The Conglomerate Blog: Business, Law, Economics & Society

April 02, 2009

Family Film Blogging: Monsters v. Aliens

Posted by Christine Hurt

If you are already making weekend plans and are wondering about the newest Dreamworks animated feature, Monsters v. Aliens, then wonder no more. We were there for the big opening weekend, and we were not disappointed.

First of all, the 3D version is really cool. (Our theater had three screens showing the movie, but only one screen was in 3D.) Our showing was sold out when we arrived, and the two fifth-graders that accompanied me insisted we wait 2 hours for the next 3D showing, not 20 minutes for the next "2D" showing. But, the wait (spent at the library) was well worth it. I am fairly skeptical of 3D movies, having been burned for the past 30 years or so (Jaws 3D? Awful. The Adventures of Shark Boy and Lava Girl 3D? Awful on multiple fronts.) Looking at this list of 3D movies, I'm guessing that "realD 3D cinema" is the key to the new resurgence in 3D movies outside of the IMAX format. (Note from the list that Toy Story and Toy Story 2 may be re-released in realD 3D in theaters. Just make a Toy Story 3, people!) Anyway, the 3D is very good, and the glasses you get are not silly paper things that fall off of your face -- these are Buddy Holly-type plastic glasses that are quite comfortable to wear. Cool!

And, the movie isn't merely a 3D vehicle -- it actually has a story, and the story is cute. I'm a big sucker for these kids' movies with a plot twist a couple of eons away from "beautiful damsel is in distress and rescued by handsome prince" fairy tales. That's why I loved both the first two Shrek movies and Enchanted. Here, you also have a female character who rescues herself from both physical and emotional disasters and who comes to realize that being strong and powerful is a good thing. I like that kind of fairy tale!

There are some really funny moments, and Seth Rogen's "B.O.B. (blob)" character is really, really hilarious. I can't find this quote online, but I'll paraphrase my favorite line. In the warroom, the President and his staff are trying to strategize on how to respond to an alien probe that is impervious to conventional weapons. Someone says "We have to get the brightest minds in America on this." Someone else says, "Call India." No one else in the theater laughed but me, but that's not a rare occurrence.

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April 01, 2009

Spitzer Writes Well, But Not Accurately

Posted by David Zaring

As we wait to see what the G20 will suggest re: regulatory reform (my bet is a college of supervisors; an unlikely alternative is a treaty - and a nonstarter is the UN - creating comprehensive global regulation), let's take a gander at Eliot Spitzer's views on regulatory reform. Spitzer has done more for the federalization of financial regulation than anything except for the current unpleasantness, given his track record of holdups of Wall Street institutions from Albany. I'm assuming he enjoyed exercising that authority, because, indeed, the takeout is: let's not throw out the baby with the bathwater, we already had all the regulatory authority we needed.

The bad actors who got us where we are—ratings agencies, commercial banks, and investment banks that participated in the origination and securitization of the bad debt—have been squarely in Washington's regulatory sweet spot. The regulators had all the power they needed to peer deep inside the AIG counterparties to see if there was risk that should have been avoided. And, truth be told, they had that power with AIG as well. Today there is a hue and cry about hedge funds, but it is not hedge funds or private equity funds that are seeking bailouts and taxpayer subsidies.

I also think regulatory reform would dispense with the old system - at least entirely - at its peril.

So it is odd to agree, to some degree, on a bottom line and think that the reasoning is totally, 100% dishonest. It is absolutely untrue, of course, that I-banks were subject to all the regulatory authority that Washington needed (they were supervised for capital adequacy only to the degree they wished). I don't know what Spitzer is thinking with regard to being able to peer inside AIG's counterparties, but the CDSes AIG wrote for them were explicitly left unregulated, and many of those counterparties were unregulated hedge or PE funds. And acting like we haven't been bailing out those alternative asset classes by bailing out Citibank and AIG is willfully obtuse. The equity holders have gone to circa zero. The management has been fired or is working for a dollar. And the workers are being fired en masse. These stakeholders haven't been bailed out at all. The whole point is that we've bailed out the creditors and counterparties, and many of them are unregulated.

Spitzer knows how to begin a screed, I'll give him that. Indeed, you might argue that he is making Slate interesting again.

Does it strike you as odd that the American government has invested $115 billion in TARP money alone in Citibank, JPMorgan Chase, and Bank of America, fully 70 percent of their market cap ($164.5 billion, as of March 30), yet we have virtually no say in the management or behavior of these banks? Does it seem even odder that these banks are getting along extremely well with the government regulators who should be picking them apart for having destroyed the economy and financial system?

It doesn't strike me, however, that he is answering these questions accurately.

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Is Facebook Conditioning the Market for a Possible IPO?

Posted by Christine Hurt

Facebook is changing its CFO. Although Mr. Yu "is a well-regarded Silicon Valley veteran with experience at Google, YouTube and Yahoo," the explanation given after his departure is "[Facebook has] hired an executive search firm to find a successor with experience in running a public company."

As you know, Facebook is a private company. To be come a public company, it would have to have a registered public offering. Part of the rules governing registered public offerings is that issuers may not try to "condition the market" by mentioning an upcoming IPO in certain ways before a registration statement is filed. However, a spokesman says that "Facebook had no immediate plans for an initial offering." Or, at least not in the 30-day safe harbor window.

I guess we will all stay tuned. In "these tough economic times," a fun technology IPO would bring some cheer, wouldn't it?

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FASB v. Treasury

Posted by Usha Rodrigues

According to the WSJ, the Financial Accounting Standards Board (FASB) is changing its mark-to-market rules tomorrow, "allowing banks to set their own values for certain hard-to-value troubled mortgages, corporate loans and consumer loans...The change was meant to assist U.S. banks after bankers complained current mark-to-market accounting rules forced them to undervalue their assets, by setting prices at deeply discounted, fire-sale values."

The most alarming part of the article is the observation that there is a "disconnect" between this accounting change and the Treasury Plan for banks. Both try to address the central problem of valuing so-called ~~toxic assets~~ legacy funds. Everyone seems to believe that these assets are "really" worth more than they're selling for now, and therefore that anyone who sells now is losing money they don't have to, because at least some will increase in value.

What do we want banks to do? Hunker down until the storm passes and the assets can be sold for more money than they can get now? If so, and banks are hindered by an accounting rule that forces them to "mark" them down to an artificially low "market" price, then FASB's change of heart could help them eventually see more money. But if we want banks to get rid of these assets, then Treasury's Public-Private Investment Fund (PPIF) could help banks. But then PPIF investors and taxpayers would get the benefit from the expected up-tick in value.

I favor the PPIF idea, on the theory that relaxing mark-to-market gives banks an incentive to "wait it out," rather than deal with the central problem of valuation and facing up to losses. Still, I'd hate to have sell anything--a house, a car, a teacher's manual--in this market. Actually, if you're looking for that last one...

Kidding.

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Heat and Light on GM

Posted by Fred Tung

WSJ dubbed it "one of the most dramatic government interventions in private industry since the economic crisis began," and one senator commented called it "truly breathtaking," a move that "should send a chill through all Americans who believe in free enterprise." The firing of Rick Wagoner as GM's CEO, along with current moves to replace most of the board, sure seems aggressive. But compared to what?

The government is now a major creditor in GM, and creditors routinely use their leverage over distressed firms to replace management. It might seem like the government has been a bit quick on the trigger, having become a GM creditor only a few months ago. On the other hand, GM management has quite a long and public track record, so this new creditor didn't really need to spend a lot of time with first-hand observation. Moreover, absent the government lifeline, it's quite conceivable that GM's private creditors would have pursued some version of this approach anyway, including forcing GM into bankruptcy, where managers are shorn of much of their operating and financing discretion, creditors often take control, and replacing management is pretty routine. But as long as there was the possibility of bailout money in the offing, it made sense for all private parties to wait and see.

Now, the administration is surely subject to the standard criticism that it hasn't the pure economic motives of private creditors in making decisions about GM management or its fate generally. Government decision makers are generally politically motivated and not profit seekers. So they generally lack the incentives to get it right on the economics. OTOH, GM's a pretty special case all around. Certainly given the size and political importance of GM, the public scrutiny involved, and the multiplicity of political stakes, the administration has every incentive to get this one right. "Right," of course, could come in many different forms, but at the very least, it would include preserving the best GM brands and operations as going concerns, and the related jobs--for GM, its suppliers, and its dealers.

One other important aspect of the management ouster is that bankruptcy is now a much greater possibility. The fear of bankruptcy has been wildly overblown, especially the notion that suppliers will stop shipping. Uh, this is not a new issue in bankruptcy, and as Mark Roe pointed out recently, the bankruptcy system has all sorts of prospective inducements to keep suppliers shipping.

The real threat with a GM bankruptcy may be the unknowns for managers and unions. As noted, managers lose some discretion in bankruptcy, as they have to seek court permission to use encumbered cash and to do anything out of the ordinary course. Managers also commonly lose their jobs either during the case or immediately afterward. As Rumsfeld might have said, this known unknown is now known. New management is in place, and it is singing a different bankruptcy tune.

For unions there is risk as well. Bankruptcy allows for the rewriting of burdensome contracts. While there are some extra hurdles to the rewriting of collective bargaining agreements, the law leaves an enormous amount of discretion in the hands of the bankruptcy judge. So who knows how that would come out?

Stay tuned.

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March 31, 2009

More on the Campaign Contributions of TARP Recipients

Posted by David Zaring

I told you last week about the herculean efforts of the Michigan group that has been studying relationships between donors and senators. It's worth looking a bit more closely at their really interesting visual display that highlights the donations of TARP recipients - you can click to it and interact with it a bit more to find your favorite bank and senator.

As the below jpegged excerpt from the chart suggests, Chris Dodd is at the center of a lot of things, but then, so are the TARP recipients. A nonexclusive list of the financial institutions that give appear to move from blue to red in this order Goldman (more blue donation relationships), JPMorganChase, Citigroup, Morgan Stanley, BofA, Merrill Lynch (more red donation relationships), with the "bluer" three giving more than the "redder" three:

Well worth a look. Here are some of the more general, non-TARP conclusions that the Michigan team draws:

(1) Industries locate in the center of the graph because they provide significant funding to both Democrats and Republicans.

(2) Industries which generally only fund one political party are located toward the respective red/blue boundary. For example, it is hardly surprising to observe the location of “Oil and Gas” versus “Environmental” groups.

(3) It’s important to note that we do not impose the partisan separation or party outliers apparent in the image. Rather, the algorithm places Red Senators in Blue Territory and Blue Senators in Red Territory because they receive significant sums from industries who typically fund the opposing party. For example, consider Senator Olympia J Snowe (R-ME) who is typically characterized as a moderate Republican. Since she receives money from more industries that typically fund Democrats than Republicans, she is placed in Blue Territory by the algorithm.

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March 30, 2009

Guess The Futurist

Posted by David Zaring

Who said this upon the repeal of Glass-Steagall?

Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place.

I mean, it's pretty uncanny how it encapsulates everything arguably good about GS and all the risks of its disappearance. Maybe an economist said it? Like Larry Summers? Nope, he said:

Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century.

Maybe a forward-thinking senator said it? Like super-smart Senator Bob Kerrey, Democrat of Nebraska? Actually he said:

The concerns that we will have a meltdown like 1929 are dramatically overblown.

So who was thinking about systemic risk? Answer after the jump.

more ...

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Maryland Names Its New Dean: Phoebe Haddon

Posted by Lisa Fairfax

Today Maryland's president announced the appointment of the law school's new dean: Temple Law School Professor Phoebe Haddon, who will be the ninth dean of the University of Maryland School of Law and its first African American dean in the school's 185-year history. Having served in leadership positions in many of the organizations dedicated to improving legal education including the ABA, AALS and the Law School Admissions Council, Haddon is a national leader in legal education. Her scholarship focuses on constitutional law and tort law, with a particular focus on equal protection, jury participation, the courts, and diversity. As a (now former) member of the dean search committee, I could not be any more thrilled with Maryland's choice. I think the chair of the law school's Board of Visitors summed it up best by saying "Phoebe Haddon is the right person at the right time to be the next dean of the University of Maryland School of Law." So congratulations to Maryland!

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TOTM Book Symposium

Posted by Victor Fleischer

Reminder: The TOTM Blog Symposium on Michael Carrier's new book is now underway. Check it out.

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Another glimpse behind the curtain at AIG

Posted by Gordon Smith

Last week the letter from Jake DeSantis, an executive vice president of the American International Group’s financial products unit, to Edward M. Liddy, the chief executive of A.I.G., caused a public sensation, as we saw the executive bonus kerfuffle from the other side. Today John Carney offered another peek inside AIG, courtesy of the executive director of AIG's Financial Products. Here is a sample, but you can find the whole post over at Clusterstock:

Unwinding thousands of intertwined, complex deals in a market where your counterparties know what you are trying to do, without losing even bigger amounts of money, takes specific knowledge of the transactions, and knowledge of the systems, the vast majority of which were developed in-house....

As it was, we managed to wind down nearly 40% of the whole portfolio - another news item being ignored - derisking almost a trillion dollars worth of risk that the American taxpayer doesn't have to pay for. We hope to finish the job. We're professionals like that.

It's amusing to hear people say we should be fired, or that the job isn't all that hard, or there's 50 people willing to do any of our jobs. To all of those folks, here's a clue: This is not a going concern, we have been working ourselves out of a job for the last 6 months, we will not have jobs when we are done, and any replacement will be doing it slower than we can, and is very likely to screw it up much worse than it already is. Oh, and a replacement might not get paid at all, if the government changes its mind again. The only reason I stayed was because I was told that I was a valued member of the team and I was promised a payment. Nobody ever actually tried to renegotiate the terms. It was never a secret, the ERP was disclosed many times. Anybody telling you otherwise is lying. Anybody - Geithner, Cuomo, Blumenthal, Dodd, all of them and also those guys in Congress - they all had that information back in October. Cummings has been railing at Liddy about it since at least October....

I am, ultimately, just a support guy, albeit a highly compensated, highly qualified and highly professional one. I am certainly not looking for sympathy, I already knew I was losing my job and I was preparing for my time. I had made my peace with the events which had led up to the unwind. Certainly one should not expect sympathy from the likes of Andrew Cuomo. I just hope I can roll out of the way before he reverses the bus to back over me again.

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