after the current round of bonds expires. I'd hate to see our politicians face a maturity-mismatch, too.

Via Dealbreaker, I found this fascinating article on how financial blogs aren't credible. Unfortunately, their site didn't seem to have a comments section, so I can't post on that -- apparently they're too credible to need it. They also don't have an easy way to see who's linking to the site, so I had to go to Technorati to check (they are, per Technorati, linked about half as often as Dealbreaker).

The real meat of the argument is this:

Drew McCoy, chairman of the Advisor Council of the Washington-based Wealth Advisor Institute, has similar concerns. “While I don’t have any clients who admit to using blogs, my concern is that it has become the new cocktail party when it comes to investing conversation,” he said.

“There is great danger in that, because the ability to have wide-scale dissemination of that sort of blogging can open itself up to pump-and-dump schemes,” Mr. McCoy said.

So, blogs are dangerous because people might start reading them, and other people might start abusing them. How did Investment News get a whole article out of something worth maybe a one-sentence blurb and a link? It's incredible.

"We have never been busier,'' said Hasan Mustafa, head of emerging-market loan syndication in London at ABN Amro, the biggest arranger of Russian corporate loans, according to Bloomberg data. "In a market that's heading south, it's the safest kind of paper you can hold.''

The "safest kind of paper you can hold" is Russian corporate debt. This is in the same country that rewrote the tax code steal Yukos back from Khodorkovsky. It's pretty irresponsible to assume that much has changed since.

This tragic tale of networks begetting networks and entrepreneurs moving west for capital, has a weird moral:

After a second meeting at the Charles, and a visit to Battery's offices above the reservoir in Waltham, Zuckerberg said he thought Facebook was worth about $15 million, and was willing to accept an investment ranging from $1 million to $3 million, which would have given Battery a substantial chunk of the start-up.

... [Zuckerberg & Co. move to California] ...

Through a chance connection, Zuckerberg was introduced to Peter Thiel, a cofounder of the online payment system PayPal, who was running a hedge fund called Clarium Capital. He met with Thiel in August, at Thiel's office in downtown San Francisco.

Thiel had also been an investor in Friendster, and he knew that the conventional wisdom was that all the social networking sites "were just fads that would come and go," he says. Thiel listened to Zuckerberg's pitch in the morning, asked him to go out and grab lunch, and by the time Zuckerberg returned in the afternoon, "we said we'd invest, and we agreed to the basic valuation parameters," Thiel says.

"It seemed like a good company," he said, adding, "Most of the time, we're not that fast."

Thiel put in $500,000 of his own money in return for 10 percent of the company.

Hm. Did Facebook lose 70% of its value over a couple months? Or did Zuckerberg know about the equity equation, and realize that getting into the Paypal Network was worth a $10 million haircut?

Either way, it was a good deal for someone:

A Bear Stearns analyst recently estimated that the company, which has already spurned several acquisition offers, is worth as much as $6 billion, and will bring in about $140 million in revenue this year. That's with just over 300 employees.