Andy Kessler

NYT: QOTD

Huh?

NYT: Tough Times for Buyout Lords

I don't normally post these, but I couldn't resist.

http://www.nytimes.com/2008/03/08/business/08mogul.html

Tight Credit, Tough Times for Buyout Lords

By LANDON THOMAS Jr.

Published: March 8, 2008


...
“The crowds are smaller at cocktail parties, the aura is stained, but there still is the letter B, as in billionaire, next to their name,” said Andy Kessler, a former hedge fund executive who has written books about Wall Street. “They may still have halls named after them at universities, but the idea that these guys are the kings of investing, that time has passed.”

UPDATE March 10: A $100 million Donation to the N.Y. Public Library. That was fast. "Stephen A. Schwarzman Building ...the name to be etched on the building." Schwarzman wants his legacy etched in stone and protected by lions.

WSJ: Internet Wrecking Ball

Imagine a town that has all sorts of gasoline pipelines running by it but only one gas pump. Rationing is inevitable. So are price controls.

Everyone gets equal amounts, except of course first responders like police and ambulances, which should get all the gas they want. And, well, so should the mayor. And if you can make a good business case that you work 60 miles away, you can file paperwork and perhaps pull some strings for more gas. How about those kids hot-rodding around town who can't drive 55? They get last dibs, and maybe we can sneak in some gas thinner to slow down their engines and not waste gas.

You can do all that and constantly update the gas neutrality rules -- or you can just open another gas station across the street. Or one on each corner.

The trick to an open and innovative Internet is not sneaky technical fixes nor more rules and regulations and bureaucracies to enforce them. The Internet will only expand based on competitive principles, not socialist diktat.

This is the essence of the Ed Markey's (D., Mass.) Orwellian-named Internet Freedom Preservation Act of 2008, which would foist network neutrality on the wild and woolly Internet. The Federal Communications Commission is holding a public hearing today at Harvard Law School in Cambridge, Mass., to build the case for the ill-conceived idea of preventing, as Mr. Markey's bill would, network operators from using technologies that may favor one application over another.

It's a bad idea because the only thing Mr. Markey's bill will preserve is mediocrity via the lack of competition, and full employment for regulators micromanaging a business whose very innovation comes from the lack of rules. With net neutrality, there will be no new competition and no incentives for build outs. Bandwidth speeds will stagnate, and new services will wither from bandwidth starvation.

The idea of network neutrality is that all of our Internet packets are equal, and that the spirit of the Internet and its ability to create wonderful new applications like Google, MySpace and Facebook is predicated on open (albeit limited) access for all. Yet, despite an overabundance of bandwidth pulsing throughout the U.S., we are still stuck with rationing to our homes. Haven't we learned that advancing technology is never served by arbitrary rules to divvy up scarce resources? Look at the dearth of good cell phone applications. Rules make incumbents lazy.

WSJ: What's Next for the Banks

If you want to know what's going to happen to the big banks and investment banks, you've got to go back to early 2003, when the seeds of destruction were planted.

It had been a year or so since a couple of trillion dollars of investor wealth had been wiped out. The Dow was 8000 and dropping, and the stocks of big institutions from Citi to Merrill Lynch to Morgan Stanley were at multiyear lows. Bank lending was down, but no one was really worried. The old "borrow short, lend long and pocket the difference" game had been around for millennia, and banks had weathered worse than this mild economic slowdown.

What was not at all clear was how investment banks were going to make money going forward. Wall Street had piles of capital and no place to go. Stock trading and large parts of bond trading had gone electronic. Decimalization of the stock market wiped out markups. IPOs were down, mergers were down and, gasp, bonuses were way down.

Stocks were out and investors wanted yield -- safe, predictable returns -- but there wasn't much profit in that. Some, especially hedge funds and international investors, insisted on even higher yields than plain old government bonds.

So Wall Street, as it always does, gave investors what they wanted -- excess yield in the form of derivatives, asset-backed, mortgage-backed, collateralized debt obligations (CDOs), basically funky amalgamations of lots of other pieces of paper. Done right, no one but you knew how to value these exotic instruments, so you could mark them up way more than a penny and generate huge fees, profits and bonuses. Win-win.

TCS: Cali Cupcake Cops

I tried. I really tried. But it took all of a few days with the kids back in school before I ran into the new "policy" that finally pushed me over the edge.

Look, school is hard, starting with no buses. Yeah sure, a good cardio workout in the morning for my massively helmeted and biking boys is just the ticket to put on an attentive face as the day and their teachers drone on. Never mind that their backpacks are heavier than our troops' patrolling the Sunni Triangle. Biking builds character. Or so I've been told. I'm OK with that.

Gosh, I hope that mother with the pig-tails and hairy legs uses hot water.

And I've caved on the whole paper plate and plastic cup thing. Classes are now stocked with real plates and cups (donated, of course) and us eco-squirrels take turns bringing home the dirty dishes, washing them and returning them to the class. Gosh, I hope that mother with the pig-tails and hairy legs uses hot water. Don't you dare try to load the plates in supermarket bags, paper or plastic, for your awkward bike ride home. No, no, no. Go online and find the same unbleached burlap sack I found and you'll get the clucks of approval you are after. Yeah sure, second graders make a real mess and the dishes smell worse than a chemistry experiment gone wrong, but I'm OK with that.

Weekly Standard: YouTube U.

http://www.weeklystandard.com/Content/Public/Articles/000/000/014/250klogu.asp

Without much fanfare, college lectures are being put online, for free. MIT lectures can be downloaded from iTunes University, and you can watch Cal professors pontificate on your computer via YouTube. Is this some new trend? Do colleges feel threatened by Wikipedia? Something funny is going on. No one gives anything away for free without some ulterior motive.

Now you can sleep through lectures in the comfort of your own home

I mean, don't they know college is big business? Right now, 17 million students are involved in higher education, some higher than others. As a business, college is growing faster than sales of multicolored Crocs. Since 1980, the population of students under 25 has grown 40 percent--and for those over 25, it's up even more at 52 percent. Is this what your neighbors are doing during the day? Could be. Even better (for colleges, anyway), since 2002 tuition has jumped 35 percent in real terms (that's adjusted for inflation, for you French-lit majors). And while financial aid is available, there is some $85 billion in student loans outstanding. Who is going to break the news to these kids that they could have bought a Mustang and watched that physics class for free on their laptop between shifts at Dunkin Donuts (which isn't even spelt right)?

Wallstrip Interview

WSJ: Blackstone's World of Cash

Will the private equity party -- this week's Blackstone IPO is icing on the cake -- end with a bang or a whimper? Let's recall that on Friday, Oct. 13, 1989, the almost $7 billion employee-led buyout of United Airlines fell through, a bookend on a wild 1980s of junk bond-led takeovers. The Dow dropped 190 points that day, almost 7%. That's 1000 points today. Ouch. Could it happen again?

Sure. The money involved here ain't small potatoes. Private equity funds raised $221 billion last year, up from $33 billion 10 years ago. There are now over 170 private equity funds with more than $1 billion in assets. The value of deals done last year was $475 billion, up from $37 billion five years ago. Most of it was taking public companies private -- Equity Office, HCA, Harrah's Clear Channel and on and on.

What's fueling the boom? With the Dow over 13,000, it's not like there's lots of cheap companies just begging to be bought and turned around. Rather, the world has been awash in cash. The money supply has been growing like a weed at the same time that the federal deficit is shrinking -- $148.5 billion through the first eight months of budget year, down 34% from last year. As our trade deficit with China grows, they keep buying our long-term bonds. Add to that the Japanese carry trade (borrow in Japan at negligible interest rates and invest elsewhere), and you get distortions -- especially from fixed income investors such as banks, insurance companies, pension funds and hedge funds, all chasing higher yields.

WSJ: A Future For Newspapers

New technology is mucking up the media, and newspapers seem to be taking the brunt of it. Craigslist and eBay took away classified ad sales, direct advertisers are allocating budgets to search engines and circulation is receding faster than Bruce Willis's hairline. Investors seem to prefer the safety of television broadcasters and cable companies, with their nice, government-mandated franchises and pipes that reach directly into homes.

Media, after all, is about owning a pipe -- some conduit between the creation of news or entertainment and the eyeballs that consume it. Media companies sell the owners of those eyeballs lots of things we weren't even sure we needed. The higher the ad rates, the better the business. The pipe reaches the consumer directly, keeping competition at bay. The tighter the pipe, the less the competition.

For broadcasters, the pipe is spectrum given or bought from the Federal Communications Commission under the guise that spectrum is scarce. For cable operators, it is often the sole cable franchise in a town. For phone companies, it's those regulated copper wires, some of which are so old they have Alexander Graham Bell's teeth marks in the insulation.

And newspapers? Where's the pipe? What conduit to readers do they control? Well, there is the guy that drives up and somehow misses your driveway every morning. Or the sidewalk newspaper dispenser where the homeless man buys one copy and steals the rest so he can peddle them on street corners. So unless you are the only paper in town (ask Warren Buffett how much he makes on monopoly papers like the Buffalo News), there is not much of a pipe to control. Instead, reputation, quality news gathering, trust and credibility maintain the franchise, something The Wall Street Journal and the New York Times enjoy on a national level and the Washington Post and others have locally.

NYT: Trust Me

Is there trust anymore? We are caught between Obi-Wan Kenobi saying, “Let go, Luke. Luke, trust me,” and Eric “Otter” Stratton in Animal House declaring, “You [Delta House language] up. You trusted us!” Heck, the civilized world still shakes hands to show we aren’t packing daggers. In business, “trust me” often turned out to be the two most dangerous words in America.

Joe Nacchio is the latest trust-destroying manager, convicted on 19 counts of insider trading and dumping Qwest stock while smiling to shareholders. Names like Ebbers, Kozlowski, Skilling, and Martha are now synonymous with fraud, scandal and even in polite conversations are likened to the thin film that covers standing ponds. (I did meet Martha once, and she gave me a recipe for flourless waffles, so let’s give her a pass, shall we?)

Wall Street research was long ago disgraced, but add to that mutual fund late trading, options backdating, onerous interest ratings and insurance premium overinflating, and what you have is a lot of folks whose reputations have been shredded into scraps finer than Arthur Andersen documents. And the government? Given all the lying in D.C. on both sides of the aisle, you would think Scooter Libby’s defense would have been selective enforcement.

So here I am at my Carrie Bradshaw moment: Will we ever trust anyone again?