No this is not the name of the hottest new band! It is the name of the new venture capital fund started by Marc Andreessen and Ben Horowitz. This fund is $300 million in size and "aimed purely at investing in the best new entrepreneurs, products, and companies in the technology industry."
So dust off those business plans and apply today!
The July issue of Bloomberg Markets lists The Finance 50, ranking the top 50 earners in Finance during the past year. Who’s at the top? You might ask, none other than the CEO of Godman Sachs Lloyd Blankfein, followed in turn by all the other big recognizable names in finance such as American Express, Citigroup and JP Morgan Chase. The article expanding on the list talks about the future of executive compensation and which parties have the power to change the scale of executive pay. Additionally the article talks about other topics such as “silver handshakes” CEO compensation in the UK and Canada and the largest “Golden Send-offs” of 2008. You can read the article on the Bloomberg website but I recommend if you can get your hands on the print version the graphs and charts are really well done.
"It always struck me that being in the right place at the right time was important in career paths," said Paul Oyer, an associate professor of economics at the Stanford Graduate School of Business who studied the long-term career choices and salaries of more than 35 years' worth of the School's graduates. From surveys conducted in 1996 and 1998, Oyer concluded that random factors play a large role in determining the kinds of jobs that MBAs take upon graduation. Specifically, the proportion of graduating MBAs who manage to get hired into lucrative investment banking positions shrinks or expands depending on how well the stock market is performing in a given year.
Read more about it.
It was announced this week that the SEC is filing charges against Aldus Equity for allegedly being involved in a kickback scheme with the New York State Common Retirement fund, the fourth largest retirement fund in the U.S. According to Pensions & Investments website. Liberty Mutual just announced a 92% loss due to losses in their Private Equity division. RBS (Royal Bank of Scotland) now owned by the government of Great Britain, has eliminated the role of Private Equity (PE) manager at the bank.
There are however signs of life in PE, KKR (a private equity firm) is in talks to purchase Oriental Brewery Co, which is part of Anheuser-Busch InBev. Additionally TheDeal.com ran an article yesterday entitled PE Fundraising Ends April Strong espousing the strength of future leverage buyout activities due to larger fund-of-funds.
The McKinsey Quarterly in an article entitled The Future of Private Equity says it best in that Private Equity “must adapt to thrive.”
Raising venture capital? Guy Kawasaki blogs about a free online term sheet generator, available through the kind offices of Wilson, Sonsini, Goodrich and Rosati, one of Silicon Valley's key law firms. The tool will generate a venture financing term sheet based on your responses to an online questionnaire. It also has an informational component, with basic tutorials and annotations on financing terms. Check it out.
 The SF Giants baseball team's net worth is down 5 percent. I guess if I were in the market to buy a team, that would be a steal!
Read more about it.
The SF Chronicle asked readers to send their best ideas for startups, then chose a dozen from more than 250 submissions and ran them by some venture capitalists.They list a few of the finalist in today's article.
Do you have that next great idea?
I came across an article at Seeking Alpha and the first sentence is, "When it comes to the U.S. financial crisis, it’s tough to know just what to think or who to believe these days." The author goes on to compare the different opinions and scenarios to "Goldilocks and the 3 bears" and the movie "The Good Bad and the Ugly".
I suppose you could view the current financial crisis as a dream (or nightmare) or a fairy tale and one day you will wake up and it will all be over.
Late last year, Bloomberg surveyed around 400 financial professionals on where they think M&A and capital markets are heading this year. The survey found that the most attractive targets for takeovers would be distressed companies and assets. The industry expected to produce the most IPOs is consumer discretionary. Where will companies get most of their capital? By a wide margin it’s going to be via bonds. You can read more about the survey on pp.132-133 in the March 2009 issue of Bloomberg Markets.
Is the American financial system broken? According to journalist and author Fareed Zakaria our system is approaching the terminal stage. Banks are moving toward insolvency, buried under a mountain of bad assets and, despite a huge influx of cash, they are not lending. Speed and money are crucial. Zakaria believes President Obama understands the issues, but is concerned that Congress does not understand the severity of the situation. He believes we must act swiftly to restore America‘s credibility by first putting her financial house in order.
In his blog entry titled The Bailout, GSB Professor Bob Sutton takes former Merrill Lynch bigwig John Thain to task for apparently paying out billions of dollars in bonuses the last quarter of 2008, shortly before his firm was acquired by Bank of America -- itself the beneficiary of billions of bailout bucks. Sutton wishes out loud that a process for retrieving these undeserved handouts may already be in motion. A photo he includes of the recently downed jet in the Hudson, with commentary, forcefully (and humorously) reminds us of what has been happening to our society. As one who recently mailed out a parody Xmas poem to my friends and relatives titled 'The Night Before Bailout', I just couldn't resist including this in my blog today. Bob, thanks for the memory !
An article in the SF Chronicle talks about how Alex Gould who teaches a course at Stanford on money, banking and the financial markets is using the current financial crisis to impart real-life lessons about the economy.
Educators across the Bay Area are using the biggest financial crisis since the Great Depression to teach everything from behavioral finance and social justice to the recasting of capitalism.
"What's happening now affects every one of us," Gould said. "It provides an unparalleled laboratory of real-world applications upon which to test theories."
The current credit crisis has impacted every aspect of American life. The Rock Center for Corporate Governance, together with the Stanford Federalist Society and the Stanford American Constitution Society, recently presented a panel discussion featuring three Stanford professors: Michael Boskin, the GSB's Darrell Duffie and Joseph Grundfest. If you are having trouble understanding the crisis and how it might be resolved, this panel can help -- starting with Professor Grundfest’s analogy of the 'obese man'. Listen or view the full panel discussion.
Traders are keeping a nervous eye on an obscure index known as the VIX. The Fear Index or other wise known officially as the (Chicago Board Options Exchange Volatility Index) measures volatility, the technical term for those wrenching market swings. A rising VIX is usually regarded as a sign that fear, rather than greed, is ruling the market. The higher the VIX goes, the more unhinged the market looks.
The VIX had its origin in 1993, when the Chicago Board Options Exchange approached Robert E. Whaley, then a professor at Duke University.
Read more about it.
There is an interesting article in the NY Times comparing the roles of JP Morgan and Warren Buffett in times of financial upheaval.
Their times and personalities are vastly different, of course. But J. Pierpont Morgan’s role in the Panic of 1907 has its echo in Warren E. Buffett’s actions during the current financial troubles.
“What Buffett is doing is similar in ways to what Morgan did in 1907,” said Richard Sylla, an economist and financial historian at the Stern School of Business at New York University. “It’s what you might call profitable patriotism.”
Read more about it.
The credit default swap market is not a very familiar term to the general public, however many in finance shudder when conversation turns in that direction. Credit default swaps are complicated insurance mechanisms for stocks, as shown by Steve Kroft of 60 Minutes in his report Wall Street’s Shadow Market, some contracts can be hundreds of pages long. Kroft also speaks to the International Swaps and Derivatives Association about their members and the current financial crisis in the United States. The credit default swap market is also discussed in the Fortune (October 13, 2008) article The $55 Trillion Time Bomb indicating that the market in default swaps, although having lost value, has not hit rock bottom yet.
If you are wondering what CDSW -GO- is, its page in Bloomberg where credit default swaps are evaluated.
For those who follow our blog, a symposium of distinguished faculty convened yesterday at Stanford to discuss the current credit crisis. GSB Dean Robert Joss introduced the session, which included faculty from Law, Economics and the Business School. We are all concerned about the present situation, so take this opportunity to increase your awareness by watching a video of the symposium.
Puzzled by the recent flurry of developments on Wall Street? Feel like it's too much, too fast to digest? A GSB instructor just recommended a New York Times Freakonomics blog entry by economists Diamond and Kushyap to his MBA students. An interesting explanation of these potentially globe-shaking events ... as well as what it all means for you and me.
It was announced this week that the IMF would conduct a review of the US Financial System. The program is called the Financial Sector Assessment Program (FSAP) and is usually reserved for countries with devaluing currency or other major financial market issues. The IMF steps in to help them decide next steps and in some instances organizes loans. The Spiegel (a major German news magazine) explains a bit more about the process and what will be expected in an article entitled The Shrinking Influence of the US Federal Reserve.
Apparently the FDIC (Federal Deposit Insurance Corp.) keeps a list of banks they consider to be financially troubled. The specific names of the banks are not released to the public, however the number of banks on the list is. At the end of the first quarter the number of banks on the list hovered around 90 this month the list comprises 117 banks. Let's put this in perspective, at the height of the S&L scandal of the 1980’s the number of banks on the list reached 1,500 according to Money magazine.
As I mentioned in an earlier blog entitled IPO Dearth the number of IPOs during the past few months has been slow. So it’s surprising that KKR one of the oldest Private Equity firms (some of the firms actions are chronicled in the book Barbarians at the Gate: The Fall of RJR Nabisco) is jumping in with plans to go public. Other Private Equity firms such as Carlyle Group and Texas Pacific Group have changed their minds after Blackstone shares lost 50% of their value since IPO. KKR is however going public in a very creative way which you can read about in the Reuters article Buyout King Kravis Swaps Privacy for Stock. It is also interesting to note how involved European groups are in this transaction as outlined in the Financial Times article KKR to Go Public Through Fund Merger.
Who's moving and who's shaking ? Treasury & Risk magazine June 2008 issue has listed its candidates for the 100 Most Influential People in Finance, movers and shakers in the world of big bucks. The list is segmented into sections, such as 'The Financial C-Suite', 'Treasurers', 'Bankers', 'Politicians', 'Risk Management' and others. Some names like Mayor Michael Bloomberg, finance legend Kirk Kerkorian, Representative Barney Frank and Fed Chairman Ben Bernanke are instantly recognizable; others will be new to you. Read more in the issue on the current periodical racks in Jackson Library or online.
Silicon Valley VCs increasingly are looking at investment areas such as energy production and cleantech which require substantial technology. vcj (June, 2008) reports that science driving innovation in these areas isn't coming exclusively out of Stanford University. It's also coming out of Oklahoma State University, Virginia Polytechnic Institute, and Rice University. The number of start-ups jumped nearly 20% in 2006 to 698, according to the Association of University Technology Managers. Reaching the right people has never been easy. An example of one easy way is a campus associate program by Alsop Louie Partners. "Every VC firm on Sand Hill Road is all over Stanford looking for the next Larry and Sergey. So we designed the campus associate program at Berkeley because it was right across the bridge" says Alsop.
Besides hiring an insider to scout out the hottest newly minted entrepreneurs, other ways include the following:
2. Connect with alumni - research shows that the median age of the founders of U.S. technology companies is 39 and that twice as many were older than 50 than were younger than 25.
3. Reach out to university VC programs - popular at many business schools, the best known university-sponsored programs are Cornell's BR Ventures and the University of Michigan's Wolverine Ventures.
4. Tap university-affiliated angel groups such as Bluegrass Angels (affiliated with University of Kentucky), Harvard Angels (Harvard), and Youniversity Ventures (Stanford University, University of Illinois at Urbana-Champaign)
5. Connect with non-profits that help commercialize university tech such as the Southeastern Universities Research Association (SURA).
Source: Thomson Venture Capital Journal June 2008, available at Jackson Library
The Washington Post reports today in an article entitled Venture-Backed IPO Tally: Zero that no venture backed companies have gone public in the second quarter. Why is this significant? Well as the National Venture Capital Association states “venture-backed companies … represent a critical job creation engine for the United State economy”. The news release goes on to synthesize a survey of NVCA membership. Read more about the survey in IPO Drought Creates Capital Market Crisis for Start-Up Community.
Although it’s been a difficult year for PE, things seem to be looking up. If Private Equity Analyst is any indication funds are beginning to launch again. PEA reports that Thomson Reuters and Research in Motion are working with Canada's largest bank to launch a $150 million venture fund for device developers for BlackBerry. That following a similar venture put forth by Kleiner Perkins to develop add-ons and software for the iPhone.
The Wall Street Journal is also reporting in the article Deal Making: They Shall Return that PE insiders such as David Rubenstein, one of the co-founders of Carlyle Group, is bullish on PE deals.
For those members of the GSB community who missed the Bloomberg presentations on May 15 with Penny Lane, you may now view the screen capture video that we have made of the 'intro' session. Under the Spotlight part of our Jackson home page, there is another link to the session. A version of the 'advanced' session, also held May 15, will soon be available. Please note that these sessions are available only to those with GSB accounts.
Jackson Library and the GSB Finance & Investment Club are happy to present Bloomday 2008 (pace, James Joyce). Bloomberg rep Penny Lane will be on deck in L-107 tomorrow, May 15, to present two hour-long sessions on the Bloomberg financial database. The first, from Noon to 1:00, will serve as an introduction to the system. The second, from 1:30 to 2:30, will address more advanced issues. Bloomberg, as you recall, is a fixture at Wall Street firms, offering complex current and historical data on equities, fixed income, commodities, mortgages, interest rates and more. Feel free to 'brown bag' it; cookies will be availble.
But space is limited. If you are a GSB student and wish to attend, go to the CMC registration system. Faculty, staff and others should RSVP to Helen Losch as soon as possible.
Want to learn about Bloomberg? Don't want to spend time doing it? We have a solution: Bloomberg Bullseyes. 'Bullseyes' are short sessions -- 30 minutes, max -- which give you an opportunity to pick up the basics on a subject when you've little time to spare. Bullseye sessions will be offered to GSB students May 7, 9 and 14 in the Jackson Library Trader's Pit. To save a space, sign up via the CMC registration system. Bloomberg is a vast collection of market information on currencies, commodities, fixed income, interest rates, equities and much more. A Bloomberg Bullseye can give you the simple compass you need to navigate this ocean of financial data. And that's no bull.
Got your attention? Sorry, not Da Mayor, but a representative from his brainchild, The Bloomberg System. If you plan to go to Wall Street, you may end up using this product. Penny Lane will be at the GSB Thursday, May 15 to present two sessions on Bloomberg: a basic overview from Noon to 1:00 PM, followed a half-hour later by an advanced session from 1:30 to 2:30. Location will be L-107. Space is limited, so please RSVP. GSB Faculty can do so by contacting librarian Helen Losch; GSB students should sign up via the CMC registration system. Attendees are welcome to bring their lunch, but cookies will be available. Questions? Contact Helen.
Who wouldn’t want to get investment advice from Warren Buffett? Or, ask him about his perception of the present state of economy and politics? It turns out that such a session can be arranged especially for the MBAs from various schools. About 15 times a year Berkshire CEO invites business students for the day of learning. The latest get-together with Warren happened in early April. A group of 150 Wharton students spent a day touring one or two of Berkshire businesses, then proceeded to the company’s headquarters in downtown Omaha where for two hours students engaged in a question and answer session with Warren Buffett. The conversation continued during lunch at one of Warren’s favorite restaurants. The excerpts of Warren Buffet’s talk with the students are published in April issue of Fortune magazine. Some of the questions ranged from the state of financial markets, where to invest, to the presidential election, to how Warren himself gets his investment ideas. To find out what the answers are, check the magazine in Jackson’s periodicals area or read the article online.
Welcome to Hedgie Heaven, where mindboggling profits are the stuff of everyday life. Meet John Paulson, fund manager, who made $3.7 billion (yes, that's with a b) last year. How? According to the New York Times, by betting against mortgages and the complex financial products that held them. Or James H. Simons and George Soros, who reaped almost $ 3 billion each (yes, there's that b again.) These gentlemen come from the new Alpha magazine annual ranking of top hedge fund earners, who quietly rake in staggering sums that would have made JD Rockefeller's eyes rotate. In an era when the middle class struggles to maintain decent salaries and avoid home foreclosures, such astronomical amounts are, well, disquieting. As William Gross, chief investment officer of bond fund Pimco, puts it, "There's nothing wrong with it -- it's not illegal. But it's ugly." The median American family earned roughly $60,000 last year. By contrast, these top 50 fund meisters last year earned a total of almost $30 billion (and for the last time, that's with a b.) Read more about this hedgie hegemony in Alpha, on the Jackson periodicals racks.
And on a related note, see the Barron's top 75 hedge fund list in the 4/14/08 issue -- also on the Jackson periodicals rack.
Futures magazine March 2008 issue highlights the Top Traders of 2007. Prominently mentioned are Michael Geismar, Jaffrey Woodriff and Greyson Williams of Quantitative Investment Management (QIM), Randy Shell and Simcha Bluth of Jalex / Kesef Trading, and Gregory Cotter of Tri Global FX. Included is a summary of the year that any member of the CTA (commodity trading advisor) set will appreciate. But read the full story in the issue on the Jackson Library current periodical racks.
No, not for Vendetta but for Visa (NYSE: V). The largest IPO in US history and the gavel came down on a final price of $17.2 billion. The IPO price per share began at $44 and has risen in the week since trading. Money has already been set aside for legal fees (won’t lawyers be pleased) to cover potential lawsuits over fees credit card companies charge business. The Wall Street Journal in an article entitled Visa's IPO Is Worth a Close Reading talks more about what has made this IPO tick. Business Week gives some insight into how the largest IPO could happen while the investment banking industry is in such turmoil and what the future might look like for Visa in an article entitled Visa’s IPO Victory.
I’m not sure how many people in the United States have heard of Northern Rock, however in Europe and especially in England it has made headlines. As one of the top five mortgage lenders in the UK the bank was hit hard following problems in the credit markets caused by the US subprime mortgage financial crisis. The Bank was Nationalized on February 17, 2008 to help ally investor fears. Was this a good or bad move? The newly appointed head of Northern Rock is a Stanford GSB alum who was able to turn Lloyd’s around in the mid-1990s. You can read more about him in the Forbes article entitled Sandler Takes Northern Rock Helm.
According to the LBO section of Mergers and Acquisitions magazine (February 2008), the article The Mezz Revival: As other financing option fade, the mezzanine market marches forward mezzanine providers are swamped with work. Churchill Capital mentions they have up to 15 transactions waiting in the wings. During this time of financial ups and downs the mezzanine investments are more stable than other forms of financing.
Those who are interested in investment industry please check out the Private Equity Analyst 2007 Review and 2008 Outlook. This annual supplement contains statistics on top VC and Buyout deals of the past year along with the ranking of the top fund managers and alternative investors. As for the future, the Private Equity Analyst gives its outlook on overall economic environment, fund raising, LP, and emerging markets. Find the publication in Jackson library's Reference Collection (Alphabetical Subject Section: Venture Capital).
No it doesn't stand for "extra funny thoughts" or some such thing, EFT stands for "exchange traded funds". While at the reference desk, here at the b-school library, I've been asked where to find information about these funds. Well, today I happened to find a site by Bloomberg.com that answers the question "What are EFTs?" I thought I would pass the site along to others out there in the blog-o-sphere who also maybe seeking. Enjoy.
Atlantic magazine January / February 2008 asks the $1.4 trillion question: Are we playing the Chinese for suckers, or are they playing us? Author James Fallows ponders the vast sum that the Chinese government has mostly placed in U.S. Treasury notes, an amount that increases roughly $1 billion per day. By his calculations, every person in the United States has over the past 10 years borrowed about $4,000 from the People's Republic of China. But there are potential future risks involved -- political and economic. And China has its own hopes. Chinese economic movers and shakers like Lou Jiwei and Gao Xiqing may in future play a far bigger role in U.S. economics than Americans would prefer. What will be the answer to the $1.4 trillion dollar question? Read more
Read the story behind the Bank of America takeover of Countrywide in the January 28th issue of Time magazine. Some say was a bailout, but BofA CEO Kenneth Lewis begs to differ. Before he decided to take over Countrywide, Lewis sent a team bank executives to check out the company. Reports from execs were good. After reviewing the reports, Lewis concluded that problems came from poor management at the top, not problems on the ground. In fact the company had great technology on the front end, great technology in their operations and great people in the trenches. When the deal closes in a few months, Lewis has promised borrowers that he will bend over backwards to avoid foreclosure. His financial limberness is good news for those caught in the subprime debacle.
Edward F. Greene, General Counsel of the Markets and Banking Group at Citibank, will speak to students about the recent investments in Wall Street firms by Sovereign Wealth Funds after the subprime meltdown, and issues these investments raise for regulators and investors.
Rock Center Governance Lunch for Students
"How the Subprime Meltdown Brought Sovereign Wealth Funds to Wall Street"
Date: January 25, 2008, 12:30 - 1:30 p.m
Location: Stanford Law School, Room 280-B
The topic of December issue of Red Herring is the rapid development of high-tech industry in Israel. You’ll find an interview with Orna Berry, Israel Venture Association Chair, who attributes the country’s success in maintaining the leading position in today’s global economy to huge investments in the early-stage ventures among other factors. In the interview with Shimon Peres, the Israeli president reveals some major directions of developing the economy such as massive switching to electrical cars in the near future and becoming an incubator of the solar energy. Another set of articles talks about close relations between Israeli new enterprises and Silicon Valley in creating new ventures and collaborating with VC companies such as Benchmark, Sequoia Capital, and Greylock Partners among others. You’ll find an article devoted to the state of biotech research in Israel, its successes and challenges. For more, read the magazine in Jackson Library's Periodicals section.
Yes it's another Warren Buffet blog item. I came across a CNBC article about a soon-to-be-released study conducted by two researchers, Gerald Martin of American University and John Puthenpurackal of the University of Nevada. The study titled, "Imitation is the Sincerest Form of Flattery" proves what a lot of savvy investors have known for years: buying the stocks Warren Buffett buys will make you a lot of money.
Another interesting story I saw this weekend about Warren is his advice to A-Rod.
Warren is a busy guy.
This is a title of a book I came across while browsing the stacks of the library. The full title is More than you know: finding financial wisdom in unconventional places. The author Michael J. Mauboussin shares his secret to becoming an insighful investor and provides invaluable tools to better understand the concepts of choice and risk.
The author states in the introduction" More Than You Know's core premise is simple to explain but devilishly difficult to live: you will be a better investor, executive, parent, friend- person- if you approch problems from a multidisciplinary perspective.
Find it in the Library
Corporate and financial investors are collaborating to do business in China. MySpace.com is teaming up with IDG and China Broadband Capital Partners to launch a subsidiary in China. IBM and Lehman Brothers also jointly set up a $180 million investment fund last October. Whereas VC firms typically fund technology start-ups and PE firms do buyouts in developed markets, it is difficult to find truly disruptive technologies in China or to take total control of companies in the China situation. VCs and PEs are therefore putting money into later stage companies with appealing but unproven business models. The IBM-Lehman fund takes minority stakes in targeted companies much like a VC firm. It acts as a strategic partner instead of aiming at a controlling interest. In addition to offloading some risk to a financial partner, a more experienced partner such as Lehman can offer insights into the market. Lehman was one of the first global investment banks to enter China in 1993 and one of a small group of foreign institutions allowed to invest directly in China’s equity and bond markets.
Another reason for the collaboration was that the size of required investment to make deals work in China has increased tenfold in the past 10-15 years. Now one finds strategics having to put up $600 million or $1 billion. For example, a consortium of investors including Goldman Sachs plunked down $3.78 billion to buy 8.5% of shares in Industrial and Commercial Bank of China. As part of the deal, Goldman agreed to help the bank develop its corporate governance, risk management and internal controls and offer training in corporate and investment banking and disposal of nonperforming loans.
The China deal is to have foreign corporates bring in technological or management expertise. It’s no surprise that firms position themselves that way in order to get a deal.
According to the Centre for Asia Private Equity Research, PE funds dedicated to China rose to 4.8 billion in 2006, up 37% from prior year. VC spending on China also up 52% from 2005 levels to $1.8 billion according to research firm Zero2IPO.
Reported in “Blurring the boundaries”, July-August 2007 issue of Corporate Dealmaker. The print copy is available at Jackson Library.
Why is this man smiling? The August 6 issue of U.S. News & World Report features the beaming face of multibillionaire Warren Buffett, legendary moneymeister and investment idol. The issue states that if you had invested $1,000 with Buffett in 1956, you would have $27 million today. 27 million reasons to smile. Included are 'Six Keys to Investing Buffett Style', a dramatic graph of Buffett's record, classic books on Buffett, and highlights of WB's disciples -- as well as (gasp) 'The Anti-Buffett', Glen Fogle of American Century Vista, who has his own way of doing things. If you are one of the millions who didn't plop down their money in 1956, there are still lessons to learn from the Oracle of Omaha (and he doesn't even have a Bloomberg on his desk!) Read the piece in Jackson Library, or online.
The business world has been abuzz for weeks about the IPO of The Blackstone Group, one of the world’s largest private equity firms. Morgan Stanley estimates the IPO to happen this week a week earlier than expected, and the ticker is expected to be BX. There has been much speculation about what this means for the future of PE.
Update – Blackstone’s IPO was the biggest in five years and the eighth largest by a company ever, as reported by Reuters.
It starts with mortgage brokers selling exotic mortgages such as no-doc loans, which don’t require evidence of income or savings to buyers with weak or subprime credit. A record of $805 billion of subprime mortgages were originated in 2005. Big banks buy the subprime loans and then bundle the debt and sell it to Wall Street firms. Wall Street banks then package subprime loans into mortgage-backed securities and collateralized debt obligations (CDOs). Sales of new MBSs soared to $2.5 trillion in 2006. The banks divide the CDO into pieces so that they get the desired rating for each portion. CDOs include a mix of bonds and securities backed by mortgages and home equity loans. In 2006, an estimated $100 billion of subprime debt went into the $375 billion in CDOs sold in the U.S. CDOs were sold to banks, insurance companies and pension funds. Bankers refer to the bottom level of a CDO as toxic waste because as more borrowers default on loans, these investments would be the first to take losses and could be wiped out.
By the way, the rating companies, Moody's, S&P, and Fitch ask that you do not base any of your investment decision on their CDO ratings.
Story at Bloomberg Markets.
Bring out the cake, light the candles: The S&P 500 turned 50 this month ! Born March 4, 1957 as a benchmark to measure stock performance, it was comprised of 425 industrials, 15 rails and 60 utilities. It has since become the world's most highly watched measure of U.S. markets. In 1975 the first index mutual fund was offered to individual investors; later named the Vanguard 500 Index Fund, it tracks the S&P 500.
The S&P 500 is a market-value weighted index; each stock’s weight in the index is proportionate to its market value. It is calculated using a base-weighted aggregate methodology -- meaning the level of the index reflects the total market value of all component stocks relative to a particular base period. Total market value is determined by multiplying the price of the stock by the number of shares outstanding.
The first U.S. commercial property derivatives market is set to launch as four of the world's biggest banks team up to create a trading platform. Credit Suisse, Goldman Sachs, Merrill Lynch, and Bank of America were believed to be the lenders, reported Financial Times. Property is one of the few major asset classes without a developed derivatives market in the US, in spite of its size, estimated at $26,000bn.
Story at Ft.com.
An article in today's New York Times talks about a company LiveFuels created by a husband and wife team and they are betting their careers and personal fortunes that they can grow masses of the slimy organism and use its natural photosynthesis process to produce a plentiful supply of biofuel. Read the story.
Guy Kawasaki (The Art of the Start, Rules for Revolutionaries, The Macintosh Way) revisits venture capital, a favorite topic, with a blog called 'The Venture Capital Aptitude Test'. In response to queries seeking advice on how to break into the 'VC biz', Kawasaki offers advice and a VCAT test, based on his own experience, to help young people decide if they are right for this line of work. Take the test online, if you wish. Word to the Wise? "Venture capital is something to do at the end of your career, not the beginning. It should be your last job, not your first."
The New York Times reports that there may be concern among retailers about how much consumers will spend this holiday season. Wal-mart has reported that the company expects a weak sales estimate, and after that report, stocks tumbled in their steepest slide since July. As Wal-mart goes so does the economy?
SmartMoney showcases its 'Power 30' as its November cover story -- the 30 most influential people in investing today. Broken into groups (The Investors, The Policy Makers, The Market Movers, etc.) these investment titans are shaping (and rocking) the financial world.
Names include Harry Lange of Fidelity Magellan, Bill Miller of Legg Mason Funds, Sheila Blair of the Federal Deposit Insurance Company, US Representative Christopher Cox, Liz Ann Sonders of Charles Schwab, Hector Ruiz of Advanced Micro Devices, Toshihiko Fukui (Governor, Bank of Japan), Vinod Khosla of Khosla Ventures and of course, The Oracle of Omaha himself, Warren Buffett. Learn who's who in investing -- and why.
In a recent New York Times article, Fortress Investment Group, an alternative investment firm, has filed to sell $750 million worth of shares to the public, valuing the company at $7.5 billion. The article poses that this company has let the general public take a peek into the financial workings of the hedge fund world.
After a sharp decline in investments following the tech bust of 2000 and 2001, venture firms are beginning to pour money into a new crop of Web 2.0 companies, in businesses such as social networking and online video. Some worry that the frenzy is getting out of hand. "This is scarily like 1998 in some ways," says David Card, a senior analyst with Jupiter Research. "There's easy money out there, and there are some bad ideas getting funded." Read the article at BusinessWeek.com.
Think you know what analysts are saying? Not in their formal Wall Street reports, but in their own blogs? To find out, head to Tekraki. A total of 170 blogs are listed. The directory lists the name of the blogger, a link to the blog, and a one-sentence description of the blog's scope.
In Donald MacKenzie's new book, An Engine, Not a Camera : How Financial Models Shape Markets, he "argues that the emergence of modern economic theories of finance affected financial markets in fundamental ways. These new, Nobel Prize-winning theories, based on elegant mathematical models of markets, were not simply external analyses but intrinsic parts of economic processes." "MacKenzie examines the role played by finance theory in the two most serious crises to hit the world's financial markets in recent years: the stock market crash of 1987 and the market turmoil that engulfed the hedge fund Long-Term Capital Management in 1998. He also looks at finance theory that is somewhat beyond the mainstream - chaos theorist Benoit Mandelbrot's model of "wild" randomness. MacKenzie's pioneering work in the social studies of finance will interest anyone who wants to understand how America's financial markets have grown into their current form."
A review by David Warsh is available at economicprincipals.com. You can find this book in the library's MAIN collection, under call number: HG4523 .M24 2006.
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