Commentaries
Now raising intellectual capital
from Rolfe Winkler:
No MSG Please
Cross-posted from today's Times.
The formidable skills of LeBron James probably won’t reach the stock market. Speculation is rampant he could soon be headed to the New York Knicks basketball team, whose owner is now trading on the Nasdaq.
The listing followed a spinoff of Madison Square Garden Inc. from the cable operator Cablevision to its shareholders last week. MSG is a collection of trophy assets but doesn’t seem to be a gold-plated investment.
In addition to the Knicks, MSG owns the New York Rangers hockey team, the Madison Square Garden arena, Radio City Music Hall and some lesser-known teams and theaters. But the teams lose money, and the entertainment division, home to the Rockettes Christmas show, only broke even last year. The real value is in MSG’s two regional sports networks, where the Knicks and Rangers are the primary draw.
The shares look fully priced already, after rising to $19.76, or 8.5 percent, in their first days of trading. Analysts expect MSG to generate about $95 million in earnings before interest, tax, depreciation and amortization, or Ebitda, for 2009. Add $30 million from a new broadcast deal with Cablevision, a better year for the Rockettes, other television-contract renewals and narrower losses for the teams, and MSG might just have EBITDA of $160 million in 2010, as some analysts forecast. Put that on a multiple of 10, the same as its closest peers, and you get an optimistic enterprise value of $1.6 billion.
Forget the cash on MSG’s books — it will be chewed up in an estimated $800 million renovation of the Garden. All in that equates to $21 a share.
That price overlooks fresh competition and potential corporate governance costs. The Barclays Center in Brooklyn, where the New Jersey Nets are expected to play, is to open in 2012. And the Dolan family, which controls Cablevision, still controls MSG via super-voting shares. Conflicts are already apparent: The Dolans won’t let Cablevision rivals AT&T and Verizon carry the MSG network’s high-definition feed.
from Rolfe Winkler:
Bank capital buffers increase, still not high enough
(To enlarge the chart above in a new window, click here.)
The superstructure of financial reform may be stalled in Congress, but at least regulators are forcing banks to raise capital. Since the nadir of the financial crisis in the fourth quarter of 2008, the Big Four have more than doubled their common equity, raising another $55 billion just in the fourth quarter.
The question is whether they've raised enough. With capital only a bit above early '08 levels, especially among regional banks, the answer is most likely no.
Stepping back for a minute, it's helpful to remember why capital is so crucial. The most important reason is that it provides a buffer to absorb losses from the asset side of the balance sheet. As assets are written down, a too-thin equity capital cushion leads to a run among creditors who race to get out before taking a loss. Bank runs -- whether the run-of-the-mill type among depositors or the high finance equivalent among short-term creditors -- can quickly bring a financial system to its knees.
Luckily, regulators appear to be laser-focused on capital. Documents published in December by the Basel Committee -- an international collection of bank regulators -- would redefine capital in a number of productive ways.
More stringent capital requirements are also a back door way to accomplish other regulatory goals. For instance, the "size" component of the recently proposed "Volcker Rules" is designed to limit reliance on non-deposit liabilities. The more capital banks are required to hold, the smaller these liabilities.
from Rolfe Winkler:
Lunchtime Links 2-2
Homeownership rate falls to 2000 level (CR) At 67.2% it's still way overstated. Home "ownership" is a misnomer in cases when the owner has withdrawn mortgage equity or when the price of the home has fallen below the principal value of the mortgage. A better measure of homeownership, I think, is just to look at total owner's equity as a % of household real estate. The most recent Fed Flow of Funds report (page 104, line 50) puts the figure at just 37.6%...
U.S. could extend bank fee beyond 10 years, Geithner says (Di Leo/Crittenden, WSJ) The proposed tax on non-deposit liabilities should be permanent, and should target ALL liabilities, including repos. Deposits are guaranteed via FDIC. While that insurance is dramatically underpriced (witness the cash-strapped state of the DIF) at least banks pay something for it. Non-deposit liabilities are also effectively guaranteed, for the biggest banks anyway, via the promise that none which is too big will be allowed to fail. To counter moral hazard, this implicit guarantee must be taxed in order to offset any benefit derived from lower funding costs.
Must-Read: What's a college degree really worth? (Pilon, WSJ) A lot less than you think, as argued here before. This piece is well-written with lots of good data!
AIG derivatives staff said to forgo $20 million in retention bonuses (Katz/Son, Bloomberg) They're still well-paid, but this is better than nothing I suppose.
Deficits as a national security issue -- Sanger NYT & Seib WSJ -- Good to see prominent columnists picking up the thread. A refresher on the Suez Crisis of 1956 offers helpful background.
Rising FHA default rate foreshadows foreclosure crush (ElBoghdady/Keating, WaPo) Key line: "the FHA projects that it will pay out claims to lenders on one out of every four loans made in 2007 -- the worst rate in at least three decades. The claim rate should be nearly the same on the vastly larger volume of loans made in 2008."
Goldman spokesman's most withering rebuttals (Daily Intel) Methinks he doth protest too much...
from Rolfe Winkler:
Lunchtime Links 2-1
President's budget (gpoaccess.gov)
Barney Frank: The poor should rent, not own (Indiviglio, Atlantic)
Citigroup said to plan sale of private equity unit (Keoun/Keehner, Bloomberg) Citi cites raising cash to pay down debt as the reason to sell this unit. Of course this would also get Pandit some brownie points with Paul Volcker, who wants commercial banks out of private equity, hedge funds and proprietary trading...
HCA owners get $1.75 billion payout (Lattam, WSJ) Speaking of private equity...a nice payout for investors in one of the biggest LBOs in history.
All those little Stuy towns (Morgenson, NYT) Bullying as a business model...
Goldman Sachs and the $100 million question (Times UK) This is a thinly sourced article that claims Lloyd Blankfein will get a blowout $100m bonus for 2009. If true, talk about giving the finger to, well, pretty much everyone.
Five myths about America's credit card debt (Manning, WaPo)
Regarding running, yeah, you should land (and stay) on your forefeet, not on your heel. However, you’re resting when you land on your heel (it’s like walking), so it’s more energy efficient to heel strike. This ain’t exactly new news…
At any rate, we should all forefoot striking. When I used to heel strike, I broke small bones in my feet several times, and was constantly dealing with shin splints, sore knees, sore hips. I will note, however, that the first time I went from heel strike to forefoot strike, I went from running 12 miles a pop to 1.5 miles a pop before my calves and my feet tired out and I couldn’t run anymore (forefoot striking, that is… I could still heel strike). It took me a long time to build back up, and I run about 1 mph slower forefoot striking because of the energy difference (went from 8.6 mph to 7.5 mph, body temperature limited, not cardio limited). It’s a no brainer as long as you’re not racing competitively.
You need flat running shoes to forefoot strike. Most running shoes have high heels because heel strikers need the extra cushioning, which in turn makes it harder to run on your forefeet unless you set a treadmill to incline. Something like a New Balance 758 is reasonably flat.
If one can’t forefoot strike, then I’d seriously suggest not running and hitting an elliptical machine instead.
from Rolfe Winkler:
Obama’s blowout budget
Now that the worst of the financial crisis is behind us, one would think the budget deficit might start to come down. Actually, no. Obama's proposed budget sets a new deficit record -- $1.6 trillion this year compared to $1.4 trillion last year.
The President thinks he can help the economy with more deficit spending. But debt is the reason we have a jobs problem in the first place. We've accumulated more debt than our incomes can support (see chart at bottom) so the economy is trying to pay it down, leading to less spending and higher unemployment. Adding to the debt pile only makes the employment picture uglier in the long-run.
In his blog entry introducing the budget, Office of Management and Budget Chief Peter Orszag tries to argue that the administration is working to close the deficit. Meanwhile the spin from the White House is that this budget marks the beginning of a "new era of responsibility." Of course that's not at all what we're getting. Orszag even trots out the line that we can grow our way out of debt:
Economic recovery – on its own – would take our deficits from 10 percent of GDP to 5 percent of GDP.
But GDP -- a measure of spending -- can't grow unless we're spending more. Seems to me the only way for aggregate spending to grow faster than government spending is for the private sector to spend more. But households are tapped out. They're saving more to repair already busted balance sheets.
We've published the following chart here at Reuters, which illustrates a key talking point for deficit doves:
The other question worth asking is what assumptions did Orszag’s team use to create the GDP growth projections? Did they assume that the past two decades of levered GDP growth is representative of what to expect going forward in a “recovery”?
from Rolfe Winkler:
Lunchtime Links 1-31
Paulson says Russia urged China to dump Fannie/Freddie holdings (McKee/Nicholson, Bloomberg)
Avatar breaks $2 billion worldwide box office mark (Box Office Mojo) Very impressive of course, though on an inflation-adjusted basis, Avatar ranks just 25th all time. Nothing will ever beat Gone with the Wind.
Volcker Op-Ed: How to reform the financial system (NYT) Unfortunately not a lot of additional detail over his proposed reform plan. But for those not already familiar with it, this does offer a helpful articulation of Volcker's reform philosophy. Yves is happy Volcker has entered the fray, but believes he needs to go beyond his current thinking.
Frank says banks "recognize reality" by throwing support behind wind-down fund (Howell, Reuters) Am I alone in my fear that a wind-down fund will make matters worse? The idea that new "resolution authority" must be accompanied by a pool of funds to bail out systemic failures compounds moral hazard greatly. Even assuming that banks will be charged high enough insurance premiums to give the fund sufficient financial heft -- how well has that worked with the Deposit Insurance Fund? -- the very existence of this fund will provide an implicit guarantee to the creditors of the firms' backed by it. The DIF already creates major moral hazard by removing all depositor incentives to worry about the health of their banks. Now an even larger slice of creditors would be insulated from risk.
PDF -- TARP inspector general says program will cost less than expected, warns that little has changed (SIGTARP) In his latest quarterly report, Neil Barofsky acknowledges that TARP won't cost as much as once expected. But he also warns that "even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car." Section 3 of the report emphasizes that present government policy risks re-flating the housing bubble.
PDF -- Treasury releases first quarterly PPIP report (Treasury) A breakdown of the the legacy securities program, which combined public and private capital in order to support the price of toxic assets. The use of non-recourse government leverage, plus Treasury's equity investment, shifted principal risk on these assets to the public's balance sheet. It took a while to get off the ground, and the program isn't very large -- less than $25 billion of investments. So far the funds are breaking even.
Justice, medieval style (Leeson, Boston.com) Interesting article, though the author offers little evidence to support his claim that trials by "ordeal" worked. (e.g. judging innocence/guilt based on whether the accused sank/floated when tied up and thrown in water.) ht reader Paul M.
To my mind the whole Too Big To Fail issue is way too vague. We need to get specific about particular financial products, and specifically derivatives, that are the source of big danger.
It is tragic that derivatives have lost their biggest critic now that Goldman has purchased Buffett’s silence.
The big catastrophe ahead now involves interest rate swaps. The value of interest rate swaps is orders of magnitude bigger than credit default swaps and they have grown as tender towers to the sky in the gentlest of interest rate environments. Interest rates worldwide are forcibly held down by central banks while governments strain an the edge of the fiscal precipice. What will happen to with these massive towers if there is a real earthquake of upward moving interest rates?
What is worse, this earthquake is quite certainly coming. With the demographic shift across the developed world where aging boomers are followed by a much smaller generation in almost every developed nation, massive sources of the world’s savings will become massive sinks and interest rates will be forced upward. In short, there will be much fiercer claims for much more limited global savings. Interest rates, reflecting the supply and demand dynamics of savings, will be forced upward.
The tens of trillions or hundreds of trillions in interest rate swaps are predicated upon the idea that the inevitable can not happen.
Will we find that 2008 and 2009 were a walk in the park?
from Rolfe Winkler:
Bank failure Friday
- Failed bank: First National Bank of Georgia, Carrollton GA
- Acquiring bank: Community & Southern Bank, Carrollton GA
- Vitals: at 9/30/09, assets of $832.6m, deposits of $757.9m
- Estimated DIF damage: $260.4m
- Failed bank: Florida Community Bank, Immokalee FL
- Acquiring bank: Premier American Bank NA, Miami FL
- Vitals: at 9/30/09, assets of $875.5m, depoists of $795.5m
- Estimated DIF damage: $352.6m
- Failed bank: Marshall Bank NA, Hallock MN
- Acquiring bank: United Valley Bank, Cavalier ND
- Vitals: at 9/30/09, assets of $59.9m, deposits of $54.7m
- Estimated DIF damage: $4.1m
from Rolfe Winkler:
Spanish canary in the European coal mine
The quote of the day comes from Marc Chandler, currency strategist at Brown Brothers Harriman, who has graciously offered to let me reprint a note he sent today.
While Greece gets much of the news, Chandler argues that it's in Spain where the policy dilemma is "most stark."
Today Spain reported that its unemployment rate in Q4 rose to 18.8% from 17.9% in Q3. The consensus was for a rise toward 18.5%. The unemployment rate has doubled in the past two years. As seems to be typical in Europe, the unemployment [rate] is especially pronounced for young people. In Spain it's 40%...
Cyclical forces and the €8 billion public works program pushed Spain's deficit to around 11.2% of GDP last year according to the EC. This is almost as large as Greece's. One key difference between the two in this context is that Spain's debt to GDP is considerably lower than Greece, giving it perhaps greater chance to stabilize the debt/GDP ratios before they become ruinous.
In the face of such sobering news on the labor market today, Spain officials have felt compelled to indicate that they are considering increasing their efforts to cut the budget deficit quicker. The government is contemplating proposals that will cut another €50 billion or 5% of GDP by 2013.
Rolfe here. Victor Mallet at FT has the news: Spain unveils radical austerity budget.
This illustrates the dilemma policy makers face. The economy does not warrant an end to fiscal support yet. The IMF has argued this. The EC has argued this. But the dramatic market response to Greece has been a siren call, seemingly forcing policy makers--not just in Spain, but Portugal earlier this week and Poland earlier today too--to mitigate the wrath of the bond vigilantes.
By appeasing the vigilantes, officials risk aggravating the economic downturn, which offsets some of the fiscal austerity and spurs social tensions. [But] if the vigilantes' concerns are not addressed in a satisfactory fashion, capital will strike, at least partially, and interest rates will rise...also exacerbating the economic downturn.
Many developed economies have borrowed so much, they can borrow no more. While borrowers love to hate their lender, they need him desperately if they've levered up their lifestyle past a point supported by their income.
Governments that rely too much on the bond market for funding should expect the market to turn against them eventually.
“Governments that rely too much on the bond market for funding should expect the market to turn against them eventually.”
If that’s the case, and I have no reason to not believe it is , then the sooner the better the bond vigilantes bring this extraordinary experiment in QE and fiscal stimulus, to say nothing of structural deficits, to an end. Everyday that goes by will make the inevitable financial realignment that much more difficult as the debt mountain grows ever taller.
from Funds Hub:
Milan’s deserted depots point to double dip
Travelling towards Italy's major financial centre Milan last Sunday on my way back to Zurich, I spotted something out of the window that had little effect on my fellow train passengers but made my blood run cold.
The massive storage depot just outside the city was practically devoid of goods containers.
These containers are usually stacked four high in periods of normal economic activity, although their number fell noticeably during the recession from which we have now supposedly emerged.
But now there was bare space on the ground.
This clear indication of economic woe does not only afflict Italy, however. Over the past several years, the majority of the containers passing through the Milan depot have belonged to Hanjin, China Shipping, Hapag Lloyd (China) and other Chinese shippers.
The recession has undoubtedly impacted the sale of Chinese goods in Italy, and probably in other countries served by the Milan depot as well, such as Switzerland, just an hour's train ride to the north, with a continuing impact on Chinese exports.
The government has stepped in briskly to lend a helping hand.
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The Wall
