Between The Numbers

TV Business Models: A Problem Even Jack Bauer Can't Solve

Good look at the future of television. One point I would differ with you is that of volume. All in the Family was made for and shown in the US only. It got 20M out of 65M households, which is a great fraction, never again to be duplicated. However, internet distribution might allow a show like 24 to reach 100 million of the 6 billion people in the world. Like you say, the idea of reaching households is rapidly diminishing, as users are able to get content targeted directly to them. However, even if the revenue per user is much less, costs for distribution are nearly zero (unlike the broadcast market of 1985), and it is possible the total return on investment could be as good as before. The current business model is dead, I completely agree, but Jack Bauer and characters like him will go on indefinitely as soon as content producers learn to take advantage of the current environment. It may not be ad only, and there will likely be many more low-budget narrow focus programming, but people are still satisfied by the entertainment itself and will always seek and pay for quality.

Cost-Benefit Analysis Is Tricky When Applied to Government Regulation

The problem is the government cannot be trusted to calculate the cost-benefit analysis correctly. In the private sector, one always has competitors. If you charge too much, customers go elsewhere, and too little and you can't make the profit to stay in business. Government is a monopoly with practically infinite cash, so there is no feedback mechanism of success/failure to judge the quality of the decisions that are made. Even if there were no decisions based on political concerns (already a huge problem), there is still no reason to believe that they would be made well because of the lack of accountability.

Bulldozing brand new suburbs. Amazing video of brand new suburban homes being razed, as lenders find it's cheaper to destroy out-of-vogue ex-urban communities than to keep them on the books.

This, to me, is a failure of markets. There has to be someone, somewhere, who would purchase these houses for a number greater than the cost to operate a bulldozer. The local regulators were fining and threatening the banks for owning incomplete under-code housing, yet not giving them a way to work out the negative cashflow situation and sell them. A liquidity crunch of houses in Southern California, where an asset was destroyed rather than sold. Go to the discount window, get the cash needed to fix them, get them sold at pennies on the dollar, repay govt and all is well. It would have been in everyone's interest to find a way to get them sold, fixed, and not knocked down.

For the First Time Ever, Microsoft Turns to the Bond Market

Please, please be joking. Facebook had $300M in revenue in 2008. Twitter has raised a total of ~$100M of venture capital so far. $50B valuation between them is absurd. MSFT, while rich and cashflow positive, does not have $50B.


On May 11 06:13 PM Cetin Hakimoglu wrote:

> Microsoft should buyout facebook & twitter for $50 billion

CDS Moral Hazard: Insuring the House You Burn Down

My solution is a lower premium for the ones with insurable interest (and the accompanying solution for CDS issuers) and the assumption (for pricing purposes) that anyone buying CDS without insurable interest is (or can be) an arsonist.
If you incent CDS buyers to not burn the house down (via price), then we need not have elaborate regulation to enforce insurable interest. By separating speculative positions from true hedging/insurance, we can wall off the risk behaviors from one another. We have seen that regulatory regimes can be gamed, so my suggestion relies on the market (specifically CDS issuers who's money is on the line) to price it correctly. It essentially forces insurable interest for most CDS purchasers, while not eliminating the speculative uses of CDS.

Here's a bank by bank list of capital buffer shortfall, or lack thereof (source): American Express (AXP): $0 Bank of America (BAC): $33.9B BB&T (BBT): $0 Bank of New York Mellon (BK): $0 Capital One (COF): $0 Citigroup (C): $5.5B Fifth Third Bancorp (FITB): $1.1B GMAC: $11.5B Goldman Sachs (GS): $0 JPMorgan (JPM): $0 KeyCorp (KEY): $1.8B MetLife (MET): $0 Morgan Stanley (MS): $1.8B PNC Financial (PNC): $0.6B Regions Financial (RF): $2.5B State Street (STT): $0 SunTrust Banks (STI): $2.2B U.S. Bancorp (USB): $0 Wells Fargo (WFC): $13.7B

Surprising numbers: JPM needs $0, GS needs $0, Citi needs $5.5B. I would have thought, for sure, they would peanut butter spread a bit of capital requirements across the most politically-connected banks to make the stress tests seem credible. However, these numbers are silly low, almost demanding to be rejected by investors.

Not-Surprising: GMAC is in a ton of pain, and the $11.5B (conservative) number implies significant dilution. They aren't too big to fail (but they do aid in car sales, which aids in union salaries, which nets votes), but the fact they were stress tested shows they won't be allowed to. If ever an argument could be made for receivership based on such whitewashed numbers, this might be it.

Nassim Taleb's Latest: Rogue Traders and Why Big Banks Fail

It's finally time someone took a hard look at the "too big to fail" concept. His conclusions, that "big means more likely to fail" and that "too big to be allowed to exist due systemic risk" should be the guiding principles for financial regulation going forward.

Of course, Taleb neglects the "so big to wield disproportionate political power" problem, but that is another matter entirely. He's been right for years, but unable to get anyone important to listen.

Politically Powerful Unions: A New Class of Senior Debt?

Sure enough, the predicted villainization is taking place (as covered by Tyler Durden):
seekingalpha.com/artic...

Chrysler Lenders (Non-TARP) Come Out with Guns Blazing

This is pretty much what I discussed in this article "Politically powerful unions a new class of senior debt?"
seekingalpha.com/artic...
If the cramdown succeeds, and senior debt holders are fleeced, then expect that no future union dominated company will ever be truly healthy again. Yes, that may seem harsh, but debt markets, once burned so thoroughly by political concerns, will not likely lend again at anything reasonable to such corporations. In the long run, only the governement will lend to these companies, before or after bankruptcy, creating effective nationalization.

PPIP Face-Lift: Silver Lining for Taxpayers?

Then again, if a private investor were to actually stumble upon a class of assets that might make money, the Treasury, bearing all of the risk, would get none of the upside. Not sure if I like that, even if I believe that almost every PPIP will be designed to pump asset prices paid to banks and then collapse.
Might a better course of action be to keep the 50/50 equity split and limit the leverage of the non-recourse loan portion (the real taxpayer giveaway)? We could still achieve the dis-incentive of lower leverage (say, limiting the loan to 50-75%), while still keeping the upside for the taxpayer.

Stress Testing: What's Your Bank's AQ?

I love the use of difficult-to-manipulate numbers and data from the market itself. Truly looking between the numbers here, and I'll be itching to dig deeper if gov stress tests differ from these numbers significantly. Great article.

Politically Powerful Unions: A New Class of Senior Debt?

jsmerriam - I wish I could tell you that your bonds were going to fetch 10 cents on the dollar, but the current offer (rejected, yes) would have you holding 10% of the equity in the new GM, no cash in hand. Others do not forsee that company being worth $27B (meaning 10c/1$ for bonds), so it is likely you are getting nearly nothing.

Alfredo - some of the info on Chrysler suggests that the most senior *secured* debtors, who would likely recover a large chunk in a liquidation, are being asked to take a 70% haircut (but at least are getting cash for the remaining 30%). Something tells me you won't be lining up to get in on any DIP financing for GM or new Chrysler.

Credit Default Swaps May Be Playing a Supporting Role in Chrysler Bankruptcy Filings

Careful what you wish for in a restructuring like this. Smashing the bondholders now just because it is politically feasible does not build a solid long term company. If union claims are senior to all debt, then the contracts signed between bondholders and management are violated. I posted a bit on this a few days ago:

seekingalpha.com/artic...

Obama to Announce Chrysler Bankruptcy Thursday

I suspect the lenders will run, not walk, to accept the $2B cash settlement on $6.9B. The GM proposed settlement had bondholders getting just 10% of the restructured company for $27B in debt, no cash.

Stress Tests Were Never a Serious Exercise

I'm going to suggest the politically unpalatable yet simple solution: Convert debt to equity. The US Treasury policy has been 100% protection of debtholders at all costs, which is a foolish course of action that fosters more moral hazard, conflict of interest, etc. As Rolfe says, converting preferred doesn't get the total equity up enough to absorb all potential losses. Converting just 10-20% of debt to equity would make even the most unhealthy megabank solvent. If the assets are worth more than they are being sold for now (mantra of the big bank), the equity will rise nicely over time and the debtholders will benefit. If no, then debtholders take losses as they should, but no systemically critical bank need face failure/liquidation.
This will, of course, never happen.