I am taking some leave and will not be back at work until Monday April 7 so I do not plan to post again until then, unless something unusual happens. Have a good time without me.
My column in the Financial Times this week is about the need for better incentives and simpler regulation of investment banks, rather than a vast new regulatory infrastructure and set of rules. You can read it here and comment below.
In what is intended as an occasional series noting new jobs, and new names for old ones, I would like to start with the “reservationist”.
A reservationist is a person who takes your reservation for a New York restaurant. I found this out just now when calling Keith McNally’s restaurant group – which includes Balthazar, Pastis and others – for a booking.
So far so good – or at least, not too bad – seems a fair assessment of how the financial crisis has so far treated hedge funds. Although some have collapsed, including two managed by Bear Stearns, and others have hit trouble, they have generally done better than big financial institutions.
One hedge fund manager I talked to this month estimated that hedge funds with equity of about $15bn had so far been mortally wounded in an industry that now manages $2,000bn of assets. He compared this to financial institutions such as Citigroup and Merrill Lynch (and now Bear Stearns) that had suffered more.
But I do not think we have yet seen the full impact of the financial crisis on hedge funds. As banks that have kept hedge funds in business by lending them money and providing other services pull back – and it becomes much harder to leverage equity with debt – some funds will face a colder climate. Read more
I am afraid that I forgot to post a link to my column on Saturday in which I tried to explain to Weekend FT readers that Bear Stearns employees really were suffering from the collapse of their institution. The email responses I received were equally split between those who thought I was too kind, and those who thought I was too harsh, to Bear. You can post comments below.
Having reviewed Richard Florida’s Whose Your City the other day, I am unusually alert to stories about people flocking to cities from suburbs and the countryside.
So this FT story this morning caught my eye. It is about a McKinsey Global Institute study of urbanisation in China and includes this paragraph: Read more
Hmm. Well, we have now seen the terms of the JP Morgan’s revised $10 a share offer for Bear Stearns and I do not think it is a good outcome for the Federal Reserve.
The Fed does gain something from the new deal – JP Morgan takes on liability for the first $1bn of losses from the $30bn portfolio of illiquid assets that it guaranteed as part of the first agreement. Read more
Is JP Morgan about to give in to Bear Stearns’ angry shareholders and offer five times its original $2 a share price?
So Andrew Ross Sorkin says in the New York Times this morning:
Under the terms being discussed, JPMorgan would pay $10 a share in stock for Bear, up from its initial offer of $2 a share — a figure that represented a mere one-fifteenth of Bear’s going market price.
The Fed, which must approve any new deal, was balking at the new offer price on Sunday night after several days of frantic, secret negotiations, these people said. As a result, it was still possible the renegotiated deal might be postponed or collapse entirely, said these people.
I do not understand how the Federal Reserve can stand behind the deal on anything like the original terms if JP Morgan is going to pay more. Read more
Things happen very rapidly in a crisis. A week or two ago, the Federal Reserve was still hesitant about providing back-up finance for investment banks on the same terms as the banks it regulates.
Now, the Fed has not only extended back-up financing to Wall Street primary dealers following the Bear Stearns collapse, but has its sights set on taking over their regulation from the Securities and Exchange Commission.
It makes sense for the regulatory division that mirrored the Glass-Steagall Act separation of banks and brokers to break down now that banks and investment banks compete directly with each other. Read more
A financial incentive is a powerful thing.
Bob Nardelli, Jim Press and Tom LaSorda, the improbable triumvirate now heading Chrysler, came into the Financial Times office in New York this week to talk to a group of us about their turnaround efforts.
On the face of it, the idea that these three men will carry on working smoothly together until Chrysler is restored to profit and perhaps floated or merged with another company is improbable. Read more
The topic of the falling burglary rate in western countries has always interested me. It seems a fair bet that burglary has been in decline because there is less point to stealing stuff such as televisions and DVD players.
I wrote a column about it in 2004, which included this paragraph: Read more
You win some and you lose some has always seemed to be Virgin’s business model. In the case of Virgin Mobile USA, the pre-paid phones venture of Sir Richard Branson’s Virgin Group, it has been mostly the latter.
Virgin Mobile USA has put in a spectacularly bad performance since its US initial public offering in October. It floated at $15 a share and closed yesterday at just over $2 a share. It has dropped steadily since the IPO and last week lurched downwards on a gloomy earnings forecast. Read more
This is my review of Richard Florida’s Who’s Your City, his new book about the rising economic strength of cities compared with the suburbs and countryside. I liked it a lot although I did have one criticism of the format. You can read the review here and post comments below.
The world moves fast these days. Barely has one heard of something than it turns into a phenomenon.
Take the Clover filter coffee machine, which I learned the other day from perusing a local blog is an $11,000 machine that somehow makes better filter coffee than almost any of the alternatives. Read more
My Financial Times column this week is about Bear Stearns and how it was not merely a victim of the credit crisis because its leaders brought it on themselves. You can read it here and comment below.
Time lends perspective and having a couple of days to absorb about how the Federal Reserve acted over Bear Stearns has helped to clarify its intervention policy, which was devised on the hoof over the weekend.
Although there was a lot of worry about moral hazard – the US government protecting those who should not be protected from their financial errors – the Fed clearly tried to avoid it. It wanted to prop up Bear to avoid a fire-sale of its mortgage securities but did not want to give too much comfort to others. Read more
Well, no-one can complain that Erin Callan, Lehman Brothers’ new chief financial officer, lacked detail on the investment bank’s first quarter results conference call this morning.
Ms Callan rattled through a very long and thorough explanation of the bank’s earnings, balance sheet and liquidity, with the emphasis on the latter. Given that Lehman has been fighting to persuade people that will not become the next Bear Stearns, that was wise. Read more
Curiouser and curiouser. Perhaps when the dust settles from the JP Morgan Chase/Bear Stears deal we will look back on it primarily as a smart property deal. JP Morgan made sure that it not only got Bear Stearns’ head office at 383 Madison as part of the takeover but can buy it even if the takeover falls through.
Jamie Dimon, JP Morgan’s chief executive, apparently wants to reverse the plan to move JP Morgan’s investment banking and trading operations into a new building on the former World Trade Center site. As Felix Salmon notes this is a service to architecture since its planned building looked ghastly. Read more
From the Wall Street Journal:
Amid heightened concerns over the state of the world financial system, George W. Bush gave assurances Monday that capital markets are working smoothly, adding that the US is “on top of the situation.”
There has been much fuss lately about distorted incentives in bankers’ pay that encourage them to take excessive risks because they do not suffer the full consequences of failure. I have written about it myself.
The Bear Stearns collapse shows the other side of that argument. Financial News estimates that Bear employees, who own about a third of the equity through stock bonuses and pension savings, have just lost a collective $5.2bn based on the sale price to JP Morgan compared with the share price of Bear in December.
Even divided among 14,000 employees, that is plenty of money. Because of the way in which bonuses are paid on Wall Street these days, with the bulk issued in shares that only vest after three to five years, they had little choice but to be heavily invested in the fortunes (and now misfortunes) of their bank. Read more