cvs viagra buy canadian propecia 5mg cialis generic cialis us cialis 5mg cheap canadian propecia online viagra for women without prescription propecia online canada 5 sildenafil cialis generico brand viagra professional

Streetwise Professor

May 31, 2012

The Global Sorcerer’s Apprentices

Filed under: Clearing,Derivatives,Financial crisis,Financial Crisis II,Regulation — The Professor @ 8:13 pm

Global regulators are lumbering towards announcing proposals on the margining of non-cleared swaps, though they will miss the original G-20 deadlines:

Global regulators said on Wednesday they will issue proposals in coming weeks on rules to encourage banks to put derivative trades through a central clearing house, but they won’t be ready for the G20 summit in June.

. . . .

The FSB said it will issue a consultation paper on setting globally agreed margin rules for trades that are cleared directly between two parties rather than through a central clearing house.

“Momentum on OTC derivatives has accelerated in recent months,” FSB Chairman Mark Carney said at a news conference in Hong Kong.

The FSB is expected to push for a minimum margin that banks must post on derivatives trades that aren’t processed through a central clearing house. The aim is to provide an incentive for trades to be centrally cleared, or at least ensure there is a lower risk of an uncleared trade running into difficulties.

Here we go again.  Regulators believe they know how to determine the risks of transactions, and price those risks.

This of course worked out so well with Basel II, which deemed that mortgage loans and mortgage backed securities and sovereign debt were low risk and provided incentives for financial institutions to invest in them.

How’s that working out?

The clearing proposals in particular are frightening for at least two reasons.  First, they are predicated on the view that clearing necessarily mitigates systemic risk, a highly misguided view as I’ve pointed out here for years. Second, and relatedly, the very policy of attempting to encourage the movement of transactions to CCPs will tend to increase the riskiness of CCPs by leading them to clear products that are not well-suited to clearing, thereby increasing the riskiness of CCPs.  And because these CCPs are systemically important, this creates systemic risks.

It is also interesting to note that this one regulatory effort my be undermined by another one.  The New! Improved! Basel Rules will set capital requirements for exposures to CCPs.  The prevailing belief is that this will result in low risk weights (2 percent) on exposures to CCPs.  But an analysis by JP Morgan suggests that actual risk weights are likely to be far higher:

New capital rules outlined under Basel III are designed to incentivise the use of a CCP by levying a relatively small 2% risk weight against a bank’s exposure to a clearing house. This charge is much lower than the punitive charges proposed against traditional bilateral non-cleared trades and is designed to make clearing more financially attractive.

However, in-depth research by JP Morgan analyst Kian Abouhossein and his European banks team has cast doubt on this presumption. Taking a hypothetical clearing house that is only 45% funded against its theoretical capital requirements, they argue that the move towards central clearing could in fact prove far more costly under the new rules than initially thought.

This is because the new Basel III rules are expected to require a higher risk weight for exposure to central counterparties that may be regarded as underfunded; the rules will also levy a higher charge depending on whether the ultimate counterparties to the trade are clearing members, or clients of clearing members. Banks that clear trades on behalf of clients will also be required to take credit valuation adjustment charges against those clients which represent a measure of potential loss in the event that client counterparty goes bust.

In summary, JP Morgan finds therefore that the proposed floor 2% risk weight can only be attained under specific circumstances. In reality, the bank argues, the real risk weighting could shoot up dramatically.

So on the one hand, global regulators are trying to encourage the movement of trades to CCPs, but other global regulators are devising rules that will (unintentionally) make CCP exposures extremely expensive.

I am sure this process of setting prices for counterparty risk will turn out just swell, and lead to an efficient allocation of  these risks.

All these various efforts to regulate margins and capital weighting for counterparty exposures are a species of centralized price control.  All such schemes are doomed to failure.  Doomed.  The regulators lack the information to determine the right prices, and are in fact at an information disadvantage relative to private actors, so these schemes inevitably result in substantial losses arising from adverse selection problems.  Moreover, it is grimly ironic that these schemes are touted as a means of reducing systemic risk, when in fact they are far more likely to create systemic risks.  As I’ve noted repeatedly (and as others, such as Roberta Romano have also pointed out), these regulated pricing schemes tend to encourage everyone to load up on the same risks, and it is these correlated risk exposures that create systemic risk.

These global Sorcerer’s Apprentices believe that they are preventing the next crisis.  It is more likely that they are casting the spell that will bring it about.

A Couple of Quick Hits Echoing SWP Themes

Filed under: Economics,Financial Crisis II,Politics,Russia — The Professor @ 7:08 pm

This long piece by Catherine Belton and Charles Clover in the FT echoes several SWP themes.  Most notably, it focuses on the role of Putin as balancer between rival clans who distributes power and resources to maintain an uneasy political equilibrium.  It also opines that the political developments since the December Duma elections have undermined Putin’s ability to perform this balancing act.

One interesting tidbit: the story reports claims that Gunvor’s Gennady Timchenko plays hockey with Putin.  Recall that (a) rumors are rife that Putin owns a big chunk of Gunvor, but (b) Putin denies any personal relationship with Timchenko.  If Timchenko is really a participant in the private sports bonding where real deals get done, that would undermine Putin’s denials, and lend credence to the rumor.

This article by Lee Smith from the Weekly Standard blog goes into gruesome detail about Obama’s deference to Putin on Syria.  The last paragraph gets it mostly right.

Moscow is simply playing the spoiler and thereby enjoying the sort of international prestige that it has not been afforded since the end of the Cold War. The Russians are not going to engineer a coup against Assad, or in any way work to resolve the issue, because it is precisely the conflict that has given them influence in Syria—the conflict, that is, and Obama, who for no good reason has handed Moscow the reins.

I say mostly right, because Putin has other reasons not to resolve the situation in Syria, including his inveterate anti-American attitude and zero sum mindset, and the economic benefits that accrue to Russia from continuing turmoil in the Middle East.

May 30, 2012

No Dividends For You!

Filed under: Economics,Energy,Politics,Russia — The Professor @ 9:47 am

Over the weekend I blogged about the renewed legal hostilities over Vimpelcom, Ltd, which, among other consequences, prevents the company from paying dividends.  Mikhail Fridman’s Alpha Group holds a large stake in Vimpelcom, along with Norway’s Telenor, and the Russian Anti-Monopoly Service which has moved against Vimpelcom is presumably acting as Fridman’s stalking horse. Another Alpha joint venture with a big western company-TNK-BP-is also unable to pay dividends because its board “inquorate” (a new word for me) due to the resignation of Gerhard Schroeder in December, and the to-the-knife conflict between the Russian AAR partners and BP that has precluded the naming of a replacement.  (BP claims that it can force the firm to pay dividends through an arbitration process.)

The war between the Russian owners and BP is now on the verge of going nuclear with Fridman’s resignation as CEO.

This means something big, obviously.  Just what? I have no clue.  Neither does anyone else, though numerous theories are being hawked.

Pretty much everyone agrees that this has something to do with Putin’s return to the presidency; Igor Sechin; the fallout from the failed BP-Rosneft deal; Russian energy politics; and the operations of the Russian natural state, with its balancing among oligarchical, state, and clan interests.   Just exactly how these pieces fit together is what no one quite gets.  This is Riddle, Mystery, Enigma: The Energy Edition.

A big part of this is due to the fact that no one understands what cratered the BP-Rosneft deal.  Yes, we all know that AAR’s demand that BP adhere to the TNK-BP shareholder agreement that required the British company to work exclusively through TNK-BP in Russia was the proximate cause of the termination of the Rosneft-BP transaction.  But no one knows exactly what went on.  Were Fridman and the other AAR partners defying Putin and Sechin, or acting with their tacit or explicit consent?  Or did Putin side with AAR against Sechin then, but is changing sides now?

What is certain is that this bodes ill for Russian efforts to attract investment.  What I find amusing is that much of the commentary presumes that Putin’s first priority is to implement reforms that improve the investment climate in order to build a stronger Russian economy, and wean it from its dependence on energy and raw materials generally.   He certainly pays lip service to this, but that is not his first priority.  Or even his second.  His overriding concern is maintaining control and the equilibrium between the grasping factions within the elite, and his main means of doing so is managing the distribution of rents, especially those thrown off by energy assets.

Given the virtual lack of any real formal legislative or judicial checks on his discretion, and the obvious glee with which he issues blizzards of ukases ordering this and that in the economy, I see no way for him to credibly commit to reforms that limit his discretion to intervene.  Indeed, the transition from the current state of affairs to such a rule-based would be so fraught with risk for him and the elite, that I cannot see it happening.

May 29, 2012

Some Play Chess. Some Play Checkers. Lord Knows What Obama is Playing.

Filed under: History,Military,Politics,Russia — The Professor @ 8:15 pm

For a perfect example of gibbering incoherence, take a look-if you can stomach it-at the Obama administration’s Middle Eastern policies.

Earlier today, I asked on Twitter whether it would be possible to replace “Libya” with “Syria” in Obama’s 2011 speech justifying intervention in the former country and not conclude that if the intervention were justified in Libya it would be in Syria.  I wondered if anyone would dare to ask Obama or Carney this, and lo and behold, someone did (h/t R).  And no, the answers didn’t make any sense.

“There’s a significant amount of analysis you could do on why Syria is different from Libya,” he noted, saying action against Colonel Moamer Kadhafi followed unity among regional governments and a UN Security Council blessing.

Obama took office in 2009 as Americans’ patience for quagmires in Iraq and Afghanistan wore thin, but as he brought troops home, sought to frame principles for the use of US force abroad.

Officials have balked at the idea of an Obama “doctrine” partly to avoid difficult-to-answer comparisons between the crises in Syria and Libya.

But in the case of Libya, Obama established clear tests for when “the course of history poses challenges that threaten our common humanity and common security.”

He argued Washington had a unique ability to stop horrific violence, a broad international mandate for action, an international coalition ready to act, the backing of Arab nations and a plea for help from Libyans.

There is considerable unity among Arab governments against Syria.  The violence is horrific.  Our capabilities to influence the outcome in Syria are as great or greater than our capabilities in Libya-which we hardly utilized.  There is a broad international mandate-except for Russia, China, and Iran.  And that is preventing anything from proceeding in the UN.

Obama is also operating under the delusion that Russia will assist in dealing with Iran.  As if.  Russia clearly has a strong motive in keeping things on a low-to-medium boil, in order to keep oil prices high: and besides, in Putin’s zero sum view, anything that helps the US or the west makes Russia worse off.

There is one major difference between Syria and Libya: Libya is strategically irrelevant, but Syria is strategically crucial.  It is Iran’s primary ally, and is an essential link in the support network connecting Iran and Hezbollah.  Removing Assad would seriously weaken Iran, and most importantly, Iran’s ability to project power through proxies like Hezbollah.  Eliminating Assad would be an indirect approach at Iran, and would economize on force-strategic principles with which Obama is clearly ignorant.

So Obama chose to intervene, half-heartedly, based on humanitarian motives in a strategic backwater but has refused to get involved in a strategically important country where the humanitarian considerations are equally or more pressing.

Makes perfect sense. No wonder people in the administration flee from the idea of an Obama Doctrine.

What does Obama do? He indulges his inner Jupiter, personally selecting targets for his Game of Drones (props to R for that very apt description), at whom he hurls thunderbolts-Hellfires, actually-from the sky.

Or should I say his inner LBJ?  Remember that LBJ personally approved bombing targets in Viet Nam, in what has become the quintessential example of misdirected presidential micromanagement devoid of any strategic sense.

And the same is true of the Drone War generally, and Obama’s role in it.  At most, this campaign is a war of attrition, and attritive methods are a confession of strategic bankruptcy.  Moreover, there are strong reasons to doubt that it works even as a war of attrition, which requires that you actually reduce the enemy’s forces and diminish his combat power.  It is at least arguable that in Pakistan-Afghanistan that the drone strikes have actually strengthened the enemy, by encouraging recruitment and alienating the Pakistani government.

It is frequently the case that those who are overwhelmed by the big issues, the hard choices, focus on those things they can control, regardless of their importance.  Obama can play Jupiter and feel like he’s doing something even when there is complete drift in the strategically important policies, notably Iran and Syria.

And again the complete incoherence is obvious. Obama was an early and dogged critic of Bush’s tactics in the terror war, including Gitmo, enhanced interrogation, and rendition.  So how are these things veritable war crimes, while it’s perfectly acceptable to kill by drone strike?

Obama’s flack defends the kill list:

“President Obama made clear from the start to his advisers and to the world that we were going to take whatever steps are necessary to protect the American people from harm, and particularly from a terrorist attack,” White House Press Secretary Jay Carney said.

That was the Bush-Cheney justification, no? So why is it OK for the Obama goose but not the Bush gander?

What’s more, there was at least some possibility that the Bush methods that candidate and Senator Obama excoriated produced some actionable information.  Crispy corpses in the Tribal Territories or the Yemeni wilds not so much.

I challenge you all to come up with an example of a more incoherent, strategically inverted set of foreign policies in American history.  I surely can’t.

May 28, 2012

Europe in the Matrix

Filed under: Economics,Financial Crisis II,Politics — The Professor @ 10:01 am

I missed this when it first came out, but apparently a modified Matrix plan to solve the European financial crisis has been bouncing around for a couple of years (h/t Tyler Cowen at Marginal Revolution).  The plan is take both the red and the blue pills.  Well almost: it is to issue both red and blue bonds.

Under the plan, “the senior ‘Blue’ tranche of up to 60 percent of GDP,would be pooled among participating countries and jointly and severally guaranteed.” In contrast, “the junior ‘Red’ tranche, would keep debt in excess of 60 percent of GDP as a purely national responsibility.”

Blue Bonds are essentially Eurobonds, which would mutualize/socialize European government spending, thereby perpetuating the illusion of fiscal bliss.  The Red Bonds are traditional sovereign debt, that require governments to face up to painful fiscal realities.

I seriously wonder if the plan’s authors, Jacques Delpla and Jakob von Weiszsacker had the Matrix in mind when they came up with these labels.

Europe is split into Red Pill and Blue Pill camps.  All the basket case countries are definitely clamoring to take only the blue pill: they want Eurobonds in the worst way.  The French, under newly elected president and alleged babe magnet Francois Hollande (h/t R), are also shouting “BLEU!” (no sacre).  The Germans, Austrians, Finns and Dutch, conversely, are definitely putting it all on red.

Germany in particular has said repeatedly in recent weeks that it will not countenance blue bonds.  Instead, it is pushing a “Six Point Plan” that focuses on structural reforms:

But Merkel is an experienced opponent. She knows that she is now on the defensive in Europe, and she is planning her counter-attack. She believes that euro bonds would enable the crisis-ridden countries to lower their borrowing costs, and that the necessary structural reforms would be postponed. This is why she now wants to counter Hollande’s proposals with a principle familiar to judo fighters: using your opponent’s momentum for your own attack.

. . . .

After Hollande’s statements on Wednesday, Merkel is now presenting her opposing concept. In a six-point plan, she calls for deep-seated structural reforms for Europe. Under the plan, government-owned businesses are to be sold off, protections against wrongful dismissal relaxed and obstructive regulations for companies removed. There is also talk of special economic zones and privatization agencies based on the model of Germany’s Treuhand trust, created at the time of reunification to sell off most of former East Germany’s state-owned enterprises. In short, the Mediterranean region is to become more like Germany, but with better weather.

Jans Weidmann, head of the Bundesbank, is also flashing red.  His interview with Le Monde is refreshing, not least because he calls  bull on the repeated invocation of the Growth Faeries by Hollande and others:

Growth is always a good thing. But to favor growth is like supporting world peace. The real debate is which path to sustainable growth? Growth has always been a pillar of European and adjustment programs through structural reforms. Cyclical wildfire into debt does not lead to the desired growth. In fact, I wonder about that behind these discussions. Do we want to deviate from what was decided? In this case, it is dangerous. [Emphasis added.]

Hear damn hear.

Weidmann damns the blue pill:

A belief that the Eurobonds will solve the current crisis is an illusion. This can only be the culmination of a long process which requires, among other things change the constitution in several states, changse the treaties, to implement a more unified budgett … You do not trust you credit card to someone if you do not have the ability to control his spending.Mutualized debt is can be one face of a coin whose other side is federalism. Governments who support federalism lose elections. Even in countries where governments are demanding Eurobonds, as in France , I see no public debate or public support for the transfer of sovereignty to the support . But it is precisely this debate that we must have.

Weidmann also argues forcefully that growth requires substantive structural reforms, not more leftover Keynesian crack:

But is Keynesian stimulus is an adequate response? Apart from a lack of competitiveness in some countries, the main problem of European countries remains the debt of states and should not be run in a new round of spending. Countries must first regain market confidence, regain credibility: he must set out the announced reforms and not delay the time.

If growth is the true objective, I am foursquare behind the Germans.  Long term growth requires thorough structural reforms that permit resources to flow to their highest value uses; encourage competition; reduce rent seeking; and permit creative destruction.  I understand that big cuts in government spending in the short run (cuts which have not occurred for the most part in Europe, despite all the howling about austerity, as former colleague Russell Roberts has pointed out) are counterproductive.  This suggests that the appropriate policy would be to combine structural reforms that encourage real growth with longer term strategies to reduce government spending to restore fiscal balance.

But that is exactly the problem.  It’s like the old joke: I know where you’re going, but you can’t get there from here.  There is no credible way in democratic countries to commit to these policies.

And this brings us back to the fundamental point, which I’ve made several times previously: Europe’s problems are fundamentally political ones, not economic.  I am a Europessimist precisely because I see no path to addressing these political problems, either at the level of individual nations or at the level of Europe as a whole.

The political clamor in Europe is clearly in favor of taking the blue pill. Germany and Merkel are under tremendous pressure to submit to these demands. Germany is currently struggling with intense internal conflicts, between the desire to be Good Europeans who will not do anything to destroy Europe for the third time (a desire manipulated by France and others playing guilt trips on Germany), and the understanding (well expressed by Weidmann) that socializing European fiscal problems will not solve anything, and eventually make things worse.

How will this turn out? I have no idea how it will play out in the short run: that hinges on this internal struggle in Germany, and I have no idea which of the conflicting impulses will prevail.  Eventually, however, I think that the whole thing will fall apart.  Whether Europe takes the red pill or the blue pill in 2012 or 2013 will only affect when the collapse occurs, and the distribution of the damage.

The IAEA and the Search for the Holy Grail

Filed under: Military,Politics — The Professor @ 9:16 am

Iran has told the International Atomic Energy Agency it is “not ready” for the IAEA to inspect Iran’s suspect Parchin nuclear site because the IAEA hasn’t given “good reasons. I guess the Iranians are washing their hair and aren’t decent.  Or something.

Why is it that whenever I read a story about the IAEA and Iran, this pops into my head:

May 27, 2012

Market and Regulatory Responses to Creative Destruction: The Case of HFT

Filed under: Derivatives,Economics,Exchanges,Politics,Regulation — The Professor @ 1:03 pm

As I’ve written before, there is good HFT and there is bad HFT.  The crucial policy choice is how to encourage the former and discourage the latter.

As I’ve also written extensively, going back to the very first days of the blog, many of the problems with electronic trading are best addressed by exchange pricing policies.  In particular, to the extent that abusive trading strategies involve distinctive patterns in orders and cancellations, exchanges can devise pricing structures that make it costly, and perhaps prohibitively so, to utilize these strategies.  Exchanges can also implement pricing strategies that encourage beneficial HFT strategies that increase market liquidity.  Although it would be stretching it to say that exchanges internalize all of the costs and benefits associated with deterring abusive and promoting constructive HFT strategies, they certainly have a far more powerful incentive to get it right, and far better information and knowledge, than does a regulator.

Exchanges around the world, and in different asset/instrument classes, are indeed responding to development.  The latest is the Oslo Bors:

Oslo Bors will issue punitive charges to traders if they send too many orders into the exchange that do not result in deals being done, as the industry seeks to crack down on the practice of “quote stuffing”.

. . . .

Bente Landsnes, chief executive of Oslo Bors, said: “A market participant does not incur any costs by inputting a disproportionately high number of orders to the order book, but this type of activity does cause indirect costs that the whole market has to bear.

“The measure we are announcing will help to reduce unnecessary order activity that does not contribute to improving market quality. This will make the market more efficient, to the benefit of all its participants.”

Oslo Bors’s action is just another example of organizational and strategic innovation in response to a technological shock.  With many exchanges introducing such strategies, they will learn from each other’s experiences, and use this knowledge to refine their strategies.

The demands for regulatory actions against HFT will no doubt continue despite the actions of exchanges to price utilization of their systems in ways that promotes liquidity and deters abuse.  This is because, as is almost inevitably the case with regulation, many of the demands for intervention are self-interested efforts to hamper more efficient competitors.  HFT has undercut many traditional liquidity suppliers, and made their skills obsolete.  As surely as day follows night, and as reliably as the sun will rise in the east tomorrow, this process of creative destruction is leading those on the destroyed end of the process to importune governments to hamstring those on the creative end.

And spare me the nostalgia for the old floor days.  There was a lot of corner cutting-and worse-on the floor, and many abusive HFT strategies have clear parallels in abusive strategies that were used by floor traders.

In a very ironic twist, this debate brings to mind two conversations, held more than ten years apart, with a legendary trader.  In the circa 2000 conversation, he welcomed the advent of electronic trading because he believed that electronic trading leveled the playing field.  He said he was tired of “getting raped by the floor.”  In the circa 2011 conversation, he lamented the rise of HFT, because he couldn’t make money in the new electronic age.

That’s creative destruction at work.  Yes, the innovations are not always-in fact, never-entirely beneficial.  But remember that these innovations destroy incumbents, and are especially effective at doing so when they result in substantial efficiency gains. Thus, the innovations that reduce costs most often generate the greatest hostility-and hence the most insistent demands for regulation by those the innovation displaces.

Since the innovations often do have some negative consequences or uses, those crying for regulatory intervention often have examples to bolster their case. But as the actions of Oslo Bors and other exchanges illustrate, market participants have an incentive to devise means that mitigate and perhaps eliminate the negative effects of the innovation.  Market participants also have legal recourse to attack others.  The proper scope for prescriptive regulation is limited to those effects that market and legal responses to the innovation cannot address.  And even then, it is imperative to be circumspect about regulatory responses, given the susceptibility of regulators and legislators to self-interested efforts to hamper competition and more efficient competitors.

Home Court Advantage

Filed under: Economics,Politics,Russia — The Professor @ 12:21 pm

The truce in Telenor’s Kafkaesque legal battles in Russian courts over Vimpelcom is apparently over.  You may recall that a small shareholder, Fairmax, a stalking horse for Mikhail Fridman’s Alpha Group owned by his brother, sued Telenor for $1.7 billion in Tyumen (though some accounts put the figure as high as $5.1 billion), claiming that the Norwegian telecom firm had harmed Vimpelcom by refusing to go along with a deal to purchase Ukrainian operator URS.  This followed a series of lawsuits filed against Telenor by Alpha and related entities.  Eventually this resulted in a settlement between Alpha and Telenor in which the companies set up a new joint holding company, in which the two entities would each large shares representing 25 percent of the voting rights.

That October, 2009 deal brought some relative peace, but that is now over.  In February, 2012, Telenor acquired the VimpelCom, LTD stake held by Egyptian Naguib Sawiris, which gave it a 36.36 percent of the voting shares (up from 25.01 percent) and simultaneously ceased its arbitration action against Fridman’s Altimo companies (which held 25 percent).

Two months later, the Russian Anti-Monopoly Service swung into action, filing a suit claiming that the Telenor-Sawiris deal violated Russia’s laws regarding foreign ownership. In response, a Russian court blocked VimpelCom LTD from paying dividends, and enjoined the company from implementing actions approved at its Annual General Meeting last week.  Earlier the court had blocked Telenor from voting its and Sawiris’s shares to change the composition of the board.

In response to the court actions, VimpelCom LTD’s ADRs fell over 16 percent.

This all clearly benefits Fridman by stymying Telenor in its attempt to increase its control over VimpelCom.  The Telenor-Sawiris deal outflanked him, but he had another card-or court-up his sleeve, and that card is likely a trump.

What a surprise.

This should be a warning to anyone contemplating large investments in “privatized” Russian companies.  The means of expropriation are many.  Russian interests have home court advantage-quite literally-and as a result of this advantage, can deprive foreign investors of the benefits of their investments (cash flows and control rights).

Any wonder why Russian companies sell at large discounts?  Like I said last week, Russia won’t get first world prices playing by third world rules.  But Putin et al can’t help themselves.

If you still have your doubts, I have some wonderful investment opportunities for you.  I will treat you better than a Russian court.  Promise!

May 25, 2012

Social Network-The Sequel

Filed under: Economics — The Professor @ 7:32 pm

In the aftermath of its botched IPO, Facebook may need to change its name to Fiasco Book. The recriminations are flying fast and furious, and and are likely to only intensify.

The basic facts are that right in the middle of the roadshow, Facebook realized that its earnings prospects were weaker than anticipated.  It released a revised S-1 disclosure that made a Delphic reference about the fact that its “daily active users” were growing faster than “ad impressions.”  It also told the underwriters that earnings would be at the low end of the range as a result of this poor performance.  Underwriters communicated this information to big institutional clients.  They issued no written report to the broader market, and Facebook did not make any disclosures beyond that Delphic statement.  Moreover, Facebook insiders decided to issue 25 percent more shares, and price the issue very successfully.

And the rest is history; the fingerpointing is the future.

The primary target of criticism has been Morgan Stanley, the lead underwriter.  Leading the brigade of critics is Henry Blodget, of Business Insider.

Blodget initially suggested that Morgan Stanley might have broken the law by telling only some of its clients.  He has since walked that back completely, and now focuses on the unfairness of it all.  Moreover, Blodget gives Facebook executives, notably its CFO David Ebersman, a pass, and places the blame entirely on Morgan Stanley and the other underwriters.

You may remember Blodget.  He was a famous-then infamous-Merrill Lynch analyst during the tech boom, whose work earned him a lifetime ban from the securities industry.  (More on this below.  Complete with personal color.)

So why didn’t MS issue written reports available to all investors? Because they can’t-by law-between the release of the S-1 and 40 days following the IPO.

And why, pray tell, is this true?  Because of the shenanigans that went on during the dot com boom:

The bizarre rules are a result of previous regulation, created a decade ago, after abuses made by investment bankers in written reports during the dot com era. These rules may need to be reformed, but Facebook needs to play by them for the time being.

And who is the poster child for the abuses made by investment bankers in their written reports during the dot com era? Well, one Henry Blodget.

So it is way beyond rich for Blodget to rail against the unfairness of rules that he played no small role in bringing about.  And I am at a loss for words when figuring out how to describe the chutzpah he displays by fulminating about inadequate disclosure when he fails to disclose his role in the events that led to the rules that limited what Morgan Stanley could tell the world.

His defenders claim that Blodget is reformed.  Color me skeptical.

Why? I’ve seen him, up close and in person.

I was an expert witness against him in an arbitration related to his work at Merrill.  I had the, umm, experience (adjectives escape me) of watching him testify for the first-but not the last time-in a legal action related to his behavior.  And what an educational experience it was, watching him attempt to explain how he could rave in written analyst reports about the prospects of one of the companies he followed at the same time he was referring to the same company as a “POS” in emails.  He attempted to feign that he didn’t know exactly what “POS” meant.

Uh huh.  Tell me another one.

I saw a total weasel trying to dig his way out of a mountain of lies.  So you’ll understand if I don’t trust him as far as I can throw him.

Especially since he made allegations of illegality-and then backed off, and then denied (on Twitter) that he had and claimed that I had been unspecific in my criticism.  Since he changed the subject after I replied (quoting him): “‘Selective dissemination of this sort could be a direct violation of securities laws.’Specific enuf?” Since he whined about “unfairness” and being “bashed” in response to criticism.  Boo hoo hoo.

And especially since he is flacking for Facebook, Zuckerberg, and Ebersman, and placing all the blame on Morgan Stanley. No doubt since he is persona non grata on Wall Street, he is trying to suck up to Silicon Valley and the social media VCs who are desperate to avoid the negative fallout from Fiasco Book.

I’m not buying. Facebook chose to make the Delphic disclosure.  Facebook chose not to modify its S-1 to disclose the bad earnings forecast news.  Facebook insiders chose to unload more stock.  Yes, Morgan Stanley went along with this, but (a) ultimately, the information was Facebook’s and it chose not to disclose, and it chose the size and price of the deal, and (b) it is pretty clear that Facebook was throwing its weight around (as evidenced by the fact that Morgan Stanley’s CEO participated in some of the discussions).

This will all be litigated, of course.  No doubt MS will not escape unscathed.  But my prediction is that Facebook-and Zuckerberg-will take the big hit.

Apparently Zuckerberg learned nothing from the Saverin litigation.  He tried to take everything then, and leave nothing on the table.  It appears to me he tried to do the exact same thing in the IPO-in the way that he retained control of the company, and in the way the deal was priced and sized.  He made one enemy the first time around.  This time around-thousands.

So inquiring minds want to know: will Jesse Eisenberg play Zuckerberg in Social Network II?

The Swirling Accelerates

Filed under: Economics,Financial Crisis II,Politics — The Professor @ 2:04 pm

The banks in Spain continue to swirl down the drain, and more rapidly:

Spain will make an emergency €19bn investment in Bankia, the stricken savings bank, in a bold bid to restore confidence in the stability of the country’s financial sector.

Madrid’s biggest bank nationalisation will take the total amount of state aid pumped into Bankia to €23.5bn, and will give the government as much as 90 per cent control of Spain’s second-largest bank by domestic deposits.

This represents an approximate four-fold increase in the amount of assistance this month. And who says this is the end?

And it’s not just the banks.  Regional governments are demanding bailouts:

Financial markets were further rattled by comments from Artur Mas, president of Catalonia, which forms a fifth of Spain’s economy and is larger than Portugal by output, that the region was running out of options to refinance its debts, and wanted backing from Madrid to borrow.

The Alfred E. Newman crowd often points to Spain’s relatively low debt-GDP ratio to downplay concerns that the country may turn into Greece on steroids.  But the developments with the banks and the regions is misleading.  There are massive contingent liabilities that should be added to the Spanish balance sheet when evaluating the country’s fiscal position.

What is transpiring there reminds me of the banks that set up off balance sheet SPVs, and then brought them back on balance sheet at the height of the crisis.  Creating the SPVs made the banks look less riskier and better capitalized than they were in fact.  Spain is now in the process of bringing its own equivalents of SPVs-its big banks and big regions-onto its balance sheet.  The results are unlikely to be pretty.

Next Page »

Powered by WordPress