Something I'll Never Understand

As I'm sure you all know, I'm never one to pass up the opportunity to poke fun of investment bankers. That said, I don't get why they allow themselves to get beat up in the press so that I and others can do it.

Take for example this story by Bloomberg's Michael Quint:

MTA Likes Bond Traders So Much to Forgo Subway Cars

May 29 (Bloomberg) -- The first winners in the Metropolitan Transportation Authority’s $750 million bond sale were traders who bought and unloaded the debt immediately for a quick profit, not commuters on the 5:49 p.m. train from New York to Scarsdale.

The April issue was part of President Barack Obama’s Build America Bond program to let local governments borrow at lower cost by having the U.S. Treasury bear 35 percent of their interest expense. The MTA, operator of the nation’s largest transit system, is raising fares an average of 10 percent starting next month to help cover a $1.8 billion budget deficit.

With the federal subsidy, the agency was able to pay a yield high enough for an immediate $3 million profit for traders, according to data compiled by Bloomberg. Lowering the yield 0.1 percentage point on the taxable issue would have saved about $9 million, enough for the agency’s share of eight new subway cars.

Valid or not, the bankers have their reasons for why the believe the pricing was adequate. But rather than explain this to reporters for print, they stew about the stories in private (I've heard them). And their PR guys make their companies look horrible by letting the story hang out there:

Brian Marchiony, a JPMorgan Chase spokesman, declined to comment on the MTA’s pricing or its own bond sale. The agency paid underwriters led by the New York-based bank $6.68 million to handle the sale.

Dellaverson’s statement said Goldman Sachs Group Inc., the agency’s financial adviser, had access to market information that helped it sell with more favorable terms than the earlier transactions that week by California and the New Jersey Turnpike Authority.
California Borrows

Before the MTA transaction, the price of California Build America Bonds underwritten by Goldman Sachs traded at 3.33 percentage points over Treasuries, or less than the 3.5-point spread set at the transit authority’s sale, according to Bloomberg data.

The MTA paid Goldman Sachs $487,500 for advice on getting the highest price and lowest yield, according to Aaron Donovan, spokesman for the agency. Michael DuVally, a spokesman for the New York-based bank, declined to comment.

Maybe I just don't understand communications, but how is this a good PR strategy? I really don't get what investment bank PR people get paid to do, because they rarely give anything other than a no comment and there companies consistently come out looking awful in the media. Can anyone explain to me why you wouldn't at least try to defend the company?

I'm Not A Lawyer...

But it seems to me that an article by Slate's Ben Sheffner on whether today's meeting of newspapers executives would violate antitrust law is a bit off. From Sheffner:

Antitrust law is complicated, but one principle is very simple: Competitors cannot get together and agree on price or the terms on which they will offer their services to their customers. It doesn't matter if the industry is ailing or if collusion would be "good" for society or necessary to preserve democracy. An agreement regarding pricing is "per se"—automatically—illegal under Section 1 of the Sherman Act, the main federal antitrust law.

All but a few newspapers currently give away their Web content for free. Many would like to start charging but are afraid that if they're the first to make the leap, their readers will abandon them for the remaining free alternatives. One obvious solution would be for them to agree to make a collective leap behind a pay wall.

But such an agreement would be blatantly illegal, says Kenneth Ewing, a partner at Steptoe & Johnson who, as head of his firm's antitrust practice, advises corporations on how to stay out of trouble. "It's Antitrust 101. If you're a competitor of another company, you violate federal and state law if you agree on the price or the general terms on which you are willing to compete."

Benign meetings of the American Widget Manufacturers Association can, in the absence of very careful lawyering, become the venue for unlawful antitrust conspiracies in which general discussions about industry conditions and trends can segue into verboten conspiracy. "To put a group of competitors together in a room and have them discuss anything even close to considering prices … is a very risky undertaking," says Maxwell Blecher, a prominent antitrust attorney who represents plaintiffs in price-fixing suits. In a 2007 presentation, Ewing advised that when competitors meet, they should "avoid topics" including "prices, payment terms, costs, wages or salaries, profit levels … [and] business strategy."

I would agree with Sheffner that this would be a worry for the American Widget Manufacturers Association. I'm not sure, though, it would be for these newspaper executives.

Sure, if the owners of two newspapers in the same city collaborated on business strategies, they would run afoul of antitrust laws. Which is exactly the reason why the Newspaper Preservation Act of 1970* allows newspapers to sign joint operating agreements that exempt them from anti-trust laws. See: the Detroit News and Free Press.

*Signed by Nixon!

But that's not the case here.

A very key concept in antitrust law is how product and geographical markets are defined. Essentially, we want to know who are a company's competitors and what are consumers' other options in every geographic market. For instance, if Trader Joe's and Kroger wanted to merge, economists would analyze how this would impact the grocery store market in Ann Arbor, Chicago, Columbus, etc.**


** Regulators always try to define markets as narrowly as possible for antitrust purposes. When Whole Foods and Wild Oats merged, for instance, the FTC tried to argue they would monopolize the market for "natural and organic food," while the companies tried to argue they were in just the grocery store market, because many competitors also sold those goods.

Although newspapers from different cities are in the same industry, I would argue they're not really competitors--even with the Internet. If the San Francisco Chronicle started charging for access to its website, the fact the Miami Herald also did this wouldn't really harm local news consumers. San Francisco-ites would instead turn to blogs, TV, or the alternative press to get their local news***. In fact, it'd be nearly impossible to argue newspapers from different cities are competitors given that local monopolies are the reason many newspapers had been so successful. And without being competitors, you can't really break antitrust law.

***UPDATE:Forgot to add this, but if we're defining a market as electronic news in San Francisco, for instance, it's relatively easy to break into. Establishing a printing press and distribution network may have created barriers to entry, but basically anyone can setup a website. And if the San Francisco Chronicle was charging for access, it'd be relatively easy to undercut them and draw traffic to your site. These people are competitors, not newspaper websites in far-off cities.

Again, I'm not lawyer. And I certainly haven't crunched the numbers an economist would. But I'd be willing to bet that newspapers would not lose an antitrust lawsuit if they all agreed to charge for access to their websites.

Whether it'd be a good business decision for them to do that, though, is a different story...

It's Not That Hard

A while back, I pointed out why it was ridiculous for Goldman Sachs and other banks to say that because AIG was a triple-A rated company, the banks should not be blamed for taking on all these risks with AIG as a counterparty. So I was glad to see Dow Jones columnist Donna Child earlier this week provide even more proof for how outrageous the banks' claims are.

NEW YORK (Dow Jones)--Described as a "black hole," American International Group Inc. (AIG) is largely inscrutable - but not to everyone. Like the proverbial canary in the coal mine, key reinsurance markets delved deep into the operations of AIG and concluded that they could not sustain life.

Had investment banks had the benefit of the same insight, they might have averted the counterparty risks that required a substantial bailout orchestrated by the U.S. Treasury.

Why did reinsurance markets possess the insight that had eluded investment banks?

Investment bankers understand single transactions and fees for insurance company clients, such as bond offerings, sidecars or equity issuance.

Reinsurance, which is contingent financing for underwriting risks, contains all of these features with an element of continuity that becomes an intangible asset between the insurer and reinsurer. Reinsurance companies, therefore, have a much longer time horizon than investment banks.

With a potential long-term exposure to AIG, reinsurance markets carefully scrutinized AIG's business as part of their underwriting due diligence. Because of the longevity of AIG's business commitments, the long-tail nature of certain of its liabilities and its pricing practices, including those at AIG's London-based Financial Products unit, leading reinsurance markets concluded, in the phrase of one provider, that "making a return on reinsuring AIG was an accomplishment if not a rarity."

Having reached this conclusion years ago, leading reinsurance markets declined to participate in certain of AIG's transactions and thus averted the costly lessons learned by investment banks with credit counterparty exposure to AIG and ultimately, because of the systemic risk involved, to the U.S. Treasury.

Is it too much to ask bankers and traders making millions of dollars a year to actually, you know, do research into the risks they are taking?

Some Of Us Like Our Privacy

Say you're the New York Yankees. You just spent $1.5 billion on a new stadium. It has a state-of-the-art audio-visual system. Bars, restaurants, and concession stands. Even nice elevators to the upper level. But you can't spare a future extra bucks to put dividers between the urinals*. Come on.

*Even worse, they're the urinals that jut out from the wall like regular toilets, not the ones that are parallel to the wall.

The "Experts"

Perhaps more so than ever, the average American wants financial experts to explain to them what's happening in the market. Why, on any given day, did the market go down? More important, they ask, what will it do in the future? And read the Wall Street Journal, watch CNBC, or check out one of many blogs, and you'll find thousands of different thoughts on those questions.

Unfortunately, I rarely hear any of these "experts" give out the one piece of advice that they all should know--no one has any idea what stocks will do tomorrow, much less a year or 10 from now. Study after study has shown that picking stocks is a worthless exercise. Most mutual fund managers can't beat the market year-after-year, much less your average amateur investor*. It's not even really clear whether the great Warren Buffett is a really, really great investor, or just extraordinarily lucky.

* Please don't pick stocks and don't invest in actively managed mutual funds. Buy an index fund with low expenses. Or throw darts. Or hire a chimp to throw darts. Seriously.

If people would even really think about what some "experts" are telling them, this would all be clear. For instance, Zero Hedge points out today that a research piece by Morgan Stanley upgraded the price targets on most major banks by a median of 33%. Part of its rationale: using 2012 for normalized earnings. 2012?!?!?!? If only they had been so prescient about what would happen three years down the road in 2005, we wouldn't be in the mess we're in. Does anyone really believe these people can predict this?

Why anyone gets paid to give this sort of advice--and why anyone would buy it--is beyond me.

I'm Always Amazed

I know I shouldn't ever be too surprised at the way things work in Washington D.C. But every time I see a story like this, I get more depressed about the way this country is actually run:

WASHINGTON -- Democrats in the House Energy and Commerce Committee have taken a novel precaution to head off Republican efforts to slow action this week on a sweeping climate bill. They are hiring a speed reader.

Republicans on the committee have said they may force the reading of the entire 946-page bill -- as well as major amendments that measure several hundred pages -- all aloud. This is a procedure lawmakers have a right to invoke. Republicans are largely against the bill, which aims to cut emissions of so-called greenhouse gases by more than 80% over the next half-century but would be costly.

I know BS like this goes on all the time, but it's absurd that the people leading our country have so distorted the the political process that it's now full of elementary school-like tactics. In what other serious professional realm would this be acceptable? And if this is what they're doing in public, who knows what they're doing behind the scenes.

Really?

I find it quite funny that David Brooks cited Jim Collins' Good to Great as a study of the best characteristics of CEOs:

These results are consistent with a lot of work that’s been done over the past few decades. In 2001, Jim Collins published a best-selling study called “Good to Great.” He found that the best C.E.O.’s were not the flamboyant visionaries. They were humble, self-effacing, diligent and resolute souls who found one thing they were really good at and did it over and over again.

If one actually looked at some of the 11 profiles included in the book, he might not be as impressed. As Steven Levitt pointed out last year, the CEOs Collins praised included now bailed out Fannie Mae and now bankrupt Circuit City. So much for Built to Last.

From Levitt:

I seem to remember that someone did an analysis of the companies highlighted in Peters and Waterman’s 1980’s classic book In Search of Excellence and found the same thing.

What does this all mean? In one sense, not much.

These business books are mostly backward-looking: what have companies done that has made them successful? The future is always hard to predict, and understanding the past is valuable; on the other hand, the implicit message of these business books is that the principles that these companies use not only have made them good in the past, but position them for continued success.

To the extent that this doesn’t actually turn out to be true, it calls into question the basic premise of these books, doesn’t it?

If You Build It, They Might Not Come

As part of its increasing involvement in the auto industry, the Obama Administration made some big news today on the emissions front, according to the NYTimes:

WASHINGTON —The Obama administration will issue new national emissions and mileage requirements for cars and light trucks to resolve a long-running conflict among the states, the federal government and auto manufacturers, industry officials said Monday.
President Obama will announce as early as Tuesday that he will combine California’s tough new auto-emissions rules with the existing corporate average fuel economy standard to create a single new national standard, the officials said. As a result, cars and light trucks sold in the United States will be roughly 30 percent cleaner and more fuel-efficient by 2016.

One problem: What if consumers don’t want to buy them?

The common myth among the chattering classes is that the U.S. automakers are struggling because they allowed foreign automakers to take the lead on environmentally friendly technologies, such as hybrid vehicles.

The New York Times even makes this point at the end of its story.

During the presidential campaign, he gave a speech in Detroit chastising the American automobile industry for doing too little to reduce the nation’s dependence on foreign oil and to improve the vehicles’ fuel efficiency.

"The auto industry’s refusal to act for so long has left it mired in a predicament for which there is no easy way out," Mr. Obama said.

That inaction has brought General Motors and Chrysler to their current dire state, requiring billions in federal bailouts and Chrysler’s forced marriage to Fiat to survive.

I won’t waste your time detailing the real reasons these automakers are in trouble. I assure you, though, that their failure to act on fuel efficiency have little to do with it. The fuel efficiency standards, on the other hand, had a big part.

For quite a while, the Detroit 3 knew how to make cars Americans wanted—big SUVs and minivans. With gas so cheap in the U.S. relative to other countries, Americans have typically been willing to sacrifice fuel efficiency for more comfort. Paying for fuel-efficient technologies — such as hybrid cars — was simply not worth it for many consumers. A purchaser of the much-lauded Toyota Prius, for instance, would need to drive it 4.2 years before he even broke-even with gas savings compared to a Toyota Camry LE, according to Edmunds. It makes sense as a political statement, not as a money-saving vehicle.

Unfortunately, the fuel efficiency standards set by Congress required the automakers to maintain an average fuel economy for their entire fleet. This required producing unprofitable smaller cars, to offset the lower fuel economy of the profitable big ones. Further, the fleet requirements also provided a nice subsidy to the United Autoworkers union by requiring automakers to maintain the fuel economy standards on domestically produced cars separate from those produced in foreign countries. This prevented the automakers from building profitable SUVs in the U.S., while shifting production of smaller cars elsewhere (where they might have been built more cheaply). Don't let the fact that American car companies sold tons of SUVs and truck trick you into thinking they weren't creating small cars, too*. Thinking logically, they would have had to have been building small, fuel-efficient cars to average out for all the big, fuel-inefficient ones they were building, too.

* If you've ever wondered why rental car companies and other fleets buy so many domestics, here's you answer. Car companies needed to unload all these cars somewhere.

Going back to the New York Times article, the reason GM/Chrysler needed a bailout has nothing to do with inaction on the fuel economy. It has to do with the fact consumers aren’t buying cars. Period. Even Toyota and Honda have lost billions of dollars in this economy.

You can blame years of poorly produced cars for the Detroit 3's downfall**. Or an antiquated franchise system. Or way too many brands. Or poor images. Or managerial arrogance. And so on. I don't think a failure to produce fuel efficient vehicles (if this myth is even true) has much to do with.

**Even though their cars are actually some of the best rated now.

Raising the gas tax would easily solve this problem. Consumers would now have incentives to buy fuel efficient vehicles. Because there would be actual demand, carmakers would have an incentive to build them. But why would any politician do the smart and honest thing that might upset the public, when he can just shift the blame to someone else instead.

Twitter Away, I Say

Interesting story from the NYO today about how the NYT bigwigs want their reporters to keep their fingers off their iPhones and BlackBerry's during meetings:

At the meeting, Metro editor Jodi Rudoren said that she doesn’t believe Times staffers should be tweeting any internal news—good news, bad news, whatever.

From Bill Keller:

Before we get going, I'm going to say something I perhaps should have said Monday, when we did our digital update in this auditorium. It's important that we be as open as possible with one another about things going on inside The Times. But the level of candor is likely to be diminished if people are Twittering fragments of the conversation to the outside world. We need a zone of trust, where people can say what's on their minds without fear of having an unscripted remark or a partially baked idea zapped into cyberspace.

I find it terribly hypocritical of the Times editors to be admonishing their reporters on this. It's one thing when the Times' business staff refuses to speak to the press. It's quite another when The Times' editors asks their reporters to remain silent on issues about the Times that they would demand their reporters ask sources at other institutions to provide details about*.

* That said, I also tend to think that the media spends way too much time reporting about other media. Do readers care about this? Certainly, the decline of print journalism is a story worth covering, but stories about the layoff of journalists are published at a disproportionate rate to their portion of the total number of layoffs in the broader economy. Although over-inflating the media's own importance is certainly part of this, I actually think it's more related to the relative ease with which journalists can get information about layoffs at other newspapers--as opposed to investment banks, construction companies, etc.

Markets in Everything, Fantasy Sports Edition

Taking a page out of Tyler Cowen's playbook, I found this amusing in the WSJ the other day:

Dodgers fans are not alone in their woes. Manny Ramirez's 50-game suspension is killing many fantasy owners, too. According to the Web site MockDraftCentral.com, Manny Ramirez was taken, on average, with the 20th pick in fantasy drafts this year -- about the same as Mets ace Johan Santana. The only people in worse shape are those fantasy owners who recently acquired Mr. Ramirez in a trade. Marc Edelman of SportsJudge, a service that resolves fantasy disputes, says any Ramirez trade made after the news broke Thursday should be nullified. Anything before? "Buyer beware," he says.

Here is there website. It's run by an actual lawyer. And they write real opinions.

Ughhhhh

Looks like Auggie Torres's columns were no help. From the early results of Jersey City's mayoral election:

• Vote      Count           Percent- 
• L. Harvey Smith   3,060          13.26%- 
• Phillip G. Webb     538                2.33%- 
• Louis M. Manzo    6,030           26.14%- 
• Jerramiah Healy    12,214         52.95%- 
• Daniel B. Levin       1,208            5.24%
• Personal Choice         19                 0.08%
• Total                       23,069            100.00%
  

Unless absentee and provisional ballots can keep Healy from getting 50% plus 1 of the votes, it looks like the Jersey City pubs will be in for another four years of strong earnings.

All we need is just a little patience

The elevator bank for the portion of the office that I work on has six elevators. Even though they're really slow, I don't think I've ever waited more than one minute to get an elevator after I push the button to go up from the ground floor. Could someone please explain to me, though, why others feel the need to rush to catch an elevator before it closes so they can squeeze in? Is anyone really that anxious to get to their desk one minute earlier in the morning?

I Also Forgot

Not to harp on the Craig Carton/Selena Roberts issue, but I forgot until today about the last time I remember Boomer and Carton being that hostile to a guest -- when former NY Times sports editor Neil Amdur called in to defend Roberts a few months ago. Carton's comments then, as Newsdays' Neil Best reported, pretty much sum up how seriously Carton's views should be taken:

"Does she have an anti-man complex you're aware of?" Carton asked Amdur, later adding, "She doesn't like men, is my assertion." Oy.

Oy, indeed.

I Hate To...

Waste time dissecting sports talk radio, but like The Big Lead, I found myself "increasingly infuriated" while listening to Craig Carton and Boomer Esiason attempted hit-job on Sports Illustrated's Selena Roberts this morning. And I hadn't blogged in a while, so why not start again tonight.

Let me preface this by saying, I actually like Boomer & Carton, even if I don't always agree with them. And I realize that much of Carton's behavior is just part of his shtick. But I was still disgusted with how they treated Roberts when she was a guest on their show today. I don't think I've ever heard them treat a guest more hostility--and, in this case, I think their tone, if not Carton's line of questioning, was completely unjustified. 

My complaints:

• First, Carton HAS NOT READ THE BOOK. He's entire opinion is based on two excerpts--which I'm not convinced he's actually read--that were clearly publicized because they will generate in the most interest in the book. They represent a small section of what is likely a much more detailed piece of work that will provide context as to why these seemingly small stories--such as the Hooter's tipping incident--play a role in understanding ARod as a man.
• Carton has consistently been extraordinarily sexist. I assume the "Girl of the Week" segment and "Do You Know More Sports Than  A Housewife?" are standard fare for sports-talk radio. However, anyone that's listened to Carton talk about or to women know he's goes far beyond that. The disdain he has shown for women sports journalists, in particular, would make Zeke Mowatt blush. I'm fairly certain he called Roberts a lesbian last week and, today, referred to her as "babe". I'd be willing to bet Carton would not have the same problems with this book if it was written by a man. Their interview with the Details writer that wrote about ARod was much more civilized, for instance.
• He accuses Roberts of "going after" ARod, wondering why anyone would want to learn all these details about his private life. Ummm, Carton is always among the first people to jump on these personal details when they come out in the paper, especially when they're about ARod (Carton even admits he essentially has a hard-on for ARod). And he didn't question why people wanted to know about the sordid details of the Cowboys players when he had Jeff Pearlman on to discuss his book. Carton seemed to rather enjoy hearing those stories, in fact.
• Carton continually refers to her reporting during the Duke lacrosse case. I will admit I haven't extentsively researched it -- and realize it wasn't journalism's finest moment -- but her reasoning for not apologizing seems clear: Even after all the facts of the case have come out, she still believes there was a cultural problem within the program. Should she have to apologize for having an opinion?
• On the issue of sourcing, Carton's logic seems lacking. He insist that Roberts should have on-the-record sources if she is going to say ARod may have tipped pitches. However, she --and every other journalists -- had on-the-record sources in the Duke lacrosse case, which, as Carton gleefully mentioned, turned out to be wrong. She, on the other hand, had off-the-record sources for her ARod using steroid stories, which turned out to be right. I don't necessarily like anonmymous sources, but that doesn't mean you can't use them to get at the truth. What matters is not the type of source, but the quality. And if the steroid story is any indication, Roberts has good ones on ARod. 

I could really care less about ARod. And I'm not going to read the book. But the way Boomer and Carton treated Roberts today was unprofessional and inexcusable.