Secondary Sources: Fed Exit, Lehman Lessons, Economics

A roundup of economic news from around the Web.

  • Fed Exit and Stimulus: Writing for the Financial Times, former Fed governor Randall Kroszner looks at the complications in the Fed’s exit strategy. “Complicating central banks’ exit strategy, both in the 1930s and today, is fiscal policy. (Monetary policy was not alone to blame.) Ahead of the 1936 US election, a temporary, targeted “bonus” totalling more than 1.5 per cent of gross domestic product was paid out to first world war veterans, providing a fiscal stimulus to an already rapidly recovering economy. The Fed’s concern about the potential for monetary policy to add to this stimulus was not unjustified, for the economy grew extremely rapidly in 1936 , although the Fed’s response was far too strong. Turning back to today, countries have committed to massive increases in fiscal expenditure, much of which is not going to be spent until 2010 or 2011. As economies begin to stabilise and grow, central banks will face a dilemma — is growth part of a sustainable recovery or due to a short-term impact of fiscal stimulus? If the former, then it is sensible to implement exit strategies from unusual accommodation; if not, then it might be appropriate to wait to see whether growth has taken root, which entails greater risks of inflation. Separating the impact of fiscal stimulus from sustainable economic growth to determine the time to begin to “exit” will be a key challenge for central banks during the next few years.”
  • Lehman Postmortem On the Project Syndicate, Kenneth Rogoff says the wrong lessons were learned from Lehman Brothers’ collapse. “It was not just Lehman Brothers. The entire financial system was totally unprepared to deal with the inevitable collapse of the housing and credit bubbles. The system had reached a point where it had to be bailed out and restructured. And there is no realistic political or legal scenario where such a bailout could have been executed without some blood on the streets. Hence, the fall of a large bank or investment bank was inevitable as a catalyst to action. The problem with letting Lehman go under was not the concept but the execution. The government should have moved in aggressively to cushion the workout of Lehman’s complex derivative book, even if this meant creative legal interpretations or pushing through new laws governing the financial system. Admittedly, it is hard to do these things overnight, but there was plenty of warning. The six months prior to Lehman saw a slow freezing up of global credit and incipient recessions in the US and Europe. Yet little was done to prepare. “
  • Economics and the Profession: Luigi Spaventa, writing for voxeu, looks at what the crisis has to teach the economics profession. “After the crisis, bashing the economists has become a fashionable sport. While some allegations can be dismissed as irrelevant or intellectually vulgar (that economists did not foresee the timing of the crisis or that their theories are too abstract), have there been more serious failures? Though some scholars have initiated thoughtful soul searching exercises, the prevailing mood seems to be that business as usual, as if nothing happened, is the best reply to criticisms. It is, however, undeniable that this crisis does raise serious issues for the profession.”

Compiled by Phil Izzo


Deals of the Day: Time for Yahoo to Leave the Investor Doghouse?

Deals of the Day gathers all the biggest news of the morning related to mergers and acquisitions, bankruptcies, financing and private equity. Deal Journal’s homepage is http://blogs.wsj.com/deals. You can see real-time updates of our posts and our favorite deal-related articles on other Web sites through our Twitter feed at http://twitter.com/wsjdealjournal.

Mergers & Acquisitions

Friends’ Investors Left in the Cold: Resolution has its prize–thanks to pressure from the 30% of Friends Provident investors who also own shares in Resolution. But what of the rest of the investors? [WSJ]
Related: Legal & General and the life assurance businesses of the Lloyds Banking Group are two high-profile targets on the hit list of Resolution. [Daily Telegraph]

Lloyds: The British bank said it would bring its asset-management businesses together under its Scottish Widows brand, selling most of Insight Investment to Bank of New York Mellon for $387.3 million as part of the restructuring. [WSJ]

American International Group: MphasiS agreed to buy an AIG software unit in India, while AIG also said it will sell its Hong Kong consumer-finance unit to China Construction Bank (Asia) for $70 million. [WSJ]

Ready to Deal: SABMiller CEO Graham Mackay said he is prepared to make acquisitions and forecast the beer industry will recover from the global recession at a sluggish pace.[Bloomberg]

FriendFeed: Facebook said it will acquire FriendFeed, a start-up business that lets people share content in real time, folding in a potential rival. Facebook paid nearly $50 million in cash and stock for the company. [WSJ]

Bank of Nova Scotia: The Canadian bank hopes to raise its stake in Xi’an City Commercial Bank by the end of the year to close to 20% from 1.3% now. [Reuters]

Continental, Schaeffler Head for Denouement: German auto giants Schaeffler and Continental are locked in a bitter struggle that could cost Continental’s chairman and CEO their jobs in a boardroom showdown. [WSJ]

Today in the Financial Rescue

Ben Bernanke: Economists are nearly unanimous that Bernanke should be reappointed to another term as Fed chairman, while most said the recession has ended. [WSJ]

Growth? Really? Federal Reserve policy makers may today acknowledge economic growth will be faster than they anticipated, while committing to keep the benchmark interest- rate target near the lowest level on record. [Bloomberg]

Financial Institutions

Banker Pay: The U.K.’s financial-services regulator will drop some of its toughest proposals on bankers’ pay amid concern they could harm London’s competitiveness as a global financial center. [WSJ]

AIG: The insurer’s new CEO, Robert Benmosche, plans to spend part of his first month leading the insurer in Croatia on vacation. [Bloomberg]

From Wall Street to Yoga Teacher: At Morgan Stanley’s fixed-income group, Lauren Imparato wore power suits and sold currencies to hedge funds in Europe, Asia and Latin America. Now she spends her days in form-fitting Lululemon pants, teaching yoga to former Wall Street colleagues. [Bloomberg]

Buyside

CVC: The British private-equity firm is getting embroiled in several tricky transactions as it tries to spend some of its latest billion-dollar fund. [WSJ]

Atticus Capital: The hedge fund’s founder said he will return $3 billion to investors and shut down two large funds, an abrupt change for a firm that 18 months ago was at the vanguard of a new breed of aggressive, globally connected hedge funds. [WSJ]

Carl Icahn: The billionaire investor’s $104 million stake in American Railcar Industries may suffer because CIT makes up more than half the firm’s future business. [Bloomberg]

J.P.Morgan Chase: James Dimon is taking the rare step of meeting with the heads of the biggest buyout shops to assure them that he’s behind his new head of the team that serves private-equity firm, Larry Allett. [NY Post]

Bankruptcy & Restructuring

Extended Stay: The Fed is getting actively involved in the Extended Stay bankruptcy, taking an awkward role as it tries to shore up the financial system. [WSJ]

Journal Register Co.: The newspaper publisher, which filed for Chapter 11 protection in February, said it had emerged from bankruptcy. [Reuters]

Capital Markets

Starwood Capital Group: Barry Sternlicht’s private-equity firm, which specializes in real-estate investments, increased the size of its initial public offering of a real-estate investment trust to $800 million, marking the biggest IPO to hit the market this year. [WSJ]

Company & Industry

Yahoo Searches for an End to Its Dog Days: Yahoo understandably alienated much of Wall Street with the terms of its search deal with Microsoft. But, with the shares now off 16% since the deal was announced, investors may want to step back and look at the bigger picture. [WSJ]


Economy Does Better Without Doing Well

Most economists in the latest Wall Street Journal forecasting survey said that the recession is over, but as the economy moves into a recovery period the state of the consumer remains a key question.

When asked if a substantial increase in consumer spending is necessary for sustained economic growth, about 40% of the economists said “no.” Recently Morgan Stanley economists presented three keys to sustained recovery, and none of them relied on the consumer.

“Modest consumption, government spending, exports and inventory rebuilding can bring it about,” said Allen Sinai of Decision Economics.

Indeed any hope for recovery is going to have to come on the back of moderate increases in consumer spending. The economists don’t expect personal consumption expenditures to rise more than 2% through the first half of 2010. That’s down from average growth rates over 3% in postwar period and a far cry growth rates over 5% in the late 1990s.

While the majority of economists expect a recovery, 60% still think consumer spending needs to increase substantially for sustained growth. Though, David Resler of Nomura Securities points out that after the major hit spending took in the last year, any increase over would be substantial.

“You have to distinguish between doing better and doing well,” said Neal Soss of Credit Suisse. He points out that the economy is going to recover, because it was hit so hard, but the state of the consumer means it’s likely to be a long slog to bring down unemployment.

Even as the economy recovers and the jobless rate starts to come down, consumer spending is going to be closely tied to wage increases. “Private-sector wages remain the single most important component” of consumer spending growth, Goldman Sachs economists recently wrote in a research note.

And that’s going to be a tall order. Employment data has shown wages remain under pressure, and the enormous slack built up in the labor market following the massive job cuts of the last year is likely to keep a lid on wages for the foreseeable future.

While the economy is likely to be doing better very soon, it’s going to take a long time before the consumer is doing well.


What’s Good For General Motors…Also Good For LPs?

In a world of bailouts and clunkers, a seat on the General Motors Co. board doesn’t seem like the easiest gig in the world. Buyout investors will be watching to see if the recent appointments of PE pros to the boards of GM and other troubled companies turns into a time suck.

GM, American International Group Inc. and Citigroup Inc. have added PE names to their boards.

Harvey Golub, who is also Ripplewood Holdings LLC’s executive chairman, was just named AIG’s nonexecutive chairman. Carlyle Group managing director Daniel F. Akerson and David Bonderman, founding partner of TPG Capital LP, are on GM’s new post-bankruptcy board, while Citigroup chose Timothy Collins, chief executive of Ripplewood, as a director.  

Serving on a board is actually not tremendously time-consuming – unless and until a company gets into trouble, said Kelly DePonte, partner at Probitas Partners. In difficult situations individual board members, and even ex-board members, can be sued and then need to defend themselves, said DePonte. “That becomes more problematic as it can effect not only the GPs time but their reputation.”

The board seats, however, have at times, helped with deal flow and in sourcing management talent.

“As long as the overall time spent away from work does not exceed more than 5% or so of total business time, we don’t have a significant problem with it,” said a senior vice president at an investment adviser. He noted that the specific cases of GM, Citigroup and AIG could take more than 5% of the private equity executives’ time.

“We do watch a professional’s time commitments closely, and part of our due diligence is to tease out how much time a professional really spends on the job,” he said.

“We would hope that any activity, including sitting on boards of troubled companies outside of their portfolios, would not be too distracting such that it impaired their ability to manage their funds,” said Brian Murphy, managing director at Portfolio Advisors.  He hopes that “if they found this to be the case for more than a reasonable period of time that they would resign and refocus their time and attention on the fund,” said Murphy.

Another Merrill Lynch Banker Defects to Deutsche Bank

Below is a memo from Deutsche Bank’s Global Head of Industrials banking, Paul Stefanick, reflecting yet another recruit to defect from Merrill Lynch Bank of America to Deutsche Bank. At times, the poaching has resulted in litigation.

- For internal distribution only - 

As part of our continued efforts to enhance Deutsche Bank’s global position in the Industrials sector, I am pleased to announce that Michael Santini will join our team as a Managing Director and Global Head of Diversified Industrials and Services. Michael joins from Bank of America Merrill Lynch where he held the same position and was a member of the Americas Corporate & Investment Banking Leadership Committee.  Michael began his investment banking career in 1994 at Merrill Lynch in the Industrials Group, eventually rising to the position of Co-Head of the Industrials Group in the Americas and becoming a member of the Americas Investment Banking Management Committee. This strategic hire reinforces our continued commitment and momentum to grow our Industrials business into a top tier franchise.  I am confident that Michael’s knowledge of diversified industrials and service companies, exceptional client relationships and proven track record will have an immediate impact on our global footprint.  Michael’s start date will be in approximately 90 days following his mandatory notice period.


A Summer Reading List

summerreading_E_20090807150318.jpgistock.com

As summer kicks into high gear, we asked a handful of professionals across the private equity world, including limited partners, general partners, placement agents, attorneys and academics, to provide us with their summer reading picks. Surprisingly, there wasn’t a single duplicate. Here is a sampling of what we got and why.

T. Bondurant French, Chief Executive, Adams Street Partners LLC: “How the Mighty Fall and Why Some Companies Never Give In” by Jim Collins

“Most people think companies fail because of complacency but Collins’ research shows that companies fail because they get overconfident and move too fast or take things for granted. Some of the venture and private equity firms have looked at this, saying what are the implications for us? Should we have moved into all of these new markets? Maybe not. I wish that this book had been delayed a year because there are all these good case studies that could have been included.”

Ed Kane, Senior Managing Director, HarbourVest Partners LLC: “Global Trends 2025: A Transformed World” (available for free download here.)

Christopher Ailman, Chief Investment Officer, California State Teachers’ Retirement System: “Corpocracy: How CEOs and the Business Roundtable Hijacked the World’s Greatest Wealth Machine–and How to Get It Back” by Bob Monks

“Personal reflection on the change in corporate governance by one of the founders of shareholders rights.”

Steven Kaplan, Neubauer Family Professor of Entrepreneurship and Finance, The University of Chicago Booth School of Business: “Atlas Shrugged” by Ayn Rand; “Investment Banking, Institutions, Politics and Law” by Alan Morrison and William J. Wilhelm; “Shogun” by James Clavell

On “Atlas Shrugged”: “While there is much in the book that is unrealistic/over the top, the book effectively and pointedly highlights the conflict between equity/socialism and efficiency/market capitalism that is now in the news virtually every day. And, of course, the book champions efficiency.”

On “Investment Banking”: “A terrific book that does two things at once. First, it describes the history of investment and merchant banking. This will be of interest to anyone involved in private equity. Second, the authors explain what investment banks actually do and why they need to exist. This is helpful in thinking about how to negotiate with and deploy investment bankers.”

On “Shogun”: “A page turner that takes place in 17th century Japan. The relevance for PE investors is the main character Tokugawa. He is a brilliant strategist who shows how important it is to understand deeply the incentives and motivations of allies and competitors.”

Brent R. Nicklas, Managing Partner, Lexington Partners Inc.: “Outliers: The Story of Success” by Malcolm Gladwell and “The Snowball: Warren Buffett and the Business of Life” by Alice Schroeder

Steven B. Klinsky, Founder, New Mountain Capital LLC: “Blood and Thunder: The Epic Story of Kit Carson and the Conquest of the American West” by Hampton Sides; “The Way of Man: According to the Teaching of Hasidism” by theologian Martin Buber; and “MoneyBall, The Art of Winning an Unfair Game” by Michael Lewis

On “Moneyball”: “Remains a great allegorical read on the art of investing and how to separate substance from smoke.”

Julie Richardson, Managing Director, Providence Equity Partners: “White Tiger” by Aravind Adiga; and “Restoring Financial Stability: How to repair a failed system” by Viral Acharya and Matthew Richardson

On “White Tiger”: “Humorous, fictional telling of the success story of an Indian entrepreneur [that] provides interesting insights on day-to-day life in India, and its class structure and tensions.”

Cathleen Ellsworth, Managing Director, First Reserve Corp.: “The Lady and the Panda: The True Adventures of the First American Explorer to Bring Back China’s Most Exotic Animal” by Vicki Croke; and “Telluride Promise” by Edward Massey

On “Lady and the Panda”: “A true story of a woman explorer (Ruth Harkness) pursuing a panda so that she could bring it back and introduce it to the West. While following her, you also see China through her eyes. Despite her remarkable journey, Harkness was derided and ignored by male adventurers. It would make an excellent film.”

On “Telluride Promise”: “A banker, C.C., foresaw the depression. Six weeks before the crash, C.C. set in motion his plan to protect his depositors by arranging for a ‘loan’ from New York banks. Pursued by the ambitious and the rich and powerful, brought to trial on charges that were not actually for the crime he committed, he pled guilty partly to protect his family and friends from further harassment, mostly because it didn’t seem right just to beat the system. Six years later, three months before FDR signed the National Banking Act, making his crime the law of the land, he was quietly released from prison. He tells his own story from the vantage point of his last days as an obscure Fuller Brush man of 83.”

Michael Goss, Managing Director, Bain Capital LLC: “Fool’s Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe” by Gillian Tett; and “My Life in France” by Julia Child

On “Fool’s Gold”: “A fascinating depiction of the factors in the credit derivatives and credit structured products markets that led us to the current financial crisis. Even more interesting is how all of this was happening right under our noses, but we didn’t have the perspective to understand it all until it was too late.”

On “My Life in France”: “A surprisingly engaging read. I was skeptical at first, but I read it on vacation after I had read all of my other books and my wife had finished this one. The book was part history - learning about life in post-war Europe, and part inspirational - about the joys of cooking and living in France. The book is not just about cooking, it’s also about patience and perseverance.”

Rodger Krouse, Co-CEO, Sun Capital Partners Inc.: “Twilight at Little Round Top: The Tide Turns at Gettysburg” by Glenn W. LaFantasie; and the “Women of Genesis” series by Orson Scott Card

On “Twilight at Little Round Top”: “I am a bit of an Abraham Lincoln and Civil War buff, and we’re taking a family vacation to Gettysburg this summer. The book retells one of the war’s bloodiest and most emotion-provoking battles as well as one of the war’s most interesting from a military standpoint.”

On “Women of Genesis”: “The books in this series are centered around the wives of the biblical patriarchs of the Book of Genesis. I find our complex biblical patriarchs and matriarchs to be vividly depicted with a paucity of words. We know and understand them to the core based only on a handful of important scenes, but actually know very few details of their lives. I look forward to reading how one of our most creative and prolific writers fills in the information gaps.”

Pauline Brown, Managing Director, Carlyle Group: “Free: The Future of a Radical Price” by Chris Anderson; and “The Rise of Theodore Roosevelt” by Edmund Morris

On “Free”: “Shows how companies in the digital age can out-run, or at least out-survive, competitors by giving away their products for free. After all, $0.00 is an awfully good price for the buyer, and, as it turns out, may not be such a bad one for the seller.”

On “Rise of Theodore Roosevelt”: “Chronicles the journey of a leader who redefined our nation (and the Republican Party) and whose principles are as relevant today as when he articulated them. The book stands as one of the greatest biographies of our time.”

Kelly DePonte, Partner, Probitas Partners LLC: “1491: New Revelations of the Americas Before Columbus” by Charles C. Mann; and “Extraordinary Popular Delusions and the Madness of Crowds” by Charles MacKay

On “Revelations”: “Released in 2006, it challenges what you thought you always knew about Native Americans and the Americas before the Europeans, and what really caused their decline.”

On “Madness of Crowds”: “Written in 1841, it is still fresh today – it just needs updated chapters on the Internet bubble to go along with the South Seas bubble, and valuing sub-prime mortgage vehicles to go along with valuing tulips.”

John LeClaire, Partner, Goodwin Procter LLP: “The Americanization of Benjamin Franklin” by Gordon Wood

Dixon Doll, co-founder and General Partner, DCM: “Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis” by John B. Taylor; and “Eyes on the Horizon: Serving on the Front Lines of National Security” by Richard Meyers

On “Getting Off Track”: “This book is a very much needed and timely perspective on the financial fiasco of the last 24 months and suggested principles for future government actions.”

On “Eyes on the Horizon”: “This memoir is a timely discussion of what (and why) we need to know about international issues going forward written by one of the most respected senior military officials.”

James Garvey, Chairman of SV Life Sciences: “Complications” by Atul Gawande.

“It’s kind of a book version of the television show House. It has a lot of personal sparkle to it.”

Sandy Miller, General Partner, Institutional Venture Partners: “Creative Capital: The Story of George Doriot and The Birth of Venture Capital” by Spencer Ante; and “Hot, Flat and Crowded” by Tom Friedman

On “Creative Capital”: “We’re in a very challenging time now for venture capital and it’s instructive to look at how it got started. It’s helpful to look at the bedrock principles that we should get back to as we go forward.”

On “Hot, Flat and Crowded”: “It looks at why the green revolution is important and how we need to re-energize America and have a new energy policy.”

Beverly Berman, Director, THL Partners LP: “Suite Francaise” by Irene Nemirovsky

Re-Evaluating Too Big to Fail

A simple and straightforward approach to identifying too-big-to-fail financial institutions is very likely unworkable, new research from the Federal Reserve Bank of Cleveland says.

The poster child for too big to fail. (Getty Images)

Dealing with these so-called systemically important financial institutions has been at the forefront of policy makers’ attention since the start of the financial crisis two years ago. Authorities have been repeatedly confronted with a series of banks and other entities seen as top-tier, only to see them fall or run into hard-to-fathom difficulties.

Federal Reserve and Treasury leaders have been forced to bail out firms, arguing that their collapse would cause even greater harm to the rest of economy. The actions taken by officials have been so unprecedented as to call into question the very foundations of free market capitalism itself.

The interventions have been largely ad hoc, with no clear standard as to what constitutes a systemically important firm.

Bear Stearns received major Federal Reserve assistance as part of an effort to sell it to J.P. Morgan Chase. American International Group also got a big bailout, but Lehman Brothers was allowed to fail. Many of the biggest banks in the nation received capital injections from the Treasury, although some of that has already been paid back.

Right now, Congress is mulling ways to improve the regulatory structure over finance. Many expect this process will grant the Fed new powers. But some sort of method for identifying these systemically important firms will be needed, as well as a process for mitigating the risks created by these firms.

Cleveland Fed economist James Thomson sidesteps matters of reform in favor of offering a framework to identify systemically important banks, in the paper published Tuesday. The paper argues against adopting a blunt force approach.

The economist instead advocates a form of identification that looks at a blend of factors. A firm’s size should be weighed in conjunction with its ability to spread trouble to other banks, otherwise known as contagion. But Thomson adds using size alone as a metric is “the simplest and potentially most flawed” way to identify these sorts of firms.

Banks should also be evaluated to see if their activities correlate with other similar institutions, and whether a bank is overly dominant in its markets.

Thomson says once identified, systemically important banks could be dealt with on a number of different levels, with the goal of creating a system where there are no “advantages” — read a reliance on government support in times of trouble — from having this status.

Banks that fit the bill could be subject to capital surcharges, requirements to keep more reserves on hand, along with increased reporting requirements. Thomson reckons regulators should also watch more carefully over these institutions, and plan more carefully for trouble.

Thomson believes this process should be attended by a good deal of transparency, including the release of the names of banks determined to be systemically important. How the determination was reached and what affected banks are being required to do should also be public knowledge.

Regulators should also make the public aware of institutions that could see a change in their status, the economist wrote.


Atticus Shuts Down: Five Greatest Hedge Fund Farewells

The hedge fund sign-off is a distinct art, ideally trumpeting the fund manager’s past accomplishments while burying the bad stuff under a warm blanket of “market conditions.”

Tim Barakett’s farewell letter from Atticus was no exception. There is little mention of the redemptions that hampered the firm in recent years, nor the fund’s oft-contentious relations to its own investors.

How have other managers handled their farewells? A greatest-hits sampling below.

James J. Pallotta, 2009, Raptor Capital Management. An above-the-fray approach:

Given the vantage point afforded me by this extensive experience, I have developed strong feelings about the industry’s strengths and weaknesses. Consistently, in recent years, I have conveyed my skepticism regarding the sustainability of certain aspects of the industry’s structure and short term focus. I believe that there is a place for a model which aligns the interests of investors and managers toward the goal of truly-shared compounding of superior risk-adjusted returns over time.

Andrew Lahde, 2008, of small fund Lahde Capital Management. The “You all are suckers, and I’m out of here” goodbye:

Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

Steve Lutrell and Anthony Faillace, Drake Capital Management, 2008. “It-is-what-it-is” resignation:

Under normal market conditions, these divergent interests could both be met by exiting positions and generating the necessary proceeds to redeem investors. But present market conditions have effectively prevented us from following this course of action.

Dwight Anderson, 2008, Ospraie Management. A rare apology:

Not only as portfolio manager, but as one of the largest investors in the Ospraie Fund, I have shared in these losses with you. After nine years of striving to be a good steward of your capital, I am very sorry for this outcome.

Bernard Madoff, 2009. Bernard L. Madoff Investment Securities. A courtroom mea culpa:

That’s something I will live with for the rest of my life. People have accused me of being silent and not being sympathetic. That is not true. They have accused my wife of being silent and not being sympathetic. Nothing could be further from the truth. She cries herself to sleep every night knowing of all the pain and suffering I have caused, and I am tormented by that as well.


Chicken, Biscuits And Term Loans

Why did the chicken cross the road?

chickenlbo_DV_20090811135502.jpgArt by Mike Lucas

To get financing. Despite some trouble in the restaurant industry, private equity firms have clucked out two fast-food deals lately, both in the fried chicken category.

Arcapita Inc. closed its sale of Church’s Chicken to Friedman Fleischer & Lowe LLC, for somewhere between $300 million and $390 million. Arcapita netted a 2x cash-on-cash return on its investment, or an internal rate of return above 20%.

And Falfurrias Capital Partners completed a $70 million refinancing package for its portfolio company Bojangles’ Restaurants Inc. The company reduced its overall debt by $15 million, lowered its interest rate from 10.25% to just under 6% and got rid of some tough covenants.

Chain restaurants may still be risky but financing was there for both. Bank of America NA and Wells Fargo stepped in for both deals, teaming up with Golub Capital to put up 40% of Arcapita’s deal. Falfurrias’ connections with Bank of America, the former employer of a few of the firm’s executives, surely helped speed the transaction along.

Both Bank of America and Wells Fargo have been long-time restaurant lenders. Although there’s not a major revival of private equity interest in restaurants yet, at least lending is somewhat back.

“It’s good to hear they’ve been recapping,” said Bob Hill, principal at investment bank J.H. Chapman Group LLC. “It’s good to see that maybe restaurant lending is beginning to creep into the market. A lot of fast-food chains continue to report good numbers, good store economics. That’s the most interesting area.” Bojangles’ didn’t disclose specific financial results but said it had strong earnings growth in the first half of the year.

But private equity interest in the sector has remained depressed, according to Hill. “We keep hearing from equity funds we call all the time that they’re not interested,” he said. “The buyer universe is contracted. Maybe a portion will go into distressed, get something out of bankruptcy for a low price or to keep a chain from going into Chapter 11, but for the most part PE funds start calculating the returns on equity, and the numbers just don’t work.”

Deal Profile: Dynegy Unwinds Power Plant Venture

Closely held power-generation company LS Power Associates is buying nine U.S. power plants from one-time development partner Dynegy for about $1 billion plus the return of nearly $500 million in shares. The deal effectively unwinds a 2006 joint venture that was supposed to create the country’s largest new developer of coal-fired power plants.

As WSJ reported Tuesday, “The sale will allow Dynegy, which has been struggling with slumping electricity demand and prices, to pay down debt and boost liquidity. But reducing the company’s portfolio of power plants will limit its earnings potential, said Angie Storosynski, an analyst with Macquarie Capital in New York. And LS Power’s decision not to acquire the company outright isn’t a good sign, she said. “LS Power could have bought the entire company, and their decision not to should send a message to the market,” she said.”

Deal Journal tried to being this to you on Monday but was bedeviled by its own technical snafus. So here now is Dealogic’s profile of the deal.

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Back-to-School Shopping: Down, but Not Out

The back-to-school shopping season — which lasts from about mid-July through mid-September — is one of vital importance for many retailers, making up roughly 18-20% of their annual sales, second in importance only to the holiday shopping season.

NPD Group isn’t alone in tracking sales of men’s underwear for hints of consumers’ hardship. Former Fed Chairman Alan Greenspan has also said he’s found their sales a useful gauge of the broader economy. (Getty Images)

Last year, the back-to-school shopping season was not a strong one, to many retailers’ dismay. This year, consumers are still hesitant to spend – but, according to a study released today by the NPD Group, Inc., there are some encouraging signs that the 2009 shopping season could be better than 2008.

First, the wariness: about 44% of shoppers plan to spend less on back-to-school shopping this year, compared to 35% who said so last year. Of all consumers, 77% surveyed said they won’t be shopping for back-to-school at all, at the high end of the 72-80% range seen in past NPD surveys.

In a notable reversal from the boom years, consumers plan to spend less on apparel, footwear and electronics this year – categories that used to see a lift as families hit the stores not just for pencils and paper but also for other household purchases.

“This year, they’re not even venturing into the women’s or men’s department,” said Marshal Cohen, the group’s chief retail analyst. “The parents are strictly focused on what they need to get for their kids.”

But despite the frugality, Mr. Cohen and his team, who fan out across the country every year to survey shoppers and collect sales data, found some encouraging signs.

Demand for denim and for men’s underwear is holding up, for example, and outperforming the rest of the market. “That tells me the consumer hasn’t completely abandoned spending,” Mr. Cohen said. “Shoppers may be cutting back but they’re not cutting out and that’s a huge issue.”

He said other categories seeing some firmness are those for products with “multiple functionality”, such as pants that can be worn both to work and out at night, or footwear like Pumas that can fit a variety of situations. As for school supplies, the private-label “value packs” that many stores are offering with a combination of writing tools, notebooks and other necessities are doing well, the group found.

Mr. Cohen said another surprising sign was that some of shoppers’ negativity was owed to their frustration over procrastinating on back-to-school shopping this year. “They waited until the last minute and are finding that the products are gone,” he said.

“Is that an indication of things getting better? Yes. That next year could be even better? Absolutely yes,” he said. “I anticipate next year’s back-to-school season as being very healthy, as shoppers avoid procrastinating again and have to replace more of their kids’ outgrown apparel.”


Barakett’s Letter to Atticus Investors: ‘This Will Come as a Surprise to Most of You’

Timothy Barakett, the founder of hedge-fund firm Atticus Capital, is handing $3 billion back to his investors and closing down a flagship fund, along with a smaller vehicle, The Wall Street Journal reported this morning.

Atticus was one of the highest flying hedge-fund firms over the last decade, surging from a $6 million grubstake in 1996 to close to about $20 billion under management in late 2007. And it was emblematic of a new breed of aggressive hedge funds, publicly pressuring some companies to make changes. Atticus did less hedging than more traditional hedge funds, and scored huge returns as the markets climbed. But like many of its brethren, Atticus hit hard times in the past year. Atticus is closing down the Atticus Global Fund, which Barakett managed. Atticus will continue to operate, and will manage the $1.2 billion Atticus European Fund.

Deal Journal brings you the letter that Barakett sent to his investors today informing them of the move:

August 11, 2009

Dear Investor in Atticus Global, Ltd. and Atticus Global, LP:

I am writing to inform you of my decision to close the funds I manage, including Atticus
Global, Ltd. and Atticus Global, LP (together, the “Atticus Global Fund”). This decision
will come as a surprise to most of you, especially given that we have received
redemptions of less than 5% of capital and your loyal support over the past 15 years.

I have used the market’s recent strength to begin liquidating a significant amount of our
holdings. We currently expect that the portfolio will be fully liquidated by September 30th
and that we will be in a position to return approximately 95% of your capital in early
October. The balance of investor capital will be returned after the final audit is
completed, which should be later this year.

My decision is solely a personal one. After fifteen years of being singularly focused on
building and managing Atticus, I believe it is time to reassess my future. I intend to
spend more time with my family, pursue my philanthropic interests and establish a family
office to manage my own capital and charitable foundation.

Atticus (the management company) will continue to operate, and the Atticus partnership
will remain intact. In addition, it is my partner David Slager’s intention to continue to
manage the Atticus European Fund.

I founded Atticus in 1995 and launched our first fund in January 1996 with less than $6
million under management. The Atticus Global strategy was launched in December 1996
and has compounded investor’s capital at over 19% net annually since inception.1 I am
very proud of the Atticus Global track record and our net returns through July 2009 are
shown below:

Atticus Global S&P 500
1 year -13.3% -20.0%
3 year 0.8% -6.2%
5 year 9.3% -0.1%
10 year 13.6% -1.2%
Inception 19.3% 3.9%
Cumulative 835.3% 62.3%
1 The Atticus Global Fund was formed in April 1999. The statistics set forth in this letter include the period from the inception of the Atticus Global strategy in December 1996 as a managed account.

I am also very proud of Atticus’ overall investment results: from the inception of our first
fund in January 1996 through July 2009, funds managed by Atticus have generated
almost $7 billion of profits for our investors.

I have been blessed with great investors, partners, employees, and a lot of good luck. I
am thankful and sincerely appreciative of the trust and confidence you have placed in me
and our organization.

Sincerely,
/s/ Timothy R. Barakett

Timothy R. Barakett
Founder, Chairman & CEO


Squeezing Some Juice Out of the M&A Lemon in Europe

At least one corner of the European M&A market is alive and well.

Much to the chagrin of bankers and deal watchers in Europe, overall deal activity on the Continent has been even more of a dud than it has in the U.S. The volume of announced mergers and acquisitions in Europe has fallen roughly 50% in 2009 from the already-depressed level of the same period last year, according to Thomson Reuters. It is a far cry from the height of the deal boom, when European and U.S. volume were running neck and neck.

But there is one kind of M&A transaction that is thriving in Europe: deals in which a company buys the rest of another company or division it already partly owns, sometimes known as a squeeze-out. According to Dealogic, there have been $37.6 billion of such deals where the target is European this year, an increase of 6.6% from a year earlier. The U.S. has had a 59% drop. (The action in the U.S. is more focused on distressed M&A these days, which the WSJ spotlights in this page one article today.)

In the most recent example of the squeeze-out trend, French drug giant Sanofi-Aventis agreed on July 30 to buy the remaining 50% of its Merial animal-health joint venture with Merck for $4 billion. In one of the relatively few U.S. examples, PepsiCo agreed last week to pay $7.8 billion to buy out its two biggest independent bottlers. Of course, while any deal is a welcome sight for beleaguered M&A bankers, the fees on squeeze-outs aren’t likely to match those of good old-fashioned takeovers.

While every situation is driven by different factors, the urge to do these deals now can be explained by a few factors. First, in the global economic and financial turmoil, CEOs and boards are gun shy about making any bold new strategic moves. In that context, buying the rest of a company that you already know is relatively safe and easy to pull off. Second, in spite of the strong rally in stocks, valuations of companies are still low in some cases. And in Europe, corporate structures are generally messier than they are in the U.S., with lots of family ownership for example, and in need of tidying up.

“In an environment of still-considerable uncertainty, these types of transactions are relatively low risk,” says Dieter Turowski, the head of European M&A at Morgan Stanley, who predicts the trend still has more room to run even as M&A slowly begins to recover.

Here are the 10 biggest squeeze-outs of the year to date in Europe, courtesy of our friends at Deadlogic:

Announced Target Target Nationality Acquiror Deal value (USD, in billions)
05/15/09  Hypo Real Estate Holding AG (52.692%)  Germany  Federal Republic of Germany  $4.518 
07/30/09  Merial Ltd (50%)  United Kingdom  Sanofi-Aventis SA  $4.000 
02/12/09  “Societa Italiana per il Gas SpA - ITALGAS (49.97%)
Stoccaggi Gas Italia SpA - STOGIT” 
Italy  Snam Rete Gas SpA  $2.909 
06/02/09  Jelmoli Holding AG (70.1107%)  Switzerland  Swiss Prime Site AG  $2.886 
07/23/09  National Express Group plc (81.4%)  United Kingdom  CVC Capital Partners Ltd  $2.593 
02/23/09  Alleanza Assicurazioni SpA (49.6%)  Italy  Assicurazioni Generali SpA  $2.315 
02/23/09  Nuon NV (21%)  Netherlands  Vattenfall AB  $2.289 
07/10/09  Venture Production plc (71%)  United Kingdom  Centrica plc  $1.871 
07/30/09  Concesiones de Infraestructuras de Transporte SA - CINTRA (33.12%)  Spain  Grupo Ferrovial SA  $1.663 
05/18/09  Westerscheldetunnel NV (95.4%)  Netherlands  Province of Zeeland  $1.310 


Who Sold What in the Greenhill, Evercore Share Sales

Shanny Basar, of Financial News, reports:

Executives at Greenhill and Evercore Partners reaped nearly $300 million from the sale of shares in the boutique investment banks last week, according to regulatory filings just published. Financial News has trawled through the documents to provide a breakdown of who sold what and what they earned.

Managing directors and senior advisers at Greenhill sold a total of three million shares at $73.53 each, or a total of $220.6 million, according to a Securities and Exchange Commission filing. In that deal, its three most senior executives offloaded a combined $124 million of stock. Goldman Sachs was the sole bookrunner on the sale and netted a profit of $7.4m as shares were sold in a public offering at $76 each.

The following Greenhill employees were among those who sold stock according to the SEC filing:

• Robert Greenhill, founder and chairman: $76 million; includes stock sold by Greenhill Family Limited Partnership–the filing said Mr Greenhill expressly disclaims beneficial ownership of the shares by members of his family in this partnership.

• Scott Bok, co-chief executive: $24 million; includes shares owned by the Bok Family Foundation.

• Simon Borrows, co-chief executive: $24 million; includes shares transferred to St. Catherine’s School Bramley.

• Robert Niehuas, chairman, Greenhill Capital Partners: $17.8 million; includes shares owned by the Niehaus Foundation.

Rival Evercore raised $61.5 million from selling shares in order to purchase outstanding Evercore partnership units from certain holders, including senior management. Goldman Sachs was the bookrunner on this offering, too.

According to the SEC filing, the following amounts will be paid to senior staff for their partnership units:

• Roger Altman, founder and chairman : $9.6 million.

• Eduardo Mestre, vice-chairman : $3.6 million.

• Pedro Aspe, co-chairman : $5.1 million.

In May, Ralph Schlosstein, a co-founder and former president of fund manager BlackRock joined Evercore as president and chief executive. Schlosstein didn’t sell any Evercore partnership units in connection in this offering.


The Morning Leverage: The Siren Call Of Banks Continues

morningleverage_E_20090803175649.jpgMike Lucas for Dow Jones

In this morning’s media roundup:

News: Private equity firms continue to take advantage of bargains in the banking sector, particularly among community banks. CapGen Financial Group LLC signed a letter of intent to buy 6 million shares of Seacoast Banking Corp., owner of Florida’s Seacoast National Bank, giving it a 10% stake. The firm will pay the same price as the offering price in an upcoming 28.5 million-share public offer for the bank. Seacoast received a $50 million TARP investment in December, and signed an agreement with the Office of Thrift Supervision in December to reduce its credit risk, after the OCC said the bank had “unsafe and unsound” practices. Read the LBO Wire story here.

Meanwhile, the comment period on proposed FDIC rules on investing in failed banks is over, and Lone Star Funds has joined a host of other firms in stating their opposition to the proposal, saying it would place a too harsh a burden upon investors and would potentially stunt their investment in the sector. Read the Reuters story here.

The continued, yet inexplicable, popularity of Nickleback has done little to lift the financials of private equity-backed radio giant Clear Channel Communications Inc., which reported a $3.67 billion loss in the second quarter, and won’t be good news to backers Bain Capital LLC and Thomas H. Lee Partners LP. Here’s the story from The Wall Street Journal. Clear Channel’s rough ride under PE ownership hasn’t dissuaded other entrants into the radio market. Endeavour Capital-backed Alpha Broadcasting LLC, a radio platform launched earlier this year, has agreed to buy four CBS radio stations in Portland, Ore., for $40 million in cash, with hopes of growing into a national chain in the future. Link to the LBO Wire story here.

It’s often said that when the U.S. sneezes, its neighbors catch cold. Perhaps we should send some chicken soup to our PE brethren up north, as Canada continues to see its private equity activity slow in the second quarter. Read the Reuters story here.

One sector that hasn’t slumped much in the weak economy is, not surprisingly, distressed-debt. New Dealogic figures show the deals are valued at $84.4 billion altogether, far outpacing last year’s $20 billion figure, and are coming from all sectors of the economy. Link to The Wall Street Journal story here.

Analysis: Amid a continuing economic slump, the British Private Equity and Venture Capital Association has approached major U.K. banks, hoping that they would be willing to cut their portfolio companies a bit of slack to better enable them sort out their financial messes. Check out the Dow Jones Newswires story via the WSJ site here.

And trade publication Air and Business Travel News reports that Blackstone Group has denied reports that as part of debt restructuring plan it was planning to break up troubled hotel chain Hilton Hotel Corp.

Just For Fun: The Observer marks the 500th day that the $50 million co-op of Warburg Pincus’ founder Lionel Pincus has been on the market with a brief recounting of the battle between the Pincus’ two sons and the companion of the ailing patriarch over sale of his luxury Fifth Ave. property. See the story, complete with detailed floor plans of the duplex, here.

Deals of the Day: Verizon’s Deal Making–Caveat Seidenberg?

Deals of the Day gathers all the biggest news of the morning related to mergers and acquisitions, bankruptcies, financing and private equity. Deal Journal’s homepage is http://blogs.wsj.com/deals. You can see real-time updates of our posts and our favorite deal-related articles on other Web sites through our Twitter feed at http://twitter.com/wsjdealjournal.

Mergers & Acquisitions

The Two Sides of Verizon’s Deal Making: Verizon boss Seidenberg may be one of the best deal makers of his time, or one of the worst. [WSJ]

YPF: China National Petroleum Corp. and Cnooc Ltd. have proposed paying at least $17 billion for all of Repsol YPF SA’s stake in YPF, its Argentine unit. [WSJ]

Ready to deal: Bayer AG’s unsuccessful bid for Schering-Plough’s animal-health business last month shows Chief Executive Officer Werner Wenning is prepared to make large acquisitions again.
[Bloomberg]

Finally!!! Resolution struck an agreement to acquire insurer Friends Provident for 1.86 billion pounds ($3.06 billion). [MarketWatch]
Related: The pound signs must be rolling in Clive Cowdery’s eyes after his Resolution consolidation vehicle won Friends Provident. [WSJ]

Financial Institutions


BofA-Merrill:
A judge delayed a decision on whether to approve a $33 million settlement of allegations that Bank of America failed to disclose to investors that Merrill agreed to pay billions of dollars in bonuses on the eve of their merger. [WSJ]

B-List: Big Wall Street firms are shedding traders as they ratchet back their risk-taking, and smaller firms are stepping up to hire the trading talent. [WSJ]

CIT Group: The troubled lender delayed filing its quarterly report with the Securities and Exchange Commission, saying it couldn’t meet the deadline “without unreasonable effort and expense” during its restructuring. [WSJ]

Small Banks Need Help, Too: TARP oversight panel says smaller U.S. banks may need $12 billion to $14 billion in additional capital to cope with troubled loans on their books. [Bloomberg]

UBS: The Swiss bank hired more than 20 senior bankers from competitors including Merrill Lynch and Goldman Sachs Group to strengthen its fixed-income division. [Bloomberg]

American International Group: The insurer’s former CEO, Edward Liddy, wrote to employees that he didn’t know what he was getting into when he joined the company. [Bloomberg]

Lehman Brothers Holding: The resolution of a dispute in a U.K. court between Lehman and a Bank of New York Mellon unit over a swap agreement could affect billions of dollars of similar contracts. [Bloomberg]

Regulator

A Stronger Enforcer: The SEC has stepped up enforcement and reorganized its inner workings as it seeks to repair a battered reputation. [WSJ]

Tips to SEC Pointed to Pequot: The SEC said it received at least 45 tips related to Pequot Capital Management before the hedge fund closed in May and followed up on all but one. [WSJ]

Distressed Takeovers Soar: Distressed-debt deals, in which creditors use their debt positions to seize ownership of troubled companies, are running close to double the pace of 2008, data show. [WSJ]

Buyside

Carl Icahn: The billionaire investor surprised many by quietly gagging his own activist blog four months ago, following a year of trumpeting Icahn’s mission to shake up entrenched boardrooms. [N.Y. Post]

PE, the FDIC and Buying Failed Banks: Lone Star Funds became the latest PE firm to oppose proposed FDIC rules for investments in failed banks. [Reuters]

Capital Markets

InfrastruX Group: The Seattle business seeks to raise as much as $290 million in an IPO on the NYSE. [Seattle Times]

Company & Industry

Tata: The Indian owner of car and sport-utility vehicle maker Jaguar Land Rover said Tuesday it no longer needs U.K. government funding after securing a £175 million ($288 million) private-sector loan. [WSJ]

China Dilutes Claim of Rio Deceit: Chinese officials backed away from allegations that Rio Tinto cost the country more than $100 billion by stealing state secrets, spotlighting the murky way China handles such cases. [WSJ]


Secondary Sources: Obama’s Luck, Fallacy of Composition, Right Direction?

A roundup of economic news from around the Web.

  • Obama’s Luck: Writing for the Financial Times, Niall Ferguson says the deficit may test the luck of President Obama, whom he compares to Felix the Cat. “Six months in, Mr Obama still has the look of a lucky, two-term president. But that could change if voters become even more disenchanted with the legislative branch and start blaming the president for the looming fiscal train-wreck. The scariest possibility for Mr Obama is that the runaway deficit could leave him with the worst of both worlds: exploding debt and flat-lining growth. Even Felix the Cat’s luck ran out during the Depression. His creator Pat Sullivan drank himself to death in 1933, baffled that audiences now preferred mice like Mickey and Jerry. President Obama should take note.”
  • Fallacy of Composition: L. Randall Wray writes in the Economic Perspectives From Kansas City blog about the Fallacy of Composition and relates it to the deficit. “One of the most important concepts to be taught in economics is the notion of the fallacy of composition: what might be true for individuals is probably not true for society as a whole. The most common example is the paradox of thrift: while an individual can save more by reducing spending (on consumption), society can save more only by spending more (for example, on investment). Another useful and very topical example involves the federal government’s budget deficit. Politicians and the media often argue that the government must balance its books, just like a household. If a household were to continually spend more than its income, it would eventually face insolvency; it is thus claimed that government is in a similar situation. However, careful examination of macroeconomic relations will show that this analogy is incorrect, and that it would lead to improper budgetary policy. This example can drive home the fallacy of composition.”
  • Right Direction?: On his blog, Keith Hennesey wonders whether the U.S. economy is pointed in the right direction yet. “There is a difference between “good news” and “pointed in the right direction.” Friday’s jobs report was good news, but the economy is still not yet pointed in the right direction. We have a ways to go… Imagine you’re in a car that has been rolling backwards downhill at high speed. Now the car slows down, but it’s still rolling backwards downhill, just more slowly. You are not headed in the right direction until you’re moving forward… Friday’s jobs report was good news because the bad news beat expectations, and because it signaled that things might turn around more quickly in the future. But the President is wrong – the U.S. economy is not yet pointed in the right direction.”

Compiled by Phil Izzo


Goldman Conspiracy? Sorry, Hank Paulson Is On Deadline

Journal colleague Katherine Rosman reports:

Hank Paulson is too busy to comment, thank you very much.

What did the former Treasury Secretary and Goldman boss have to say to a New York Times story that said he spoke to current Goldman CEO Lloyd Blankfein “far more frequently than Mr. Paulson did with other Wall Street executives”? And that he did it without the proper government waiver?

hankpaulson_D_20090630105442.jpgBloomberg News
Henry Paulson

Nothing, according to the Times: “Michele Davis, a spokeswoman for Mr. Paulson, said that the former Treasury secretary was busy writing his memoirs and that his publisher had barred him from granting interviews until his manuscript was done.”

What kind of steely nerves does it require to “bar” a man who headed not just the Treasury Department but Goldman Sachs from defending himself against allegations of potentially unethical conduct? We called Grand Central Publishing, whose imprint Business Plus is publishing Mr. Paulson’s book in January 2010, to find out.

“Hank was an All-American football player at Dartmouth,” said Business Plus publisher and editor in chief Rick Wolff. “I don’t think it’s wise for my health to try to bar him from doing anything.”

Mr. Wolff added, “Hank is in process of writing his book and quite frankly, he is on deadline. He is too busy to go and sit for interviews.” Asked if the publisher hoped Mr. Paulson would save his response for his book, Mr. Wolff said, “We’d like that.”

But in the aftermath of the publication of the Times article, Mr. Paulson’s spokeswoman released a detailed statement that says Mr. Paulson was advised by the Treasury Department general counsel that obtaining a waiver was not necessary. Ms. Davis’s statement continues, “Suggesting that A.I.G. was saved for the sake of one firm is as ridiculous as saying firemen put out a fire in a skyscraper to protect just one of the thousands of people in the building.”

A Goldman Sachs spokesman told the Times that given the market conditions at the time, “it would have been shocking if such conversations hadn’t taken place.”


Three Keys to Sustainable Recovery

Following a better-than-expected employment report and indications that the manufacturing sector is beginning to revive, economists have become more confident that recovery is coming. But the big questions remains: is a recovery sustainable. In a recent research report, Richard Berner and David Greenlaw of Morgan Stanley outline three keys to sustained growth.

  • 1. Credit markets are loosening up. As the post-Lehman panic subsides banks are becoming more willing to lend again. Berner and Greenlaw say the cycle is moving from “vicious to virtuous.” Despite continuing loan losses, especially in mortgages, they expect that fewer banks are tightening credit conditions and more money is on its way through the system.
  • 2. Stimulus is coming online. The government’s stimulus package was always designed to be heavier in the middle, and more shovel-ready projects and state and local construction will come online at the end of this year and into next. That means more output and more jobs associated with that output.
  • 3. Reduced inventory liquidation. Inventories are still elevated when compared to sales. But that doesn’t mean that output has to completely stall. As long as companies raise production less than demand they can continue to draw down inventories while contributing to growth.

Despite strong demand for the cash-for-clunkers program, the outlook for the consumer continues to be uncertain. But even with reduced consumption, the economy can continue to grow and avoid a double-dip recession. Just don’t expect blockbuster expansion.


Razorfish-Publicis: And the Digital Walls Come Tumbling Down

Paul Sharma, of Dow Jones Newswires, reports:

The prevailing wisdom has been that the important word in ‘digital advertising agency’ wasn’t the advertising as much as it was the digital. Technology was king.

That has all changed, as seen in two deals in the past week. On Sunday, Microsoft sold its digital advertising agency Razorfish to French advertising giant Publicis Groupe. This followed closely on the heels of Google’s sale of its Google Radio advertising business to WideOrbit, a closely held company with a leading position in managing advertising on cable networks.

These deals give an indication of how the circle of competence for the two technology-led giants has changed. A decade ago, a key differentiator of a digital agency was technology and its understanding of how the then-mysterious internet functions.

Fast forward 10 years and much of the technology for building web sites has become automated and coding simpler, removing the technology defensive moat around this type of business. So the elements that a digital advertising customer now requires, such as creative input and market segmentation, look much more like those of a conventional advertising agency than a technology company.

Looking at the Razorfish numbers, the deal looks good for Publicis. It paid around $530 million, of which $230 million was in equity and $300 million in cash. As a result of the deal, Publicis now has reached it target of 25% of sales from digital a year early.

The price paid is around 1.4 times 2008 enterprise value to sales, which is in line with Publicis’s own sales multiple. Unsurprisingly, prices have taken a tumble in the sector and this deal is at less than half the multiple Publicis paid for Digitas and WPP paid for Real Media at the top of the last cycle a couple of years ago.

Publicis recently completed a $1 billion bond issuance and has around $1.2 billion of cash, while net debt is around $1.7 billion. So Publicis’s debt levels are low, enabling the company to do further acquisitions. That said, its CEO has said there will be no more deals in the digital advertising space, given Razorfish was the last remaining “independent” agency of any size.