London: What's Going On?

The news feed is filled with stories about the decline of London and the UK in general. If reports are to be believed, hordes of unassimilated migrants go unpunished for rape, murder, and other mayhem while armed police arrest comedians for tweets and residents for waving the Union Jack. Violence against Jews is causing Jewish citizens to emigrate from the U.K. If Britain is collapsing, what are we to make of this?

London: new towers springing next to the old (Zuma/WSJ)

Apple and Citadel Fuel London Office Boom

The office market in London’s ancient commercial quarter—known simply as the City—is booming, fueled by an influx of American law and finance firms, a growing tech scene and demand for the swankiest spaces to lure workers back to their desks.

The boom shows Britain’s finance industry has defied fears of a post-Brexit exodus. Despite losing some business and financiers after the U.K. left the European Union, London still hosts by far the biggest banking and capital markets in Europe.

The buoyant market also reflects the district’s broadening appeal. For decades the area was a bastion of finance and insurance. Now tech companies—including Apple, TikTok and several thousand smaller firms—vie for space, drawn in part by the prospect of easy access to potential investors.

“London, as a location for international businesses, seems to have really proven its resilience,” said Martin Towns, who runs M&G’s $43 billion real-estate business. “The City has a renewed level of vibrancy.”

Finance companies and Big Tech are not known for taking extraordinary risks, so what's going on with the $billions pouring into London? As an Anglophile, I hope that fears of its death have been greatly exaggerated.

Illiquidity + Greed = Disaster

(Table from University Business)

The nation's largest universities have tens of $billions in endowment funds, yet are experiencing a cash squeeze. [bold added]

Over the past couple of decades, no group of investors has piled into what are called alternative assets more eagerly than the endowment funds of major colleges and universities. In their rush to emulate the stellar success of Yale University’s endowment head David Swensen, who died in 2021, educational institutions pulled tens of billions of dollars out of stocks and bonds and poured it into hedge funds, private equity, venture capital and other investments that don’t trade publicly.

The result looks nothing like the portfolio of 60% stocks and 40% bonds that has long been a guidepost for many investors. On average, in fiscal 2024, educational endowments with more than $5 billion in assets held only 2% in cash, 6% in bonds, 8% in U.S. stocks and 16% in international stocks, according to the National Association of College and University Business Officers. That left two-thirds of their total holdings in private funds and other non-traditional assets that can’t readily be turned into cash.

Now you understand the life-or-death panic that seized such elite institutions as Brown, Columbia, Cornell, Harvard, Northwestern and other universities when the Trump administration threatened to cut off their federal funding. Even though their endowments hold billions of dollars, much of that immense wealth might as well be stored on the planet Proxima Centauri b, about 4.2 light years away.

These universities are slashing budgets, freezing their hiring and scrambling to raise money any way they can.

An investment rule that's easy to understand but emotionally difficult to implement is to keep enough liquidity to cover cash needs, even during a down market or a shortfall from a funding source like the Federal government. It's a hoary lesson that one doesn't need an MBA from Harvard, Stanford, or Wharton to follow: greed and pride can be your downfall.

Sequel for Guys Like Me

The Accountant 2: Braxton and Christian bonding (Page/WSJ)

We first saw the 2016 film, The Accountant, in 2017. Ben Affleck plays the titular character, Christian Wolff, a weapons and martial arts specialist who is also a financial wizard. He is the first person who underworld magnates call when they have an "accounting" problem and legitimate auditors can't be brought in. Sometimes, however, his clients violate Wolff's personal code of ethics and he employs his lethal skills, as well as leaks to law enforcement, to enforce that code.

Another aspect to the character is that he is severely autistic--Rainman meets Rambo--which makes for some amusing and awkward moments as the super-intelligent Wolff has trouble figuring out the basics of social interactions. The Accountant ended, after the obligatory victory over bad guys, with Christian Wolff reconciling with his normal (neurotypical) and equally lethal brother Braxton.

After nine years the sequel, The Accountant 2, has been released:

“The Accountant 2” is a rarity. It’s a sequel that blows by the respectable original, evolving into something simultaneously smarter and sillier, more grounded and much more fun.

Ben Affleck is back — finally, in his best role in years (along with his 2020 turn in “The Way Back”) — as Christian Wolff, an awkward, high-functioning autistic bean counter for bad guys who is secretly a super killer. He and his estranged brother Braxton (Jon Bernthal), a slick and successful assassin, reunite when Chris is summoned to help investigate the murder of a former U.S. Treasury agent he used to feed tips to on crimes.

...Affleck and Bernthal’s portrayals are miles ahead of where they were in the first film. Bernthal seems to benefit from revisiting roles years later, as evident in his convincing return as the Punisher in the current “Daredevil: Born Again” series. This time around, Braxton is informed by fraternal warmth and goofiness. The brothers’ relationship feels settled into, and it’s a pleasure to watch. When Braxton is about to invite some women into their motel room, he admonishes the stiff Chris, “Just go stand over there. Don’t be scary.”

Affleck’s Chris is much more detailed and lived in now. Before, physical and vocal inconsistencies could pop out, but the Berkeley-born actor is in the groove here. There’s increased precision in Chris’ neurodivergent behaviors and vocal mannerisms (perhaps credit is due to the film’s neurodiversity consultant, “Autism: The Musical” star Elaine Hall). Affleck appears more relaxed, so the character is more alive.

Throughout your humble CPA's life accountants have been mocked for their introversion and inflexibility. Finally there was a movie with an accounting protagonist that was popular enough to have a sequel (and perhaps a series!) for guys like me.

Watching a Subspecies of Money Men

Last month we commented about how the super-rich signal their wealth to each other without making it obvious that's what they're trying to do. But not all of them, or those trying to be as wealthy as they are, are into that game at least when it comes to timepieces.

WSJ: The Anti-Status Watch: Why Men in Finance Love Cheap, Cheesy Watches

Sponge Bob and Avengers watches worn by financiers
Patrick Lyons and Leroy Dikito (WSJ/Lyons/Dikito)

Though finance guys famously flaunt Rolexes or Patek Philippes on their wrists, an established subspecies of money men goes the other way entirely. In place of a sleek steel case and elegant ceramic dial? Mickey Mouse. SpongeBob SquarePants. Fanta-orange rubber straps.

Over the years, highfliers have made headlines for sporting Swatches. (See: Blackstone Group CEO Stephen A. Schwarzman or former Goldman Sachs CEO Lloyd Blankfein.) That “wealthy guy, cheap watch” ethos continues to resonate in boardrooms and on trading floors, with men of all seniority levels embracing plasticky, offbeat designs, from superhero models to calculator Casios. Many resemble something you might win in a claw machine. Priced from $30 to a few hundred bucks, they’re a bit of fun and a different sort of flex, conveying an “I don’t need a Rolex” bravado that comes from having made it. Call them anti-status watches.

A practical reason for this anti-status affectation: cheap, everyday watches can be used as conversation starters in business conversations.

It's also possible to be viewed as truly wealthy, especially if everyone knows that a person is rolling in it, by not appearing to care about looking the part. The psychology of wealth, like the most important aspects of life, can be complicated.

The Banks Aren't X-ing X

(WSJ photo)

When Elon Musk bought Twitter in October, 2022, for $44 billion, most financial observers opined that he substantially overpaid for the stock.

Twitter had been a giant in social media. It was unrivaled as the nation's water cooler, where everyone went for the latest news and opinions on the events of the day. Although it attracted millions of eyeballs every day, Twitter couldn't figure out how to monetize the traffic. Neither selling ads or subscriptions generated revenue to justify a $44 billion valuation.

Twitter also came under fire during the Trump Presidency as it began censoring "misinformation" that turned out to be accurate, yet allowed through information that was later shown to be untrue. The bias all went in one direction, against conservatives and for liberals.

Elon Musk believed that he could make Twitter profitable, but I doubt that his primary motivation was investment, i.e., that it would be a slam-dunk turnaround winner. IMHO, his motivation was equally to create one of the few free-speech platforms that would be widely read. Elon Musk also has a provocative streak, and the purchase of an entity that the Progressives thought they controlled was guaranteed to infuriate them. As I wrote last year

Elon Musk's current net worth has been estimated at $241 billion. His purchase of Twitter was, IMHO, for both investment and personal enjoyment, and he seems to be deriving immense pleasure from seizing control of the Progressives' playground and reminding them daily that he has it. Losing 11% of his net worth on something that interests him is not the best outcome, but he can afford it.

Nearly two years after Twitter (rechristened "X") was taken private, the Wall Street Journal reported on X's financial status:

The $13 billion that Elon Musk borrowed to buy Twitter has turned into the worst merger-finance deal for banks since the 2008-09 financial crisis...

The banks that agreed to underwrite a deal that even Musk said was overvalued did so largely because the allure of banking the world’s richest person was too attractive to pass up, according to people involved in the deal. Musk and other investors ponied up around $30 billion to buy the company, giving the banks some cushion in case things were to go wrong.

The banks—which also include Barclays, Mitsubishi UFJ Financial Group, BNP Paribas, Mizuho and Société Générale—have been able to collect hefty interest payments from the X loans. They are generally for seven to eight years and carry rates several percentage points above the benchmark for investment-grade companies. And the banks could still ultimately be made whole if X is able to cover its interest obligations and repay the principal when the loans mature...

But nearly two years after Musk’s acquisition, X’s business is still struggling to climb out of the deep hole it fell into under his ownership—the company last year said its value had fallen by more than half, to around $19 billion.

While data indicate that use of the app rose amid the explosion of political news in recent weeks, there isn’t evidence that that is translating to a meaningful recovery in the advertising revenue that long sustained the revenues of the company, which pre-Musk struggled to maintain profits. Musk has gone from telling advertisers who fled the platform to “go f— yourself” to suing them and a trade group this month, claiming they illegally conspired to boycott X. The group has said it plans to rebut the claims in court.

Servicing the loans isn’t helping X’s financial health. Even before rates stopped rising, Musk said its annual interest payments total around $1.5 billion.

Banks typically have a number of legal ways to force X to make good on principal and interest. However, IMHO, they're being patient because they have their eyes on a bigger prize--upcoming financing and/or public offerings involving SpaceX, Tesla, and other Musk-controlled entities.

The deal presents a Catch-22 for the banks. On one hand, they are eager to be well-positioned to work with Musk and his six companies that range from electric-vehicle maker Tesla to Neuralink and xAI. Many view a possible initial public offering of Musk’s rocket company SpaceX or his Starlink satellite business as a fee-generating event that they don’t want to miss out on.

Elon doesn't forget those who stuck by him and who crossed him.

California Gas Prices: the Answer Always is More Regulation

The Phillips 66 refinery in Rodeo (Merc)

We've posted before about why California gasoline prices are higher than the rest of the country (gas taxes, "boutique" gas formula, banning new Internal Combustion Engine cars after 2035, etc.).

As refineries close down, the ones that remain have been accused of price gouging--any person capable of critical thought might ask herself why refiners are abandoning such a profitable business--but critical thinking about Progressive governance has been sorely lacking for decades.

The long-term supply outlook has become so dire that last week the Progressive government floated trial balloons about California seizing control of the refineries. Realizing that running refineries (and bearing responsibility for the inevitable debacles) was a step too far, Governor Newsom proposed a bill that he thinks will stabilize fuel prices. [bold added]

California Gov. Gavin Newsom on Thursday announced a first-in-the-nation plan to require petroleum refiners to maintain minimum fuel reserves to avoid supply shortages he says create higher prices at the gas pump.

The proposal would authorize the California Energy Commission to require state refiners to maintain a minimum supply, which would help prevent gas price spikes and save Californians hundreds of millions of dollars every year. Newsom said profit spikes for oil companies are overwhelmingly caused by refiners not backfilling supplies when they go down for maintenance.

The industry is likely to have to build storage facilities in order to hold the gasoline reserves. Also, the gasoline reserves themselves have a cost. As students learn in Finance 101, all assets on the balance sheet are financed through debt or equity (for analytical purposes debt is assumed). Adding storage and gas-reserve assets will increase interest expense which the companies will try to recover through higher prices.

Higher prices are what Governor Newsom was trying to avoid, but if the regulator doesn't allow the expense to be passed through to the customer, the exodus of refiners will accelerate. In the one-Party state, the answer to unforeseen consequences of regulation is always more regulation that will make the problems worse.

Finance Bros' Day in the Sun

Forget about going after doctors or lawyers, ladies, it's time to prowl Wall Street:

It all started with a TikTok video by 27-year-old Megan Boni, known as Girl On Couch. Her April post, amassing about 49 million views, features a singsong message: “I’m looking for a man in finance. Trust fund. 6’5.” Blue eyes.”

This video was clearly made in jest. For the height criterion alone the percentage of men over 6'5" is less than one percent. Plus a trust fund and blue eyes? That's a unicorn.

Boni said she made the original video as a satire of women with impossible dating standards, not because she’s particularly interested in dating a man in finance.

“I wanted to make fun of single people, including myself,” she said.

Your humble blogger went into finance, is well short of 6', has brown eyes, and has no trust fund. Nevertheless, his life turned out all right. I recommend finance as a career if you're willing to work hard, but don't expect success on dating apps.

Below is a video that starts with Megan Boni's original, then riffs on it.

Spreading the Gospel of Net Present Value

Your humble blogger studied accounting and finance before the personal computer was invented.

The only electronic devices that we brought to class were calculators that performed basic arithmetic. And so it was that we labored over present value/future value problems, pencilling out intermediate solutions so we at least could get partial credit from the proctor.

After learning how the basic formulas were derived, we were taught how to use books of tables to bypass much of the repetitive drudgery in financial calculations. The future-value table below is from McGraw-Hill.

Until financial calculators and PC's came on the scene, such tables were used in finance for 3½ centuries(!) These tables seem extraordinarily crude today, but when they were first published in the 1600's, it sparked the widespread acceptance of "discounting" as an alternative payment. It wasn't businessmen or bankers who spread the word, but the Anglican church. [bold added]

In the early 1600s, the officials running Durham Cathedral, in England, had serious financial problems. Soaring prices had raised expenses. Most cathedral income came from renting land to tenant farmers, who had long leases so officials could not easily raise the rent. Instead, church leaders started charging periodic fees, but these often made tenants furious. And the 1600s, a time of religious schism, was not the moment to alienate church members.

Interest-calculation book from 1700.

But in 1626, Durham officials found a formula for fees that tenants would accept. If tenant farmers paid a fee equal to one year’s net value of the land, it earned them a seven-year lease. A fee equal to 7.75 years of net value earned a 21-year lease.

This was a form of discounting, the now-common technique for evaluating the present and future value of money by assuming a certain rate of return on that money. The Durham officials likely got their numbers from new books of discounting tables. Volumes like this had never existed before, but suddenly local church officials were applying the technique up and down England.

Spreading the "Gospel of Net Present Value" was one of the most important developments in capitalism. With apologies to the bard,

Neither a borrower or a lender be
But if you are either
Be mindful of the NPV.

Buffett to Apple: It's Not You, It's Me

The Berkshire Hathaway shareholders' meeting in Omaha last Saturday.

Apple stock has been Berkshire Hathaway's largest and most successful investment in Warren Buffett's storied history. [bold added]

Apple is Warren Buffett’s greatest investment. It has also become one of his riskiest.

In 2016, Buffett made perhaps the most surprising bet of his career. That year, Berkshire Hathaway, the company he runs, began buying up shares of Apple—the exact kind of stock Buffett and his longtime partner, Charlie Munger, had long avoided...

Yet working with protégés, Buffett soon transformed into an Apple bull in a remarkable about-face. After an initial purchase of nearly 10 million shares worth about $1 billion in 2016, Berkshire added to its holdings later that year and then stepped up its buying in 2017 and 2018, spending about $36 billion on the stock over those years. Berkshire later trimmed some of those holdings.

By the end of the third quarter of 2018, Berkshire’s Apple stake represented about a quarter of its entire investment portfolio. In dollar terms, it was twice as large an investment as Buffett had previously made.

The move has paid off, in a very big way. Today, Berkshire’s 5.9% stake in Apple is worth about $157 billion, even though Apple has fallen lately. Berkshire is sitting on about $120 billion in paper gains, likely the most money ever made by an investor or a firm from a single stock. Nothing in Buffett’s long career comes close. Apple stock represented nearly 50% of Berkshire’s stock portfolio at year-end.

Warren Buffett has never followed hard-and-fast rules for portfolio diversification. Many portfolio managers would sell an individual stock if its value exceeded, say, 10% of their portfolio, but Warren Buffett rode a seven-year wave until Apple equalled nearly half of Berkshire's $370 billion stock holdings.

At that point no one would criticize Warren Buffett for trimming his position, which he did in the first quarter. He announced his action in last Saturday's Berkshire shareholders meeting, all the while continuing to praise Apple:

Warren Buffett is still a big fan of Apple.

The legendary investor praised the iPhone maker on Saturday from the stage of his annual meeting, even after revealing that Berkshire Hathaway had slashed its stake in the first quarter. He hinted that tax considerations may have played into the decision.

Buffett told an arena of Berkshire shareholders that Apple is “an even better business” than American Express and Coca-Cola, two other big positions in his company’s massive stock portfolio.

Berkshire sold about 13% of its mammoth stake in Apple in the first months of 2024, leaving it with $135.4 billion of the iPhone maker’s shares at the end of March, according to a regulatory filing released Saturday morning.

He really didn't have to justify the sale, but what was the reference to "tax considerations"? Was there some esoteric tax rule that applied to unbalanced insurance company investments?

No, Mr. Buffett was simply referring to the likelihood that the Federal government, facing unprecedented deficits and unwilling to cut spending, will soon raise the long-term capital gains rate from 21%. (He elaborates on YouTube.)

We don’t mind paying taxes at Berkshire , and we are paying a 21% federal rate on the gains we’re taking in Apple. That rate was 35% not that long ago and has been 52% in the past when I’ve been operating. The Federal government owns a part of the earnings of the business we make. They don’t own the assets but they own a percentage of the earnings. They can change that percentage in a year and the percentage is currently 21%, and I would say that with the present fiscal policies I think that something has to give and I think that higher taxes are quite likely, and if the government wants to take a greater share of your income or mine or Berkshire’s, they can do it.

They may decide that someday they don’t want the fiscal deficit to be this large because that has some important consequences and they may not want to decrease spending a lot and they may decide they’ll take a larger percentage of what we earn, and we’ll pay it. We always hope at Berkshire to pay substantial Federal income taxes. We think it’s appropriate that a country that has been as generous to our owners—Berkshire was lucky that it was here—and if we sent in a check like we did last year, we sent in over $5 billion to the US Federal government—and if 800 other companies had done the same thing no other person in the United States would’ve had to pay a dime of Federal taxes [applause], whether income taxes, no Social Security taxes, no estate taxes, all down the line. I hope things develop well enough with Berkshire—we say we’re in the 800 club [companies with a market capitalization of at least $800 billion]-- and maybe even move up a few notches. It doesn’t bother me in the least to write that check, and I would really hope with all that America has done for all of you, it shouldn’t bother you that we do it, and if I’m doing it at 21 percent this year and we’re doing it at a lot higher percentage later on, I don’t think you’ll actually mind the fact that we sold a little Apple this year.

Far be it for me to argue with Warren Buffett, but his statement that no one would pay any taxes if 800 companies paid $5 billion to the Treasury is technically true, but fantastical. Excluding banks, who need multi-$billions to conduct operations, there are fewer than 50 companies that have at least $10 billion on hand. (It's like saying that if everyone had an EV there would be no climate crisis.)

However, the Oracle of Omaha is very likely to be correct in his prediction that the government is unwilling to cut spending and will raise taxes in the near future. At 93, Warren Buffett talks about the way things are, not the way he wishes they could be.

I Want to be Part of It, New York, New York

New York still retains its allure (Chron photo).

Back in my day every MBA who majored in finance dreamt of going to New York, the financial capital of the world. The big banks and the investment banks were all headquartered there, and the latter paid by far the highest salaries, double and triple what other employers were offering. The sights, sounds, and cultural attractions were an added bonus, and the only major drawback was the high income that was required to live in NYC.

50 years later technology has eclipsed finance as the largest and most glamorous industry. Silicon Valley is the Mecca for techies, but after a few years of enduring the high cost of housing, traffic, and California taxes, many of them are leaving for other hubs that are far more amenable to buying a house and raising a family.

It may come as a surprise that a sizable contingent of Bay Area tech workers are leaving for a city that's even more expensive than San Francisco. Yes, NYC still appeals to young dreamers. [bold added]

many early career Silicon Valley professionals have migrated east despite a higher cost of living there. A recent study found that tech workers who leave the Bay Area are most likely to move to New York, where apartment rents have reached record levels, meals out are among the country’s most expensive, and the average income is lower than in San Francisco.

Until now, New York hasn’t figured as highly in the tech exodus narrative. Austin, where there are no state income taxes and four-bedroom houses often have mortgages the same as a one-bedroom apartment rental in San Francisco, was touted as a hot destination for Silicon Valley expats during the pandemic. For a bit, Miami was also talked up as a relocation option.

Now flush with wealthy investors, companies big and small, and thousands of Bay Area defectors, New York has cemented itself as the nation’s No. 2 tech hub. Its $29.5 billion in venture-capital investment in 2022 ranked second only to Silicon Valley’s $74.9 billion.

...With offices shuttered throughout the country during the pandemic, reports surfaced about Silicon Valley tech workers fleeing to Austin, Denver, Atlanta, even Puerto Rico — anywhere their money could stretch further. Why, then, would more tech employees leaving the Bay Area now choose New York over any other city?

...Aaron Sines — director of technical recruiting for Edison & Black, a New York IT consulting firm — has seen a surprising amount of tech people who can work remotely, yet still choose to move to New York. Not so shocking: Almost all those employees are in their 20s.

“A lot of it is just the overall idea of wanting to live in New York,” Sines said. “A lot of people just want that experience before they get married and have kids.”

It's not one of my major regrets, but we had our chances to move to or nearby NYC before settling down. That door has long since closed, but sometimes I wonder....

Gross Over-Reach

A property that could be seized by New York (Le Monde)

At one of my previous employers my job was to price loans, leases, and equity to corporations who were our customers. The corporations always put the best face on the assets we were advancing money on, and one of my department's jobs was to ascertain those assets' realistic value in the event of a default and ultimate liquidation of the property.

Another task was to price the risk we were taking. In addition to the value of the assets we had to look at the financial strength of the borrower and assess the likelihood of being repaid if the business functioned under stress. The higher the risk, the higher the rate we would charge.

Often we would spend hundreds of thousands of dollars analyzing and negotiating terms that were acceptable to both parties. Larger deals, such as the loans made to Donald Trump's businesses, would go to senior management committees for their approval, and hundreds of thousands of dollars would be spent on legal documents that captured the nuances of the deal.

It's possible for financiers to lose a lot of money on loans, of course. None of them put the coronavirus lockdown in their models, or the permanent shift to working from home, or the cessation of downtown foot traffic, or the inability of cities to protect properties because of police defunding. And it's still possible to defraud sophisticated lenders with the inclusion of fake properties or fake financial statements.

Judge Arthur Engeron ruled that sophisticated lenders were fooled by fraudulent Trump financial statements and calculated the fine based on the additional rate the Trump organization would have paid had the lenders not been misled. For example, Deutsche Bank would have charged 400 basis points more:

The memo indicated that for Trump Chicago, the Commercial Investment Bank Division would be willing to provide a loan on a non-recourse basis (i.e., no personal guarantee) at LIBOR plus 8%, and that the private wealth division would be willing to provide a loan on a full recourse basis (with an unconditional personal guarantee) at LIBOR plus 4%.

Judge Engeron misunderstands, perhaps wilfully, the give-and-take of commercial real estate finance. If Deutsche Bank had smelled a rat, it would have priced the loan, say 100 bp higher at LIBOR plus 5%. If it had regarded a Trump guarantee as worthless, it would have reverted to LIBOR plus 8%, which is extraordinarily expensive given the collateral, and Trump would have gone elsewhere. All these dynamics are familiar in business-to-business finance, which is not the same as business-to-consumer where one party has a distinct knowledge advantage. The bottom line: Trump would never have paid the LIBOR plus 8% on which Judge Engeron based his penalty calculation.

Today the appeals court reduced Trump's fine:

Donald Trump needs to pay just $175 million to put his $454 million civil fraud judgment on hold during his appeal, a New York appellate court ruled, giving the former president a crucial win on the cusp of a financial deadline.

From the point of view of fair dealing, especially since neither borrower or lender were harmed, there should have been no fine. But New York Attorney General Letitia James found a unique New York law that allowed her to impose a financial death penalty on Donald Trump's organization. To this humble blogger it's a gross over-reach of prosecutorial power, but then again I'm no lawyer.

Double-dipping is Never a Compliment

If you don't understand this diagram, don't do double dips.

Some leveraged companies whose low-rate loans are coming due are resorting to "double-dip" loans:

Here’s how a double-dip loan generally works: A company creates a subsidiary that issues new loans and it lends loan proceeds to its parent on a secured basis, meaning the proceeds are backed by collateral. The parent also guarantees the new loans, creating a second claim on the assets. New lenders often get collateral not pledged to existing lenders. Such a transaction is called double-dip because the loan to the parent company, along with the loan guarantee, creates separate claims on company assets.

A double-dip provides additional claims against existing collateral via an intercompany note and guarantee. Double-dips must be allowed by a company’s credit agreements, and they usually are because contractual provisions have weakened over the last several years, [AllianceBernstein director Scott] Macklin said.

Companies drawn to these transactions generally have a significant amount of leverage and few options for refinancing short-term debt. Potential new lenders often are concerned a heightened bankruptcy risk for many of these companies would prevent recovering the par value of debt they provide, so they require additional protections, Macklin said.

If you're still with me, dear reader, here are my comments.

To vet the transaction a lender needs to diagram the cash flows and understand thoroughly what happens when a deal goes south.

On a macro level when money gets tight, structures get more complex. Securitizations and collateralized debt obligations were all the rage because buyers convinced themselves that the collateral was good in case the cash flows did not materialize. We know how that turned out.

Double-dips are simpler to analyze because they only involve one company and look like a way to borrow against assets that are unpledged. Prospective lenders should ask themselves: why doesn't the parent just issue the debt without all this complexity? Instead, they've got to lend to a subsidiary that's got the collateral and a parent guarantee that's worth little when things go south.

They've got to ring-fence the sub with enough protections so they can sleep at night. Frankly, I'd try to get some upside over and above the nominal spread as compensation for the risk.

From the borrower's point of view, these loans may carry a lower coupon than other alternatives, but legal, investment banking, sales-commissions, and compliance costs make them expensive.

Yes, I used to look at complex financial arrangements and didn't particularly enjoy it. But it was a living.

The Forever Bond

The business news through the weekend has been all about bank failures and their effect on interest rates and the economy. At the heart of the problem is the inability of banks to pay off deposits when customers show up during a bank run.

Bank deposits are "hot money" because they are liabilities that can be redeemed at any time. Silicon Valley Bank and Signature Bank failed because they didn't have enough cash on hand (or could get cash quickly enough from asset sales or borrowings from other institutions).

"When this bond was written on vellum in 1648,...
its wide margins were empty. Over many years,
the margins were covered with the records of the
interest returned to its owner."

At one end of the duration spectrum are bank deposits. At the other is a 375-year-old “perpetual” Dutch bond.

One of Yale’s most intriguing investments is a 375-year-old “perpetual” Dutch bond that still pays interest. It was issued by the Hoogheemraadschap Lekdijk Bovendams, a semi-public organization charged with maintaining the dike along the Lek river in the Netherlands.

The water authority was founded in 1323; its successor still operates today, in the province of Utrecht, as the Stichtse Rijnlanden.

The bond is a "bearer bond," which is a key plot point of many a murder-mystery novel:

The text makes clear that the bond was transferable, and payment was to be made to the bearer of the security, not to someone listed in a registry.

However, what may dissuade someone from acquiring the instrument via foul means is that the bearer must show up in person to receive the interest. Also, the amount at stake is not enough to quit one's day job:

Beinecke curator Timothy Young presented the allonge in 2015 at the Stichtse Rijnlanden offices to collect the subsequent twelve years of payments. The latter amounted to the equivalent of $153.

The water company paid its obligation, even when the Netherlands were annexed by France in 1810. When the debt was issued in 1648, the payment of same was viewed as a moral imperative. It's nice to know that some people and cultures still subscribe to that principle.

Applause Not Needed

(photo from NY Post)

Warren Buffett is the most successful investor in history. His knowledge of the stock market and financial analysis is unrivalled, but IMHO his wisdom concerning human nature and human behavior are equally important components of that success.

And it all stems from his empathy, i.e., the ability to put himself in another's shoes. The latter was on display when he said why he doesn't talk about politics in public, at least not any more. [bold added]

the CEO explained why he’s not speaking on politically charged topics — because doing so could affect Berkshire and the companies it invests in.

“I don't want to say anything that will get attributed basically to Berkshire, and have somebody else bear the consequences of what I talk about,” Buffett said.

“Why in the world do I want to hurt the people in that other room that do all kinds of things for Berkshire? Why do I want to hurt you? Because I say something that 20% of the country is going to instantly disagree with. And sometimes they will be so upset about us that they will try and…have campaigns against our companies.”

Michael Jordan expressed a similar thought 32 years ago. When he was urged to support the Democratic candidate in a Senate race, he said, "Republicans buy sneakers, too."

My mother asked to do a PSA for Harvey Gantt, and I said, 'Look, Mom, I'm not speaking out of pocket about someone that I don't know. But I will send a contribution to support him.' Which is what I did.

"I do commend Muhammad Ali for standing up for what he believed in. But I never thought of myself as an activist. I thought of myself as a basketball player.

"I wasn't a politician when I was playing my sport. I was focused on my craft. Was that selfish? Probably. But that was my energy. That's where my energy was."

They refrained from politics for different reasons: Michael Jordan didn't want to hurt his own brand, and Warren Buffett didn't want to hurt the people in Berkshire's businesses. Two other similarities: both men have shown enormous discipline throughout their lives, and neither craves the adulation of people who clap because they like their politics.

The Opponents Aren't Melting

Ben & Jerry's Israel factory (JTA)

The BDS (boycott, divest, sanctions) movement began 15-20 years ago in order to show support for Palestinians and punish companies that did business with Israel. BDS was embraced by left-wing activists as a non-violent method of harming Israel economically and perhaps inducing it to change its policies.

When Ben & Jerry's, the popular ice cream company now owned by Unilever, announced that it will no longer sell its products in the West Bank, it was not a surprise. BDS was just another chapter in Ben & Jerry's' 30+-year history of left-wing activism. BDS, like climate change, Black Lives Matter, and vaccination mandates, has had an easy ride because companies have judged the cost of resistance to be too high.

However, the opposition to BDS is beginning to employ the same tactics on Unilever that BDS has used on companies like Hewlett-Packard, Puma, and Sodastream: [bold added]

Two months after Ben & Jerry’s said it would stop retailing its products in Jewish settlements located in the Israeli-occupied West Bank, several state funds are selling or threatening to sell their investments in Unilever PLC, the ice cream brand’s parent company.

The New Jersey Division of Investment, which manages several state pension funds, said this week it planned to sell $182 million of stocks, bonds and other securities linked to Unilever, accusing the company of breaking state laws that prohibit the boycott of Israel. It didn’t give a time frame for the sale, and Unilever can appeal the decision.

Separately, Arizona said earlier this month that it would sell the last $50 million of its investments in Unilever by Sept. 21 for the same reason. The state said its funds had already sold $93 million worth of investments in Unilever since Ben & Jerry’s announced its decision.

Other states including New York, Florida and Texas have said they are evaluating whether their funds would need to sell their Unilever investments. Unilever declined to comment Friday on the divestments but reiterated its commitment to Israel.

Just as BDS has had little effect on companies with a sizable market cap, the pushback on Unilever will not hurt it directly. However, this episode shows that acquiescing to activism is beginning to carry its own costs.

The Indefatigable Cathie Wood

(WSJ photo)

Cathie Wood came to my attention about a year ago due to her frequent appearances on the cable business channels. Her ARK Innovation ETF was being buzzed about, and the normally conservative TV analysts were nodding their heads while she made bold, some would call them outrageous, predictions about the you-ain't-seen-nothing-yet futures of bitcoin or Tesla.

Cathie Wood's principal approach is to invest in potentially disruptive businesses that don't worry much about generating profits today. This high-risk high-return philosophy, which sometimes produces steep short-term losses, had its zeitgeist moment during the coronavirus, when trends that took years to ripen manifested in a matter of months. [bold added]

Ms. Wood’s Innovation ETF was up 149% last year, her best year ever, thanks to big bets on Tesla, Zoom Video Communications Inc., Teladoc Health Inc. and Roku Inc. ARK has amassed about $45 billion across eight exchange-traded funds, up from just $3.3 billion at the start of 2020...

Ms. Wood has responded [to her funds' lackluster 2021 performance] by putting more money into some of her riskiest investments. Her latest predictions call for Tesla shares to quadruple to $3,000 by 2025, and bitcoin to eventually hit $500,000. The electric-car maker’s shares, which remain the biggest single position across Ms. Wood’s ETFs, are flat this year.

After laboring most of her Wall Street career in relative obscurity

At age 57, she left AllianceBernstein and founded ARK. Ms. Wood has said the name is both an acronym for active research knowledge and a reference to the ark of the covenant in the Bible.

She has embraced new media with a vengeance:

Ms. Wood said that her use of social media, videos, podcasts and other mediums give her a competitive edge. “There’s a great hunger out there for information from professional investors,” she said.

Ms. Wood has been mentioned on Twitter more than a quarter-million times this year, quadruple the count for all of last year, according to social-media analytics firm Sprout Social. Since the start of 2020, she has appeared more than two dozen times on CNBC and Bloomberg. Monthly videos featuring Ms. Wood’s musings on the economy and markets regularly garner hundreds of thousands of views.

Adding to her unique narrative is that she is a devout divorced Catholic who reads the Bible every day and openly supported Donald Trump in the 2020 election.

I haven't decided whether she is a late-blooming genius, a self-promoter who got lucky, a true believer who bets billions while breaking all rules of portfolio diversification, or some combination thereof.

Meanwhile, she gives hope to all us over-60's that we can adapt to the seismic changes in our society to such an extent that our best years can still lie ahead.

STEM + A

(Graphic from poetsandquants)

Your humble blogger has always been in awe of the STEM (science, technology, engineering, and mathematics) professions. The feeling started in college; the classmates who majored in these courses were very smart and, frankly, worked harder than I did. They didn't necessarily become scientists or engineers; many became doctors, which requires lots of STEM.

Sufficient aptitude in math and statistics enabled me to enter the fields of accounting and business finance and, as they say, put food on the table. But I never thought that accountancy was as technically demanding as engineering, biochemistry, or computer programming.

However, some politicians do. The House of Representatives bill HR 3855 proposes [bold added]

To amend the Student Support and Academic Enrichment Grant program to promote career awareness in accounting as part of a well-rounded STEM educational experience.117th Congress (2021-2022)

(Image from Mindy Barker Assoc.)

Ever since STEM was identified as a national priority in the early 2000's, STEM education funding has steadily increased regardless of which party controls the White House or Congress.

It's great that accounting has been accorded some respect and that accounting education may soon be eligible for Federal support. There is an acute shortage of accountants relative to open positions.

Respect the green eyeshade!

The Dismal Classroom

Although my chosen profession of finance and accounting provided me with a good living and decent retirement, Ben Stein's economics teacher in Ferris Bueller's Day Off always punctures any pretentiousness that I may have had about my line of work:



It's pathetic that I (still) know the answers to Ben Stein's questions.

Philosophical Underpinnings

(Examiner image)

Out of curiosity more than necessity your humble retired accountant has been sampling online Continuing Professional Education courses that CPA's take to maintain their active status.

It's a hard slog, with tax modules grinding through Internal Revenue Code sections and accounting training covering the recently recompiled accounting bible, the Accounting Standards Codification. Right, I could barely keep my eyes open writing the previous sentence.

If you can handle the tedium, you can find nuggets of substance, such as:

An entity should aggregate or disaggregate disclosures so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have substantially different characteristics.

Don't overwhelm the reader with "insignificant detail", yet don't combine dissimilar information if it will mask meaning. Holding to these principles requires deep understanding of the material by the writer and an ethical obligation both to present and not to omit significant information.

Long ago I seriously considered a career in journalism, and I thought its aspiration to report the truth without fear or favor was similar to accountancy.

Both professions fall short of that ideal, of course, but IMHO most journalists no longer view truth as their ideal anyway; rather, they seek to weave a narrative to influence readers toward a particular point of view.

Accountancy harks back to an Enlightenment perspective: present all information that will be important to rational, intelligent readers of financial statements (e.g., lenders, investors, employees, customers, etc.) in making their decisions. Despite the mockery they must endure, accountants can take pride in the philosophical underpinnings of their profession.

Now, back to the dusty ledgers and green eyeshades....

Take My Oil, Please

Oil storage tank (it's a model) for sale on Amazon.

Another effect of coronavirus economics that even experts have a tough time explaining:

CNBC: An oil futures contract expiring Tuesday went negative in bizarre move showing a demand collapse

West Texas Intermediate crude for May delivery fell more than 100% to settle at negative $37.63 per barrel, meaning producers would pay traders to take the oil off their hands.

Your humble blogger has never traded commodities and remembers vaguely from long-ago finance classes that future oil prices are dependent on today's ("spot") price, interest rates, and storage costs.

But the biggest factor can be buyers and sellers' estimate of future supply and demand . A producer can sell oil today, for example, at around $20 per barrel but might be willing to commit to deliver oil at a $15 price in July if the producer thinks demand will be soft.

Oil markets have been pessimistic before, but the futures price has never been negative. The closing price in the headline means that the seller will pay a "buyer" $37.63 to take a barrel of oil on May 1st. I was tempted to place an order to take delivery of oil and get paid for doing so, but I don't have a place to put 1,000 barrels, the minimum size of a futures contract.

The anomalous situation will undoubtedly right itself tomorrow, but there have been too many glitches in the Matrix recently:

Governments voluntarily killed their economies for a month or longer, akin to doctors stopping the patient's heart to perform an operation.

A roaring economy and stock market have collapsed into a deep recession and bear market, respectively, in a matter of weeks.

After a primary season with more than two dozen contenders, the Democrats have picked the worst candidate possible. Anybody in the Boston phonebook will perform better in a debate with Donald Trump.

Celebrities voluntarily broadcast their images without make-up, and many just look like ordinary people.