Daily Archives: July 9, 2008

Auction-Rate Securities And Alcatraz

It is a good thing that "The Rock" is a national park now, and not a high-security prison. Some of the people who marketed auction-rate instruments may be going to jail. For the time being, Alcatraz is not an option.

According to The Wall Street Journal, "Federal prosecutors, ramping up criminal probes stemming from the credit crunch, are investigating whether two former Credit Suisse brokers lied to investors about how they placed their money into short-term securities, according to people familiar with the matter."

The auction-rate market, which had total investments of about $330 billion in it, stopped trading when banks and brokerage houses decided that supporting it was too risky.

In this case, the charges are not that auction-rate securities were less liquid than people believed. Rather, the government is saying that the form of the paper sold by the brokers in question to their clients was more risky other forms of the instruments.

The whole matter does open the door a bit more for broader litigation. There is the significant matter of what brokers and banks told their clients about how liquid these securities were. Since auction-rates had traded regularly since 1985, in some cases it was clearly represented that they were as liquid as cash but got slightly better yields.

Who said what to whom? That is what will be dragged through the courts for several years. Of course, clients could have read the fine print in the contracts. They would have seen that auction-rate paper was not a cash-equivalent. But, who cares about the details?

Douglas A. McIntyre

Posted on: July 9, 2008 – 5:24 am in Law

Icahn’s Folly: What Can He Get For Yahoo! (YHOO)?

Carl Icahn often makes money in his corporate takeover attempts, but he is as flawed as a raider can be. His recent investments in Motorola (MOT) and Blockbuster (BBI) have done remarkably poorly. His work to get control of Yahoo! (YHOO) may turn out the same.

Icahn’s problem is very simple. He may "own" Yahoo! within a few weeks, but there is no guarantee he can sell it to anyone. Microsoft (MSFT) says it is interest, but that may simply be a feint. Nothing would serve Steve Ballmer’s goals better than Yahoo! in disarray with a new board and management that will take a couple of quarters to get their hands around a failing business. Microsoft can sit back and wait. Owning the portal company may not be as good a deal as seeing it implode. It is certainly less expensive to sit on the sidelines and watch the fun.

Bill Miller, the famous money manager at Legg Mason, has caught on to all of this. His company owns over 5% of Yahoo! He thinks Icahn needs to make sure that shareholders who follow him into Yahoo! make money. Miller told Reuters, "The difficulty with Icahn is he’d have more shareholder support if he would say he wouldn’t sell the company for less than $33."

And, it is impossible for Icahn to say that. Microsoft may leave him at the altar, even though at one point it said it would bid $33 for Yahoo!

The drawback to Icahn’s raiding approach is that shares often move up when he gets into a stock. Investors figure he can beat up management and make changes which will drive value higher. Often, that does not happen. Stocks trade up for a few weeks. Then Wall St. figures out that Icahn has no real plan or no real leverage to improve long-term value.

Yahoo! is starting to look like Motorola. Both are ugly as a goat.

Douglas A. McIntyre

Posted on: July 9, 2008 – 5:06 am in Mergers and Buy Outs, , , ,

The SEC And The Credit Rating Agencies, Better Profits Through Cheating (MCO)(MHP)

"I am shocked, shocked to see that gambling is going on in here,"–Captain Renault, "Casablanca: 1942

Of course, Captain Renault controlled the gambling in Casablanca, but it was best that, as the chief of police, he not admit that. Something similar happened at the big credit agencies including S&P and Moody’s. They were supposed to be honest brokers of opinions about paper like mortgage-backed securities. They neglected to fulfill that obligation. They may have been busy making buckets of money for themselves, perhaps in ways that compromised their judgments.

According to The Wall Street Journal, the SEC did a major investigation of how the credit rating agencies had been run. The paper writes "The 10-month examination uncovered poor disclosure practices, a lack of policies and procedures guiding the analysis of mortgage-related debt, and insufficient attention paid to managing conflicts of interests," Among those conflicts of interest where that analysts knew how their firms were paid by clients. Makes objectivity a little harder.

The SEC report is probably not the end of it. The document is likely to be used as evidence in a number of lawsuits against the rating firms. Banks and their clients lost billions of dollars by betting wrong on mortgage-backed paper. They relied on S&P and its peers for opinions instead of handling the due diligence themselves.

It is the American way. Someone lost money so someone has to pay.

Douglas A. McIntyre

Posted on: July 9, 2008 – 4:50 am in Analyst Calls, ,

Google’s (GOOG) YouTube Disaster

Google (GOOG) paid something around $1.7 billion to buy YouTube, which is by a wide measure the most popular video site in the world. By some accounts, one billion videos are watched at the site each day.

According to The Wall Street Journal, YouTube revenue is only running about $50 million a quarter, which makes the buy-out seem very expensive. Google executives blame some of the poor revenue numbers on the own advertisement placement systems. But, that is only a small part of the problem.

The real drawback to YouTube as a marketing medium is its content. The most popular video of all time on YouTube is called "The History of Dance", a short comedy feature shot in resolution so poor that it is barely visible. It is cult classic for buffoons. And, it has been viewed almost 92 million times. Not far behind that is a clip of a laughing baby. The content is sophomoric and the quality of the video is hideous.

YouTube will never do well until that great majority of the heavily trafficked content is high-quality video with high-quality content. Big TV advertisers like Chevy and Bud really don’t want to be found in the company of video clips taken with cell phones and posted for the bizarre amusement of the great unwashed.

For now, YouTube is toast, at least as an ad medium

Douglas A. McIntyre

Posted on: July 9, 2008 – 4:33 am in Internet,

Media Digest 7/9/2008 Reuters, WSJ, NYTimes, FT, Bloomberg

According to Reuters, large Yahoo! (YHOO) shareholder Legg Mason said Carl Icahn’s bid would have more support if he guaranteed he would not sell the company for less than $33.

Reuters writes that the CEO of JP Morgan (JPM) said Wall St. losses where not due to accounting practices.

Reuters writes that the Fed may extend its low-cost lending to brokerages.

Reuters reports that Google’s (GOOG) YouTube ad revenue is running well below expectations.

Reuters reports that Alcoa’s (AA) results fell but beat Wall St.expectations.

The Wall Street Journal reports that the government is looking into whether Credit Suisse brokers lied about the value of auction rate securities.

The Wall Street Journal reports that Steve & Barry’s will file for Chapter 11.

The Wall Street Journal writes that the SEC found credit rating firms put profits ahead of quality controls.

The Wall Street Journal reports that a measure of national advertising revised growth down to 2% this year.

The Wall Street Journal reports that VMWare (VMW) pushed out its famous CEO.

The Wall Street Journal writes that Siemens (SI) will cut nearly 17,000 jobs.

The New York Times writes that the Fed sees the credit turmoil moving well into next year.

The New York Times reports that GM’s cash cushion does not seem adequate with its big drop in sales.

Douglas A. McIntyre

Posted on: July 9, 2008 – 3:00 am in Press Digest, , , , , , ,

Asia Markets 7/9/2008 (LFC)(SNP)

Most markets in Asia were higher.

The Nikkei moved up .2% to 13,052. Izuzu Motors was up 3.3% to 498. KDDI was up 1.1% to 621000.

The Hang Seng rose 2% to 21,635. China Life (LFC) was up 4.8% to 27.20. China Petroleum (SNP) was up 3.8% to 7.42.

The Shanghai Composite rose 3.8% to 2,921.

Data from Reuters

Douglas A. McIntyre

Posted on: July 9, 2008 – 2:40 am in International Markets, ,