Quotes from Inside Job
Just caught a bit of Inside Job on TV and had to share some choice lines.
The men who destroyed their own companies and plunged the world into crisis walked away from the wreckage with their fortunes intact.
Love it.
Countrywide CEO Angelo Mozilo made 470 million dollars between 2003 and 2008. 140m came from dumping his Countrywide stock in the 12months before the company collapsed.
Stan Oneill is allowed to resign and takes away $151m. …Oneill’s successor John Thain was paid $87m in 2007. And in December 2008, two months after Merril was bailed out by US taxpayers, Thain and Merrill’s board handed out billions in bonuses.
In March 2008 AIG lost $11bn. Instead of being fired Joseph Cassano the head of AIG was kept on as a consultant for a $1m a month.
Pushing for better governance…slowly
0.66% of US directors rejected by shareholders in 2010
The Florida State Board of Administration which manages $140bn of pension funds asked 2200 companies to not re-elect directors who failed to attract majority of shareholder votes
Council of Institutional Investors sends letters to directors who don’t get a majority vote urging them to resign.
California State Teachers Retirement System submitted 26 shareholder proposals asking for majority votes in 2011 and plans 50 more for 2012.
70% of the S & P 1500 have not majority vote requirements.
Small volumes of bond purchases move yields
If 1% pushed across entire curve of $1tn of outstanding bonds can be achieved easily by the ECB spending just $8bn (0.8%), what does that tell you about the debt crisis? Thin purchases moving markets tells you that price action might not be signifying much useful at all.
Oracle going from strength to strength
Is Oracle unstoppable? They sold a billion dollars of X in the last quarter. What is X? Hardware.
Thanks to the very canny acquisition of Sun and some sharp integration work, the database vendor is now a lot more than a database vendor and investors are lapping it up – especially given the guidance from the company which was pitched just right.
Analysts thought Sun was a bad buy. How wrong they were. Perhaps it’s because analysts don’t have a true tech background. True geeks will always have a deep seated admiration for Sun and an appreciation of the inner value that lay beneath layers of business incompetence – in a way, Sun (great tech, lousy execs) is the anti-Microsoft (lousy tech, lots of lawyers and sales people).
Sun workstations and their Sparc/UltraSparc chips were highly respected and were seen in every university science / computing department at one time. The prices were outrageous, but the dotcom era of tech architects bought them by the truck load for their stability and superb scalability under Solaris (again, a Sun product, and one of the most robust and respected operating systems ever produced).
And I haven’t mentioned Java, Sun’s programming language, yet. A technical marvel when it was revealed back in the mid 90s, it has become one of the most prevalent programming languages in the modern world, and the dominant platform for mobile development. Sun never monetized it and botched the marketing of Java completely – they were never sure if they were promoting a server product to geeks or a general product for home use to everyday Internet users.
At least Sun successfully managed to fend off Microsoft in court as the sly old Redmond firm tried its old tricks to pervert Java and steal some of its mojo from Sun. Keeping Java developers on side (i.e. fighting off Microsoft) was critical, and it’s now Oracle that will ultimately benefit.
Many techies of a certain age will have rose tinted memories of Sun, and are probably glad overall that a dynamic businessman like Oracle’s Ellison is finally bringing dollars to Sun’s long suffering engineering talent.
So, bottom line, this may well just be the beginning. If Oracle can grow, or rather continue growing, into a successful all round hardware, software, cloud service and general consulting company, it could end up the Apple of the business world.
Google does consumer search and mobile, Apple does consumer devices and media, and Oracle does business. And Microsoft? Who?
More evidence that big banks are worse banks
BusinessWeek (Feb 7th-13th) reports that NYU’s Stern School of Business have classified US banks’ risk level according to a model based on stock price (as an observable correlate to capital), which projects capital requirements in the face of a 40% drop in stock price.
Here are their results.
Top 10 Riskiest Banks
- Bank of America
- JPMorgan Chase
- Morgan Stanley
- Citigroup
- Goldman Sachs
- MetLife
- Prudential Financial
- Sallie Mae (SLM)
- Hartford Financial Services
- Wells Fargo
Note that the three biggest banks in the US are 1, 2 and 4 in the list of riskiest banks. MS is at number 3 as it apparently has $22 of assets for every $1 of stock value (so either its balance sheet is genuinely too big or its stock is underrated).
ZIRP provides funds for Private Equity’s uglier balance sheets
We expect the application of extraordinary policies (Zero Interest Rate Policy) in extraordinary times (the Great Credit Crash) but keeping the adrenaline needle stuck in the heart for too long creates major health risks of its own.
The effect of ZIRP, negligible rates of return for stable investments, inevitably leads capital into riskier areas, thus potentially replicating some of the imprudence which kicked off the financial crisis in the first place. Combined with inflation, investors searching for yield are turning a blind eye to ugly balance sheets and gearing.
For example, private equity firms are now reporting that they are able to raise finance for highly leveraged investments which would have been untouchable in a pre-ZIRP setting. Over $5bn junk bonds were sold last month alone (at an annualized rate, that would be 50% up on 2010, which itself saw three times the issuance of the previous year, 2009).
The search for returns and general improving confidence has seen the lowest rated debt (“junk”) increase in value. With lower yields, comes the self-fulfilling further lowering of yield (as defaults become less common under lower yield environments, the debt security rating and market confidence improves, leading to further lowering of yield).
S&P state that speculative-grade debt defaults last year were 3.3%, compared to 11% in 2009. They predict a further lowering of default rate to 2.4% this year.
ZIRP exists primarily to re-capitalize the banks (and part of this intention is to prop up the mortgage market). As big banks are (by definition) at the very heart of the functioning of the global financial system, nation states had no choice other than to give them free money (ZIRP).
Many years of ZIRP are still technically needed to allow the banks to deleverage and accumulate adequate capital buffers to make the entire system much less brittle (although sadly this wouldn’t be effective in practice since since the banks seem to feel obligated to pass on large fractions of this free money to their employees rather than use it for its intended purpose of strengthening our financial system).
Despite the general cheap institutional borrowing backdrop, muni bears like Meredith Whitney are creating the opposite effect to the corporate junk bond situation in the domain of local government finance. Their warnings are helping force up the cost of public finance. Many point out that debt servicing costs are generally a small fraction of government budgets and by being able to raise tax, they can avoid defaults at their will.
Nonetheless, despite Pimco et al downplaying the risks, one gets the feeling that, especially with the eurozone issues out of focus, bears could win this battle for the time being and create a lot more pressure on muni markets.
Chinese income inequality stats
Renting a room in a run down town costs about $40 per month.
Per capita rural income is nearly $80 per month.
Per capita urban income is $250 per month.
The Gini coefficient has worsened from 0.3 to 0.5 over the last quarter century.
The upper 10% of workers earn 23 times the lowest 10% of earners according to the official numbers but some suspect the figure is much higher at around 65 times (due to large black economy of undisclosed earnings/kickbacks).
A widening wealth gap has for some reason been tolerated by many industrialized countries (e.g in the USA the top 20% of earners own 80% of stocks and 50% of housing equity, numbers which expand as the USA retracts progressive policy and extends tax cuts for high earners) but I suspect it cannot be tolerated much longer politically in China where poverty is much more severe and widespread. Policy changes and a move to reduce corruption need to arrive in time to prevent civil unrest.
Bank levy hot air – a pointless point made
Osborne’s bank levy raise of an extra £800m is being portrayed as a complete surprise.
The reason the government can get away with a surprise, if indeed it is, is surely that the measure is pretty trivial.
The FT reports:
Bank analysts estimated the levy would cost each of the big four banks an additional £100m-£150m in tax this year.
Now it’s not just me that thinks this is pretty pathetic. £100m is pretty tiny in comparison with sales of £20bn or so that a big bank can bring in, and a few billion in profit (even after paying billions to its staff).
Total UK banks profit for 2010 is about £25bn, with about £6bn being paid to staff members. A levy of £2.5bn is negligible in comparison to the liabilities (measured in the hundreds of billions, or perhaps now trillions) the state has assumed in order to bail the banks out.
The deadline for “Project Merlin” (provide equity finance to medium sized businesses, increase general lending, agree restraint on bonuses, etc) to come up with something tangible is set for just before Barclays announces its results.
No doubt George knows a lot more than the public do and he’s getting the politics in early to preempt further major anger from the public. He must be banking on them not understanding numbers.
Takeover rumour stocks analyzed over five years
BusinessWeek (jan 17th 2011) examined 1875 takeover rumours of 717 firms over a five year period (05-10) and found (surprise, surprise) that …
buying rumour equities is not a good idea
Results: after the initial jump on the day of 2.9%, the target stock declined in the following month by 1.2% (at an annualized rate of 14%), against the background of a slightly rising index.
Microsoft: is there life left in the old dog?
Kinect came out on 4th November 2010 and by Jan 5th 2011 had sold 8 million units. A lot of that success was despite MSFT rather than because of MSFT. Checkout out thriXXX if you want an inkling why.