Lieutenant Island Views : Commentary About Finance, Politics and Baseball

Tom Toles’ Take on the Estate Tax

April 3, 2009
Leave a Comment

As my mom often tells me, “many a truth is told in jest”. Tom Toles captures the estate tax argument in a cartoon. What is hard to believe, in times like these, is that there is substantive Republican discussion about the estate tax. For those in the Republican leadership who have gripes about the $7million limit before taxation that President Obama proposes, they and their constituents should be happy if they can still pass that level of tax free capital to their children. They may not realize that many who might have been able to do so can no longer do it due to the financial crisis. Likewise, when they had a chance to increase the limit, they overreached and sought to completely eliminate it on a permanent basis. Fighting over this issue now raises a serious issue of certain leaders’ priorities in a conflagration!

http://www.washingtonpost.com/wp-dyn/content/opinions/tomtoles/?name=Toles&date=04032009&type=c

Advertisements

Let’s Look Under the Banks’ Hood (Declining revenues may take care of that nasty compensation issue)

April 1, 2009
Leave a Comment

A quick look at the first quarter ’09 Underwriting revenue statistics released today by DealLogic suggests that Underwriting may not be such a big source of increased profitability for banks. While total proceeds raised increased 27% from $1.344 billion to $1.707 billion, industry wide fee income was down 11.9%. The results were far worse for a number of the former industry leaders whose liquidity and stability are in question.The differences are, in part, explained by the fact that there was less activity in the higher margin areas of equity and less than investment grade debt issuance. More interesting is a look at the underwriting revenues of individual banks. Only Deutsche Bank and Royal Bank of Scotland posted increases in underwriting revenue. Names like Citi, Goldman and BofA did not fair well at all. If Citi and BofA are going to have up first quarters, it won’t be from underwriting. Citi’s first quarter revenues were down 31.3% and B of A’s declined a whopping 56%. The mighty Goldman Sachs fell from third to tenth on the League Table and saw its underwriting revenues fall 45%, which was worse in total dollars and percentage terms than even Citi’s results.

The changes probably reflect a few things. First, the more stable banks, like JP Morgan and Deutsche, are likely to be the leaders going forward. While Citi and BofA were still marginally ahead of Deutsche, their precipitous declines point to an issuer abandoment trend that may not be quickly restored. Were it not for a few old relationships, which probably meant joint books on the right and conferred less real revenue than DealLogic thinks, they would likely be behind Deutsche. Second, were it not for major refinancing by investment grade names, who were taking advantage of market windows and proactively moving to protect their balance sheets, revenues would have been much worse for everyone. These event phenomenons, if true, may not be indicitive of great ongoing revenue streams. Third, Goldman’s fall off reveals just how dependent they really were on equity and less than investment grade issuance. In the last few years they evolved into a higher risk shop dependent on proprietary trading and investments together with higher margin and risk underwriting.

Perhaps the Obama administration need not worry about legislating bank compensation. Decining Underwriting and other bank revenues may do the job for them!!

Bank Underwriting Revenues First Quarter 2009 v 2008 may be found below:

http://online.wsj.com/mdc/public/page/2_3106-FeesStocksBonds-Q12009.html


The End of the Beginning or the Beginning of the End of Hedge Fund and Private Equity Economics?

March 30, 2009
2 Comments

Saturday’s Wall Street Journal has an interesting article (“Calpers Tells Hedge Funds To Fix Terms-Or Else”) which details the California Public Employees’ Pension Fund’s (“Calpers”) attitude toward hedge fund and private equity compensation. Calpers is the nation’s biggest public pension fund. It has seen its hedge fund and private equity portfolios decimated this year along with its myriad other equity oriented investments. This is necessitating a reallocation of their portfolio which will mean substantial cuts in funding for “alternative investments” like hedge funds and private equity. Calpers’ reallocation issues has done more to put the fear of God into heathen PE and hedge fund managers than would any overzealous preacher! Loss of Calpers money can put a dent into any fund’s asset base and be a harbinger of incremental losses as other funds follow Calpers’ lead. Reallocation also gives Calpers extraordinary “muscle” to demand favorable terms from those with whom it chooses to invest. As the article points out, some of the modifications in terms that it is looking to achieve include:

• Reduction in annual fees (now 2-3% on avg.) and carry from 20% to something significantly less
• Recoupment of fees paid in good years to cover subsequent bad performance
• Managed accounts solely for Calpers to reduce the impact of redemptions by other investors
• Greater disclosure of assets and potential limits to leverage

Implementation will come primarily with the deployment of new money rather than amendments of existing fund investments. While it will take some time to implement the changes desired, they will have a chilling effect on the compensation and operations of many hedge funds and PE shops. Because so many institutional fund investors follow Calpers example it is likely that some fund managers will opt for dissolution or be forced to that decision by an inability to raise adequate capital. If Calpers succeeds, the face of alternative investments will look very different in the coming years. It also won’t help the value of homes in the Hampton’s or large apartments on Park Avenue.

It is quite possible that the fund business will follow the example of Major League Baseball. Top performers like Paulson and Soros may still be able to demand their terms because of their stellar track records in the recent downturn. Others will see a dramatic change in life and pay because they did not measure up in the clutch. There won’t be many Johan Santanas or Albert Pujols in the fund world. To make matters worse, Calpers is signaling that they have no intention of spending as freely as the Steinbrenners!

http://online.wsj.com/article/SB123818466240759815.html


Spitzer for Treasury Secretary? Are You Joking Katrina?

March 25, 2009
Leave a Comment

Recently Katrina Vanden Heuvel, Editor of the the Nation, has been suggesting that Treasury Secretary Tim Geithner should be replaced by Elliot Spitzer. We know that she and her husband have been his friend since their days at Princeton but her suggestion is an embarrassment. Perhaps she is letting friendship cloud her judgment. Aside from the fact that Spitzer pleaded no contest to several of the crimes (Mann Act violations, illegal currency wire transfers, aiding and abetting prostitution etc.) that he often used to coerce his targets when he was New York Attorney General, he may have been the root cause of AIG’s demise. His actions, which forced out AIG’s long time CEO, Hank Greenberg, led to new management which took the company in the wrong direction. Greenberg’s successors had a difficult time maintaining his earnings record. They went for what they saw as easy money in credit default swaps and other esoteric insurance products. This was a large and real deviation from the way Greenberg ran the company. We all know the rest of the story.

The laws of unintended consequences really can be punishing when you act in a vindictive manner rather than as a result of a deliberate strategy.

As a secondary question, does Katrina expect an easy confirmation for her friend Elliot? Larry Summers was kept away from the Senate confirmation process because he spoke out about the gap between women and men in scientific fields of study. Imagine if he had broken multiple laws to hire $5,000 per hour hookers! At least Elliot paid his taxes.


Assessing Krugman’s Take on Toxic Asset Plan

March 23, 2009
2 Comments

Regardless whether one agrees or disagrees with Paul Krugman’s op ed in today’s New York Times, it is hard to disagree with his agrgument that the the plan is largely a subsidization of banks and/or a low risk option for investors. What he fails to point out is that, because of his points, that it is a huge subsidy, banks ought to rush to sell as much as they can of their toxic paper. Without the low interest rate, non-recourse government loan (means that the government can’t go after the new investors for any more than the underlying assets), the assets would almost certainly sell at lower price levels. Krugman argues that this is a failure to recognize the loss. He probably is correct but such recognition won’t get capital flowing or move the process forward. This government/private investor investment is effectively another capital injection into the banks. What Krugman also fails to note is that the subsidy should help facilitate trading in the aftermarket for these assets, if for no other reasons than the fact that there will be an auction to determine value. If nothing else, and maybe only for today, the market seems to like the plan. This evidenced by a huge rally led by the financial sector. I am sure that even Prof Krugman agrees that it is hard to ‘fight the tape”.

http://www.nytimes.com/2009/03/23/opinion/23krugman.html?ref=opinion

http://krugman.blogs.nytimes.com/2009/03/23/geithner-plan-arithmetic/”>


From Whence Cometh Our Financial Mess?

March 22, 2009
Leave a Comment

Beneficiaries of a Jesuit education learn early that logic and careful analysis are predicates to better judgments and conclusions. Jesuit pedagogues would also suggest that careful analysis and judgments are also necessary for appropriate corrective actions in addressing major problems. When it comes to our current national and global financial mess, blaming the usual suspects (George Bush, greedy CEOs, Wall Street, high executive compensation et al) or pandering to mass frustration may be cathartic but can never be confused with analysis or be a basis for corrective action.

In the coming days, we hope to address the nature of many of the issues that we believe contributed to our current economic troubles. We will endeavor to do so in a clear, simple and concise manner. Please do not be offended if we do not cover each issue in the first or second post. We believe that the issues fed on one another and are best examined seriatim rather than in one fell swoop.

What then were some of the most significant issues?

• The Growth of Leverage, Particularly in the Last Five Years
• Credit Default Insurance
• Mark to Market Rules
• CDOs (Collateralized Debt Obligations) and CLOs (Collateralized Loan Obligations)
• Failure to Guarantee Fannie and Freddie Preferred Shares
• Letting Lehman Fail
• Delayed and Insufficient Action on AIG
• Treasury “Crying Fire in a Burning Building” to Pass TARP
• TARP Mismanagement

From these issues flowed incremental and very significant problems and issues including:

• Bank Failures and Capital Inadequacy in the Financial Sector
• AIG Insolvency
• Sub-prime Surge and Failings
• Mortgage Foreclosures
• Stock Market Meltdown
• Post-TARP AIG Compensation Levels

In the coming days we will deal with each issue and seek to expand our discussion by building on each issue and reflecting on subsequent problems that flowed from them. Stay tuned!!

(Note: While the author has long admired the discipline, training and learned nature of the Jesuit Order, he is neither a Roman Catholic nor the beneficiary of a Jesuit education.)


« Previous Page

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

Search

Navigation

Categories:

Links:

Archives:

Feeds