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• Credit Default Swaps: Proudly the Tool of the Devil Again
• Protectionism and the Chinese Box of the Renminbi
• QOTD: John McCain’s 15% U.S. GDP Cut
• Who Files for Bankruptcies?
• Books of the Week

 

Show Me a Stupid Risk, and We'll Take It

Classic and funny Bird & Fortune conversation in the FT about banking, the economy, and how everything and nothing has changed in the last year.


 

Sharks Circling the Galleon Galleon

One of my favorite bits of bloodthirsty Wall Street behavior is the feeding frenzy when a hedge fund goes down. The first thing everyone does is check the fund's known positions, figure out where the fund is in deepest -- the biggest positions in the least liquid stocks -- and then shorts the crap out of those stocks, expecting that said flailing hedge fund will have to sell.

With the preceding macabre thought in mind, here is a (for amusement only) table I put together over the weekend of Galleon's largest positions as measured by days to trade out of positions (as of 6/20/3009). I have updated the table to include in the final column the performance of these ten stocks on Monday of this week. As you can see, the top three stocks by days-to-trade all had a crummy day yesterday.

[Update] I updated the table to take out AMD, which as a convertible position is more difficult to interpret. Again, a reminder, that this data is as of 6/30/2009, so Galleon may have traded out of all of these positions long ago. It's just interesting that its two most awkward positions had bad days yesterday after the revelations.
 

The Three Ways to Make Money Fast

From a due diligence report on Galleon (excerpted in the FT), here are the three ways to make money with hedge funds. It's sort of amusing, in a bleakly comedic kind of way -- especially the first paragraph:

"You can take advantage of trading technology, but few do. You can be more intelligent than others, but few are.

"Or you can have some specialised source of sustainable information. Unless that information is from fundamental analysis - and in Galleon's case it did not all seem to be - then that's a red flag for us."

[via FT]

 

Is Venture Investing Like Pascal's Wager?

Pascal's Wager (or Pascal's Gambit) is a suggestion posed by the French philosopher Blaise Pascal that even though the existence of God cannot be determined through reason, a person should wager as though God exists, because so living has everything to gain, and nothing to lose.
    - Wikipedia

Peter Thiel made a provocative claim in a recent talk about the innovation deficit in the U.S.:

Peter recently talked to an LP (endowment) who was thinking of  re-allocating its portfolio to hold less than 5% in venture capital as its recent returns had not matched expectations. Peter told the LP that they're thinking is flawed: if their 5% allocated to vc eventually does not return a mega profit, the remaining 95% allocation is going to be worthless anyway. "Investing in technology as a VC is like Pascal's bet: if that isn't going to work, nothing will."

It's an interesting argument, but does it have the added value of being true? In other words, Is it true to say that an LP can't afford not to invest in venture capital, because to do so would be tantamount to saying the U.S. economy is dead, in which case you shouldn't be investing in the U.S. economy at all?

For this argument to hold, at least three things would have to be true:

1. There can be no free-riders
   
2. All LPs investing in venture at 5% commitment level wouldn't destroy returns
3. There is no cyclicality to venture

Are these all true? I don't think so. There certainly can be free-riders in venture -- I benefit from your investment, even if  don't invest myself -- so not everyone has to imbibe. Similarly, if every LP invested in venture at the 5% level the industry would be in worse shape than it is today. And, finally, venture is demonstrably cyclical, so a constant allocation is irrational.

To be fair, if you don't believe there any material growth prospects in the U.S. economy, and the situation is so bad that you think no-one should ever invest in growth companies, then clearly you should be out of the market entirely as it's dead in all but name. But that is affirmedly not the same thing as saying that there are too many LPs investing too much money in too many funds.
 

Natural Gas Changes Everything (?)

Must-read piece up at Technology Review on how expanded U.S. natural gas reserves change energy calculus. Some of that is direct, with there being far more natural gas potentially available than imagined even five years ago; some of it is indirect, with a possible natural gas supply expansion representing a sort of circuit breaker in the face of oscillating and/or climbing oil prices.

There are many challenges of course, not least of which is the absence of natural gas-powered cars on U.S. highways. A wholesale auto fleet transition to natural gas is not in our future, at least not a rapid one. Then again, even the threat of a partial transition is an important development in the tight world of oil supplies.

Lots more here.

[via Gregor]
 

Text of David Einhorn's Speech: Up With Gold; Down With Dentists

Text of David Einhorn's "up with gold; down with dentists" speech today from the Value Investing Congress is up ever at Rolfe Winker's site. Fun reading.  

Television and Debt

There is a funky new research paper out arguing that you can make a connection between debt and 1950 television-watching patterns. Here is the abstract:

THE ROLE OF TELEVISION IN HOUSEHOLD DEBT: EVIDENCE FROM THE 1950’S
August 5, 2009

ABSTRACT
We examine whether advertising increases household debt by studying the initial expansion of television in the 1950’s. Exploiting the idiosyncratic spread of television across markets, we use microdata from the Survey of Consumer Finances to test whether households with early access to television saw steeper debt increases than households with delayed access. Results indicate that television increases the tendency to borrow for household goods and to carry debt. Television is associated with higher debt levels for durable goods, but not with total non-mortgage debt. The role of media in household debt may be greater than suggested by existing research.

 

Weekend Reading: Goldman, Titanic, Savings, CRE, etc.

A few links from my weekly Weekend Reading column:

• Goldman Can Spare You a Dime (NYTimes)
• Panic in the asset-backed commercial paper market (FRB)
• Surviving the Titanic Disaster: Economic, Natural and Social Determinants (eScholarship)
• Should We Spend or Save to Rescue the Economy? (NYTimes)
• Research renegades: The rise of new equity research (Bloomberg Markets)
• Southern California's vast commercial real estate desolation indoors (LAT)

 

The Shorter Buttonwood Conference

I'm a huge fan of not attending interesting-looking conferences, but encouraging other smart people to go and report back -- especially in abbreviated form. Here is Mike Panzer doing exactly that from The Economist magazine's inaugural Buttonwood event this week in New York:

Secretary Tim Geithner, United States Department of the Treasury:

    "Generally, we did not do enough." (Referring to the failure to address growing concerns over excessive risk-taking in the period leading up to the financial crisis.) [Editor's note: understatement of the year?]

Stephen Roach, Chairman, Morgan Stanley Asia:

    Those who are looking for a "V"-shaped recovery are in for "a rude awakening."

    "The imbalances going into the crisis were large to begin with. Now, they are bigger than ever."

George Soros, Chairman, Soros Fund Management:

    "Bankers have too much power." (Referring to the hold that Wall Street has over Washington.)

    The "globalization of financial markets is built on false premises: namely, that markets can be left to their own devices."

Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation:

    "Insured deposits are being used in ways that I don't like to see."

Wilbur L. Ross Jr., Chairman and Chief Executive Officer, WL Ross & Co.:

    People were focused on "risk-ignoring rates of return." (Describing one of the things that went helped bring about the financial crisis.)

    If regulators had taken the time to visit a Countrywide Lending office, they would have seen something akin to "a Wall Street boiler room," rather than a bank branch. (Referring to regulator's unwillingness to go out into the field and see what was really going on during the housing boom.)

    "Government is its own systemic risk in the mortgage market."

More here.

 

Swanson: Solar Cells at the Cusp

Stanford's Richard Swanson, a photovoltaic pioneer, on how solar cells are at the cusp. Fun story: At first no-one wanted solar cells, so a company of Swanson's spent a bunch of time building & selling the technology allowing Palms to beam contact back and forth.

 

Colbert on Stock Market MILFs

Stock market erotica from Stephen Colbert, just because you know you need it. And yes, it's safe for work.

 

Readings: Galleon, plus FHA, Skiing, etc.

• Rise and fall of a billionaire tech hedge fund guru (Om)
• Godfather of KPO and McKinsey Director Anil Kumar Arrested (SpendMatters)
• Galleon’s Rajaratnam Charged in Biggest Hedge Scheme (Bloomberg)
• SEC Charges Billionaire Hedge Fund Manager Raj Rajaratnam with Insider Trading; 2009-221; October 16, 2009 (Source)
• In post El-Erian new normal, Harvard Paid $500 Million to Exit Backfired Swaps  (Bloomberg)
• Audit questions FHA's ability to screen lenders (AP)
• China close to drilling deal in Gulf of Mexico (NYT)
• Coming Soon - The Warning (Frontline)
• Turner Lost CNN, Fonda, Fortune, Feels ‘Like a Dummy’ (Bloomberg)
• Mammoth Mountain opening day (Mammoth

 

Banning Biotech?

A slide from a presentation I’m doing today that could make a reasonable person wonder if about revisiting their fondness for biotech. In short, the mapping of the genome, and other such inflection points in this failure-prone industry, has done nothing to accelerate news drugs, while causing costs to escalate dramatically. That’s success?

 

Entertaining Superfreakonomics Takedown

Kneejerk contrarianism is as tiresome as rote consensus, so I was amused to read this two-part (environmentally-centric) takedown of some contrarian claims in the new book, Superfreakonomics:

• Part 1
• Part 2

 

Revisiting the Age of Balance Sheet Recessions

A favorite presentation from the prescient Richard Koo of Nomura Securities back in March of this year:

Nomura: The Age of Balance Sheet Recessions 2009 -