A Look Inside Fed’s Balance Sheet — 7/16/09 Update

This post is by WSJ.com: Real Time Economics from WSJ.com: Real Time Economics

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The Fed’s balance sheet expanded for the first time in three weeks, rising back over $2 trillion. Direct-bank lending rose after posting declines in the four previous weeks, though the increase was relatively small. A bigger contribution came from a more than $5 billion boost in the Term Asset Backed Securities Loan Facility, which is aimed at spurring consumer lending but hasn’t been used nearly as much as originally envisioned. The largest expansion in the balance sheet came through purchases of Treasurys, agency debt and mortgage-backed securities. The Fed started a program in March to ramp up such acquisitions in order to push down long-term interest rates low. Since that time the makeup of the balance sheet has shifted substantially, with less direct emergency lending to banks and more holdings of debt. Central bank liquidity swaps increased for the first time in 14 weeks, but still remain lower than crisis levels reached soon after the collapse of Lehman Brothers.

In an effort to track the Fed’s actions, Real Time Economics has created an interactive graphic that will mark the expansion of the central bank’s balance sheet. Every Thursday afternoon, the chart will be updated with the latest data released by the Fed.

In an effort to simplify the composition of the balance sheet, some elements have been consolidated. Portfolios holding assets from the Bear Stearns and AIG rescues have been put into one category, as have facilities aimed at supporting commercial paper and money markets. The direct bank lending group includes term auction credit, as well as loans extended through the discount window and similar programs.

Central bank liquidity swaps refer to Fed programs with foreign central banks that allow the institutions to lend out foreign currency to their local banks. Repurchase agreements are short-term temporary purchases of securities from banks, which are looking for liquidity and agree to repurchase them on a specified date at a specified price.

Click and drag your mouse to zoom in on the chart. Clicking the check mark on categories can add or remove elements from the balance sheet.

“Congress Must not Touch the Federal Reserve”

This post is by Mark Thoma from Economist's View

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Mark Gertler says the Fed's independence should not be compromised:

Congress must not touch the Federal Reserve, by Mark Gertler
: The economy
was experiencing the worst recession since the war. In Congress, members were
beginning to wonder whether the Federal Reserve’s intervention strategy was
extracting too great a toll on the economy. Some started to suggest publicly
that it may be time to rein in the central bank’s independence.

Sound familiar? Though they bear a strong
resemblance to … today, the events I refer to in fact happened in the early
1980s, in the midst of what was then the most serious economic crisis since the
Depression. The head of the institution under threat of losing its independence
was none other than Paul Volcker.

Of course, Mr Volcker would go on to be recognised
as one of the great central bankers of modern times. He would do so by standing
firm against political pressures. By continuing on the course he set out, the
economy recovered and a new era of price and output stability began. … In the
Volcker era, the political outcry occurred in the midst of the economic
contraction that the Fed had engineered to tame inflation. The costs of the
policy were plain to see, but the long-term benefits that would eventually
emerge were difficult for many to imagine at the time.

The Fed’s role has been different this time round.
Rather than trying to slow the economy, it has been acting to contain the damage
brought on by the most complex financial crisis of modern history. By the
accounts of many, the Fed has acted masterfully under difficult circumstances.

Given that hard times remain, nonetheless, it is
natural that Congress is questioning the Fed, just as it did in the early 1980s.
… Unfortunately, the Fed cannot demonstrate what would have happened to the
economy if it had not intervened in the way it did. Many observers agree that
the situation would be far worse than it is today. Yet discussions of reining in
central bank powers proceed as if the financial system would have stabilised
itself without any Fed intervention.

The Fed well understands the lesson from the
Volcker era that it can be effective only when it resists political attempts to
influence its decisions. One can only hope that sober voices in Congress who
appreciate the importance of central bank independence will help keep Capitol
Hill from taking any measures that do permanent damage to the Fed.

A more constructive route for Congress would be to
proceed with regulatory reform that would prevent a repeat of the current
situation. At the core of the crisis is an antiquated regulatory system that
permitted large financial institutions to take excessive risks. By giving the
Fed the ability to monitor risk-taking by these institutions, Congress would
diminish greatly the likelihood the central bank would again need to intervene
directly in private credit markets.

The Fed may not have been perfect in its response to this or previous crises,
but that doesn't mean that a less independent Fed would have done better. Taking
away Fed independence – including subjecting the Fed to audits by the GAO –
would be a mistake. In addition, if we are going to strengthen regulatory
authority so that we can better monitor and reduce systemic risk that threatens
the financial system – and we should – that authority needs to be in the hands of an
independent entity, and the Fed is the natural place for this. Finally, its
role in regulating system-wide risk is complementary to many of its other
activities. For example, its role as a systemic risk regulator would involve
monitoring risk within large institutions. Should a bank get into trouble, that would be helpful in
assessing whether the bank should be granted access to the discount window in its capacity
as lender of last resort.

We need to maintain an independent Fed, to give the Fed the powers it needs to monitor and regulate the level of overall risk, and to give the Fed the authority it now lacks to put banks through an orderly bankruptcy process so it can avoid bailing out financial institutions that are in trouble and a threat to overall the financial system.

Update: See Willem Buiter for a longer, more detailed version of many of the same points, e.g.:

Probably the single most damaging  failure of the US Treasury, the US
Congress and the US financial regulators was there
inability/unwillingness to create a special resolution regime (SRR)
with structured early intervention and prompt corrective action for all
systemically important financial institutions (those too big, too
complex, to interconnected, too international or too politically
connected to fail in the ordinary Chapter 11 or Chapter 7 way).  …

But however weak its past performance and credentials, they are
rock-solid compared to those of the other candidate institutions. …

Only the Fed can fulfill the macro-prudential regulator-supervisor
role.  That is because it has the short-term deep pockets.  It is the
source of the ultimate, unquestioned liquidity in the economy, through
its monopoly of the issuance of base money.  Without the short-term
deep pockets, a macro-prudential regulator/supervisor cannot act as
lender of last resort, market maker of last resort or provider of
enhanced credit support.  It would be … toothless…

He also makes this point:

The problem with this solution of the macro-prudential
regulator/supervisor problem is that it is incompatible with central
bank operational independence as interpreted since 1989 or
thereabouts. … When the central bank plays a quasi-fiscal role, as the Fed has been
doing on an unprecedented scale in the current crisis, the fullest
possible degree of accountability to the Congress, the tax payer and
the citizens is essential.  The Fed has no mandate to engage in
quasi-fiscal operations, even when it is for a good cause.  …

If the
same institution, the central bank, has to be in charge of both normal
monetary policy and systemic risk regulation (albeit jointly with the
Treasury for the systemic risk role), there is no elegant, first-best
solution.  Either monetary policy will be driven by politicians whose
macroeconomics is limited to a partial understanding of the Keynesian
cross and whose monetary policy views can be summarised by the
proposition that the have never seen an official policy rate so low
they would not want it even lower, or the central bank continues to act
as an off-budget, off-balance sheet special purpose vehicle of the

You pick.

Okay. As much as possible, monetary policy should be kept out of the hands of politicians.

Update: Jim Hamilton (I also signed the petition a day or two ago):

I joined many of my colleagues
in urging Congress and the President to remember just how valuable an
independent central bank is for the ordinary citizens of this country.
You may not pay much attention to central bank independence. But you'll
miss it when it's gone.

Shining a Bad Light

This post is by panzner from Financial Armageddon

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Many people are upset — rightly so — about the lack of information coming from Washington detailing how and where — and, perhaps, why — taxpayer funds are being spent in an effort to “save” the economy.

That said, we do see the occasional ray of official sunshine — if you can call it that — describing the unwelcome fallout from the drunken orgy of spending that our leadership has been engaging in.

As an example, I refer to the post published this afternoon at the Congressional Budget Office’s Director’s Blog (a new discovery for me), entitled “The Long-Term Budget Outlook”:

Today I had the opportunity to testify before the Senate Budget Committee about CBO’s most recent analysis of the long-term budget outlook.

Under current law, the federal budget is on an unsustainable path, because federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the population will cause federal spending to increase rapidly under any plausible scenario for current law. Unless revenues increase just as rapidly, the rise in spending will produce growing budget deficits. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress economic growth in the United States. Over time, accumulating debt would cause substantial harm to the economy. The following chart shows our projection of federal debt relative to GDP under the two scenarios we modeled.

Federal Debt Held by the Public Under CBO’s Long-Term Budget Scenarios (Percentage of GDP)

Federal Debt Held by the Public Under CBO’s Long-Term Budget Scenarios (Percentage of GDP)

Keeping deficits and debt from reaching these levels would require increasing revenues significantly as a share of GDP, decreasing projected spending sharply, or some combination of the two.

Measured relative to GDP, almost all of the projected growth in federal spending other than interest payments on the debt stems from the three largest entitlement programs—Medicare, Medicaid, and Social Security. For decades, spending on Medicare and Medicaid has been growing faster than the economy. CBO projects that if current laws do not change, federal spending on Medicare and Medicaid combined will grow from roughly 5 percent of GDP today to almost 10 percent by 2035. By 2080, the government would be spending almost as much, as a share of the economy, on just its two major health care programs as it has spent on all of its programs and services in recent years.

In CBO’s estimates, the increase in spending for Medicare and Medicaid will account for 80 percent of spending increases for the three entitlement programs between now and 2035 and 90 percent of spending growth between now and 2080. Thus, reducing overall government spending relative to what would occur under current fiscal policy would require fundamental changes in the trajectory of federal health spending. Slowing the growth rate of outlays for Medicare and Medicaid is the central long-term challenge for fiscal policy.

Under current law, spending on Social Security is also projected to rise over time as a share of GDP, but much less sharply. CBO projects that Social Security spending will increase from less than 5 percent of GDP today to about 6 percent in 2035 and then roughly stabilize at that level. Meanwhile, as depicted below, government spending on all activities other than Medicare, Medicaid, Social Security, and interest on federal debt—a broad category that includes national defense and a wide variety of domestic programs—is projected to decline or stay roughly stable as a share of GDP in future decades.

Spending Other Than That for Medicare, Medicaid, Social Security, and Net Interest, 1962 to 2080 (Percentage of GDP)

Spending Other Than That for Medicare, Medicaid, Social Security, and Net Interest, 1962 to 2080

Federal spending on Medicare, Medicaid, and Social Security will grow relative to the economy both because health care spending per beneficiary is projected to increase and because the population is aging. As shown in the figure below, between now and 2035, aging is projected to make the larger contribution to the growth of spending for those three programs as a share of GDP. After 2035, continued increases in health care spending per beneficiary are projected to dominate the growth in spending for the three programs.

Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security (Percentage of GDP)

The current recession and policy responses have little effect on long-term projections of noninterest spending and revenues. But CBO estimates that in fiscal years 2009 and 2010, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II. As a result of those deficits, federal debt held by the public will soar from 41 percent of GDP at the end of fiscal year 2008 to 60 percent at the end of fiscal year 2010. This higher debt results in permanently higher spending to pay interest on that debt. Federal interest payments already amount to more than 1 percent of GDP; unless current law changes, that share would rise to 2.5 percent by 2020.

The Darker Light

This post is by panzner from Financial Armageddon

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Once again, we have that same old disconnect: Wall Street and Washington say that things are looking up, while most Americans continue to believe otherwise, as CNNMoney.com‘s Paul La Monica reveals in “The Economy Feels Better. Why Don’t You?”:

Wall Street’s celebrating “strong” earnings and the Fed thinks the recession may soon end. But consumers won’t be confident until the housing woes are over.

The economy seems to be getting better. That’s what Wall Street is telling us. Stocks soared Wednesday thanks to a slew of decent earnings reports.

That’s also what C Street — home of the Federal Reserve — is telling us. In the minutes from the Fed’s last meeting, released Wednesday afternoon, policymakers indicated that the recession could be over “before long.”

But on Main Street, people seem to have a decidedly different view. It’s hard to find things to be happy about when the unemployment rate is at a more than quarter-century high of 9.5% and the housing market remains in shambles.

The mess in housing — foreclosures in the first half of the year were up 15% from the first six months of 2008 — is something that some fear could keep a lid on an economic recovery.

So even though investors, CEOs and Fed chair Ben Bernanke may be seeing green shoots everywhere they look, many average Americans have to squint very hard in order to find them. Just try telling a Zillow.com-obsessed home owner who’s watched the value of his home continue to plummet in recent months that the economy is getting better.

“The big unknown variable in the economy still is housing,” said Haag Sherman, managing director with Salient Partners, an investment firm based in Houston. “The worst may be behind us with subprime loans, but I don’t think housing has found a bottom. We could have a recovery in Corporate America that’s much narrower than the recovery in the broader economy.”

Sherman pointed out that banks are starting to experience waves of delinquencies and defaults with higher-quality mortgages such as alt-A loans and prime loans.

To that end, JPMorgan Chase, which posted strong second-quarter results Thursday morning thanks to healthy gains in its investment banking division, reported some fairly dismal numbers out of its consumer lending unit.

The bank said that net charge-offs, a figure that measures the amount of debt written off as bad, were $1.3 billion from home equity loans, double the $511 million of a year earlier. And net charge-offs related to prime mortgages quadrupled to $481 million from $104 million last year.

JPMorgan Chase is widely considered one of the healthier banks around. So if it’s experiencing more difficulties in its home loan business, it’s likely that two of the more troubled big banks, Citigroup and Bank of America, will also disclose more bad news from their mortgage units when they each report their second-quarter numbers Friday morning.

Rising delinquencies could lead to more foreclosures. If so, it’s harder to envision a scenario where prices will rebound since foreclosed homes just add to the inventory of unsold real estate.

Steven Kyle, professor of applied economics at Cornell University, said the fear that prices will fall further is discouraging some homeowners from even putting their homes on the market because they’re worried about the existing glut of homes.

Kyle added that with unemployment nearing 10% and likely to exceed that level before long, he worries many consumers won’t be willing to buy homes — even if prices stay relatively affordable and mortgage rates remain fairly low.

“Housing is not going to go rocketing off anytime in the near future. Interest rates are already low, so you won’t get a boost from that. And unemployed people aren’t buying houses,” Kyle said.

Sherman said that, ironically enough, more talk of an economic recovery could actually hurt chances of a housing rebound, since it could lead to higher rates in the future.

That’s because some fixed-income investors may start to fear inflation and start selling long-term bonds, which would drive up their yields. Bond rates and prices move in opposite directions.

In fact, it’s already happened to some extent. The yield on the U.S. 10-year Treasury has surged from a low of about 2% in December to about 3.5% currently. Many fixed-rate mortgages are closely pegged to longer-term Treasury rates, so a further dumping of Treasurys won’t help prospective home buyers.

“You can have housing stabilize for a bit and then take another leg down. Continued affordability is what we want to see, but if bonds sell off, that weighs on affordability,” Sherman said.

0:00 /4:19Housing market’s false hope
Nonetheless, there are some pieces of good news about the housing market. The National Association of Home Builders reported Thursday that builder confidence in July was it its highest level since last September.

In addition, finance professors Paola Sapienza of the Kellogg School of Management at Northwestern University and Luigi Zingales of the University of Chicago’s Booth School of Business, said consumers are much more confident about the housing market now than they were just a few months ago. The professors run a quarterly survey of consumers that looks at their trust in the financial system.

Sapienza said that a majority of consumers polled in June thought that prices in their market would be stable over the next 12 months and that only 26% thought prices would decline. By way of comparison, nearly half of the consumers surveyed in December were predicting price drops, Sapienza said.

We’ll find out even more about the state of housing Friday morning when the Census Bureau reports its latest figures on housing starts and building permits. Both numbers are key measures of potential demand for new homes.

Economists surveyed by Briefing.com are forecasting that the number of permits rose slightly in June to an annualized rate of 524,000 from 518,000 in May and that starts dipped a tad last month — from a rate of 532,000 in May to 530,000 in June.

The consensus estimates for both permits and starts are considerably higher than the record lows set in April. So as long as the June numbers are close to forecasts, one could make the case that the housing market is stabilizing and that the worst may be over.

But as I pointed out in Wednesday’s column about earnings, stabilization is not the same thing as a recovery. And even though Wall Street still seems willing to subsist on a diet of green shoots salad, consumers are hungering for more substantial evidence of a recovery.

“The end of the world didn’t in fact happen so people got more optimistic earlier this year. But to say the end of the world was avoided doesn’t mean we’re now swimming in rose petals,” Kyle said. “The real estate market is still looking rocky. The danger is we just bump along in this stagnating saggy state for awhile.”

And as long as that’s the case, consumers are unlikely to feel much better about the economy.

“People are still nervous. We haven’t seen an actual turn in housing yet, just signs of bottoming,” said Brad Sorensen, director of market and sector research with Charles Schwab. “This isn’t rocket science but an improvement in the housing market will make consumers feel more confident and more willing to spend and that will have a trickle down effect on the overall economy.”

While it is possible that the permabulls, pundits, and politicians are right and ordinary folks are missing the boat , the experience of the past several years suggests it has not made sense to bet against the masses when it comes to describing the true state of affairs.

In fact, some might argue, based on the following commentary from syndicated columnist Paul Craig Roberts, “Can the Economy Recover?” that the fundamentals are so bad that it won’t take long before even the most deluded of establishment shills is forced to see the world in a darker, though more realistic light.

There is no economy left to recover. The U.S. manufacturing economy was lost to offshoring and free-trade ideology. It was replaced by a mythical “New Economy.”

The “New Economy” was based on services. Its artificial life was fed by the Federal Reserve’s artificially low interest rates, which produced a real-estate bubble, and by “free market” financial deregulation, which unleashed financial gangsters to new heights of debt leverage and fraudulent financial products.

The real economy was traded away for a make-believe economy. When the make-believe economy collapsed, Americans’ wealth in their real estate, pensions and savings collapsed dramatically while their jobs disappeared.

The debt economy caused Americans to leverage their assets. They refinanced their homes and spent the equity. They maxed out numerous credit cards. They worked as many jobs as they could find. Debt expansion and multiple family incomes kept the economy going.

And now suddenly Americans can’t borrow in order to spend. They are over their heads in debt. Jobs are disappearing. America’s consumer economy, approximately 70 percent of gross domestic product, is dead. Those Americans who still have jobs are saving against the prospect of job loss. Millions are homeless. Some have moved in with family and friends; others are living in tent cities.

Meanwhile, the U.S. government’s budget deficit has jumped from $455 billion in 2008 to $1 trillion this year, with another $2 trillion on the books for 2010. And President Obama has intensified America’s expensive war of aggression in Afghanistan and initiated a new war in Pakistan.

There is no way for these deficits to be financed except by printing money or by further collapse in stock markets that would drive people out of equity into bonds.

The U.S. government’s budget is 50 percent in the red. That means half of every dollar the federal government spends must be borrowed or printed. Because of the worldwide debacle caused by Wall Street’s financial gangsterism, the world needs its own money and hasn’t $2 trillion annually to lend to Washington.

As dollars are printed, the growing supply adds to the pressure on the dollar’s role as reserve currency. Already America’s largest creditor, China, is admonishing Washington to protect China’s investment in U.S. debt and lobbying for a new reserve currency to replace the dollar before it collapses. According to various reports, China is spending down its holdings of U.S. dollars by acquiring gold and stocks of raw materials and energy.

The price of 1 ounce gold coins is $1,000 despite efforts of the U.S. government to hold down the gold price. How high will this price jump when the rest of the world decides that the bankruptcy of “the world’s only superpower” is at hand?

And what will happen to America’s ability to import not only oil, but also the manufactured goods on which it is import-dependent?

When the oversupplied U.S.
dollar loses the reserve currency role, the United States will no longer be able to pay for its massive imports of real goods and services with pieces of paper. Overnight, shortages will appear and Americans will be poorer.

Nothing in Presidents Bush and Obama’s economic policy addresses the real issues. Instead, Goldman Sachs was bailed out, more than once. As Eliot Spitzer said, the banks made a “bloody fortune” with U.S. aid.

It was not the millions of now homeless homeowners who were bailed out. It was not the scant remains of American manufacturing — General Motors and Chrysler — that were bailed out. It was the Wall Street Banks.

According to Bloomberg.com, Goldman Sachs’ current record earnings from their free or low-cost capital supplied by broke American taxpayers has led the firm to decide to boost compensation and benefits by 33 percent. On an annual basis, this comes to compensation of $773,000 per employee.

This should tell even the most dimwitted patriot whom “their” government represents.

The worst of the economic crisis has not yet hit. I don’t mean the rest of the real-estate crisis that is waiting in the wings. Home prices will fall further when the foreclosed properties currently held off the market are dumped. Store and office closings are adversely affecting the ability of owners of shopping malls and office buildings to make their mortgage payments. Commercial real-estate loans were also securitized and turned into derivatives.

The real crisis awaits us. It is the crisis of high unemployment, of stagnant and declining real wages confronted with rising prices from the printing of money to pay the government’s bills, and from the dollar’s loss of exchange value. Suddenly, Wal-Mart prices will look like Neiman Marcus prices.

Retirees dependent on state pension systems, which cannot print money, might not be paid, or might be paid with IOUs. They will not even have depreciating money with which to try to pay their bills. Desperate tax authorities will squeeze the remaining life out of the middle class.

Nothing in Obama’s economic policy is directed at saving the U.S. dollar as reserve currency or the livelihoods of the American people. Obama’s policy, like Bush’s before him, is keyed to the enrichment of Goldman Sachs and the armament industries.

Matt Taibbi describes Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Look at the Goldman Sachs representatives in the Clinton, Bush and Obama administrations. This bankster firm controls the economic policy of the United States.

Little wonder that Goldman Sachs has record earnings while the rest of us grow poorer by the day.

Allied Carpets in Adminstration

This post is by Sarla Buch from 123Jump.com: Market News

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Allied Carpets in a pre-packaged deal under voluntary administration reemerged with fewer stores and new lead investor. The fate of the 166 of the 217 stores with 1,100 employees is uncertain, even though the restructuring administrator indicated optimistic outcome.

KKR Delays Fundraising Drive

This post is by Dan Primack from Pe Hub Blog: Firms & Funds

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Kohlberg Kravis Roberts & Co. will not begin raising its next North American buyouts fund until 2010, peHUB has learned. The buyout giant had originally planned to begin marketing earlier this year, but has since thought better of it. Worth noting that this is an informal postponement, as KKR never actually got to the point of sending out private placement memoranda.

Why the delay (informal or otherwise)? Two reasons: First, it’s just very difficult to raise big buyout funds right now, particularly from traditional backers like public pension systems and university endowments (although it did just manage to close a hefty new European fund).

Second, KKR still has more than $5 billion of dry powder from a $17.6 billion North American fund raised in 2006. That’s a lot of cash, considering that the most recent North American deal it did — a joint venture with recording label BMG — will require a maximum equity check of around $250 million.

I speak a bit more about this in the following video, which also features some new buyout fundraising data from Thomson Reuters:


Apple blocks Palm Pre iTunes synchronisation

This post is by Paul Taylor from Tech Blog

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One of the features that made Palm’s recently launched Palm Pre smartphone stand out in an increasingly crowded market was the ability to sync non-copy protected songs with Apple’s iTunes software.

Much to the chagrin of Apple, Palm’s engineers had figured out a way to build iTunes synchronisation into the Pre – something no other smartphone maker (other than Apple) had managed to do.  This achievement was perhaps not so surprising since many had been recruited by Jon Rubinstein, who helped develop the iPod at Apple before joining Palm in 2007.

After the Pre was announced, Apple issued a rather testy statement warning that, “because software changes over time, newer versions of Apple’s iTunes software may no longer provide syncing functionality with non-Apple digital media players.”

Sure enough, on Wednesday this week Apple rolled out an iTunes update – iTunes 8.2.1 – which, Apple said, “addresses an issue with verifying Apple devices.” Translation: The new version blocks the iTunes sync feature built into the Pre.

There are of course workarounds, including copying songs over manually from a PC or Mac using the USB connection, or using one of several third-party synchronisation packages, but none are quite as simple.

So what was the value to Palm of ensuring that the Palm Pre smartphone could sync with Apple’s iTunes, albeit for just five weeks after the launch? Interestingly the stock market provided a clue.

Investors wiped almost 5 per cent or $400m off the value of company when trading opened on Thursday,  although the stock bounced back to close 1 per cent higher at $15.06 at the close and is still up more than fourfold this year.

British Air Raise £600 M, Cable & Wireless Up

This post is by 123jump.com Staff from 123Jump.com: Market News

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British Airways after denying for months it needs additional capital raised £600 million to cover the mounting losses. Miners closed higher after the rise in copper and other base metal prices. In the third year, more shareholders voted against the controversial bonus plan at Cable & Wireless.

Silicon Valley Smackdown Over Twitter Leak and Its Handling

This post is by Connie Loizos from PE Hub Blog: Venture Capital Deals

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By now, pretty much everyone who cares about the startup Twitter knows that a French hacker managed to access both some of the company’s confidential and personal documents last month.

We know because on Tuesday night, the individual, a Frenchman who uses the handle “Hacker Croll,” sent several hundred confidential Twitter documents and screenshots to TechCrunch, after French blogger Manuel Dorne, who claims he received the documents first, decided not to post anything other than a few screenshots.

“I don’t want to cause damage to Twitter or to help their rivals,” Dorne told the BBC yesterday.

TechCrunch’s decision to publish a number of those same documents — including the original pitch for a mundane-sounding Twitter TV reality show; an internal financial forecast that highlights Twitter’s 2013 projections (1 billion users, $1.54 billion in revenue, 5,200 employees and $1.1 billion in net earnings); and internal strategy memos listing year-end goals, like establishing a reputation system — has had tech watchers abuzz for days over TechCrunch’s ethics, or lack of them.

Before posting anything, Michael Arrington explained to his readers that his staff and TechCrunch’s attorneys were working closely with Twitter and its attorneys on striking a balance around the “right way” to go about publishing the information that TechCrunch was sent.

Ultimately, however, Arrington said that TechCrunch was making the same decision that many news organizations — most of which are leaked information regularly  – make every day. As long as TC wasn’t publishing anything that could hurt Twitter, its employees, or anyone who’s interviewed at the company and could do without being exposed as a one-time candidate, he didn’t see the conflict. “[C]ertainly, it was unethical, or at least illegal or tortious, for the person who gave us the information and violated confidentiality and/or nondisclosure agreements. But on our end, it’s simply news,” he wrote.

For my part, I’m not sure that the information served any greater good. Still, I understand why TechCrunch moved in the direction it did and I’m happy it’s chosen to work closely with Twitter in ensuring that nothing published could materially damage the company.

Plenty of folks in Silicon Valley aren’t nearly so ambivalent, however. In fact, friendly seed-stage investors Josh Felser, Chris Sacca, and Travis Kalanick have been publicly expressing their disparate opinions on Twittergate all morning — via “tweets,” naturally.

Sacca, a Twitter adviser, thinks TechCrunch should have kept mum on what it was sent and told Kalanick a few hours ago, “Your characterization of news outlets trafficking in stolen goods really requires understanding what ‘stolen’ means,” and “Trav, if you’re going to play lawyer, go read up on what a trade secret is (it’s a very specific term).”

 “Thx,” tweeted Kalanick in response. “I have read up on trade secrets this morning. It is a specific term & if I’ve missed something here, pls make the argument.”

Later, when Sacca said he was signing off, Lakanick added, “respect ur opinion but if u disagree w/ [Arrington] publishing any of it u are in conflict w/ what most news orgs in the country do every day…again if there is an arg to be made make it… u can’t mk ur pt by saying ‘You’re wrong and I’m going to take my toys and go home.’

Felser, who’s been chiming in occasionally from France, is meanwhile siding with Sacca and Twitter, writing Kalanick via the add-on Firefox application Power Twitter. “I know there is precedent 4 [Arrington] to publish the stolen twitter files but it just feels wrong 4 techcrunch to profit from hacking.”

He added in a follow-on tweet: “I know that news orgs publish illegally obtained info but our community should frown on tech piracy not reward it.”


PE Mergers a Reality? Edgewater Sells To Lazard

This post is by Erin Griffith from Pe Hub Blog: Firms & Funds

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Investment bank Lazard today announced plans to purchase Chicago-based Edgewater Funds, in what is only the third example of a private equity firm takeout that I can think of. This begs an obvious question: Why?

The press release says that Edgewater, which makes growth-oriented investments, will “compliment Lazard’s Financial Advisory business in the Midwest.” Other than Lazard’s desire for a Chicago office, this tells us precisely nothing, which is just how press release writers like it.

The less-obvious question is: What happens to Edgewater’s current efforts to raise $750 million for a new fund? It entered the market last year and has only raised $153 million as of June. Maybe that vehicle will be scrapped in lieu of a new, Lazard-branded fund. The press release says Edgewater aims to “leverage” the Lazard brand, but that seems to be in reference to portfolio company expansion.

We’re still waiting to hear back from Edgewater or Lazard for any available color on the deal. In the meantime, let’s look at how two past PE mergers are faring:

In 2005, Apax Partners took over Saunders Karp & Megrue. Not too long after the deal closed, Alan Karp, who had become the firm’s co-CEO in the merger, and U.S. consumer head Chris Reilly left to form a new middle market buyout shop, called KarpReilly. Seems the independent buyout pros didn’t like having a corporate parent to answer to.

The other example is Metalmark. The firm began life as an in-house unit of Morgan Stanley, until spinning itself out in 2004. Three years later the firm agreed to sell to Citi Alternative Investments. Since then, Metalmark appears to have existed without incident under the Citi umbrella.

So there’s a success and a (slight) failure. By that measure, Edgewater has 50/50 odds of success under Lazard.


Metalmark is no longer alone

PE Firm Mergers Are a Bad Idea. Here’s Why:


Orange Juice Prices Spike While Coffee Drops

This post is by Paul Hickey from Bespoke Investment Group

Click here to view on the original site: Original Post

As shown below, orange juice futures have soared to overbought levels over the last couple of weeks while coffee futures have collapsed. Here is a story we found that tries to explain why orange juice has taken off, but we couldn’t find any other news that would cause such a move. We decided to plot the ratio of coffee to…

Bank Investing: The Law Of Unintended Consequences

This post is by WSJ.com: Private Equity Beat from WSJ.com: Private Equity Beat

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It’s not just private equity firms that are new to bank investing that are displeased with proposed Federal Deposit Insurance Corp. guidelines governing how they can do deals. Long-time, proven investors in financial institutions are also upset.

fdic_E_20090716164328.jpgBloomberg News

In a comment letter regarding the proposed rules, veteran bank investor Banc Funds Co. says the proposal might well inadvertently affect its deals.

Charles Moore, president of the Chicago-based firm, says in the letter that Banc Funds has been investing primarily in community banks since 1986 and has traditionally capped its ownership interests at 9.9%.

“We have exercised no control over any of those companies,” Moore writes. “We have neither sought nor accepted board seats, management roles, special voting covenants, veto control over management actions, solicited proxies, or joined a voting group.” Additionally, he writes, the firm invests directly from its funds, and not via more controversial silo structures.

The approach is different from that of many other private equity firms, which typically seek control so that they can effect operational changes – a distinction Moore acknowledges in his letter. “The pool of bank investors in the United States is not homogeneous, and the pool of private equity investors is not homogeneous,” he writes. He wasn’t available for comment.

Moore suggests the FDIC should differentiate between firms like his and others that take bigger stakes in banks. “We would request that you include a brightline test delineating which investors will be subject to the qualifications and associated responsibilities,” he writes, suggesting that investors with a less than 9.9% interest should be exempt from the requirements.

Without the exemption, minority investors would find their ability to invest “eliminated,” the letter says. “The proposed qualifications would be very onerous for us.”

You can see all comment letters on the proposal here. The comment period ends Aug. 10.

Do Not Forget to Specify, When Time and Place Shall Serve, That I Am an Ass

This post is by The Epicurean Dealmaker from The Epicurean Dealmaker

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“Dost thou not suspect my place? Dost thou not suspect my years? O that he were here to write me down an ass! But, masters, remember that I am an ass; though it be not written down, yet forget not that I am an ass. No, thou villain, thou art full of piety, as shall be proved upon thee by good witness. I am a wise fellow; and, which is more, an officer; and, which is more, a householder; and, which is more, as pretty a piece of flesh as any in Messina; and one that knows the law, go to; and a rich fellow enough, go to; and a fellow that hath had losses; and one that hath two gowns, and everything handsome about him. Bring him away. O that I had been writ down an ass!”

“Who have you offended, masters, that you are thus bound to your answer? This learned constable is too cunning to be understood. What’s your offence?”

— William Shakespeare, Much Ado about Nothing

Late yesterday, I published on this site a post commenting on an article by one Julie MacIntosh of the Financial Times concerning the rise of boutique advisory shops. I thought the article was well-balanced, informative, and well-written, and I said so. However, in addition to a rather lengthy disquisition on a couple salient points which I thought Ms MacIntosh had missed or underemphasized in her piece, I chose to sprinkle a few jibes and asides into my post that focused on certain possible aspects of Ms MacIntosh’s putative appearance. While you may question my judgment, I thought they added a little harmless and humorous spice to my essay.

If professional journalist Heidi Moore‘s rapid Twitter messages to me are any indication, however, she, for one, did not agree:

moorehn @EpicureanDeal “Either that, or she has really nice tits.” That’s in bad taste. She’s a professional journalist and that’s demeaning.
about 17 hours ago from web in reply to EpicureanDeal

moorehn @epicureandeal Not to mention that the only spur for your idiotic leering seems to be that she wrote an article that you read.
about 16 hours ago from web

moorehn @epicureandeal This isn’t the old days at the client with a Solly AmEx card in the strip club. Get over yourself and get into this century.
about 16 hours ago from web

And, if I had any doubts as to her meaning, I suppose they must have been allayed by the following direct message:

moorehn You really come off like a tremendous asshole in that piece. Maybe rethink the whole “demeaning any female who dares write abt IB” thing.
about 17 hours ago


* * *

I suppose I could try to defend myself by pointing to the long tradition of using unreliable, unintelligent, and even despicable narrators to relay comic messages, or to the fact that to underline the inanity of my “idiotic leering” I footnoted the most egregious aside in my post with a ludicrous industry joke older than dirt. I suppose I could point to previous writings on this site which undermine a casual perception of me as an unrepentant sexist or chauvinist. Finally, I suppose I could point to the barrelfuls of vitriol, invective, and naughty language I have spilled here in pursuit of countless idiots, stooges, and scoundrels—virtually every one of them male. But that would be a waste of time. It’s hard to convince someone you were trying to be funny when they don’t believe you were.

So let me make a couple brief points.

The intersection of female beauty and male power is one of the most ancient themes in the never ending Battle of the Sexes. The attraction of older, successful men to young and physically attractive women, and the complementary attraction of young women to powerful, wealthy, and successful men, are powerful physical and emotional forces that operate somewhere near the level of our cells. They will never be domesticated out of our beings, no matter how feminized our culture may become. For proof, I only have to look at the 50 to 70-year-old squillionaires squiring 30-year-old wives and children young enough to be their grandchildren to school every morning around my neighborhood. (Or, for those of you farther from the center of the universe, Donald Trump.)

Layer on top of that substrate a situation wherein a young, fresh faced female journalist—no matter how professional—eagerly interviews a wealthy, powerful, testosterone- and hubris-soaked Captain of Industry for his wisdom, insight, and experience, and you have a combustible combination. The man—unless he is dead, or on estrogen therapy—cannot help but be flattered to have an intelligent, attractive young woman hanging on his every word and nodding and laughing in vigorous agreement to every bon mot, joke, and opinion he cares to regale her with. The woman—unless she is dead, or on testosterone therapy—cannot help but sense the power and charisma radiating off her distinguished interviewee, and be highly conscious of his wealth, power, and eagerness to please and impress her. This is heady stuff, for both man and woman. Just ask Suzy and Jack Welch.

To deny that this tension occurs in such a situation, no matter how suppressed it may be in any particular instance, is just foolish. It is also foolish to deny that some female journalists over the ages have been more than happy to use what my grandmother used to call their “feminine wiles” to squeeze just a little more juice out of the lemon than their interview subjects would normally care to share. (Not that these horndogs aren’t more than capable of defending themselves, mind you. I ask for no pity for powerful men.)

So when I noted that Ms MacIntosh authored a piece incorporating interviews with many of the most powerful, distinguished, and wealthy investment bankers on the planet—bankers who, by dint of their position at the top of their own firms, are in control of their own destiny to a degree not shared by other, equally wealthy peers at larger firms—my subliminal antenna perked up. I have never met Ms MacIntosh, and did not know what she looks like before this morning, so she was a tabula rasa, so to speak, for the fevered imaginings of my brain. I sensed the potential tension inherent in the situation, and I shamelessly exploited it for comic intent. So shame on me.

* * *

But honestly, Dear Readers, I really don’t feel any shame. I suppose I am sorry that Ms Moore took offence, and I would be genuinely sorry to learn Ms MacIntosh suffered any distress from my puerile scribblings. I hope that she has developed a tough enough carapace to withstand any paper bullets of the brain that naturally wing their way toward her in her role as a public commentator and journalist, but I take no particular pride in adding to the shell, if I did so.

But let’s get real for a minute. This is a blog, people. This is a blog written by a pseudonymous investment banker who curses, exaggerates, and generally takes any and all liberties available in pursuit of an (admittedly confusing) agenda of both entertaining and informing his Dedicated Yet Quite Tiny Audience, usually not at the same time. It is a vanity project. It is a labor of love. It is something to do when I am bored, which has been happening with distressing frequency during these last several months. If you come here looking for evenhandedness, balance, and facts, I have to ask you just one simple question: What the fuck are you thinking?

So if my volatile ramblings insult, annoy, or offend you, do what countless others before you have done. Cut me off, drop me from your RSS feed, unfollow me on Twitter, and do anything else you can to erase the knowledge that there is someone as cutting, uninhibited, and uncivilized as me wandering about the intellectual landscape, or at least the little corner of it demarcated by Wall Street and Broad. Don’t worry: I won’t take offense if you leave.

In the meantime, I will soldier on regardless, happily unconcerned what the disapproving classes think about my maturity, sexual politics, and preferences in female body parts.

Besides, anyone who really knows me knows I’m a leg man.

© 2009 The Epicurean Dealmaker. All rights reserved.

Tech Stocks Rally

This post is by Paul Hickey from Bespoke Investment Group

Click here to view on the original site: Original Post

Is it 2003 all over again? Don’t look now, but the tech-heavy Nasdaq 100 index is up 25.53% year to date. And both Google and IBM reported stronger than expected earnings after the close tonight, although GOOG is currently trading down while IBM is up. As shown in the chart below, the index just took out its early June highs…

Midweek M&A Madness

This post is by Erin Griffith from PE Hub Blog: Buyout Deals

Click here to view on the original site: Original Post

Now that the weather has finally warmed up, plenty of M&A bankers are hoping the market for deals will as well (look no further than Goldman Sachs, where YOY M&A fees were down 54% this quarter, for proof).

We’ve noticed a few more targets coming to market in recent weeks and have compiled a list of some of those we’ve come across. Our sources are various news reports and the Buyouts “Seeking Buyers” list.

The following companies (among many others) are either formally considering “strategic alternatives,” reported to be on the block or are rumored to be in sales talks. For prior lists, see below, and send any additions my way.

Platinum Group Metals, based in Vancouver, is pursuing strategic alternatives. The business holds a 74% interest in large scale Platinum Group Metals reserve and resource in South Africa.

Athabasca Potash Inc., a Canadian business, is using CIBC World Markets Corp. and Genuity Capital Markets to help it look at a potential sale.

First Gold Exploration Inc., based in Quebec, has retained Minvestec Capital Corp. to help it explore strategic alternatives.

Ukrop’s, a family owned grocery business in Virginia, may be for sale, according to local reports.

Safilo, a luxury eyewear maker, expects to sell a minority stake in itself by the end of the month.

Bashas’ Inc., Arizona’s largest family-owned grocery chain, has filed Chapter 11 bankruptcy and will pursue a sale of the company.

McGraw Hill has confirmed it will explore a potential sale of BusinessWeek.

Breakingviews.com is shopping itself. Thomson Reuters was named as a potential buyer.

Springer Science and Business Media, owned by Candover and Cinven, continues to shop stakes in itself. Bids for 49% of the business from TPG, EQT and a joint bid from Carlyle Group and Providence Group, fell short of expectations.

Rumours persist regarding the sale of Duracell and Pringles, owned by Procter & Gamble. P&S tried to sell Duracell around two years ago but only succeeded in exiting its coffee business, Folgers. The consumer products giant also hired Goldman Sachs to sell its pharmaceutical business, which includes the osteoporosis drug Actonel.

In addition to its attempt to sell The Travel Channel, Cox Enterprises is still looking for buyers for its newspapers in North Carolina and Texas.

Perella Weinberg Partners has joined the bidding group which includes Crestview Partners and Richard Li, for the assets of AIG’s asset management business.

Electroglas Inc., a supplier of wafer probers, will sell itself. It has hired Needham & Co. to advise it on its 363 sale.

Bankrupt Oscient Pharmaceuticals Corp. is seeking potential buyers for its approved drug, Antara, which deals with cholesterol.

Bridge Resources Corp., based in Alberta, has engaged RBC Capital Markets to assist with a review of strategic alternatives for its North Sea Southern Gas Basin exploration portfolio.

Publicly-traded Health Net is exploring strategic alternatives.

Bankrupt Jennifer Convertibles, a New York-based furniture company, will sell itself with advisory from TM Capital Corp.

EnerJex Resources, Inc., based in Kansas, has retained C. K Cooper & Company to help it evaluate strategic alternatives.