Not Only am I Alive, But Big Things are Happening

In the time since I’ve posted last, there have been two major “deals” in the works. One sort of died on the vine and the other has started as of today. I penned the first of what I hope will be many well-received articles over at the Huffington Post. The topic is one that I’ve touched on before, and written pieces that are related to this in the past. This article, though, meshed well with their Obama coverage coordinated to be one year after the election. Now that I’m done “holding off” on writing something until I know what people will want from me, I can start to write here and there regularly again… Sorry for the delay.

Please go check out my inaugural Huffington Post article here.

 

Making the Financial Networks Useful

Starting with the little spat between John Stewart and CNBC I started to think seriously about how the financial news stations are extremely broken. Now, I’ve mused on specific parts of this equation before. However, I’ve been writing this post, a more complete look, for a while. So, imagine my surprise when Barry Ritholtz beat me to the punch! Barry’s look, though, seems to focus more on the “low-hanging fruit” when it comes to improving CNBC. Personally, I think there is a massive overhaul needed. So, instead of taking the same approach as Barry (telling a network how to improve itself) I’ll focus on describing what my ideal financial news network would look like.

1. Make no buy/sell recommendations. Honestly, the shameless self-promoters that  go on CNBC are quite often wrong. There is no accountability for recommendations–obviously, the logistical issues are both important and daunting. However, there is a much larger problem that is most observable with Jim Cramer. I have no doubt Mr. Cramer is intelligent, just as I have no doubt that his show is useless drivel–he needs to make so many recommendations just to fill his airtime that no one ever sees his performance, CNBC doesn’t track it, and all the studies that look at his recommendations need to make huge assumptions. But, the easiest explanation of why recommendations are bad comes from a post entitled Lawyers vs. Detectives. Clearly, also, there doesn’t exist the air time or continuity to track and update recommendations correctly–the logisitical issues I mentioned earlier. And, to be frank, any idiot can just dump ticker symbols onto the screen and say a few sentences about why those ticker symbols are good or bad… and be completely wrong or stupid. The point of a good finance network should be to bring reporting and analysis to light. (Further evidence: look at Barron’s experts who, as a whole, underperform passive indices. And they are tracked and asked for analysis of their picks regularly.)

2. Emphasize investiagtive journalism. Financially literate, intelligent people can add a whole lot of value when it comes to explaining and digging into economic and financial stories. Think Kate Kelly and her three part tick tock of the Bear Stearns situation as a good example. Think of the deep look into the mortgage industry that NPR did. Think of the detailed profiles of various individuals at the center of the finance world. Clearly, there is a lot of value to be added merely by going beyond the puff piece. Right now what people get 90% of the time when it comes to finance reporting pertains to what the Dow Jones did or is doing for the day. Guess what? When stocks go up, it’s because there are more buyers than sellers. When they go down, vica versa. Trying to divine more than that from the market move on a given day is as useless and surface as it often is wrong.

3. Hire experts and not personalities. I’ll tell you a secret… Maria Bartiromo adds no value if you know anything about markets and finance to start with. I’ve seen her provide an outlet for executives to provide narrative versions of their press releases several times. There is never a question I’ve heard her ask that was probing or had an answer I didn’t already know from reading the NY Times or the WSJ. She doesn’t even understand journalism very well! The entire lineup of attractive and vacuous seat-warmers add no value. Remember this little episode with Fox Business news? Now, that’s a little different because it was live, breaking news. However, a thinking person probably would have stopped before talking about how great a move it was for Apple to buy AMD, despite the fact that such a purchase would have been “WTF?!” move for Apple–the current anchors just talk to talk. I even remember a CNBC anchor pulling up a guest’s chart on a segment (the network had been hyping this segment for a few hours–theoretically the anchor had prepared for it) and asked why, if things were so dire, the chart showed such a strong rally/uptrend. Well, the chart was showing spreads for a certain class of bonds–and, as we all know, when yield goes up, price goes down! She was anchoring a segment on fixed income (and had already been chatting about the topic for a few minutes!) and still couldn’t figure out what was going on in a very simple chart… Surely there’s room for improvement!

The model, though, for financial news anchors should really be an engaged, credentialed moderator. Thomas Keene, honestly, is a great example of this. I don’t catch his show (or podcast) as often as I would like, but whenever I do it’s clear he’s intelligent, familiar with the underlying issues, and that he views his job as getting his guests to make their case as well as expose the “other side” of the argument. A network should be able to create a lineup of intellectual experts (with relationships and enough personality to be interesting) in equity markets, corporate credit/finance, economics, macroeconomics, currencies, commodities, personal finance, etc. Networks haven’t seemed to figure out that, unlike human interest stories and traditional news, having some domain expertise is vital to being able to ask the right questions and get the underlying reasoning out into the open.

4. Go beyond soundbites and short on-air segments. I think finance is much more complicated than normal news, in the same way that political news usually is more complicated: there are lots of underlying dynamics, complex rules, and large parts of the process are hidden from view and established through precedent. Unlike a plane crash, terrorist attack, or story about some zany celebrity antic, financial news that focuses on the “what” instead of the “why” is dull, uninteresting, and useless. This is why financial news, in the first place, tries to explain what’s going on. So, it should only be natural that financial news, if it needs the “why” to be useful and is more complicated than garden-variety news, needs to allocate more than a few minutes to a given issue. No one is going to understand what’s going on with commercial real estate in five minutes. CDOs can’t even be explained in ten minutes, let alone covered in the context of the credit crisis in that time.

How can a financial news network, then, ensure that there is enough depth to a story or segment? Well, time is obviously a big piece of the equation. To revisit a prior example, Thomas Keene usually has guests on for 30+ minutes. However, media and a command of visual aides and interactive media online is also important. Some of the most compelling explanations of how CDOs work and different aspects of the credit crisis are graphics. Further, finance is based on data–models, data highlighted in charts and stories, and other material should all be made available online.

5. Embrace new media. As far as I can tell, no financial news station has a strong online presence. If a strong group of credentialed experts is the backbone of the network’s on-air talent (see #3 above) then they should have deeper, more valuable insights than what they can cover on the air. These thoughts should be blogged about, tweeted, and whatever else to make them as accessible as possible–more and more the “conversation” is online and to join it one must have their thoughts online. The NY Times does a good job at this–their columnists and reporters write all sorts of blog entries ranging from deep, researched pieces to random musings and clever one-line arguments.

Further, with my idealized network, all the content from on-air segments would be put on YouTube and made available to whomever wants to link or embed it. Openness and access would be key strategies for the network. A part of this is also making the on-air personalities and others who contribute regularly interact with the public as much as possible (currently, Twitter is a great medium for this).

6. Emphasize standards–make objectivity, fairness, and accountability the network’s core values. Barry talked about this in his list:

7.  Fact Check: An awful lot of things on air get stated with authority and confidence. Much of them are little more than junk or pop myths. Why is it that the more dubious a proposition is, the greater the confidence the speaker seems to muster? Consider fact checking as much of the statements that are made on air as possible, and making frequent corrections.

Now, this ties in with some of what I’ve said above. However, my point goes beyond this. Executives should not want to go one my idealized network when they need to “get out a statement”–the “narrative press release” as an interview is useless and doesn’t hold the subject of the interview accountable for their words. Similarly, when a guest comes on and makes an assertion that is incorrect it needs to be challenged at the time and corrected later–I clearly take a harder stance on this issue than Barry does. If people will be making their investment decisions based on information presented on the network and then they need to trust the network–viewers need to know the network strives to prove correct information and puts every effort into doing just that. Also, the rules of “journalistic engagement” for the network (things like policies on anonymous sourcing) should be public.

7. Make education a pillar of the network. Finance and markets, as I describe in multiples places above, are complicated and often counter-intuitive–a fair amount is “inside baseball.” Having a section of the website and some on-air time dedicated to explaining both terms and important but obscure facts and market dynamics is an important service. Simple things, like bond math, are important and static–these concepts (that subtly undergird all other topics–remember the anecdote about the misread chart above) should be revisited whenever absolutely necessary while being available at all times.

If these simple pieces were all followed, I believe there would exist a simple to follow, engaging financial network that would add a ton of value where there currently is a void. Then, maybe, the other networks would need to follow suit. I won’t hold my breath.

The Post Pipeline: June 12th, 2008

Okay folks, I’m not dead. I moved, went for a reunion, and other assorted things. I said before that I wanted to start posting my post ideas… hopefully some of you will enjoy thinking about them while I do. So, without further adieu, the first “post pipeline”

1. Why facebook should buy Yelp — As I think about the problem with facebook monetizing it’s traffic, the issue seems pretty clear. There is no link between social networking and commerce… I’m your friend, great. Now, add something focused and with some commercial application, and you can sell ads better.

2. Why Google should buy the New York Times — This has been rumored, but I came up with it on my own, I promise. Firstly, Google can monetize traffic more effectively. Second, the times has built a very sophisticated content management system. Google can leverage that.

3. A surprise multi-part series. This will essentiall break down something very complex, piece by piece. I hope this will be a great addition to the regular posts I write.

4. The role of ego in finance — This is an important trait that allows bigger, better, and innovative things. It’s an important thing, so it should be discussed. Obviously, there are perils.

5. A series where I argue two sides of one issue. Been batting this one around for a while. So far, the title I have selected is “Devil’s J.D./M.B.A.” … play on advocate and brings business into it. Please help with the title… please!

6. A post on Sovereign Wealth Funds — I’m skeptical this one will materialize. It’s interesting to think about some things relating to SWFs, but this keeps dragging on. We’ll see…

Some interesting things:

A. Consumerist — Go there right now. It’s simply amazing. The personal empowerment and the blunt forced instruments afforded to a consumer looking to help themselves (executive info, B.B.B., consumer protection laws and rights, etc.) are extremely interesting as they have that human drama element and have a “big guy” versus the “little guy.”

B. Concept for Mobile FireFox — Simple and amazingly powerful. Very intuitive. iPhone, are you listening?

Here’s Some Advice, Pre-Salted

Having been recruiting and interviewing people for a few years now, I get constant questions asking about careers on Wall Street. For the lucky few who find their way into the right career, right industry, and the right job, then it’s not something they probably ever ask about. However, for the students and others looking, it’s a daunting task to sort out the options. What are the differences in working environment? What are the things I should be considering? Large firm or Small firm? Trading, Sales, Investment Banking, or Private Equity? These are all personal questions, but here is some advice I think will be useful regardless of what you seek.

1. The people are important. Your work environment will depend on the people found within it. Your entire group and the people with whom you interact are all integral parts of the equation. You don’t have to love everyone you work with, but you have to feel that they understand your position, are worthy of your respect and will treat you fairly, and that they are motivated on a personal level to see you do well. Obviously, since the only way to know these things for sure is to work with them, it’s difficult to know these ex-ante.

2. Be a team player. There are far, far too many examples of people building walled gardens in the world of finance. The thought process is, “If I know everything, and other people don’t, then I’m the most valuable person.” Let me tell you how the story usually ends: someone senior figures it out and the person hoarding information is usually pushed aside, fired, or moved. Not only that, but when the person is doing everything critical, they become a bottleneck, and urgent matters crush them personally and professionally. Show everyone from the start you are a team player. Involve people more junior than you and solicit input and feedback from people at or above your level. Offer to help and ask for help. It’ll get you a long way personally and professionally.

3. Never stop learning. Don’t just learn how to do what you’ve been doing well and stagnate. There is a constant evolution in the world of finance. Do you know what happened to all the people who were working with sub-prime mortgages and only knew their end of the business? Nothing good. You can’t evolve in your job if you don’t learn anything new. As innovations occur, understand them, the motivation behind them, and what they mean for the market/industry/system. Once you start to understand why people improve on existing structures, techniques, or financial technologies you’ll be in a position to innovate yourself when you see an opportunity.

4. Keep in touch with people and go out of your way to meet new people. This one is tough because it’s largely a personality issue, some people are comfortable with this and some people aren’t. Almost every hedge fund and every private equity firm was started up by a handful of people, deciding to cast their lots with each other. Now, these mega-success stories aren’t representative, but it also shows that one never really knows which relationships and ties will be most vital and beneficial to one’s future. Also, it’s hard to point to any example in my experience where knowing or meeting someone was a bad thing.

5. Don’t take any magic advice. There isn’t any. Everything that leads to success is slow and common sense, when stated plainly enough. Look for magic bullet somewhere else. Every story about someone who made a billion dollars in three years has an element of luck that is spun into certainty by good story telling. If you keep trying to be in the right place at the right time you’ll miss out. A strong knowledge base, solid work ethic, and a deep understanding of what’s going on around you and why is the best way to anticipate the next need. Keep in mind, as well, that the selection bias in the stories you are told obviously favor the success stories.

6. Have a backup plan. This business is both cyclical and fickle–the people you need in a boom aren’t the same people you need in a bust. Quarterly reporting means that sometimes things are rushed. Political and irrational concerns play into personnel decisions, resource decisions, and decisions on business focus. Any one of these changing can mean an adverse event and a sudden turn for your career. Headhunters are your friend but the firm‘s enemy (in general, some aren’t anyone’s friend)–talk to the good ones and keep in touch.

7. Know and demonstrate your value. When it comes time for recognition, promotions, or compensation you should know the facts going in. Take notes of what you’ve done. Inform your boss of what you’ve contributed, don’t assume others will do it for you (keep it appropriate and infrequent, but better to tell him something he knows than have it go unsaid). Obviously your mileage will vary and this is a series of personality assessments, but the principle is a constant. You lose your right to complain about something if the right people don’t know about it (vague, but meant to be general–think of it as not voting and complaining who won the election, you can’t).

9. Know what’s going on with your peers. Guess what a big theme on the street is? Comps (comparables). Guess what you get from the company you work for and your boss? Whatever they have to give you to be happy, and no more than suits them–it’s not personal, it’s a business. You should be talking to your peers to know if they are progressing faster than you, slower than you, or differently. Learn about how they handle problems and what works for them. It’s collective experience, and it gathers much faster than individual experience.

10. Get your foot in the door. I have only seen one person get hired for a non-support role on the Street that where the person wasn’t of college or from another firm on the Street. This person was one year out of college, at a major technology company, and even then was second guessed. Entry level jobs have a profile that recruiters look for, and some places have policies against taking people that have work experience into these entry-level jobs (obviously not including people graduating with M.B.A.’s who have prior work experience). I also haven’t seen a job listing that doesn’t call for relevant work experience. Even jumping between disciplines within finance is really difficult (P.E. to trading, or sales to banking, etc.). Unfortunately, this is the reality.

11. Know your priorities–prioritize money, career, and lifestyle early and often. This probably should have been #1 or #, but that’s life. If you wan to get paid and be a mercenary, then do that. If you want to be career oriented, then take that path. Either way the more you let it be known what your priorities are, people will associate those with you. If your priority is money, people will come at you with guarentees and higher risk positions. If your priotity is career, people will keep you in mind to take leadership opportunities and advance (with a higher potential for failure and a career setback). Keep in mind that mercenaries get paid more, but their high compensation paints a target on their back. Career-oriented employees can find themselves not being paid at the top tier, but with a bigger job. Tradeoffs all around. Whatever your focus, though, ensure that you’re good at what you do and advancement (up the money ladder or the corporate ladder) will come (with varying degrees, for maximum benefit add a few ounces of luck too).

The Most Empirical Hedge Fund

Here’s an idea for a hedge fund. First, you go out and hire some financial journalists. Next, you go out and hire a whole bunch of people with various degrees of financial training from various roles within the finance industry (research analysts, traders, portfolio managers, etc.). And last, you hire about twenty behavioral psychologists. Then, the finance people sit down and read all the news they can on companies. The psychologists analyze how they react to the stories and their general sentiment. The financial journalists then write stories showing different possible future developments and the finance people read those while the psychologists measure their reaction and mood. One can then estimate how much risk there is versus reward in the scenarios coming to fruition and trade based on that. Also, if some of the fictitious scenarios come true, or come close, you’ll have some data on how things should play out. Obviously you’ll need a lot for the proof-of-concept to be verifiable and get investors, but it’s simple enough–instead of trying to figure out why people react certain ways you’ll be saying how they react.

As for the name of the fund? How about “Couch Capital” or “How-I-feel-isn’t-important-it’s-how-you-feel-that-matters Global Opportunity Fund”?

You’ll notice your paycheck is lower. We have reformed it!

The F.T. had an article yesterday about  an organization (that I’ve never heard of) coming up with “code of best practice” to establish banker’s pay (note that the F.T. mentions rules would be geared toward traders, so much like most of the financial media, they think everyone at an investment bank is a banker). Obviously it’s a disadvantage for whichever institution institutes these things on their own–if you’re going to be paid less and be at a long-term risk for something you do at one institution, but not at another, then you’ll avoid working there. So, here’s my question: At what point is a bunch of bank’s, getting together to talk about a new code for pay, establishing a “code of best practice” versus being anti-competitive?  Just a thought.

I Could be Wrong, But I Think I See a Pattern

Well, let’s take a quick survey of the issues that have been plaguing the capital markets. (Note, these aren’t all completely in order, but the spike in “mind-share” of any given story should correspond with the order.)

First there is sub-prime. This problem can best be described as fundamental. I won’t bore anyone with the issues plaguing this market, they have been well documented and aren’t even the least bit vague. Go to the always complete Calculated Risk to read all the details. Do you know how banks would make money off of sub-prime securitizations? Once a group of whole loans was securitized, the banks would keep the bottom most piece–it would get marked to a high yield at a conservative speed and it would get held on balance sheet. Banks would be monetizing the mismatch between the bonds issued and the interest rates being paid by the sub-prime loans. Essentially these structures allowed a more leveraged return for their equity. To do this, the mismatch between shorter and safer assets was exploited.

Second, there was the C.D.O. issue. This was where enterprising structured product people went out and issued bonds with low interest rates off of underlying bonds with higher interest rates. This was done by creating credit support and safety for AAA bonds, which, due to the (perceived?) lesser risk garner less of a need for returns. The party holding the “equity” tranches take the difference between the underlying and the bonds issued. Essentially these structures allowed a more leveraged return for their equity. To do this, the mismatch between shorter and safer assets was exploited.

Third, there was the S.I.V. issue. This was an issue where some banks were funding longer liabilities with shorter ones and exploiting the difference in rates required for a more senior, safer (again, perceived?) set of bonds issues off of the underlying bonds. Sub-prime mortgage bonds were backing some of these vehicles’ liabilities, thus the problems. Essentially these structures allowed a more leveraged return for their equity. To do this, the mismatch between shorter and safer assets was exploited.

Fourth, there was an issue with overnight liquidity for banks. Here banks would borrow on a shorter time frame to fund liabilities by borrowing overnight. The Fed then lowered the discount window rate to facilitate borrowing because overnight funding had spiked and there was a major shortage of liquidity. Banks borrow overnight to more efficiently fund their balance sheet to match their ever-changing cash needs. To borrow more than they need would be “bad” if they paid interest on too large an amount, this would lower their earnings. By only borrowing overnight banks’ liabilities are minimized, and they maximize the spread between what their assets are paying and what the banks are required to pay to hold all the necessary capital against said assets. This works until liquidity is horded by banks and they can’t fund their liabilities when the current funding comes due. Essentially these structures allowed a more leveraged return for their equity. To do this, the mismatch between shorter liabilities was exploited.

Fifth, the T.O.B. market began to see problems (actually, a post I discovered on a blog I read, Accrued interest–he actually alludes to the same parallels I’m alluding to here)..  This was caused by bond insurers having less capital and the overall (perceived?) credit quality of insured municipal debt securities declining. T.O.B. programs allow an exploitation in rates that arise from municipal debt securities being structured to provide a higher amount of credit support. The enhanced credit support allows bonds to be issued with different rates and different durations from the bonds that back them. Essentially these structures allowed a more leveraged return for their equity. To do this, the mismatch between shorter and safer assets was exploited.

Sixth, the auction-rate securities market began to hit the skids. This audience probably remembers the WSJ article about the not-that-bad situation involving  some rich people. Well, the way those securities work is actually pretty simple. One takes some long term bonds and auctions off bonds, with a shorter maturity, backed by longer bonds. The interest rate required to take on the risk of default or some other risk during the short term of the auction-rate securities is, obviously lower because the risk is (perceived to be?) lower (isn’t it less risk to bet on something defaulting in the next year versus it’s entire life?). Essentially these structures allowed a more leveraged return for their equity. To do this, the mismatch between shorter and safer assets was exploited.

Hmmmmm…  As credit issues begin to build up, I wonder what might be next? Perhaps commercial paper issued by corporations as their credit quality deteriorates? Maybe real-estate holdings funded by shorter term loans mean to “bridge” to full financing?I guess we’ll find out.