Opinion

James Saft

Pinterest and Blackstone as QE’s children: James Saft

October 24, 2013

Oct 24 (Reuters) – Two groups with particular reason to be
grateful about the Federal Reserve’s never-never taper are the
people at Blackstone and Pinterest.

Blackstone, with its pioneering and soon to be
AAA-rated securitization of single-family house rents, and
Pinterest, which is valued at $3.8 billion and has no reported
revenues (zero, nada, niente), both could serve as poster
children for extraordinary monetary policy.

Each, in its own special way, is the beneficiary of the
loose conditions which the Federal Reserve sees fit to maintain.

Each too, provides a convenient barometer by which we can
observe the effects of Fed policy made manifest in financial
markets.

In short, this is the kind of stuff that often happens when
you have a bubble, but sometimes when you do not.

How far it goes and how it ends, I cannot tell you. That you
should be watching is absolutely certain.

PIN THIS

Pinterest, an Internet service which allows users to post
pictures and other media, raised $225 million this week from a
group led by Fidelity Investments. That attached a $3.8 billion
value on the company, or $158 for each of its 24.9 million users
in September, who like to do things like post pictures of
dinners they someday hope to make.

The company, which raised $200 million in February, plans to
use the new funds to expand internationally (pictures of
Japanese dinners!) and develop mobile apps (pictures of Japanese
dinners you look at while waiting for the bus!).

The company has made the first steps towards turning this
into money, announcing in September tentative plans to
experiment with promoted pins (pictures of Japanese dinners
featuring pineapple slices paid for by Dole!)

Remember too that the investors in the latest round didn’t
plop their money down hoping to cash out with a small gain. More
likely they are hoping for a very healthy multiple of $3.8
billion as the final IPO price.

So should we be concerned about a company with zero reported
revenue going up in value by 52 percent in eight months?

For one thing, a recent Reuters and Ipsos survey found 26
percent of the 807 people polled who had signed up for Pinterest
said they do not use the service any more and 9 percent of
people who signed up have since shut down their accounts.

But public markets are keen, with Twitter planning to go
public next month. A September survey of Silicon Valley venture
capitalists found confidence to be at a six-year high, with
particular enthusiasm about the environment for public
offerings.

Hmm, where were we six years ago? Oh yes, at the beginning
of a financial crisis which only ended due to extraordinary
efforts by government and by central banks.

Pinterest may turn into a money-making machine, and well
reward its investors, but there can be no doubt that Fed
policies aimed at encouraging risk taking in financial markets
are at work here.

GROUND-BREAKING SECURITIZATION

“Ground-breaking securitization.” There was a time when I
actually thought I’d never hear those three little words again.

But no, now we have private equity group Blackstone and its
planned $300-500 million bond backed by rents flowing from homes
it bought mainly out of foreclosure. (here)

A bit like Pinterest, the whole enterprise is either pure
genius or just another financial disaster waiting to happen.

Having spent upwards of $6 billion buying up foreclosed
houses, Blackstone now wishes to get some of its money back by
selling the right to the stream of income to investors hungry
for that extra bit of yield.

According to the Financial Times the deal will get a credit
rating from agencies including Kroll, Morningstar and Moody’s
and will get at least one AAA rating.

Now of course structured credit ratings are different from
sovereign ratings, but there is an irony here that the U.S.
doesn’t even have AAA ratings from all its raters. And while I
am sure this will have lots of bells and whistles to justify the
top rating, the U.S. has a printing press with which it can
satisfy its creditors at zero cost.

To be sure, it is impossible to judge the offering without
knowing the particulars, which are not yet public.

That said, this is a complex business, really a new one on
this scale, and the securitization will include many risks for
which we don’t have very good data.

Again, the very fact that this is happening is at least in
part due to very loose monetary policy which has made many
investors both highly confident and really desperate for that
extra bit of yield.

Triumph, disaster or somewhere in between, both of these
deals will be fascinating to watch.
(At the time of publication, Reuters columnist James Saft did
not own any direct investments in securities mentioned in this
article. He may be an owner indirectly as an investor in a fund.
For previous columns by James Saft, click on )

(Editing by James Dalgleish)

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