Lieutenant Island Views : Commentary About Finance, Politics and Baseball

The New Yankee Stadium-Redefining the Term Visitor Friendly

April 19, 2009
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Have you heard that the new Yankee Stadium is extraordinarily visitor friendly? After scoring 22 runs yesterday, the Cleveland Indians certainly would agree! (Note: they were but inches away from 26 runs on a Travis Hafner fly ball to the wall in the 9th inning)

It has great amenities and should be a money maker for the Yankees. For all of the lucre it may generate, it is also possible that the stadium really has sacrificed a bit of the “home field advantage” that it once conveyed to the Bronx Bombers. As Joel Sherman points out in the New York Post, this is not your Granddad’s cacophonous House that Ruth Built:

• No more upper deck virtually hanging over the field. The upper deck is now set back and is much less directly above the action
• Bleachers and their fanatic fans are much further from the field and much less of an annoyance to visiting outfielders
• Field level pricing that would make Marie Antoinette blush! At $1,000 + per seat, one now finds soft spoken plutocrats, a few mild mannered expense account recipients and a lot of empty seats (as was the case yesterday in the Indians blowout.) You can be sure that Carl Pavano was a happy Indian that the down close seats no longer felt like the seats held by “the Mob” at the Roman Coliseum. In any case, he sure was not fed to the lions like Yankee fans in the far away seats had hoped.

Reducing the crowd effect at Yankee Stadium will undoubtedly reduce the home field advantage that the Yankees once enjoyed. Their hard core fans remain loud and lunatic. They are just far away from the field of play and in a lesser position to intimidate opponents. Fortunately for visitors, including those few in the expensive seats and on the field, the place is a lot more visitor friendly!

http://www.nypost.com/seven/04172009/sports/yankees/bronx_cheer_for_this_quiet_new_ballpark_164874.htm


Wall Street Crash = No Jobs; The Blessing for Recent and Upcoming Graduates

April 19, 2009
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When Winston Churchill lost the Parliamentary election of 1945, his wife advised him that it was “a blessing in disguise.” His response was that the blessing was “very well disguised!” Many recently laid-off young bankers and college seniors who are NOT receiving investment banking jobs are feeling a lot like Churchill in 1945.

Unlike Churchill, the blessing may be closer to reality than they realize. As a long time investment banking group head, recruiter and, for the last two years, a college finance professor, I have seen far too many bright young twenty year olds pursuing a false dream on Wall Street. The allure was the trappings of the job, not the experience or nature of the work. High compensation, an exciting life style, prestige, material possessions and other superficialities were part of a bargain made in exchange for 100+ hour work weeks, sublimination of personal creativity, foregone time with friends and, at times, abuse by obsessive compulsive ego maniacs who may have suffered similarly and view mistreatment of junior bankers as an outward sign of their power and success.

The real question is whether investment banking is what they really want(ed) to do or whether it is just a means to achieve the fruits of a Faustian bargain. Was or will it be worth it for them? Will they be happy? Will they even last long enough to achieve the fruits?

For a few, the answer is yes. They will be either the lucky or those who genuinely enjoy the challenges and sacrifices attendant to the career. They will tend to be people who possess various requisite skills and aptitude for specific jobs on the “Street.” Facility with numbers, problem solving talents and an enjoyment algebra and statistics are crucial prerequisites for success at virtually any Wall Street position. Knowledge of psychology, legal concepts, salesmanship and recognizing recurring historical patterns are also important. An entrepreneurial spirit, a proven ability to recover from severe setbacks and a desire to make money are a must for all.

Sadly, the last point is probably the only common thread with the vast majority of young Wall Street job seekers and the freshly unemployed. Few actually would ever see the relevance of most of the skills enumerated above except maybe for the quantitative aspects and regrettably, few would ever mention a love of algebra or statistics less they be viewed as “geeky” or unsophisticated.

Typical arguments made by “twenty-somethings” when seeking investment banking jobs include variants of the following:

• “I am really a hard worker and love putting in 100+ hour weeks as a “work unit”
• “I have always received top grades and have never been anything but the best academically”
• “I know what it takes to be a success and I have it”
• “I have always wanted to be an investment banker”

Too infrequently asked or sincerely answered are questions like:

• Would you work 100+ hours per week as a banker next year if your pay were to be $20,000 per year with no bonus and limited economic upside?
• If you have never experienced a serious setback in life or evidenced an ability to recover from adversity, why should one believe you can do so in a high pressure and now low paying job?
• What does it say about your intellectual curiosity or self realization that the only thing you ever wanted to be is an investment banker? Explain why this will still be the case in a low pay environment
• When asking about skills to be an effective banker, see how many, if any, cite knowledge of legal concepts, historical methods, psychology or even statistics, algebra and salesmanship

The point to glean from such questions and observations is that the preponderance of the 35-50% of the classes at Princeton, Harvard, Yale or any other college that now seeks Wall Street jobs are not appropriate candidates regardless of their inherent intellect. They would likely be happier in other pursuits if they could only get over trappings of Wall Street. Sadly, many recruiters have been as misguided as the students in recognizing this verity or in selecting appropriate candidates.

The good news is that the allure and job availability are now significantly diminished. Only those who “really” want jobs, regardless of compensation, are likely to land such positions. Ridicule of bankers, a scarcity of positions and limitations on economic upside will do much to reorient thinking.

Where will the young people go for employment? Is it really a blessing that they won’t be on Wall Street?

It will be a blessing if the students and newly laid-off exercise self realization and pursue jobs which excite them because of the content rather than the compensation or perceived prestige. It will be a blessing if they experiment, explore and take chances pursuing dreams rather than dollars. Who knows, maybe some would be bankers will instead join the Peace Corps, start a business, become teachers, coaches, artists, work with autistic children or even become community organizers. Most importantly, maybe they will find satisfaction and happiness doing something because they enjoy it. They may even find a great truth to be that enjoyment and happiness with one’s job can lead to significant career success. History would suggest that this is what happened to Barack Obama, Bill Gates and Bill Belicheck. None can argue that they pursued traditional jobs or were the highest paid when they left college. They were bright, hard working and blessed because they sought careers doing what they enjoyed when they were young!

The attached article from the New York Times provides further insights on this topic:

http://www.nytimes.com/2009/04/18/business/economy/18grads.html?_r=1&scp=1&sq=looking%20beyond%20wall%20street&st=Search

Note: While the author did spend a significant number of years on Wall Street, he was a history major who liked algebra and statistics and remained a practicing Democrat to the chagrin of his loyal clients. His immediate post college years included selling advertising, travel to Brazil without a job in pursuit of adventure and an around the world trip mostly by public bus. He arrived on Wall Street in the sustained and severe downturn of the late 1970s and early 80s with 20% interest rates, low salaries and minimal bonuses. He stayed because he enjoyed the work, liked the clients (despite their political predilections)and was excited by the markets. Eventually the compensation got better and he did not complain!


Why You Should Hate Brussels Sprouts Rather Than Bankers!

April 17, 2009
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The Daily Deal has an uproarious essay on why we should not vilify bankers any more. They point out that it is just starting to get passé. New villains are needed. Their recommendation; Brussels sprouts!
Their case is absolutely compelling.

While many of you may not read ‘The Deal” on a regular basis, if at all, it is a terrifically well written “trade rag” for the finance industry. They have both a “wicked” sense of humor and social conscience in addition to being excellent reporters (Note: they assist this writer in his teaching at Morehouse College). Check out the article.

http://www.thedeal.com/newsweekly/insights/dear-bankers.php


Is George Will Un-American or Just an Insufferable Elitist?

April 16, 2009
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In an article/screed today, George Will decries Americans’ love affair with denim and blue jeans. He tells the story of Levi Strauss inventing jeans. He also indicates that, in his entire life, he has owned but one pair which he has only worn once to a party which required that everyone be in jeans. Doesn’t George know that wearing jeans is one thing that virtually all Americans can agree on? They are uniquely American. Created for our early economic development (use by those prospecting for gold), they now are owned by most men, women and children in the nation. Jeans are generally cheap, comfortable and non-determinative of class, social status, education level or other things. Jeans are truly non-discriminatory. Rich, Poor, Blacks, Whites, Native Americans, Asians, Blue Bloods and Immigrants all wear and enjoy jeans. Why does George have a problem. Is it in some way retaliatory for someone telling him that his use of bow ties is “European”? By his own admission, he has virtually no experience as a jeans wearer or owner. For such a Libertarian type of fellow, it is hypocritical to hear him foisting his anti-denim values on the rest of us. Perhaps he should avoid being an arbiter of good taste and focus on subjects for which he is capable of more inciteful and knowledgeable commentary. George, how about another good book on baseball?

http://www.washingtonpost.com/wp-dyn/content/article/2009/04/15/AR2009041502861.html?wpisrc=newsletter&wpisrc=newsletter&wpisrc=newsletter


Tax Day Lament (circa 2009)

April 15, 2009
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Today is Tax Day all over America. Unlike our current Secretary of the Treasury, more than 65% of all Americans now have professionals prepare their tax returns. With incomes down, few if any capital gains to offset losses and a $3,000 limit to investment losses against non-investment income, tax returns have become less complicated for a lot of people. As I have talked to friends, family and acquaintances ranging from my 89 year old mother (living on a fixed income) to former students in their first year of work, they all have had a similar complaint: the tax preparation cost me as much or more than I saved.
Perhaps Tim Geithner’s do-it-yourself plan was a harbinger of today’s lament!!

In any case, as is almost always true, the Wizard is a source of great wisdomon this subject!

Tax Day Lament (circa 2009)

Tax Day Lament (circa 2009)


How Deficits Are Financed Does Matter

April 14, 2009
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Fortune magazine’s Allan Sloan poses some excellent questions and raises some ugly issues in his piece “Structuring the Treasury’s bet for a Long-Term payoff.” His central thesis is that the Treasury makes a mistake financing the majority of its new debt in the short term debt markets at .2% today rather than locking in long term (30 year) rates at about 3.6%. It is his belief that long rates are likely to rise as the US deficit increases. While he makes no judgment on the merits of a deficit driven stimulus plan, financing such long term deficits in the short term markets may make the near term savings extremely expensive in the long run.

Rates may rise regardless of what action the Treasury takes today, however, the actions taken today may make tomorrow worse than it need be. Rising rates are usually what happens when business conditions improve from recessionary levels. Financing an increasing deficit in the short term market today exposes the Treasury to greater refinancing risk in the future in what most likely will be a higher rate environment. Laws of supply and demand will also have an impact on the US Treasury’s cost of capital. The larger the amount to be financed, the more leverage the buyers will have in terms of rate demands. The Chinese are already talking about holding less dollar debt. Is this a precursor for a “Sino-Hold-Up” that would make John Dillinger proud? While there is still faith in the United States Treasury, that faith could have an unattractive price tag attached!

The implications for a rise in long term rates and strategies to minimize the long term interest cost do more than just add varying levels of incremental debt to our national balance sheet. Corporate bonds are usually priced on the basis of a “spread” over Treasuries. Higher Treasuries, regardless of the maturity, mean higher corporate borrowing costs unless spreads decrease; the exact opposite may happen in a rising rate environment. Weaker and smaller less-than-investment-grade companies can expect to be hit the hardest. In a worst case scenario, it is possible that no spread would be sufficient to compensate investors. To put hard numbers to this, in today’s market, B rated companies’ 8-10 year bonds are trading in the 14-15% range. Similar bonds of BB rated businesses are in the 10-12% range. Were ten year Treasury rates to rise 2.5-3% and spreads to remain constant, the cost of ten year bonds for B rated businesses would rise to 16.5-18% and BB rated bonds to 12.5-15%. Any upward movement in spreads would make rates higher, taking them to potentially prohibitive levels. Though such rates would not impact the cost of pre-existing bonds, they would be a severe impediment to the refinancing of maturing bonds and/or to finance growth or capital projects.

Dick Cheney was famous for saying that “deficits don’t matter.” Time will tell if he was right. What is for sure is that how deficits are financed can make a big difference!

http://www.washingtonpost.com/wp-dyn/content/article/2009/04/13/AR2009041302585.html?wpisrc=newsletter&wpisrc=newsletter&wpisrc=newsletter


Easter, Passover and Real American Values

April 10, 2009
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This weekend American Jews and Christians of various denominations will celebrate high holy days of their respective faiths. As they do so, they should also remember and give thanks to the wisdom our our nation’s founding fathers that they chose to distinguish our nation as one with a clear separation of religion from governmental law. One of the great principles of our nation is that individuals can be free to practice, or not practice, the religion of their choice. To those who would suggest otherwise, we would urge that they re-read their American history.

The attached cartoon and a copy of Thomas Jefferson’s word to Baptist ministers in Danbury, Ct. make clear the values of our founders and the author of the Decration of Independence.

Happy Easter and Happy Passover to all who celebrate. God bless America to everyone!!

http://www.washingtonpost.com/wp-dyn/content/opinions/anntelnaes/

http://www.loc.gov/loc/lcib/9806/danpre.html


Pulte Buys Centex-Rumors of Hombuilding’s Demise are Greatly Exaggerated!

April 8, 2009
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To paraphrase Mark Twain, “Rumors of the demise of the homebuilding industry are greatly exaggerated”. The recently announced acquisition of Centex Homes by Pulte Homes is a bold move that speaks volumes about where the business is going. Several points worth noting about the deal include:

1) It is a stock for stock transaction-Centex directors want to capture some of the upside which is created. They are not heading for the door.

2) The synergies are huge, probably amounting to $.75-!.00 per share annually. On a net present value basis over five years, this represents between 30-40% of the purchase price.

3) The structure materially improves the pro forma company’s balance sheet

4) Centex had near term (ie next 18 months) maturities in excess of $500 million. This has not been talked about by analysts but must have been an important consideration for their management and board. The questions around the debt included:
a) Could Centex refinance all of the debt?

b) What would be the cost to refinance the debt if it could be refinanced ? Arguably the cost would have been a coupon in the mid to high teens with limited ability to call if a deal could be done? And that is a HUGE if!

c) What sort of operating constraints would the banks put on Centex in terms of revolver availability etc? Banks do not like bondholders paid out in front of them. They would have forced the issue and turned a $500million maturity problem into a portential muli-billion dollar issue. Any impairments or other issues which caused bank covenant violations would have led to truly significant problems for Centex.

d) Could the problem have forced them into some sort of bankruptcy proceeding?
This writer believes that the debt issue played significantly into Centex’s thinking. They opted to be pre-emptive rather than risk that someone would beat them to Pulte and leave them a universe of less likely acquirors, forcing them to suffer the vicissitudes of a prolonged bad debt market

5) Centex’s bonds did not have a change of control clause (“COC Provision”). This basically would allow a buyer to assume the Centex bonds as part of the transaction rather than having them “put” at 101 and forcing a major refinancing. This was a major transaction advantage to any buyer. That said, it was also something of a “wasting” asset which could be lost if Centex were to default on its bank debt and trigger a cross default with the bonds. It is very likely that Pulte viewed the lack of a COC provision as a major attraction to Centex. Centex probably viewed it as a “use it or lose it” opportunity and chose to use it.

6) Did Centex have alternatives to Pulte? Looking at the other big builders, Pulte and, to a lesser extent, NVR were clearly the most logical. Pulte had a relatively high stock price in terms of PE and multiple to book. Moreover, it only has $25million in near term maturities vs some $318million for DR Horton and over $500million for Lennar. While NVR has the industry’s most enviable balance sheet and stock multiples, it has generally operated with a “land light” strategy and high margin construction strategy. Buying Centex could have hurt their multiple and been a huge undertaking for them operationally. This was less the case for Pulte where it was much better set up to cut employees, plug Centex subdivisions into their infrastructure and play. From my soundings around the industry, Centex did not do a significant market test, opting to cut the best deal it could with Pulte and then hope that the combined entity’s stock performs.

7) Could Centex have achieved a higher price? Maybe. To do so would have involved a game of corporate “chicken” with Pulte. The odds were not stacked in their favor as most strategics (ie other builders) were not likely buyers and the size and industry precluded private equity from becoming engaged. My guess is that Pulte started at a price below book and was worked up to book value. Going above book value in this market, with attendant goodwill and impairment issues was a bet Centex could only make if it were willing to “walk from the deal” and continue on a stand alone basis. They also knew that the odds were high that their bet would be called.

8) Is this a harbinger of other deals? If so, who is next? The answer is a resounding maybe! The same issues of debt maturities, form of consideration and price will be at play. Pricing will be tricky because of all of the usual constituencies involved including common shareholders, bondholders and banks. Fair deals for all will work. Banks and bondholders do not want to operate homebuilders and, in many cases, managements own significant stock (ie Toll, Lennar, MDC, Horton, Hovnanian et al.). Land positions, size and the quality of management will also be issues

All in all, this looks to be a decent deal for Centex shareholders relative to the downside risk. They traded off a low price for their shares for comfort that they would not be crushed by their near term debt maturities. They also believe that they will still have terrific upside in Pulte shares due to the synergies and general deal structure. They are probably correct in this thinking. For the same reason, the biggest winners will likely be the Pulte shareholders

PS The bank lenders, many of whom were lenders to both Centex and Pulte, will also be very happy because they will probably be able to significantly reduce their aggregate exposure to the combined entity.


Josh Beckett Dominates!!

April 7, 2009
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The Red sox opened their season today. The weather was fine and Fenway looked great. The festivities started with a touching moment when Ted Kennedy threw out the first ball to Jim Rice. Both are Hall of Famers in their respective games and belong in the Pantheon of Boston greats!

When the game got down to business, so did the Red Sox. Dustin Pedroia got things going early with a home run in the first inning. Beckett rang up ten strikeouts in seven innings while giving up only 2 hits in a quick 93 pitches. Jason Varitek hit his first homer, the team struck out 14 Rays and Jonathan Papelbon finished with a 1-2-3 inning! After the Yankees abysmal opener and the Sox knocking off their other significant AL East rival, at least for tonight, all is right with the world!! With any luck, the question will be, whether the Yankees or Orioles can beat the Rays for the Wild Card slot.


Baseball’s Newest Stadiums-Citi Field vs Yankee Stadium Redux

April 7, 2009
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As we have suggested previously, in sports, finance and politics, money does not always assure success. In particular, creativity and inspiration can actually be inhibited by economic excess. While none will claim that the New York Mets are economically deprived, by many accounts they did more with less when it came to designing and building their new stadium. It is inspired by many of the great old time ball parks and is a joy to visit. Some suggest that Citi Field evokes Ebbetts Field while the new Yankee Stadium reminds viewers of some of Benito Mussolini’s achitectural inspirations! Notwithstanding its unfortunate name, Citi Field (note: some Yankee fans use the first letters of its old park’s name and drop the C in the new name), early reviews suggest that the Mets have a winner vs the Yankees. Add to this the fact that the cost of tickets to Citi Field is significantly less for desirable seats, it will be interesting to watch how comparable attendance figures unfold. We would also note that CC Sabathia and Mark Texeira’s opening day performances, if indicative of future performance, will not enhance attendance at the new Yankee stadium.

Phil Mushnick of the New York Post adds his thoughts and points to some of the less than fan friendly aspects of “The House That Greed Built”

http://www.nypost.com/seven/04062009/sports/mets/new_mets_field_clobbers_yanks_from_tv_st_163157.htm


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About author

Mr Thaler is currently the Managing Partner of Lieutenant Island Partners, an organization providing corporate finance advice and general consulting to corporations and not-for-profit organizations. Mr Thaler retired as Vice Chairman of Deutsche Bank Securities in early 2008. His background includes experience as an investment banker, senior manager, business builder, college professor, not for profit board chair and trustee. In his thirty plus years as an investment banker for Deutsche Bank and Lehman Brothers, he has been involved in numerous significant debt and equity financings, mergers & acquisitions, leverage buyouts, restructurings and cross border transactions. Of particular note, Mr Thaler has been one of the most active participants and strategic advisors to the homebuilding industry. In a period of significant turmoil and losses, he was one of the few active bankers to the industry who did not have either a loss or credit write down. He is currently advising several public builders on strategic matters and is an adjunct professor of finance at Morehouse College in Atlanta, Georgia. Though he lives in New York, he is a life long Red Sox fan! www.LieutenantIslandPartners.com

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