April 26, 2008
Arbitration: "Be Careful What You Wish For"
Not long ago arbitration was one of the darlings of the anti-court, anti-lawyer crowd. Courts and lawyers cheated poor people and arbitration was a solution. Now mandatory arbitration clauses are common in consumer industries and there is a bill pending in Congress to ban them. Why? Business likes them. So much so that they are willing to collude, apparently, to make them industry wide. The Second Circuit has reinstated a complaint against credit card issuing banks that claims they colluded to put mandatory arbitration clauses in all credit card agreements. "Be Careful What You Wish For" [Hillary Clinton statement to a reporter when told conservative radio talk show host Rush Limbaugh was counseling his listeners to vote for her in the Democratic primaries so as to disrupt the Democratic nominee selection].
April 25, 2008
Wendy's Bought by Peltz
Thursday, Wendy's International, Inc. agreed to be acquired by Arby's parent Triarc in a stock deal valued at about $2.3 billion excluding debt. The deal will create the third-largest fast-food company, with approximately 10,000 restaurants and annual sales of more than $12.5 billion. The daughters of the founder, Dave Thomas (one of whom was the real Wendy) are distaught, as they should be. Their father was a true business legend in this country -- someone to set up as an example for young people going into business. After the death of Dave Thomas the company got fancy and forgot how to build and advertise a good, inexpensive hamburger sold in a clean facility. "Our burgers are square because we do not cut corners." How great is that.
Private Equity Still Flush with Cash
Private equity funds are sitting on close to one trillion dollars, one trillion dollars, on uninvested cash. Investors believe the funds will do better than alternative investments -- no matter what the academics say.
The SEC is finally, finally, tackling the problem of rating agencies. They are very, very late to the party on the matter. Moreover, the SEC has found that its running up against Reg. FD and insider trading rule problems in the solutions in wants to propose -- that agencies demand more information when they rate securities. I was introduced to the ratings agency mess as a consultant on a law suit that ended in a bizarre result. A local municipality refused to pay all the agencies for ratings -- it would pay only one. One of the other rating agencies then rated the bonds anyway and hammered them -- resulting in the municipality having to pay higher interest rates. When the municipality sued for, in essence, economic extortion, the judge dismissed the suit on First Amendment grounds -- free speech!! Extortion is free speech?? Unbelievable. The real problem hear is one the SEC will not address -- the SEC has created a oligopoly in the industry. The SEC does two things -- it requires ratings in many of its rules and it licenses the rating agencies. Since few rating agencies are licensed the rating agencies that are can demand high prices and do shoddy work. The SEC is throw this open to market forces by no longer requiring ratings (only the disclosure of any and all ratings that do exist) and by licensing many more rating agencies (a simple test and a character qualification should do it). Let investors choose the rating agencies they trust and ask firms to us.
April 24, 2008
Student Loans: Wrecked
Right-thinking people have long fussed about the "burden of student loans" on idealistic young students who want to go to school on other people money and do "do good". We have devised forgiveness programs and capped interest rates. The wife of Barack Obama has made some famous (infamous) comments on the matter. Well -- not a problem any more -- there are no more loans at all. We have so regulated them that the banks have pulled out -- they cannot afford to lose money on every loan-- particularly in an economic slowdown. Whatttt???? Now students will have to pay their own way or get loans from universities directly. Idealistic young students will have to work for a while to earn tuition and go to state schools. They will not be able to go to Princeton and Harvard on other people's money and then complain about repaying loans well into their forties. Maybe there is a bright side to all this.
April 23, 2008
States as Creditors in Bankruptcy: Ohio and Skybus
Ohio has found itself as a major creditor in the bankruptcy of Skybus Airlines and it will, as other creditors will, get nothing. The Ohio Department of Development gave Skybus 1.5 million taxpayer dollars to locate in Columbus. One year later, the money and the airline are gone. Ohio has filed a claim in bankruptcy and will get nothing. The head of development in Ohio, the Lt. Gov., has indicated that it will "keep an open mind" about forgiving the debt for potential purchasers of the airline. In other words, he has learned little. There will be no purchasers and he will have to pony up another big new grant to get a new airline in town -- he will be willing to double down with tax dollars.
National City's Woes Affect Ohio Pension Plans
It was an easy prediction to anticipate shareholder lawsuits over the National City buyout. Shareholders have lost 84% from highs and the hedge fund buyout group is diluting existing shareholders by close to 70 percent at a below trading market price. Not only are private shareholder the big losers -- employees who took company stock into 401(k) pension plans and sat on it and Ohio pension funds that try to invest in Ohio companies too baths as well. It is another hard lesson for Ohio public pension plans that should invest for pure returns rather than out of local social obligation.
Zell to Sell Newsday to Murdoch?
Tribune CEO Sam Zell indicated in a conference call last week that he may sell Newsday and other Tribune assets, a reversal of his plan to keep Tribune's paper businesses in place. Rupert Murdoch indicated interest in buying Newsday from Tribune Co., for about $580 million. News of a deal was reported Monday by The Wall Street Journal, which Murdoch bought last December, and on Tuesday, by Newsday and The Chicago Tribune. The deal is interesting from several angles. First, Zell is reversing course on holding the Tribune's papers. Second, Murdock must seek an exemption from the FCC to buy Newsday because he will hold too many New York City major newspapers. The exemption will depend on the politics of current FCC commissioners. Third, it is another indication that the newspaper business in is serious decline and in a state of total disarray -- the vultures are in charge and what they do may not be pretty.
April 22, 2008
Intrepid Potash IPO a Success
Agri-business in the United States is booming. Note the success of the Intrepid Potash IPO in the United States yesterday. Shares of the pure-play agricultural nutrient producer, Intrepid Potash, Inc., began trading yesterday on the NYSE. The 30 million-share IPO sold for $32 per share. At $32 per-share, the IPO price was $3 above the top of the $27 to $29 anticipated pricing range. The offering was recently increased from 24 million shares and had an estimated price of $24 to $26 per share. Intrepid stock rose over 50% or $15, to $47 per-share, giving the company a $3.6 billion market cap. There is money out there, waiting.
Hedge Funds to the Rescue: National City
In what has to be galling to the many hedge fund critics, the nation's hedge funds are rescuing the country's ailing financial system. After the overblown hysteria directed at hedge funds in the past two years we have discovered that our main line banks, not our hedge funds, are the financial institutions that lost internal control over risk and are in distress. The hedge funds, with capital, are riding to the rescue of the banks that are sorely in need of capital. Without the hedge funds, the banks would either go under or suck up more government money in bailouts. Unlike a government bailout, the hedge funds are providing need capital for profit -- they expect good returns. The hedge fund returns come from the dilution of existing shareholders -- who should take a hit. The National City cash infusion is a case in point. Hedge funds put $7 billion in the bank, saving it from collapse. The only issue is whether managers, who mismanaged the bank, sold to quickly and to the wrong bidder. Hedge funds are smart. They show a paper profit after their weekend investment even though the stock dropped 28 percent yesterday (Monday) on the bank's announcement of first quarter losses. The existing shareholders have lost big (84% from highs). Where are the hedge fund critics now???
April 21, 2008
A Ridiculous Example of Executive Compensation Disclosure
Footnoted reports on a silly disclosure in a recently filed proxy statement:
Here at footnoted, we’re all about better disclosure. But as with most of the other good things in life, there are certain times when there is simply too much of a good thing. Take the proxy statement filed by CVB Financial (CVBF) last week. In a footnote to the “all other compensation”, the bank disclosed that each of its five named executive officers (NEOs) received a $150 gift card and that the bank spent $350 so that the wife of CEO Christopher Myers could attend a banking conference with him.
Now, why in the world did their lawyers think that this should be disclosed? And who, among CVBF's investors, cares about disclosure of the giftcards? Since I can come up with no regulatory justification for the disclosure (even after looking at the past comment letter footnoted mentions), I must hope that the disclosure is some kind of tongue-in-cheek protest against what the company perceives as an overzealous set of executive compensation requirements.
Posted by Paul Rose
Blockbuster's "Hostile Bid"
There is no such thing as a hostile takeover anymore. A hostile takeover is a takeover that occurs without the support of the incumbent board of directors of the target. Anti-takeover statutes and firm specific defenses make this impossible. A bidder must, at some point, get the assent of the target board, either the incumbents (payoffs work) or replacements (through a proxy fight). A "hostile bid" is a bid for the company that starts without target board approval and is a harsh bargaining tactic designed to get target board approval by using target shareholder pressure on their board as a lever. It does not lead to a hostile takeover. A hostile bid is designed to end in a friendly deal.
National City Corporation's Deal
The board of directors of National City Corporation is going to sell 50 percent of the company's stock to a club group of hedge funds. The price? Five Dollars a share. The trading price of the shares when the deal was announced was $8 a share and this represents an 80 percent drop in share price over the past year. Shareholders of National City cannot be happy. At issue is whether the many other potential bidders for the bank would have paid the shareholders more and whether the board declined to protect 1) incumbent managers and 2) local employees. The corporation is incorporated in Delaware, a state which does not follow the Ohio constituency statute that permits such decisions. Smells like litigation is in the air.
April 20, 2008
Income Disparity in United States: It's not a conspiracy
Most now know the data. In the last few years income, as recorded on income tax returns, of the very very wealthy as increased as a percentage of the total amount of income reported. In 1980 the top .01 percent reported .87 percent of the total income reported; in 2006 the top .01 percent reported 3.89 percent of the total. The data is imperfect -- income in not wealth and income tax laws have changed dramatically over the years. But it does get one's attention. Those studying the difference have come to focus on returns to education -- returns to education, particularly higher education -- have increased significantly since 1950. We are in a sophisticated world and those who are educated are scarce and valuable. With the different, however, come other studies that show it is not necessarily where you go to school that counts -- it is that you go to a good solid school, are attentive, get decent marks, and take strong personal qualities (persistence, conscientiousness and intensity) with you to your first job. You do not have to go to Yale or Harvard. It makes sense, which is better than the other crazy theories on government policies (the income disparity increased with similar percentages under Reagen, Clinton, and Bush) that do not.
How Good People Have Come to Look Like "The Three Stooges"
We have three very talented and experienced people running our capital markets. Chris Cox, a well-respected, capable member of Congress, is Chairman of the SEC; Henry Paulson, who ran the world's best investment bank -- Goldman, is Secretary of the Treasury; and Bob Bernanke, who is an intellectuals intellectual on market crisis, is Chairman of the Fed. These are able, honest, capable folks. Then why do they now look like the Three Stooges. Cox and the SEC sat on the sidelines in the securitization mess (not to mention the mutual fund mess and the Wall Street analysts' mess). Paulson is initiating study groups and and producing proposals that do not relate to the present crisis and that have no chance of passage anytime soon and has decided to broker investment bank buyouts with government money. Bernanke is fighting with Paulson over buyout prices, late to the party on interest rate changes (calm too long and now too much in a panic), and has decided to regulate investment banks and brokerage houses as well as commercial banks. It's the Three Stooges regulating our capital markets. Permit me a bit of amateurish psycho-babble (move over Obama): Good people get into government and just lose their focus -- they are scared that the history books will condemn them for a severe economic downturn -- so they do something, anything, to attempt to appear anyway as concerned, committed, and engaged. They would rather go in the history books as well-intended and not effective than detached. But sometimes detached is what they should be. Markets correct themselves. If they want to appear committed they should all focus on fraud prosecutions and condemnations. Enforce the rules on the books. Go after those who did not disclose the truth or who lied to people and extract appropriate penalties.