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?