CBLOG

2. Detroit muni controversy: A troubling precedent?

The Libor scandal was one of the biggest and farthest reaching in recent memory. Investigations are underway in many countries and have spread to other interbank rates, such as Tibor and Euribor, and even other markets. At some point, given the intensity of the crimes and investigations, we'll likely see more criminal prosecutions.

In the United Kingdom, Tom Hayes, a former trader at Citigroup and UBS, has become the first person charged by the Serious Fraud Office. Hayes, a British national who worked in Tokyo, and another former UBS trader, Roger Darin, had already been criminally charged. Hayes will likely face the music in his home country first.

Two other brokers were arrested with Hayes back in December, but have so far not been charged.

All this will play out over time, and it's best to keep the big picture in mind. Benchmark rate and prices are under investigation around the globe, and not just those set by committee.

"The Libor settlements, which have seen three banks pay nearly $2.6bn in fines, have made clear that indices set by surveying banks or market participants can and were manipulated," notes the Financial Times. "But there is growing evidence that market-based rates, often touted as the solution to the Libor problem, may also be vulnerable to manipulation or at least front-running by knowledgeable traders. Whistleblowers have alleged that traders in both foreign exchange and energy markets have sought to influence the benchmark price by stacking up transactions during critical price-setting windows."

In terms of solutions and best practices, we'll be hearing a lot more about this soon.

For more:
- here's an article from the Financial Times

Read more about: LIBOR, Criminal Charges
back to top

By Jim Kim

Comment |

3. Loeb escalates battle against Sony

When it comes to the hierarchy of municipal bond creditors, the pecking order has always been relatively firm. Bondholders rank pretty high, certainly above pensioners. Still, the idea that average pensioners, who are certainly not rich, will get their benefits slashed to help pay off the bondholders has always packed a powerful political wallop. Traditionally, it has been enough to force all parties to the negotiating table. But the New York Times notes that the looming Detroit muni nightmare seems to be changing the game just a bit.

"With talks on labor issues scheduled for Thursday, municipal bond market participants say one of their main concerns is that the city's proposal would flatten the traditional hierarchy of creditors, putting say, a retired librarian on par with an investor holding a general obligation bond. That does not square with the laws and conventions of the municipal bond market, where for decades small investors have been told that such bonds are among the safest investments and that for "general obligation" bonds cities could even be compelled to raise taxes, if that's what it took to make good. The 'full faith and credit' pledge was supposed to make such bonds stronger than the other main type of muni — revenue bonds, which promised to pay investors out of project revenue."

That said, retirees aren't concerned with bond market tradition. They just want what they think they are entitled to. And you can certainly understand their position. They worked a lifetime for their benefits. In addition, they have already made big concessions.

So the stakes are really high, which means the entire mess may end up in bankruptcy court, where the pie will get divvied up by a judge.

For more:
- here's the article

Read more about: Muni Bonds
back to top

By Jim Kim

Comment |

4. Stock buyback ROI strong but not everywhere

With Sony scheduled to hold its annual shareholder meeting this Thursday, Third Point's Dan Loeb has escalated the stakes in his battle against management.

In a letter to Sony's board, Loeb disclosed that his firm, Third Point, had boosted its stake to about 7 percent, or about 70 million shares, from 6.5 percent last month. The letter also reiterated Loeb's request that his firm be given a board seat.

Loeb issued some new requests as well. In particular, he suggested that Sony embrace "a semi-independent governance structure," which would allow the current chairman to remain as chairman of Sony and a spin-off proposed by Loeb.

The Sony board is mulling Third Point's proposal to spin off as much as 20 percent of its music and movie assets so the company can focus on its flagging consumer electronics units. The board has put forward some new director candidates. Shareholders will vote on the board's nomination of three new directors, which includes two former Apple executives, to replace four that will retire.

Japan Real Time suggests several reasons why the board may rebuff Loeb: the company isn't hurting for cash, IPOs take time and are expensive, the partial spin-off of the financial unit yielded mixed results, and viable alternative to Loeb's ideas may prove more workable.

For more:
- here's the item

Read more about: Dan Loeb, Third Point
back to top

By Jim Kim

Comment |

5. Icahn makes a new proposal for Dell

The conventional wisdom on stock buybacks is that they are win-win. Management loves to tout that they are investing in their own company. Shareholders assume that earnings and the stock price might get a boost, as fewer shares are traded. The CEO of Apple recently said, "We believe so strongly that repurchasing our shares represents an attractive use of our capital that we have dedicated the vast majority of the increase in our capital return program to share repurchases."

The Institutional Investor Corporate Buyback Scorecard, however, offers a different narrative, as it submits buybacks to the same rigorous return-on-investment analysis that governs other uses of cash. The rankings calculate the total return on cash expended on buybacks for the two years ended March 31, 2013, taking into account dividends avoided and the average value of shares at the end of each quarter.

The ROI on buybacks is somewhat less than what many assume. According to the Scorecard, in the case of Apple, the company's –56.7 percent return on buybacks "trails those of all S&P 500 companies that compete in the rankings. Every dollar spent by Apple on share buybacks during the two-year period was worth less than 44 cents. The tide may still turn for Apple's buyback ROI if the company repeats past magic in consumer markets and the stock price zooms to new highs, but contrary to the CEO's assessment, the recent $2 billion in buybacks does not look like an attractive use of its capital."

To be sure, the study notes that all too many companies invest heavily in their own shares, with little effect on the stock price. That said, a bull market can do wonders for the effectiveness of buyback plans. And as of late, the ROI has been strong at most companies. The median ROI was 19.6 percent in the first quarter, compared with 9.7 percent in the fourth quarter.

One issue that will likely have some ROI implications is the use of buybacks to fund stock options grant programs. To the extent that these programs merely keep the number of shares outstanding even, the bang that many shareholders are hoping for may not materialize.

For more:
- here's the article

Read more about: Stock Buybacks
back to top

By Jim Kim

Comment |