Wednesday, March 19, 2008
The age of the intangibles and venture capital
Most great business today don't require physical assets. Capital that investors put into companies typically are no longer used to finance plants and physical capital but rather to help them develop intellectual properties, systems and/or franchises that generate earnings streams. Each new individual business typically is much riskier but generates much higher returns on capital when successful. Venture capital has gone mainstream.
Saturday, March 15, 2008
Obituary - Haimchinkel Malintz Anaynikal
That was the name legendary Alan (Ace) Greenberg invented for the fictional "counselor" he referred to in his famous memos when he ran Bear Sterns. HMA's core business philosophy was "Make decisions based on common sense. Avoid herd mentality. Control expenses with unrelenting vigil. Execute the fundamentals. Free your motivated, intelligent people from the chains of command. Hire PSDs (Poor, Smart and with a deep Desire to become rich). And stay humble, humble, humble." It seems his successors adopted only the part on "freeing people from the chain of command" part and now, as they say, the rest is history. RIP, Haimchinkel Malintz Anaynikal.
Follows some scraps from recent cover pages on Bear Stearns demise and Greenberg's book that lead me to exciting reflections:
The context:
FT: "The credit crisis on Friday engulfed one of Wall Street’s most important investment banks as the Federal Reserve and JPMorgan Chase combined to provide emergency finance for 85-year-old Bear Stearns and prevent further upheaval in global markets.
The decision by the monetary authorities to throw a temporary lifeline to Bear followed a night of deliberations involving regulators, led by Timothy Geithner, president of the New York Fed, and came after Bear’s shares plunged and its access to overnight funding dramatically diminished. It is likely to pave the way for a sale or liquidation of the company in the coming weeks.
Fed officials told the Financial Times that it acted because of the systemic risks involved in the potential sudden failure of the fifth-biggest US investment bank at a moment of extreme fragility in the markets."
WSJ: "By 7:30 p.m. Thursday, when it became clear Bear had not managed to secure necessary financing or a strategic deal, Fed officials began to realize they might have to step in.
Yesterday's developments were the latest in a series of blows to the financial system that began in August. Then, banks became so wary of lending to each other that money markets seized up and the world's central banks had to intervene. The trigger was a surge in delinquencies on U.S. subprime mortgages and the end to a spectacular rise in home prices.
The pervasiveness of the financial problems and the risks to the economy became increasingly apparent at the beginning of the year. That led the Fed to cut short-term rates by 1.25 percentage points in 10 days, and the Bush White House and Democratic Congress -- usually unable to agree on anything -- to approve a large fiscal stimulus."
And The Economist: "The Fed’s concern is understandable. If it had failed to intervene on Friday, few doubt that Bear would have gone down the tubes. The timing of the move shows just how desperate the situation had become at Bear. If the bank could have held on until March 27th it would have been able to borrow directly from the central bank under a new facility announced earlier this week.
Bear’s fate now hangs in the balance... would-be buyers have reason to be wary. Bear’s books are stuffed with complex “structured” mortgage-related assets, the value of which is hard to calculate. As a result, so is the value of Bear’s equity. A full-blown collapse cannot be ruled out if the value of its collateral—to whose credit risk the Fed is now exposed—continues to fall"
Memo from ACE Greenberg to All General & Limited Partners, March 13, 1979.
"... The developments at Bear Stearns certainly seem to be positive and as a result we will, of course, intensify our surveillance of all positions and expenses. You know how I feel about the dangers of overconfidence.
It certainly looks like we have a dynamic future in store as long as we remember the words of the famous philosopher Haimchinkel Malintz Anaynikal:"thou will do well in commerce as long as thou does not believe thine own odor is perfume".
Memo from ACE Greenberg to Senior Managing Directors, Managing Directors & Associate Directors, April 12, 1988
"...always respect our in-house administrators and compliance people. It is impossible to make enough on a trade or a deal to justify subsequent litigation due to carelessness or greed".
And to finish on a funny note, the Economist remarks that "the intervention came a day after Standard & Poor’s, a rating agency, said that the worst of banks’ write-downs related to subprime mortgages—Bear’s biggest weakness—may soon be over" and I received an email from a friend that ran like that: "This is simply too funny"
"at 2:17 pm: Standard & Poor's cut some of its credit ratings on investment bank Bear Stearns Friday following news of the bank's cash crisis and emergency bailout.
S&P cut its long-term counterparty rating on Bear Stearns to "BBB" from "A" and its short-term rating to "A-3" from "A-1."
S&P said Bear Stearns' need for temporary financing to continue operating normally led to the downgrade. Earlier Friday, Bear Stearns said it is receiving a financing line from JPMorgan Chase that is secured by the Federal Reserve Bank of New York.
The agency also placed the bank's long- and short-term ratings on negative watch, meaning they could be downgraded in the next three months."
OMG! How can someone even dream about sailing those dangerous waters without having timely access to S&P's prescient views?
Follows some scraps from recent cover pages on Bear Stearns demise and Greenberg's book that lead me to exciting reflections:
The context:
FT: "The credit crisis on Friday engulfed one of Wall Street’s most important investment banks as the Federal Reserve and JPMorgan Chase combined to provide emergency finance for 85-year-old Bear Stearns and prevent further upheaval in global markets.
The decision by the monetary authorities to throw a temporary lifeline to Bear followed a night of deliberations involving regulators, led by Timothy Geithner, president of the New York Fed, and came after Bear’s shares plunged and its access to overnight funding dramatically diminished. It is likely to pave the way for a sale or liquidation of the company in the coming weeks.
Fed officials told the Financial Times that it acted because of the systemic risks involved in the potential sudden failure of the fifth-biggest US investment bank at a moment of extreme fragility in the markets."
WSJ: "By 7:30 p.m. Thursday, when it became clear Bear had not managed to secure necessary financing or a strategic deal, Fed officials began to realize they might have to step in.
Yesterday's developments were the latest in a series of blows to the financial system that began in August. Then, banks became so wary of lending to each other that money markets seized up and the world's central banks had to intervene. The trigger was a surge in delinquencies on U.S. subprime mortgages and the end to a spectacular rise in home prices.
The pervasiveness of the financial problems and the risks to the economy became increasingly apparent at the beginning of the year. That led the Fed to cut short-term rates by 1.25 percentage points in 10 days, and the Bush White House and Democratic Congress -- usually unable to agree on anything -- to approve a large fiscal stimulus."
And The Economist: "The Fed’s concern is understandable. If it had failed to intervene on Friday, few doubt that Bear would have gone down the tubes. The timing of the move shows just how desperate the situation had become at Bear. If the bank could have held on until March 27th it would have been able to borrow directly from the central bank under a new facility announced earlier this week.
Bear’s fate now hangs in the balance... would-be buyers have reason to be wary. Bear’s books are stuffed with complex “structured” mortgage-related assets, the value of which is hard to calculate. As a result, so is the value of Bear’s equity. A full-blown collapse cannot be ruled out if the value of its collateral—to whose credit risk the Fed is now exposed—continues to fall"
Memo from ACE Greenberg to All General & Limited Partners, March 13, 1979.
"... The developments at Bear Stearns certainly seem to be positive and as a result we will, of course, intensify our surveillance of all positions and expenses. You know how I feel about the dangers of overconfidence.
It certainly looks like we have a dynamic future in store as long as we remember the words of the famous philosopher Haimchinkel Malintz Anaynikal:"thou will do well in commerce as long as thou does not believe thine own odor is perfume".
Memo from ACE Greenberg to Senior Managing Directors, Managing Directors & Associate Directors, April 12, 1988
"...always respect our in-house administrators and compliance people. It is impossible to make enough on a trade or a deal to justify subsequent litigation due to carelessness or greed".
Memo from ACE Greenberg to Managing Directors & Associate Directors, May 2, 1987.
"... We are different from other corporations. Let us stay that way."
Memo from ACE Greenberg to Senior Managing Directors, Managing Directors & Associate Directors, October 28, 1994
"... I have just received an invitation from Corporate Decisions Inc. of Boston to attend a one-day Senior Executive Forum on November 29, 1994. The subject of the conference is Value Migration: A Strategic Framework for Succeeding in the late 1990s.
If any of our senior managing directors would like to participate, please let me know. They will not be allowed to attend, but I would like to discuss with the interested parties why they want to attend, their philosophy of managing and why are they at Bear Stearns.
It seems like we receive at least on invitation per week to attend a conference regarding the buzz words... I find it amazing that we never hear of a conference devoted to applying common sense to the securities industry. We can not miss."
Memo from ACE Greenberg to Senior Managing Directors, Managing Directors & Associate Directors, January 13, 1989.
"The only thing that can stop us from getting richer is stupidity"
And to finish on a funny note, the Economist remarks that "the intervention came a day after Standard & Poor’s, a rating agency, said that the worst of banks’ write-downs related to subprime mortgages—Bear’s biggest weakness—may soon be over" and I received an email from a friend that ran like that: "This is simply too funny"
"at 2:17 pm: Standard & Poor's cut some of its credit ratings on investment bank Bear Stearns Friday following news of the bank's cash crisis and emergency bailout.
S&P cut its long-term counterparty rating on Bear Stearns to "BBB" from "A" and its short-term rating to "A-3" from "A-1."
S&P said Bear Stearns' need for temporary financing to continue operating normally led to the downgrade. Earlier Friday, Bear Stearns said it is receiving a financing line from JPMorgan Chase that is secured by the Federal Reserve Bank of New York.
The agency also placed the bank's long- and short-term ratings on negative watch, meaning they could be downgraded in the next three months."
OMG! How can someone even dream about sailing those dangerous waters without having timely access to S&P's prescient views?
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