On Early Wednesday morning, Greg Smith, a 33-year-old midlevel executive at Goldman Sachs resigned, citing concerns that the company’s culture has gone haywire. About 15 minutes after his resignation, an op-ed article that he had written explicating his criticism was published in the New York Times. The article - containing statements such as, “it makes me ill how callously people still talk about ripping off clients", reignited the debate about corporate greed on Wall Street that had largely begun to to subside after the industry’s behavior in the financial crisis in 2008. CEO LLoyd Blankfein expressed his frustration with the article, saying that there were many outlets within the firm - such as its detailed and intensive employee feedback methods, and independent, public surveys - through which Smith could have made his concerns known. The release of the op-ed article attracted negative attention from the media worldwide, and Goldman shares fell by 3.4 percent. Evidently, the public nature of Smith’s discontent has produced a ripple effect for the firm.
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Editorial Staff
Wednesday, March 14, 2012
Monday, March 12, 2012
Arcapita Files for Bankruptcy
Arcapita, a Bahraini Investment Firm once worth $7.4 billion, filed for bankruptcy protection on Monday. Arcapita failed to extend $1.1 billion in credit that would have expired on Wednesday. Arcapita owns the Viridian Group, Pods, and J. Jill. After filing chapter 11, Arcapita seeks to restructure its debt and improve the future of the company.
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Editorial Staff
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Editorial Staff
Tuesday, February 28, 2012
M&A Activity Review
Carl Icahn bids $2.6 Billion for CVR
Icahn bids $2.6 billion for CVR, an oil refinery corporation, only two days after publically stating that the company should sell itself. The current offer would pay $30 a share wich is an 8.7 percent of the prior day’s closing. Icahn’s attempt to takeover the company may turn hostile. Icahn wants to avoid another failed acquisition as he was unsuccessful after making many attempts to buy Clorox last year.
Kellogg to Buy Procter & Gamble’s Pringles Group
Kellogg announced on Wednesday that it will buy Procter & Gamble’s Pringles. The recent deal is valued at $2.695 billion after a recent transaction with Diamond Foods failed to take place. Kellogg looks to gain an edge with the snack brand that had $1.5 billion in annual sales. Kellogg will also be adding $2 billion in debt through the deal which already has $5 billion in long-term debt.
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Editorial Staff
Icahn bids $2.6 billion for CVR, an oil refinery corporation, only two days after publically stating that the company should sell itself. The current offer would pay $30 a share wich is an 8.7 percent of the prior day’s closing. Icahn’s attempt to takeover the company may turn hostile. Icahn wants to avoid another failed acquisition as he was unsuccessful after making many attempts to buy Clorox last year.
Kellogg to Buy Procter & Gamble’s Pringles Group
Kellogg announced on Wednesday that it will buy Procter & Gamble’s Pringles. The recent deal is valued at $2.695 billion after a recent transaction with Diamond Foods failed to take place. Kellogg looks to gain an edge with the snack brand that had $1.5 billion in annual sales. Kellogg will also be adding $2 billion in debt through the deal which already has $5 billion in long-term debt.
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Editorial Staff
Friday, February 24, 2012
Market Recap (Feb. 24)
In a holiday-shortened trading week, the Dow Jones Industrial Average (DJIA) ended up 0.26% for the week at 12982.95. The index constantly flirted with the symbolically significant 13000 mark, even going over it a few times in day trading, but did not close once above it. The NASDAQ Composite and the S&P 500 both continued to rise as well, finishing up 0.41% and 0.33% respectively for the week.
On February 21st, Eurogroup officials delivered a long term refinancing option for Greece that included a large haircut of 53.5% for private bondholders and the option for creditors to swap into new bonds with a maturity of 30 years. Investors responded positively towards this new LTRO which, pending bondholder cooperation, should reduce Greece's debt by 107 billion euros and avoid a massive default when 14.4 billion euros worth of Greek bonds come due on March 20th.
Crude oil futures finished the week at $109.87 per barrel, indicating that gas prices will soon eclipse the dangerous $4 per gallon benchmark. Several commodities analysts reported on the possibility of crude reaching $130 per barrel by this August, near the record highs of Summer 2008.
Investors were heartened by the Labor Departments latest report that initial jobless benefit claims for the week were unchanged at 351,000 (the lowest since March 2008) and the four week average fell to 359,000, the lowest in four years.
In terms of fourth quarter earnings reports, Hewlett-Packards woes continued as they announced a 44% year over year drop in profits to $1.5 billion. Retail stocks performed relatively well this week with Target leading the pack on the back of better than expected 4Q earnings. AIG reported earnings of 82 cents per share that far outpaced analyst estimates of 62 cents per share, sending its stock price up. The company enjoyed a $17.7 billion gain due to the release of the allowance of deferred tax asset valuation.
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Editorial Staff
On February 21st, Eurogroup officials delivered a long term refinancing option for Greece that included a large haircut of 53.5% for private bondholders and the option for creditors to swap into new bonds with a maturity of 30 years. Investors responded positively towards this new LTRO which, pending bondholder cooperation, should reduce Greece's debt by 107 billion euros and avoid a massive default when 14.4 billion euros worth of Greek bonds come due on March 20th.
Crude oil futures finished the week at $109.87 per barrel, indicating that gas prices will soon eclipse the dangerous $4 per gallon benchmark. Several commodities analysts reported on the possibility of crude reaching $130 per barrel by this August, near the record highs of Summer 2008.
Investors were heartened by the Labor Departments latest report that initial jobless benefit claims for the week were unchanged at 351,000 (the lowest since March 2008) and the four week average fell to 359,000, the lowest in four years.
In terms of fourth quarter earnings reports, Hewlett-Packards woes continued as they announced a 44% year over year drop in profits to $1.5 billion. Retail stocks performed relatively well this week with Target leading the pack on the back of better than expected 4Q earnings. AIG reported earnings of 82 cents per share that far outpaced analyst estimates of 62 cents per share, sending its stock price up. The company enjoyed a $17.7 billion gain due to the release of the allowance of deferred tax asset valuation.
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Editorial Staff
Friday, February 17, 2012
M&A Activity Review
TNT Express Rejects Bid by U.P.S.
TNT announced on Friday that the company turned down a bid from UPS that valued the company at $6.4 billion. However, U.P.S., United Parcel Service, is continuing talks with TNT. The U.P.S. offer valued TNT at 9 euros a share which is about a 46 percent premium to the closing price. This potential deal would represent the largest merger in U.P.S. history. As a result of the talks about a deal, shares of TNT rose 2.6 percent on Friday.
Advent and Goldman Agree to Buy TransUnion for $3 Billion
Transunion accepted an offer to sell the company to Advent International and GS Capital Partners, two private equity firms. GS Capital Partners, a branch of Goldman Sachs, and Advent bought the company from Madison Dearborn Partners and the Pritzker family. The buyout is the largest private equity deal of the year.
Mitsubishi Buys 40% Stake in Encana Shale Gas Assets
Mitsubishi invested $2.9 billion in Encana’s holdings in British Columbia. Encana, a Canadian natural gas producer, owns about 409,000 acres in British Columbia. The $2.9 billion investment was made in exchange for 40% of the company. This deal represents another investment made for shale gas assets. Shale formations and fracking, a method of extracting natural gas and oil from sedimentary rock, have prompted new and increased investments.
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Editorial Staff
TNT announced on Friday that the company turned down a bid from UPS that valued the company at $6.4 billion. However, U.P.S., United Parcel Service, is continuing talks with TNT. The U.P.S. offer valued TNT at 9 euros a share which is about a 46 percent premium to the closing price. This potential deal would represent the largest merger in U.P.S. history. As a result of the talks about a deal, shares of TNT rose 2.6 percent on Friday.
Advent and Goldman Agree to Buy TransUnion for $3 Billion
Transunion accepted an offer to sell the company to Advent International and GS Capital Partners, two private equity firms. GS Capital Partners, a branch of Goldman Sachs, and Advent bought the company from Madison Dearborn Partners and the Pritzker family. The buyout is the largest private equity deal of the year.
Mitsubishi Buys 40% Stake in Encana Shale Gas Assets
Mitsubishi invested $2.9 billion in Encana’s holdings in British Columbia. Encana, a Canadian natural gas producer, owns about 409,000 acres in British Columbia. The $2.9 billion investment was made in exchange for 40% of the company. This deal represents another investment made for shale gas assets. Shale formations and fracking, a method of extracting natural gas and oil from sedimentary rock, have prompted new and increased investments.
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Editorial Staff
Wednesday, February 15, 2012
Market Recap (Feb. 15)
The Dow Jones Industrial Average (DJIA) continued its remarkably strong rally this week to finish just shy of 13,000 at 12,949.87. The S&P 500 market index ended the week up 1.38% at 1,361.23 thanks in part to large gains in the energy sector. The CBOE volatility index finished the week just below 18, indicating that investors are starting to regain confidence in the stability of global markets.
Hedge fund managers across the globe have been turning significantly more bullish on bets in equities and the international credit market. Many of these investors are basing their strategies on the belief that the European Central Banks long-term refinancing operations which commenced in December and are continuing this month will be successful in propping up struggling European banks.
Oil and gas, chemicals, and basic resources were the biggest gainers this week in terms of market sectors. Gigantic deals such as the recently announced merger between Xstrata (XTA) and Glencore (GLEN), two of the worlds leaders in natural resources, have been steadily driving stock prices skyward. Gasoline prices are now approaching record levels for the season as crude oil futures for March delivery climbed to finish the week at over $104.
European shares ended the week on a good note on the back of speculation that Greeces leaders would reach an agreement on a second bailout by today in order to avoid a disorderly default. Unfortunately, Angela Merkel sustained an embarrassing blow a midst the forced resignation of German president Christian Wulff over a political favors scandal. Merkel, along with French president Nicholas Sarkozy, are widely perceived by investors to be the most important political players in keeping the euro zone solvent. The markets ultimately ended up in part because of the traditional investor optimism that accompanies three-day holiday weekends. Stock markets were closed today in the US in observance of Presidents Day.
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Editorial Staff
Hedge fund managers across the globe have been turning significantly more bullish on bets in equities and the international credit market. Many of these investors are basing their strategies on the belief that the European Central Banks long-term refinancing operations which commenced in December and are continuing this month will be successful in propping up struggling European banks.
Oil and gas, chemicals, and basic resources were the biggest gainers this week in terms of market sectors. Gigantic deals such as the recently announced merger between Xstrata (XTA) and Glencore (GLEN), two of the worlds leaders in natural resources, have been steadily driving stock prices skyward. Gasoline prices are now approaching record levels for the season as crude oil futures for March delivery climbed to finish the week at over $104.
European shares ended the week on a good note on the back of speculation that Greeces leaders would reach an agreement on a second bailout by today in order to avoid a disorderly default. Unfortunately, Angela Merkel sustained an embarrassing blow a midst the forced resignation of German president Christian Wulff over a political favors scandal. Merkel, along with French president Nicholas Sarkozy, are widely perceived by investors to be the most important political players in keeping the euro zone solvent. The markets ultimately ended up in part because of the traditional investor optimism that accompanies three-day holiday weekends. Stock markets were closed today in the US in observance of Presidents Day.
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Editorial Staff
Sunday, January 15, 2012
Book Review: The Big Short
The Big Short
By Michael Lewis
The world of finance is one of losers and winners. When the sub-prime mortgage crisis hit the market in 2007, the big Wall Street firms with huge pile of sub-prime mortgage bonds lost while a few wise men betting against these bonds won. In Michael Lewis’ Book The Big Short, Lewis recounts the story of how a handful of Wall Street misfits anticipated the doom of the sub-prime mortgage bonds and made a fortune betting against the home-price inflation in mid-2000s. Lewis successfully tells the story with humor and clarity, considering the complexity of the sub-prime mortgage bond market before the crisis. However, his account of the financial crisis in 2007 is biased in that it exaggerates the effects of the public feature of investment banks, ignores factors such as government’s policies that lowered borrowing standards and neglects home owners’ speculative behavior.
Lewis overstates the effects of the public nature of the major investment banks. Lewis points out, toward the end of his book, that what lied at heart of the crisis was that all the major investment banks went public rather than functioned as partnerships. (Lewis traced the crisis back to a decision John Gutfreund had made- when he’d turned Salomon Brothers from a private partnership into Wall Street’s first public corporation.) Here is his logic: if a major investment bank were organized like partnership, each partner would have been more careful with their decisions and taken fewer risks. Now that these banks were public and the bankers were operating with shareholders’ money, they had few incentives to scrutinize their decisions or products because they could transfer risks to their shareholders; that was what led these firms to use high leverage and buy a great amount of sub-prime mortgages bonds without even knowing what were underlying these assets. (Lewis, 257) Lewis states that the incentives on these public Wall Street firms are entirely wrong because the bankers can get rich [even] when they are making dumb decisions. (Lewis, 256) In short, Lewis is saying that people within the investment banks took excessive risks because they had nothing to lose. This statement is not sound. First, the bankers did have many things to lose. Many individuals most responsible for the massive money loss during 2005-07 were the largest shareholders in their companies. These individuals lost money when their firms suffered.
In other words, they did not transfer much risk to the companies’ shareholders. Even though Howie Hubler, a former trader at Morgan Stanley, got away with large bonuses, the majority of the Wall Street professionals responsible for the crisis suffered from the crisis. Jimmy Cayne (CEO of Bear Stern)’s stock declined from 1 billion to 50 million. Richard Fuld (Lehman’s chairman) lost 550 million of his Lehman stocks when Lehman Brothers went under. The bankers had a great deal of interest within these firms. These individuals did want their firms to perform well. Even though the bankers are employees in a public company, they are effectively like partners in a partnership company because of their large stock holdings. Therefore, the employees engaged in careless behaviors not because they were in a public firm, but rather, because of some other factors. Second, we can refute the author’s contra-positive statement: if an investment bank were not public, bankers would not have been as careless. To refute this, just imagine that an investment bank were actually a partnership. In this case, a banker would still have bought those mortgage bonds because they were led to believe that they could make profits in these bonds. The only difference would be that the bank would not have had the ability to raise funds in the stock market. In this case, these partnership firms would just have found other creative ways to raise enough capital to buy the mortgage bonds, which would eventually lead to the 2007 crisis. To conclude, the mere fact that the major investment banks were public is not important in causing the crisis.
Moreover, the book is biased in that it gives all the blame to investment banks and ignores the government’s policies’ effects on the crisis. If the government did not lower the borrowing standards and encouraged lending at Fannie Mae and Freddie Mac, the crisis might never have had happened. Here is what happened: at first, the banks were making money with bundling mortgages backed securities backed with good credit and down payment and selling them to investors. Then they became greedy and wanted to make more money by making more loans. When there were not enough people with good credit, the banks invented credit default swaps. (In the book, a trader named Mike Edman within Morgan Stanley came up with this idea). With these swaps, a bank could give out loans to people with low credit score and little down payment. However, a loan could be granted only if it fulfilled the underwriting standards designed by the government. Therefore, the banks had to persuade the politicians to ease the underwriting standards. The investment banks then spent huge amount of money to get the government ease the standards. Then Barney Frank was saying that everyone deserves to own a home and Bush was saying that everyone deserves to live the American Dream. Clearly, if the government had not relaxed lending standards, the investment banks would have never got the chance to create the CDOs, which eventually led to massive defaults of people who should not have owned houses at first place. True, the investment banks were greedy. However, without the help of the government, they would have never been able to unleash their greed. The book also ignored that homeowner speculation also contributed to the crisis. In the book, the homeowners who got sub-prime loans were depicted as poor people who were told by the mortgage sellers to tell lies and who got deceived by the teaser rate and was later ripped off by the real rate. (Lewis, 19) These customers were truly the victims of the entire housing market scheme.
However, we had another crowd of customers who had more than one house, to whom we should not be as sympathetic. They were buying houses as speculative investments. During 2006, 22% of homes purchased were for investment purpose, with an additional 14% purchased as vacation homes. During 2005, these figures were 28% and 12%, respectively. The widespread speculation pushed house prices up dramatically. Housing prices nearly doubled between 2000 and 2006. Many homes were purchased even when they were still under construction and then sold for a profit without the sellers ever having lived in them. The housing bubble was so big that Warren Buffett stated that it was the greatest bubble he has ever seen in his life. The question is how did the broad speculation contribute to the crisis? The rising housing price gave mortgage sellers excuses to give out sub-prime mortgages, whose defaults eventually led to the crash. The inflating house prices also gave credit to the CDOs that investment banks created and encouraged large trading volume of CDOs, which increased the magnitude of the crash. As a reader, it is hard not to wonder how could Lewis know every time in advance that a crash was coming and went about documenting it, as what he did when he wrote Liar’s Poker and this book. It must be that the crash had shown its signs in times of prosperity and Lewis captured these signs.
We should learn to be as forward-seeing as Lewis is. We are just four years away from when the crash happened and our economy is still not fully recovered. As we gradually pull ourselves out of recession, let’s remember the lessons learned in the past and walk with great care. And here, we refer not only to investment banks, but also the government and every average American citizen.
--
Editorial Staff
By Michael Lewis
The world of finance is one of losers and winners. When the sub-prime mortgage crisis hit the market in 2007, the big Wall Street firms with huge pile of sub-prime mortgage bonds lost while a few wise men betting against these bonds won. In Michael Lewis’ Book The Big Short, Lewis recounts the story of how a handful of Wall Street misfits anticipated the doom of the sub-prime mortgage bonds and made a fortune betting against the home-price inflation in mid-2000s. Lewis successfully tells the story with humor and clarity, considering the complexity of the sub-prime mortgage bond market before the crisis. However, his account of the financial crisis in 2007 is biased in that it exaggerates the effects of the public feature of investment banks, ignores factors such as government’s policies that lowered borrowing standards and neglects home owners’ speculative behavior.
Lewis overstates the effects of the public nature of the major investment banks. Lewis points out, toward the end of his book, that what lied at heart of the crisis was that all the major investment banks went public rather than functioned as partnerships. (Lewis traced the crisis back to a decision John Gutfreund had made- when he’d turned Salomon Brothers from a private partnership into Wall Street’s first public corporation.) Here is his logic: if a major investment bank were organized like partnership, each partner would have been more careful with their decisions and taken fewer risks. Now that these banks were public and the bankers were operating with shareholders’ money, they had few incentives to scrutinize their decisions or products because they could transfer risks to their shareholders; that was what led these firms to use high leverage and buy a great amount of sub-prime mortgages bonds without even knowing what were underlying these assets. (Lewis, 257) Lewis states that the incentives on these public Wall Street firms are entirely wrong because the bankers can get rich [even] when they are making dumb decisions. (Lewis, 256) In short, Lewis is saying that people within the investment banks took excessive risks because they had nothing to lose. This statement is not sound. First, the bankers did have many things to lose. Many individuals most responsible for the massive money loss during 2005-07 were the largest shareholders in their companies. These individuals lost money when their firms suffered.
In other words, they did not transfer much risk to the companies’ shareholders. Even though Howie Hubler, a former trader at Morgan Stanley, got away with large bonuses, the majority of the Wall Street professionals responsible for the crisis suffered from the crisis. Jimmy Cayne (CEO of Bear Stern)’s stock declined from 1 billion to 50 million. Richard Fuld (Lehman’s chairman) lost 550 million of his Lehman stocks when Lehman Brothers went under. The bankers had a great deal of interest within these firms. These individuals did want their firms to perform well. Even though the bankers are employees in a public company, they are effectively like partners in a partnership company because of their large stock holdings. Therefore, the employees engaged in careless behaviors not because they were in a public firm, but rather, because of some other factors. Second, we can refute the author’s contra-positive statement: if an investment bank were not public, bankers would not have been as careless. To refute this, just imagine that an investment bank were actually a partnership. In this case, a banker would still have bought those mortgage bonds because they were led to believe that they could make profits in these bonds. The only difference would be that the bank would not have had the ability to raise funds in the stock market. In this case, these partnership firms would just have found other creative ways to raise enough capital to buy the mortgage bonds, which would eventually lead to the 2007 crisis. To conclude, the mere fact that the major investment banks were public is not important in causing the crisis.
Moreover, the book is biased in that it gives all the blame to investment banks and ignores the government’s policies’ effects on the crisis. If the government did not lower the borrowing standards and encouraged lending at Fannie Mae and Freddie Mac, the crisis might never have had happened. Here is what happened: at first, the banks were making money with bundling mortgages backed securities backed with good credit and down payment and selling them to investors. Then they became greedy and wanted to make more money by making more loans. When there were not enough people with good credit, the banks invented credit default swaps. (In the book, a trader named Mike Edman within Morgan Stanley came up with this idea). With these swaps, a bank could give out loans to people with low credit score and little down payment. However, a loan could be granted only if it fulfilled the underwriting standards designed by the government. Therefore, the banks had to persuade the politicians to ease the underwriting standards. The investment banks then spent huge amount of money to get the government ease the standards. Then Barney Frank was saying that everyone deserves to own a home and Bush was saying that everyone deserves to live the American Dream. Clearly, if the government had not relaxed lending standards, the investment banks would have never got the chance to create the CDOs, which eventually led to massive defaults of people who should not have owned houses at first place. True, the investment banks were greedy. However, without the help of the government, they would have never been able to unleash their greed. The book also ignored that homeowner speculation also contributed to the crisis. In the book, the homeowners who got sub-prime loans were depicted as poor people who were told by the mortgage sellers to tell lies and who got deceived by the teaser rate and was later ripped off by the real rate. (Lewis, 19) These customers were truly the victims of the entire housing market scheme.
However, we had another crowd of customers who had more than one house, to whom we should not be as sympathetic. They were buying houses as speculative investments. During 2006, 22% of homes purchased were for investment purpose, with an additional 14% purchased as vacation homes. During 2005, these figures were 28% and 12%, respectively. The widespread speculation pushed house prices up dramatically. Housing prices nearly doubled between 2000 and 2006. Many homes were purchased even when they were still under construction and then sold for a profit without the sellers ever having lived in them. The housing bubble was so big that Warren Buffett stated that it was the greatest bubble he has ever seen in his life. The question is how did the broad speculation contribute to the crisis? The rising housing price gave mortgage sellers excuses to give out sub-prime mortgages, whose defaults eventually led to the crash. The inflating house prices also gave credit to the CDOs that investment banks created and encouraged large trading volume of CDOs, which increased the magnitude of the crash. As a reader, it is hard not to wonder how could Lewis know every time in advance that a crash was coming and went about documenting it, as what he did when he wrote Liar’s Poker and this book. It must be that the crash had shown its signs in times of prosperity and Lewis captured these signs.
We should learn to be as forward-seeing as Lewis is. We are just four years away from when the crash happened and our economy is still not fully recovered. As we gradually pull ourselves out of recession, let’s remember the lessons learned in the past and walk with great care. And here, we refer not only to investment banks, but also the government and every average American citizen.
--
Editorial Staff
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