Felix Salmon

The SEC comes round to private markets

Felix Salmon
Apr 8, 2011 13:12 UTC

Jean Eaglesham has a big piece of news today: yes, the SEC is looking into the private share dealings in Facebook. But not necessarily with any kind of enforcement in mind. Instead, it’s thinking about raising the 500-shareholder limit which marks the point at which companies need to start making public filings.

A move in this direction would be a huge ratification of private markets by the SEC, which was created to protect investors. I guess that one way of protecting investors is to ensure that they never get an opportunity to invest in the first place:

The move could potentially delay or derail IPOs by tech companies that want to grow but would rather avoid having to disclose vast amounts of information. It could also shut out many ordinary investors from one of the fastest-growing market sectors, since shares in private companies are generally available only to investors whose individual net worth is at least $1 million. And at a time when investors are seeking more market transparency, it would lessen the amount of publicly available data about those companies.

The point here is that there is literally an opportunity cost to such a move, which is almost impossible to calculate. How much diversification (in the technical sense) and diversity (in the more colloquial sense) are the public markets going to miss out on if important, fast-growing companies stay private rather than going public?

But I have to admit I don’t understand this:

The possible changes come amid concerns about a dearth of U.S. stock listings, which politicians on both sides of the aisle worry could hurt American competitiveness with the rest of the world.

I don’t know which politicians Eaglesham is talking about (Tim Geithner, perhaps?), but in what sense are stock listings a sign of international competitiveness? There might be a vague correlation there, but I can’t see much in the way of causation. Indeed, there’s a strong case to be made that US companies can be more competitive internationally if they’re free to concentrate on running themselves as best they can, and don’t need to use up precious management cycles dealing with analysts and journalists and people second-guessing all of their actions on the basis of how their share price is moving that day.

The sourcing on the story is about as annoying as it possibly can be: Eaglesham says that the SEC review was “disclosed in a letter to a lawmaker,” without saying who did the disclosing, posting a copy of the letter, naming the lawmaker in question, or even explaining how the letter came to be written. This kind of coyness does nothing to advance the public interest; instead it looks like little more than a petty way of jealously guarding Eaglesham’s Capitol Hill source so that her competitors can’t find the same letter. Come on, WSJ, your job is to make news public, not keep it to yourself.

Eaglesham’s story comes in the wake of two very different takes on the prospects facing private markets. Evelyn Rusli has the bullish view from Silicon Valley, where entrepreneurs are turning down millions of dollars in funding and indeed are cashing out long before any IPO.

“By taking money off the table, you’re expunging a big source of risk, allowing you to focus on the interests of the company you’re building instead of your own,” said Andrew Mason, the 30-year-old founder and chief executive of Groupon. He said he was able to sell some of his shares in D.S.T. Global’s initial Groupon investment, a $135 million round last April.

Meanwhile, Gregory Zuckerman has the more bearish view from Wall Street, where Goldman Sachs’s attempts to put together a private stock exchange called GSTrUE have gone absolutely nowhere.

Goldman has largely stopped working on GSTRuE, merging it into the Portal Alliance, a fledgling network developed by Nasdaq, Goldman and Wall Street firms to act as a single market. That effort hasn’t attracted any new listings, either.

“When everyone ran for the door in the crisis it changed people’s desire to invest in things that aren’t listed” on an exchange, says Anton V. Schutz, manager of Burnham Financial Funds, who says he no longer buys issues that aren’t listed. “Even deeper markets than this haven’t come back after the crisis.”

Why was GSTRuE a failure while SecondMarket and SharesPost are much bigger successes? I suspect that the answer might have something to do with the fact that GSTRuE was set up to mimic a public exchange, with a common set of rules for every company looking to list and every investor looking to trade. The auction sites, by contrast, are happy approaching every deal on a case-by-case basis, structuring auctions to exactly the specifications of the company in question. And, of course, there’s also the fact that there’s a Web 2.0 bubble right now, while GSTRuE launched mainly with asset-management firms which are much less hot.

In any case, it looks very much now that all the current shareholders in SecondMarket were quite right to hold on to their shares rather than sell them on SecondMarket. (There have never been any SecondMarket trades in itself, because no one wanted to sell.) Today’s news has surely increased the value of the company substantially, and you can probably add SecondMarket founder Barry Silbert to the list of people who is politely telling would-be investors that sorry, he has no use for their money right now.


Seriously, Felix, how can you say that
“there’s a strong case to be made that US companies can be more competitive internationally if they’re free to concentrate on running themselves as best they can, and don’t need to use up precious management cycles dealing with analysts and journalists and people second-guessing all of their actions on the basis of how their share price is moving that day.”

There is a reason that listing on U.S. stock exchanges is so highly sought after. And shares of U.S. companies (as well as German and U.K and no doubt others) are desirable for investors. That reason is “disclosure requirements” and GAAP (or international GAAP for Germany UK others). If U.S. companies didn’t have disclosure requirements, they would also be a lot less attractive to international investors!

Private stock, restricted stock, whatever, is not appropriate for everyone. It is particularly inappropriate as an investment for those who don’t have access, or time, to do the sort of research necessary to estimate valuation with a pro-forma. Most non-institutional investors have their hands full with investing and following exchange traded equities.

I have an account with SharesPost, have had one for over a year. SharesPost has very explicit disclaimers and warnings about lack of transparency and liquidity. I think well of SharesPost, I am not disagreeing with your assessment of them, as they offer a service, along with disclaimers that any analysis or research reporting provided is based on limited information about these private companies. This is not investing for the general public, and SharesPost makes that very clear.

I think that spiffy76 (the previous comment) is right on the mark in his assessment.

Trying to turn private markets into “semi-public” ones, as spiffy76 said, subverts the whole concept of SEC disclosure requirements, and will result in an even less equitable IPO market. Right now it isn’t great, but at least we know how it works.

One other thing. I’ve been wondering about this for awhile, would be appreciative if anyone addressed: Why DOES Facebook want to do a semi-private IPO, or any sort of IPO at all now? Why would they want to give up any amount of ownership in this company? It is hard for me to believe that they lack for funds so much that they would want to sell equity.

As a private company, Facebook isn’t burdened by disclosure, public scrutiny, shareholder accountability. That is the benefit of their status as a privately held concern. Why change now?

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Felix Salmon
Apr 8, 2011 06:26 UTC

El-Erian predicts Eurozone debt restructurings “well before 2013″ — Bloomberg

Atlantic Reporter Captured in Libya — Atlantic

ECB’s announcement raising interest rates — ECB

Larry Gagosian, billionaire

Felix Salmon
Apr 8, 2011 06:22 UTC

On Wednesday, if all goes according to plan, I’ll be attending Marion Maneker’s first Artelligence conference, and interviewing art collector Adam Lindemann for a Reuters video after he and his wife have delivered their talk on “the truth and fiction of art as an asset class”. I’m also very much looking forward to the panel on art funds, which I hope includes one or two die-hard skeptics. (If it doesn’t, I’m willing to pinch-hit!)

The art market is becoming big business these days, as Kelly Crow’s business-minded profile of Larry Gagosian attests:

Dealers who track how he prices his gallery shows estimate he sells upwards of $1 billion worth of art a year…

He flies in a roughly $40 million Bombardier Global Express private jet and has a personal chef on call at his Madison Avenue headquarters. He has homes in New York, the Hamptons and St. Bart’s in addition to his home in Los Angeles…

Mr. Gagosian now needs to supply about 60 distinct shows a year with fresh art…

Mr. Gagosian employs a far-flung staff of close to 150, many hired from auction houses, museums and banks, to manage his empire. Sales directors at each gallery are assigned a few artists apiece, like account managers. In London, for example, Millicent Wilner, who has the account for Mr. Hirst, says she calls or emails the artist daily. Directors earn a 10% slice of the gallery’s commission whenever they close a sale, and a New York gallery director for Gagosian, Sam Orlofsky, said his colleagues often jockey for the right to sell the most coveted pieces in any show. “Sometimes it feels a little ‘Glengarry Glen Ross,’” Mr. Orlofsky said…

Plans are on hold, for now, to expand anywhere else, Mr. Gagosian said. He conceded he did some “exploring” in the Middle East last fall when he exhibited roughly $1 billion worth of art from his personal collection in a new pavilion on Abu Dhabi’s Saadiyat Island.

As Maneker points out, part of what makes Gagosian special and allows him to charge seven-figure sums for just about any artist he feels like anointing is not so much his pull with artists but rather “his control over a body of collectors willing to pay his prices because of Gagosian’s track record”.

At any given point in time, there are probably dozens of collectors who can be phoned up by a Gagosian gallery director uttering the magic words “Larry thinks you need this”, who will agree to buy whatever it is, on the spot, on the strength of nothing more than an emailed JPEG. Part of that’s due to Larry’s great track record in the past; part is also surely fear that if they say no, they’ll lose their precious privileged access to his artists.

The weird thing about this phenomenon is that the people buying into it know that it’s a bubble:

The dealer says he “lives in complete denial” about a successor. It’s a critical issue, since Mr. Gagosian plays such a central role in elevating and maintaining the amount paid for his artists’ work.

When asked what would happen to the market prices for Mr. Gagosian’s artists without the dealer there to support them, Jose Mugrabi, a major Warhol dealer who sometimes consigns pieces to Mr. Gagosian’s shows, said simply, “I shudder to even think of it.”

This bubble is hard to burst: David Segal, in a wonderful profile, hinted that there might be serious trouble at the gallery during the height of the financial crisis, but that didn’t last long, and now the Gagosian preeminence seems more solidly entrenched than ever. In the short term, that’s good for the contemporary art market: Larry simply won’t allow it to collapse, so it won’t. But in the longer term, as we all know, the longer that bubbles inflate, the nastier their bursting turns out to be.

One thing I haven’t seen anywhere is Forbes or anybody else taking a crack at estimating what Larry Gagosian’s personal net worth might be. Given that he’s the price-setter for most of the art that he owns, there are obvious problems in any such calculation. But when Crow says that Gagosian has “a lifestyle on par with his billionaire clients”, that might well be because he’s just as rich as his billionaire clients. And I’m quite sure that every major museum in the world is quietly trying to cultivate him in an attempt to get a significant bequest of whatever art he might be happening to hold when he dies.


Sounds like a remake of Michael Milken in his prime. Watch out below.

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Charts of the day, payrolls accuracy edition

Felix Salmon
Apr 7, 2011 21:31 UTC

Many thanks to Steven Guichard and Zubin Jelveh, who picked up my gauntlet and ran the numbers on whether payrolls numbers released at the beginning of the month are any less accurate than payrolls numbers which come out a bit later.

Here’s a chart from Steven, showing the average absolute change in payrolls numbers between the initial report and the final figure, according to the day of the month that the initial report was released.


And here’s a chart from Zubin, showing the same data in a slightly different form: in this case every revision is a dot. I’m not entirely sure what the outlier is on the right-hand side*, but the message of both charts is clear: there’s no indication at all that payrolls reports released later in the month are any more accurate than those released earlier in the month.


Steven also provided this intriguing graph, which shows that payroll data got significantly more accurate in the 80s and 90s, but seems to be getting less so since the crisis struck.


The average revision seems to be somewhere in the 50,000 range, which is consistent with the official error bars:

The confidence interval for the monthly change in total nonfarm employment from the establishment survey is on the order of plus or minus 100,000. Suppose the estimate of nonfarm employment increases by 50,000 from one month to the next. The 90-percent confidence interval on the monthly change would range from -50,000 to +150,000 (50,000 +/- 100,000). These figures do not mean that the sample results are off by these magnitudes, but rather that there is about a 90-percent chance that the “true” over-the-month change lies within this interval. Since this range includes values of less than zero, we could not say with confidence that nonfarm employment had, in fact, increased that month. If, however, the reported nonfarm employment rise was 250,000, then all of the values within the 90-percent confidence interval would be greater than zero. In this case, it is likely (at least a 90-percent chance) that nonfarm employment had, in fact, risen that month.

It’s important to remember here that there’s an enormous difference, as far as the markets are concerned, between a payrolls number of say 70,000 and a number of 170,000. But each one is within the confidence interval of the other. So the lesson, as I suspected, is that we should treat all payrolls reports with skepticism, but pay no attention to the day of the month they’re released.

*Update: In the comments, Zubin reveals that the outlier dates from December 1995, when the report was set to come out the 5th but was delayed because of a government shutdown. Anybody taking bets on when the payrolls report will be released next month?


Um, if you don’t understand the difference between a 70k number and a 170k number with the same confidence intervals, you really shouldn’t be pontificating about statistics. That just shows that you’re an idiot.

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The carry-trade rewind

Felix Salmon
Apr 7, 2011 17:15 UTC

Remember the sharp and painful rally in the yen following the Japanese earthquake in March? I described the 4% move as a “monster,” adding that “Japan, after being hit first by an earthquake, then by a tsunami, and then by nuclear disaster, is now going to have to suffer the effects of a volatile and overvalued currency as well.”

Well, I got the “volatile” bit right:


In the wake of the post-earthquake high of 76.25 yen to the dollar, there’s been a spectacular — and wholly welcome — plunge; you can now get 85.5 yen for your buck. That’s a fall of about 12% over the course of three weeks — a truly enormous move for one of the world’s two biggest currency pairs.

Just as the post-earthquake rally in the yen was caused by an unwinding of carry trades, it seems as though the reverse move is a function of the global carry trade being put back on. But these flows are extremely volatile and unpredictable, and it’s entirely possible that the yen is going to bounce back from its current lows. (Which, to put things in perspective, aren’t that low: for those of us used to yen/dollar being in the 120 range, the Japanese currency is still extremely strong.)

Japanese exporters would naturally prefer both a weaker yen and less currency volatility than they have right now. Might they miss the carry traders if they go away, scared by the prospect of losing years of gains in a matter of minutes? The carry traders, after all, are Japanese exporters’ friends — they’re the people shorting the yen and driving it lower. But no trade lasts forever, and any yen weakness caused by traders putting on a trade will surely be counterbalanced eventually by the same traders unwinding it. Much better that the yen drift slowly back towards 100 of its own accord, without any artificial push from the FX markets.


“It’s not just hedge funds running a carry trade, but it’s not clear to me why their positions should be somehow less legitimate than those of banks, corporations, and governments.”

Word. It’s none of our business to make moral distinctions between market players.

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Felix Salmon
Apr 7, 2011 04:43 UTC

Saletan on the lobbying power of NATO, a/k/a Big Popcorn — Slate

FakeAPStyleBook: The True Story — The Bureau Chiefs

Tasmania’s Museum of Old and New Art — Hyperallergic

Five Ways Banks Could Learn From Apple’s iPad — WSJ

1099 repeal finally passes, on the 7th attempt — Portfolio

Flying a kite for total disclosure on wine labels — Jancis Robinson


Those are some innovative ideas for banks. It is just such a shame that there is no way in hell any bank would ever do it.
Perhaps the closest to even try was the first newly launched high street (main street) bank in the UK for a century: Metrobank. However the innovation stretched as far as printing you a new bank card then and there (rather than 5 working days through the mail) and water for your dog (which obviously you would be walking through the idyllic green spaces surrounding the cement desert that is Holborn).

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How does the payrolls report come out so quickly?

Felix Salmon
Apr 6, 2011 22:19 UTC

Grumpy Editor is grumpy — and today he’s grumpy about the monthly payrolls report.

Anyone dealing with the federal government knows it takes time to get responses to simple questions while tabulation of accurate official figures often takes months, sometimes years, so Grumpy Editor finds it interesting that the March “employment situation summary” from the Bureau of Labor Statistics was wrapped up immediately after last Thursday, the last day of the month, ready for dissemination within 8½ hours.

Statistics galore were in the lengthy news release embargoed until 8:30 a.m. (EDT) on April 1.

That’s speedy work on highly-followed data…

Eyebrow-raising editors, usually suspicious of figures — from attendance at baseball games to precipitation amounts from the Weather Service — were mum on the instant tabulations that made front pages in many newspapers around the country and led-off radio and television news on April 1.

This is an easy mistake to make, but it is a mistake. Most of us think that the monthly jobs report comes out on the first Friday of the month, but in fact it technically comes out on the third Friday after the end of the reference period. And the reference period, for any given employer, is the pay period that includes the 12th of the month (regardless of the length of that pay period).

Essentially, the U.S. Department of Labor sends out forms asking employers to report on their payrolls every month. The companies report what their payroll figures are for whichever pay period included the 12th of the month. The Bureau of Labor Statistics then collates all that data, and three Fridays after the 12th of the month, it releases a preliminary estimate for how many people had jobs that month, how much they were paid, and so on.

The following month, the BLS revises those numbers, and the month after that there’s a final figure. If you want to have a look at the size of the revisions going all the way back to January 1970, you can do so here. And if you’re feeling particularly nerdy, you can try and work out whether payroll reports which come out on the first of the month end up getting revised more, on average, than reports which come out on say the 7th of the month. (Seriously, if you want to do that, I’ll send you whatever books you want from the large pile which is growing alarmingly on my windowsill, and which can be seen in the background of this photo.)

The point here is that the payrolls report is a snapshot of a point in time; it’s not something you get from adding up daily data from each of the days in the month. And the snapshot is taken on the 12th of the month, not at the end of the month. The markets love the payrolls report because it’s super-fast, rather than because it’s super-accurate: it’s the closest thing we have to an official national data series showing how the economy’s doing right now. Yes, you can raise your eyebrows at how accurate it is — I’ve done so myself.

My take on the jobs report is that once upon a time it was useful, but that nowadays, with a large increase in self-employment and with the margins of error dwarfing the actual numbers reported, it’s becoming largely irrelevant. The only useful thing you can do with it is look at it through squinted eyes and try to discern vague trends.

But insofar as the jobs report is inaccurate or unhelpful, that’s not a function of the fact that it comes out towards the beginning of the month rather than towards the end; it’s much more a function of the rise in self-employment and small businesses, which the BLS has great difficulty measuring. Or at least I think that the date of release is pretty much irrelevant. If you fancy crunching the numbers and telling me for sure either way, as I say, I’d be much obliged.


And then there’s ADP’s. Just one question: Lady GAGA and an exercise ball, really?

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Did Sokol violate Berkshire policies?

Felix Salmon
Apr 6, 2011 18:31 UTC

Did David Sokol and/or Charlie Munger violate the Berkshire Hathaway ethics policies which the WSJ has now posted online? The key bit is this:

If a Director or Covered Employee is aware that Berkshire has taken or altered a position in a public company’s securities or that Berkshire is actively considering such action, trading in any securities of such public company by such Director or Covered Employee or any of his or her Family Members is expressly prohibited prior to the public disclosure by Berkshire of its actions with respect to such public company’s securities (or until the Director or Covered Employee becomes aware that Berkshire did not take and is no longer actively considering such action.)

I think the present tense here is the Sokol loophole: the language says “is actively considering” rather than “will actively consider”. If Sokol knew that Buffett was going to actively consider an investment in Lubrizol in the future, but wasn’t doing so yet because Sokol hadn’t brought him the idea yet, then he might just have stayed on the right side of the memo, which was clearly written by a lawyer.

On the other hand, it’s pretty clear that Sokol violated the spirit of the memo. If it’s wrong to trade in a stock while Buffett’s considering it, then it’s wrong to trade in that same stock in advance of Buffett’s consideration.

Munger, on the other hand, seems relatively safe. His investment in BYD was a very long-term one; it long predated any discussions at Berkshire; and it took place at arm’s length, via an investment fund — the investment was actually made by Li Lu, rather than by Munger himself.

Insofar as Sokol’s defense is “even Charlie Munger did it”, then, I don’t think it flies. Sokol was clearly trading rather than investing, and he was switching back and forth between his roles as private investor and Berkshire representative so quickly that even Citi’s bankers got confused. I’m not a securities lawyer; I have no idea whether what he did was illegal. But it certainly wasn’t behavior becoming a future CEO of Berkshire Hathaway.


During the last Free Money and Loan Guarantee Gala The Federal Government threw for Wall Street, Buffett jumped into the Party by going partners with GS throwing $5B liquidity into the everyone gets a cut of the action table. Buffett knew full well GS had unlimited access to the discount window no matter the quality of the paper being passed and Buffett knew all GS’s cheese positions AIG were going to be covered by the bailout. Tell me where is there not inside information bouncing all around Berkshire. Buffett made a ton of money on this sure bet based on inside information! Just what Berkshire policies is who being accused of violating here?

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Zoellick’s failure of nerve

Felix Salmon
Apr 6, 2011 17:31 UTC

When I talked to Chrystia Freeland on Monday about World Bank chief Bob Zoellick’s big speech on the Middle East and North Africa today, I said I was looking for two things: concrete promises to do specific things, on the one hand, and a recognition, on the other hand, that the World Bank was working for the struggling citizens of these countries rather than their entrenched elites. The revolutions in the region have shown that politics is inextricably bound up with economics, and that you can’t affect the latter without dealing with the former.

I don’t think I’m going to get what I wanted. Here’s the closest that Zoellick comes to a policy-related promise:

I suggest it is now time for the World Bank to examine, with its Board and shareholders, whether the Bank needs new capabilities or facilities that could leverage support from countries, foundations, and others to strengthen the capacity of CSOs working on accountability and transparency in service delivery. We could give priority to countries in the Middle East and North Africa, and in Sub-Saharan Africa. We could back this work with seed capital, and with knowledge exchange and research aimed at improving the enabling environment for social accountability.

Too political?

No, Bob, this isn’t too political. Instead, it’s not remotely political enough. Setting up a committee with the World Bank board and shareholders will achieve precisely nothing. The World Bank “board and shareholders” comprises precisely the entrenched elites who have the most to lose from popular emancipation. To take an extreme example, the Saudi royal family are World Bank shareholders; I doubt they’re going to be particularly enthusiastic about accountability, transparency, and the like.

This is precisely the sort of issue where Zoellick should just go ahead and do something, daring his board to slap him down: asking forgiveness can work, while asking permission just means certain bureaucratic sclerosis. Zoellick had his opportunity to lead, here. Instead, he’s chosen to kowtow to the representatives of the very regimes who are most at risk. Which is an entirely predictable shame.

Update: In the Q&A period following the speech, in response to a question along these very lines, Zoellick first said that maybe the work could be done bilaterally, by the UK or the US or even by various foundations. Then he said there were “questions” — which he would take to his shareholders — “whether the bank should have a role in this and if so what form.” And he continued by declaring that he’s actually agnostic on these issues, saying “I’m not sure I have a view of whether there is a role for the Bank”. Weak.


What is this, Fox News?

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