Wednesday, January 30, 2008
This will be important later
by Ken Houghton
We'll come back to this, and it relates to my previous post on measuring uncertainty, but meanwhile RTWT.
Tanta Explains It All to You:
Options theory is applied to mortgages in order to price them as investments. (Strictly speaking, this is a matter of analyzing them so that a price can be determined.) [bold mine; italics hers]
We'll come back to this, and it relates to my previous post on measuring uncertainty, but meanwhile RTWT.
Labels: Calculated Risk, financetheory, mortgage, optionpricing, Risk Management
Tuesday, January 29, 2008
Reputational Risk, in Two Modes
by Ken Houghton
The undercurrent is that one of the company's subsidiaries provides payroll services to a lot of companies and agencies.
Now, there are two things a company working through Chimes/Axium can do at that point. So let us compare examples. The first was sent in early January, within a day or two of the bankruptcy announcement:
That is proactive management. There are quick assurances of the strength of the company, the strength of the contract, and ability of the firm to manage the risk it took on.
The second company's e-mail was sent several days later, without warning, and did not necessarily reach all of those affected in a timely manner (i.e., before they expected to receive a check). Let's do this in parts:
So far, so good. So why are several of us reaching to make certain we still have our wallet?
Let us remember that agencies are generally paid net-30, net-60, or net-90, and build that into their cut of the rate. And they extract concessions from consultants (who often work through an agency primarily because they want to smooth cash flows) on the basis of assuming that risk.
That "would" is worrisome, since any reasonable firm has alternative means of covering the gap—and any other one is suggesting that their risk-management skills, for which they are being compensated by their consultants, is not so good as advertised.
There was, you will note, absolutely nothing in this note so far indicating that the currently-expected payment was not being made. Nor, given the normal timeframes of payment, would there be any expectation that checks in January for December work would be withheld.
I believe this translates to "you should keep working, but we won't pay you."
The reputation of Chimes may be salvageable.* That of the second company appears to be another matter.
*As part of a larger organization, now:
The headline news is that fraud may have destroyed a company.
The largest creditor of Axium International Inc. sued the company's former principal owners on Tuesday, alleging massive fraud and theft a week after the Hollywood payroll service provider filed for liquidation bankruptcy.
In a lawsuit filed in federal court in Los Angeles, investment firm GoldenTree Asset Management said Axium's former principals, John Visconti and Ron Garber, treated the company "as their own personal piggy bank to finance their extravagant lifestyles."
The undercurrent is that one of the company's subsidiaries provides payroll services to a lot of companies and agencies.
Also on Tuesday, Ehrenberg, the bankruptcy trustee, said he had identified potential buyers for the assets of Axium and one of its subsidiary companies: Ensemble Chimes Global, or ECG, a provider of contract workers and other personnel services.
ECG's assets will be auctioned in U.S. Bankruptcy Court in Los Angeles on Jan. 23, Ehrenberg said. The opening bid for the company is $7.5 million. Last year, Axium paid $80 million in cash to acquire Chimes Inc., which was combined with another Axium subsidiary to form ECG.
Now, there are two things a company working through Chimes/Axium can do at that point. So let us compare examples. The first was sent in early January, within a day or two of the bankruptcy announcement:
I wanted to update you on a situation that has recently arisen. As of yesterday, CHIMES has filed for bankruptcy and has closed their doors at all their clients, including ******.
I am writing this email to let you know that while this situation is being sorted out, your assignment at ****** is still intact and you will continue to be paid weekly by *******. We are a large company that can afford to pay employees.
Please continue to focus on your assignment and if you have any questions, please direct them to me and not your ***** manager.
****** will continue to partner with ****** and provide them our assistance as they work through this situation.
As more information becomes available, I will be sure to reach out to you directly to provide you with any relevant updates. [emphases mine]
That is proactive management. There are quick assurances of the strength of the company, the strength of the contract, and ability of the firm to manage the risk it took on.
The second company's e-mail was sent several days later, without warning, and did not necessarily reach all of those affected in a timely manner (i.e., before they expected to receive a check). Let's do this in parts:
By now you are no doubt aware of the recent developments regarding Ensemble Chimes Global's Chapter 7 filing. We are currently in touch with each client that has been using Chimes as their consultant payment system. They have each told us that they are in the process of evaluating the situation and have asked us to please allow them time to determine how to move forward.
So far, so good. So why are several of us reaching to make certain we still have our wallet?
However, we feel that we must inform you of the possibility that monies caught in the gap of being paid to chimes and not paid to ****** or monies not paid yet to Chimes prior to the time of their Chapter 7 filing are in some jeopardy. We sincerely hope that this jeopardy will be eliminated as soon as possible.
Let us remember that agencies are generally paid net-30, net-60, or net-90, and build that into their cut of the rate. And they extract concessions from consultants (who often work through an agency primarily because they want to smooth cash flows) on the basis of assuming that risk.
Therefore we are encouraging our clients to pay ****** directly and pay Chimes ONLY the fee that they are entitled to and nothing more. This would enable ****** to keep all payments due consultant contractors up to date.
That "would" is worrisome, since any reasonable firm has alternative means of covering the gap—and any other one is suggesting that their risk-management skills, for which they are being compensated by their consultants, is not so good as advertised.
They will keep us abreast of all decisions, and we in turn will contact you with the updates. Our payments to your firm are "based upon remittance of funds to ****** from the client covered by that Purchase Order". ****** has reached out to each client for them to provide a guarantee of payment, so that our future payments to your firm will not be held up.
There was, you will note, absolutely nothing in this note so far indicating that the currently-expected payment was not being made. Nor, given the normal timeframes of payment, would there be any expectation that checks in January for December work would be withheld.
We are committed to partnering with you to minimize the impact of this sudden event, while at the same time ensuring that the client's operations are not adversely affected.
I believe this translates to "you should keep working, but we won't pay you."
The reputation of Chimes may be salvageable.* That of the second company appears to be another matter.
*As part of a larger organization, now:
Richard White, president of Beeline, said in a statement that the firm will work closely with Chimes' customers. "We are aware that many Chimes' clients have suffered recent disruptions to their operations due to Axium's bankruptcy filing. We are ready and able to jump in and provide the resources and solutions necessary to get these clients back online and operating efficiently."
Labels: labor, Risk Management, TheoryoftheFirm
Thursday, January 17, 2008
Baseball Rewards Steroids Cover-Up Team Leader
by Ken Houghton
That's two days after his "we weren't responsible, even though I 'take responsibility' schpiel:
Yep, "all of us" have to take responsibility. The buck stops...with Barry Bonds? And there's good reason to doubt that those "thousands of times" have been for more than a millisecond:
Fortunately for Bud S., but not for us, Congresscritters ask questions the same way they are asked them by the Tim Russerts and John Kings of the world:
The late Doug Pappas's countdown clock needs to be updated, and we are all the poorer for that.
Following in its grand tradition of assuming the players are solely responsible for the MLB incentive system, MLB acted in completely expected fashion today:
Bud Selig was given a three-year extension as baseball commissioner through the 2012 season.
The unanimous decision made at Thursday's owners' meeting came two days after Selig and union head Donald Fehr testified before a congressional committee that both criticized baseball for its steroids problem and praised it for strides made the past two years.
That's two days after his "we weren't responsible, even though I 'take responsibility' schpiel:
As I said in my statement, I’ve thought about this thousands of times. I’ve been in this sport all my adult life. I agonize over that, because I consider myself, at the end, a baseball man. In the ’90s — you know, hindsight is always very beneficial. I watched things. I re-read all the articles that Senator Mitchell had. I take responsibiility for everything, let’s understand that. I take it –- for all the good things that have happened to make the sport as popular as it is today, and when we talk about something negative, there’s no question about that. I’ve agonized.
But I would also remind you, and who knows how long this has gone on –- the Senator said over 20 years –- we have come a long way in a difficult environment. My minor league program is going into its eighth year. So all of the great players in this sport have been tested eight years.
Do I wish we had reacted quicker? Should we have? Yes, one can make a compelling case. And I do a lot of introspective thinking, and I’ll second-guess myself. As far as responsibility, all of us have to take responsibility.
Yep, "all of us" have to take responsibility. The buck stops...with Barry Bonds? And there's good reason to doubt that those "thousands of times" have been for more than a millisecond:
2005 (March 17): “Do we have a major problem? No.”
2008 (Around 1:05 p.m.): “As far as I’m concerned, I don’t have a scintilla of doubt that the use of performance-enhancing drugs is a very serious matter for this sport — at its core. At its core.”
...Selig was asked if baseball could change its culture, in which players may be tacitly encouraged to do steroids, if only to stay competitive with those who already have. He responded: “I have a lot more confidence than I did three years ago.”
Fortunately for Bud S., but not for us, Congresscritters ask questions the same way they are asked them by the Tim Russerts and John Kings of the world:
He was not asked in follow-up questioning how that statement could square with the one before.
The late Doug Pappas's countdown clock needs to be updated, and we are all the poorer for that.
Labels: baseball, Risk Management
Saturday, August 04, 2007
Stick a Fork in it?
by Ken Houghton
We don't have the volume on the television at work, so all I knew about the conference call was Sam Molinaro's declaration that the fixed income credit market was the worst he had seen in 22 years.
The real news was here:
The optimistic English translation of that is, "We're not quite dead meat, but take precautions and don't even think about anything less than medium well."
And the article ends on a sad note:
Make that ex-President, possibly:
Warren Spector was conspicuous among upper management as not having a major investment in the first two hedge funds. He has also been primarily responsible for the expansion of the fixed-income and MBS business and the expansion and improvements in their risk management techniques and ability over the past 15 years.*
The WSJ (via the NYT) indicates it may not be a done deal yet:
So Reason may prevail. Otherwise, the Book Value for the firm right now is probably the equivalent of "What will someone pay for Warren Spector's autobiography? (And where do I go to apply for the ghostwriting job?)"
Also, especially for the benefit of Mish and his readers, I can't resist quoting this from Bear's Press Release Friday morning in response to S&P downgrading their outlook on the company:
Fortunately, there is nothing forward-looking in that statement.
UPDATE: Yves Smith at Naked Capitalism sums up my qualms in a throw-away paragraph:
Warren Spector has been guiding that culture for over a decade. Anyone acquiring it without him is likely to find the elbows more sharp than entrepreneurial.
*I say this as one whose career trading derivatives ended in part because of Spector's taking over the Risk Management and Derivatives area at Bear.
**"Roadrunner/The coyote's after you/Roadrunnner/If he catches you you're through."
It's been less than 36 hours since this post, but it already seems outdated. In the sense that it was too optimistic.
We don't have the volume on the television at work, so all I knew about the conference call was Sam Molinaro's declaration that the fixed income credit market was the worst he had seen in 22 years.
The real news was here:
[Jimmy Cayne] then turned the floor over to Molinaro -- and wasn't heard from again. At one point, an analyst asked whether this year's 33% drop in Bear Stearns shares made for an opportunity to buy back stock.
"I think this one might be for Jimmy," the analyst said, before going on to explain why the circumstances might justify a buyback.
There was silence on the other end of the line as it emerged that Jimmy wasn't there. Molinaro then took the question, saying Bear is focused now on making sure it has "ample liquidity."
The optimistic English translation of that is, "We're not quite dead meat, but take precautions and don't even think about anything less than medium well."
And the article ends on a sad note:
But fixed income and mortgage securities are the center of this crisis, and they're Bear's wheelhouse. So investors could be forgiven for expecting a bit more guidance, and at the very least some more attentiveness, from Cayne -- who is one of the firm's biggest shareholders....
We can only hope he didn't ditch the call for a no-trump hand of bridge with Bear Stearns president Warren Spector.
Make that ex-President, possibly:
Mortgage-bond trading powerhouse Bear Stearns has taken some emergency measures to right its listing ship, dismissing President and Co-Chief Operating Officer Warren Spector and beginning a dialogue with regulators and Treasury officials over its financial health, The [New York] Post has learned.
Warren Spector was conspicuous among upper management as not having a major investment in the first two hedge funds. He has also been primarily responsible for the expansion of the fixed-income and MBS business and the expansion and improvements in their risk management techniques and ability over the past 15 years.*
The WSJ (via the NYT) indicates it may not be a done deal yet:
Bear Stearns' board is due to meet on Monday to consider the departure of Spector, who heads up its stock and bond trading operations, the paper said, citing a person familiar with the situation.
So Reason may prevail. Otherwise, the Book Value for the firm right now is probably the equivalent of "What will someone pay for Warren Spector's autobiography? (And where do I go to apply for the ghostwriting job?)"
Also, especially for the benefit of Mish and his readers, I can't resist quoting this from Bear's Press Release Friday morning in response to S&P downgrading their outlook on the company:
All other major rating agencies have affirmed their stable or positive outlook on Bear Stearns within the last six weeks.
Fortunately, there is nothing forward-looking in that statement.
UPDATE: Yves Smith at Naked Capitalism sums up my qualms in a throw-away paragraph:
Finally, there are rumors that Bear will be acquired. I can't imagine someone will want to catch that falling safe,** but DeutscheBank, in a similar value-destroying exercise, acquired Bankers Trust roughly a decade ago. Note my negative view isn't based primarily on the worth of Bear's franchise. If that were the only consideration, it might be a very good time to snap up the firm. Investment bank acquisitions have a terrible track record, and Bear has a particularly entrepreneurial, sharp-elbowed culture. I can't see it as a fit with any other financial services firm.[emphasis mine]
Warren Spector has been guiding that culture for over a decade. Anyone acquiring it without him is likely to find the elbows more sharp than entrepreneurial.
*I say this as one whose career trading derivatives ended in part because of Spector's taking over the Risk Management and Derivatives area at Bear.
**"Roadrunner/The coyote's after you/Roadrunnner/If he catches you you're through."
Labels: High Finance, Risk Management, The Old Firm
