Rénmínbì

That's a relief.

With the courteous assistance of those clever Dutch over at greatfirewallofchina.org, I just tested whether TED has been blocked from viewing by the teeming hordes of Communist China. It has.


Up until this morning, I was beginning to worry that my snarky little posts pointing out the fraud, follies, and shenanigans in our lovely financial markets were beginning to disabuse all those budding criminals capitalists of their childlike hope in the future of the global market economy.

Fortunately, the Maoist-Confucian Society for Right Thinking has banned access to these pages by its citizens, no doubt along with all the other dreck and drivel collectively lumped under the domain "...blogspot.com." Therefore, we can safely conclude that China's direct and indirect investment in The Blackstone Group, various hedge funds, and that special form of crack cocaine known as residential real estate is safe from imminent withdrawal.

Feel free to breathe a sigh of relief that the Greater Fool remains blissfully uninformed of its error of judgment, comfy behind its protective defenses. By the time the Chinese have figured out we have sold them a bill of goods—matched only in size and extent by the time we sold the entire commercial real estate stock of Manhattan six times over to the Japanese for 200% of replacement cost, and threw in the contents of the Metropolitan Museum of Art to boot—we will all be lighting newly unembargoed Cuban cigars with worthless fifty dollar bills on our repossessed hedge fund yachts in the Azores.

Talk about information asymmetry.

Hat tip to Lee Distad, who checked first.

© 2007 The Epicurean Dealmaker. All rights reserved.

Go West, Young Sheik

Greg Corcoran over at the WSJ DealJournal has a cautionary message today for US investment banks already reeling from subprime contagion, LBO “pier” loans, and an M&A market gone AWOL: The Arabs are coming.

According to this eFinancial News story, Dubai’s ruling sheik will open an investment bank that will compete in the Middle East and Africa and eventually move in on Europe and the U.S. You might want to remember the name: Al Noor Islamic Bank.

I don’t know why. The trashbins of Wall Street are cluttered with the names of foreign commercial and investment banks that tried and failed to make a go of it in the cutthroat US market. Every few years or so—usually during an extended upswing in the markets—yet another bright-eyed foreigner gets a hard-on about the idea of muscling in on Goldman Sachs, Merrill Lynch, and Citigroup in the biggest market in the world. They launch fancy new offices, snap up a bunch of high-priced talent from other investment banks, and throw their balance sheet around in a futile attempt to buy market share. Often (First Boston, DLJ, Dillon Read, PaineWebber, Bankers Trust, Alex. Brown), they shell out an outrageous sum to buy the brand name and rapidly depreciating loyalty of a bunch of Yankee i-bankers. They usually run very nice, expensive, four-color ads in all the right magazines.

And in three or four years, if they are lucky, they are gone, with only a gaping hole in their balance sheet to show for the effort. Some do cling to life here and even prosper, to an extent, but this is usually because they have brought so many American investment bankers on board that they really look and behave completely like a US investment bank. There is absolutely nothing Swiss, German, Japanese, or French about any of the US branches of the survivors. And if the foreign parent tries to force a little of the old country culture or business practices on their American cousins, eventually the only sound you hear is the shuffling of Gucci loafers out the front door.

So what makes these benighted sods think they can succeed where so many others have failed? Well, usually, in addition to an overoptimistic assessment of their own manhood, the answer is money. “We have gobs and gobs of money,” they say, “Why can’t we beat those conniving bastards at their own game?” Mr. Corcoran seems to buy into this argument as well, given how approvingly he reports the bajillions of petrodollars those clever sheiks are packing under their burnooses.

The answer, of course, is that money is not the only thing, or even the most important thing in investment banking. (We are not talking about bonuses now.) Investment banks derive their power, capability, reach, and skill from the strength and connectedness of their bankers’, salespeoples’, and traders’ networks, both within and outside the firm. If you do not have multiple personal and institutional relationships with potential investment banking clients, you stand a poor chance of getting good, profitable mandates. Likewise, if you do not have multiple personal relationships with other bankers, salespeople, and traders within your own investment bank, you will find it hard to call in favors, threaten, and wheedle to the extent necessary to make that pig deal of yours fly. You need both to be effective, and it takes time to build such internal and external networks based on favors, information exchange, and back scratching.

You cannot hire a bunch of superstar rainmakers who do not know each other—a favorite technique of foreign entrants to our market—and expect them to be as effective together as they were in their previous institutions. They simply do not have the internal networks required to be as effective as you expect them to be. This is what investment banking honchos really mean when they talk about “culture.” Extensive, robust, and proven internal networks are as essential to the proper functioning of an investment bank as its external client list. Both take time to build, and both must be built organically.

But everyone knows that investment banking is only about money, right? I remember a business school professor of mine, a published, well-respected, intelligent professor of management strategy, who told me in 1989 that if I wanted to become a successful investment banker I should go where the money is. She recommended Japan. Oops.

What my professor did not realize, and what many other intelligent people—yes, even financial journalists—do not realize is that investment bankers do not need to go where the money is to ply their trade. The money comes to them, and it gladly pays their exorbitant transaction fees because they really do add value in connecting their clients with the internal and external networks for capital and governance.

So calm down, all you worried Analyst and Associate wannabes: you do not need to rush out and learn Arabic in order to have a job in five years time. (Or Chinese, or Russian, or Portugese, for that matter.) Other than bags of shekels, Al Noor Islamic Bank seems to have nothing of what it needs to become a credible threat to Goldman, Citigroup, or even Deutsche Bank in the US: no people, no clients, no skills, and no relationships. Furthermore, it appears to want to wade into the biggest shark tank on the planet with both feet tied together and a nasty cut on its forehead. How else would you describe a bank that wants to be a player but which cannot participate in the largest securities market out there, fixed income? “Daft” might be polite.

Although, now that I come to think of it, Al Noor’s Shariah prohibitions against charging interest might be an advantage in the current credit market meltdown. “We didn’t put you in those nasty CDOs or subprime mortgage derivatives, Mr. Investor. Now, how about a nice plate of dates?”

Who knows, it might be kind of fun to do M&A deals dressed like Lawrence of Arabia. Inshallah.

© 2007 The Epicurean Dealmaker. All rights reserved.

For Whom the Bell Tolls

Gandalf had hardly spoken these words, when there came a great noise: a rolling Boom that seemed to come from the depths far below, and to tremble in the stone at their feet. They sprang towards the door in alarm. Doom, doom it rolled again, as if huge hands were turning the very caverns of Moria into a vast drum. Then there came an echoing blast: a great horn was blown in the hall, and answering horns and harsh cries were heard further off. There was a hurrying sound of many feet.
"They are coming!" cried Legolas.
"We cannot get out," said Gimli.

— J.R.R. Tolkein, The Fellowship of the Ring

Andrew Ross Sorkin is dancing a happy jig on the freshly filled grave of the private equity boom, and he wants you to know that you're next:

Comfortable? Let me offer a more dour view: wide swaths of Wall Street, and many of the industries that serve it, are in for some serious collateral damage. Not only has private equity been out of business for the last two months, but that activity is not likely to resume with any significance soon. And when it does, it will be at a fraction of its recent peak.

So what does that mean? For much of Wall Street, a severe case of withdrawal. Forget about cutting the size of bonuses: let’s start really thinking about the possibility of slashing jobs.

In his Sunday New York Times DealBook column, Sorkin goes on to identify a few of the likely victims: financial sponsors group bankers, private equity professionals, "irrational compensation packages" on Wall Street, management consultants, eager MBAs, and—cruelest of all—poor little SeamlessWeb, which delivers food to hungry analysts pulling all-nighters.

Well, shit, Andrew. Pull out the black armbands, why don't you?

The trouble is that Sorkin both goes too far in some respects and doesn't go far enough in others.

For one thing, he mentions irrational compensation in the same breath as private equity's 2% management fees, leading the uninformed reader to draw the conclusion that 2% of assets under management flows directly into the pocketbooks of a PE firm's professionals, with nary a stop for tea. Nope, sorry, my boy, that 2% counts as revenue to the PE firm, which must unfortunately be offset by such pesky little items as the expenses of running the business. Believe it or not, renting swanky offices on Park Avenue or 57th Street in Manhattan tends to chew up a great deal of that filthy lucre right out of the box. Then, of course, there are all those consultants the PE firms hire to do due diligence on deals and potential deals. While some of the outsourced services the PE firms use can indeed be charged back to its limited partners for successful deals, as Sorkin mentions, in most cases the GP cannot charge for due diligence on deals it does not close. And every PE firm out there takes a deep look and spends a lot of time and money on deals it does not win. No, it is an expensive proposition to run a PE firm, and very few GPs get rich on management fees alone.

Second, Sorkin misses or fails to mention vast swathes of the financial landscape which have luxuriated in the explosive growth of the private equity biosphere. In addition to management consultants, among those who have staffed up dramatically to serve PE clients in recent years, you can add accounting firms, sell-side investment banks, virtual deal room providers, data service providers, leveraged finance bankers, and lawyers. Had you attended one of the umpteen thousand private-equity-centered investment conferences in New York or elsewhere in the past few years, like I did, you would have been amazed at the number and diversity of service providers all jostling to lick the boots of their PE masters. Because they are so thinly staffed, private equity firms outsource practically everything. Now that PE deal volume is down, and likely to stay depressed for some time, things are going to get a mite sketchy out there on the savannah. With fewer lion, leopard, and cheetah kills to scavenge, the hyenas, jackals, and vultures are going to get mighty hungry.

Compounding this lack of joy in Mudville is the coincident carnage in the hedge fund community and at investment banks. Bankers and investors who could not distinguish Henry Kravis from Angelina Jolie are getting roiled by the same forces pummeling the credit markets which serve private equity, and cumulative net worth among these participants is disappearing faster than a cold beer on a hot day. All of Wall Street is taking it squarely on the chin (or chins, depending on your view of how fat those cats really are).

This means that the secondary fallout from this uproar will be pretty broadly distributed, some of it in places which on the surface seem far removed from the intersection of Wall and Broad. My favorite candidates include high end New York apartments, commercial rents in Midtown, vacation homes in the Hamptons, New York City tax receipts, Ferrari dealerships, "bottle service" at trendy nightspots, second and third rate contemporary art, and $3 hotdogs from Manhattan street vendors. I would expect a similar deflation of balloons in other financial centers as well, with London leading the way for Europe.

So while I enjoy a good session of Schadenfreude as well as the next guy, and appreciate a little grave dancing in the financial media to boot, I must in all honesty observe that all of us are going to feel some pain from this contraction. Not least of these, of course, will be journalists like Mr. Sorkin, who have hitched their rising star to the deal economy chariot just like the rest of us. And while he will no doubt be able to write some juicy stories of the decline and fall of financiers great and small, at the end of the day who will read his column if none of us are left?

No man is an island entire of itself; every man is a piece of the continent, a part of the main. If a clod be washed away by the sea, Europe is the less, as well as if a promontory were, as well as if a manor of thy friend's or of thine own were. Any man's death diminishes me, because I am involved in mankind. And therefore never send to know for whom the bell tolls: it tolls for thee.

— John Donne

© 2007 The Epicurean Dealmaker. All rights reserved.

The Wisdom of Crowds?

"It's like, how much more black could this be? and the answer is none. None more black."

— Nigel Tufnel, This Is Spinal Tap

Steve Schwarzman must be seriously pissed.

In addition to having Joseph Flom of Skadden Arps put a serious crimp in his social life by preventing him from waggling his private parts in public both during and after the Blackstone IPO, Little Stevie now faces the ignominy of a continuously tanking BX stock price. The naughty little security even had the temerity to close yesterday almost $10 per share (or nearly 31%) down from the June 21st IPO price of $31.

Blackstone's shares are not alone, of course, in having had a serious attack of the vapors ever since Wall Street remembered that Risk is not only a Parker Brothers board game. Listed hedge fund Fortress Investment has crapped out over 50% from its February high (although only a dollar from its IPO price), and legions of investment bankers at Goldman Sachs, Lehman Brothers, and Bear Stearns have seen massive markdowns in the value of all that lovely unvested stock their bosses have rammed down their throats over the last few years. Apparently, things have gotten so bad in the 10021 zip code that there are rumors the Park Avenue matrons are staging a Lysistrata-style sex strike until their husbands manage to restore their companies' stock prices to pre-June levels. (We'll see if anyone notices.)

Now, I don't care how many other billions you have, or how much water you draw in New York society, losing almost two and a half billion dollars on paper in less than three months has got to hurt. And if it doesn't hurt Steve, you can bet your Versace chastity belt that it hurts the lesser demigods at 345 Park Avenue, and plenty.

Normally, private equity professionals couldn't give what is colloquially known as a rat's ass about the post-IPO performance of the stock of portfolio companies they bring to market, except to the extent they want to sell their remaining shares as soon as possible at as high a price as possible. Unlike the typical public company CEO, PE guys are almost completely uninvested, emotionally and intellectually, in their companies' stock prices. In fact, many of them take an almost perverse pleasure in top-ticking the market when they take a portfolio company public. They feel that if the stock does not decline after the IPO, or appreciates too quickly, both they and their bankers have done a lousy job in extracting the maximum juice from the benighted public shareholder. This makes complete sense, of course, since a large part of private equity's business model depends heavily on the public markets selling companies too low and buying them back too high, compared to their intrinsic value.

But in the case of Blackstone itself, the inside shareholders are subject to a completely different—and, for most of them, a completely unfamiliar—dynamic. They are shareholders, and large, locked-up, unvested shareholders at that, completely at the mercy of the Great Unwashed Investing Public they have been used to making such liberal fun of in their investment committee meetings over the past several years. If they buy the Private Equity Council party line—which virtually all of them do—they believe wholeheartedly that private equity is an investment method which produces long-term value appreciation, almost regardless of fluctuations in the public equity and fixed income markets. But now they can see a real-time, tick-by-tick appraisal of the value of their own business by Mr. Market every trading day, which translates into a real-time update on each Blackstone professional's personal net worth. (And don't think that these professionals' wives and husbands don't do the very same calculation every time they plan a shopping trip to Henri Bendels.)

This must be a serious problem, especially for the poor slobs just starting out at BX. Sure, Senior Managing Directors can shrug off the loss of a few tens of millions or so each week, because they already have enough to buy a small principality somewhere, and the Missus has plenty of the folding to keep up appearances at the Central Park Hat Lunch. But an Associate or a Vice President, whose financial status as a PE plutocrat is largely on the come, has no such luxury. It's pretty hard to explain to your significant other why this weekend you can only afford a two bedroom summer share in Hampton Bays when last week you were looking at five bedroom exclusives in East Hampton. It tends to put a bit of a damper on the old love life.

Finally, it has to be galling for these Masters of the Universe—who without exception are hardwired to believe that their judgments of company value are always and everywhere superior to those of John Q. Public—to be handed a report card each and every day by the same JQP which rates their efforts at "B – ; Needs improvement."

Whether this sorry situation will have a long-term negative effect on the performance of Blackstone or not—for example, by distracting the attention and distorting the judgment of its investment managers or by making it harder to attract and retain the best PE professionals—is too early to say. All I would observe is that, in my experience, that little flashing stock ticker in the corner of an executive's computer desktop can be a mighty distraction, expecially if it is flashing red all the time.

© 2007 The Epicurean Dealmaker. All rights reserved.

Déjà-vu

I must say I am disappointed.

A few weeks ago, against the background of a steady stream of handbaskets carrying various and assorted market participants, credit ratings, and institutional balance sheets straight toward Old Beelzebub's Broiler, I decided to leave for a couple of weeks of relaxing R&R. The Dealmaker Family Unit had a lovely time, grilling the ancestral lutefisk over a cedarwood campfire, nailing the occasional squirrel to a knotty pine, and baying at the aurora borealis in Northern Manitoba. I can't be positive that the little Dealmakers truly remembered me after my habitual work-induced absence, but if not the Missus did a good job briefing them on how to pretend they recognized Dear Old Dad.

Unfortunately, when I returned to work this week I found that you people did not sort things out during my absence. The mainstream media, my fellow financial bloggists, and my trusty Bloomberg terminal are all still rabbiting on about the same old credit-contagion, market-crisis shite that consumed their attention three weeks ago. What's the matter? Weren't my instructions clear enough for you?

The current state of affairs in the markets reminds me of the old chestnut of the drunk who bumps into a lamp post. He thereupon begins walking in circles to try and avoid it. After he has collided with the same lamp post for the fourth time, he staggers to a halt and cries in frustration, "Help! They've fenced me in!"

I ask you: is that how you would like me to think of you, as a really bad, stale joke? I didn't think so. Snap out of it.

Fortunately, it seems that we did sort out at least one pressing issue of global significance while I was away: the background color to this blogsite. After extensive automated polling of the best and brightest the global financial markets have to offer—yes, you, Dear Readers—I have discovered that a substantial majority of those who voted prefer to keep this site as pure as the driven snow, color-wise, rather than the rather bilious lemon-lime yellow of yore. Some faithful partisans of The Early TED may rail at cruel and blind Fate, but the poll results are pretty clear:


Being a person who generally despises democracy as the last refuge of a scoundrel—unless you restrict the vote to free, land-owning males of a certain age, like the Athenians did—I was quite interested to see that this little exercise attracted 185 votes. Given the average number of feed subscribers over the period of the poll, that represents about 50% of the faithful TED-reading "electorate" who turned out to vote.

Now, if you paragons of civic virtue would only whip the markets back into some sort of shape, I might be able to get some of my deals back on track.

© 2007 The Epicurean Dealmaker. All rights reserved.