June 12th, 2009
The importance of position in framing plans (and creating value) is evident in the more complex strategies employed by the entertainment industry.
An entertainment industry myth is that owning a hit television show or movie is the key to a winning strategy. “Content is king” is an old catchphrase of the media and the entertainment world. At the extreme, it is true—but it is more a truism, no more a guide to strategy than is advice to only buy stocks that are about to rise. The largest value is derived not from ownership of any one media property, but from aggregating them (or, in the argot of the industry, “packaging” them). The package and the supporting infrastructure create the strategic position from which individual options (or plans) can be framed.
Owning rights to one future Disney movie or one Steven Spielberg movie is itself no guarantee of economic wealth. In fact, most of Disney’s animated movies and most of Spielberg’s movies have lost money when costs were measured narrowly against box office receipts.3 Why, then, have these films been creators of great corporate and personal wealth?
May 23rd, 2009
Although many plans begin as dreams, a dream is not a plan. The crucial distinction is that a plan deploys resources against an objective. Until the resources are in place, we are dealing merely with a dream.
The corollary of this statement is that plans do not need to be captured in writing. A strategic position itself is the source of flexibility, and a smart leader can build flexibility into his or her plans. We shall explore the view that position is a necessary, but not a sufficient, condition for the generation of a plan. The option may exist in principle, but it typically requires intelligence, information, and creativity to frame it and analytical skills to value it. These steps are the prerequisite to an actionable real option: namely, (1) frame, (2) analyze, (3) act.
To put it more simply, to make the distinction between plans and dreams, just ask if the plan is currently actionable. If so, you own a real option. The financial analogy is that to exercise a financial option, you first have to own it. To own it entails a cost or a premium. In the end, your profit will be the value of the option minus the cost of the option.
Real options derive from plans. But a real option is ambiguous in regard to the moment of ownership because full ownership may not arise from a single event. Let us explore this point for a hypothetical case.
April 30th, 2009
Numerous studies have documented that, when it comes to equity and fixed-income mutual fund managers, there is little evidence of performance persistence, except in the case of particularly bad performance. These studies suggest good performance could be attributable to luck, rather than to skill, and bad performance can result from incompetence or excessive management fees.
Of course, CDO and mutual fund managers differ in their job tasks and skill sets. A high-yield mutual fund credit analyst with a sterling performance record might wither as a CDO manager when faced with the task of managing a set of liabilities. In fact, during the late 1990s several mutual fund companies with strong high-yield performance records branched into CBOs and discovered the hard way that success in the flexible world of mutual fund management did not help them when managing the numerous constraints of CBOs.
April 3rd, 2009
In late November 2008, the Treasury and the Federal Reserve announced a facility to finance the issuance of non-mortgage asset-backed paper in order to support lending to consumers and small businesses.
The consumer asset-backed securities market offers
- liquidity to lenders that provide loans to small businesses
- to consumers through auto loans, student loans and credit cards.
Because this assetbacked market stopped functioning, it has become difficult for consumers and businesses to obtain affordable and sufficient credit. The Treasury indicated that the lack of affordable consumer credit undermines consumer spending and weakens the economy. In an effort to make credit available, the Treasury will provide $20 billion in credit protection from EESA funds to the Federal Reserve in connection with the Federal Reserve’s $200 billion Term Asset Backed Securities Loan Facility (“TALF”). In addition, the Federal Reserve announced a program to purchase $600 billion in mortgage-backed securities and direct obligations of Fannie Mae, Freddie Mac and Ginnie Mae. These new programs exceed the $700 billion approved by Congress in October.
The Federal Reserve’s aim is to:
- reduce the costs
- increase the availability of loans for home purchases.
In turn, more home purchases would support the declining real estate market.
April 2nd, 2009
The most significant component of EESA is the Troubled Asset Relief Program (“TARP”). TARP permits the Treasury, through the new Office of Financial Stability, to use up to $700 billion to purchase troubled assets from financial institutions. The Act defines “troubled assets” and “financial institution” very broadly, allowing great flexibility for the Treasurer’s activities. The financial institutions covered under EESA include banks and credit unions as well as insurance companies and securities broker-dealers. The troubled assets that are covered include residential and commercial mortgages, any securities based on the mortgages and, importantly, other financial instruments the purchase of which will promote financial market stability. TARP was initially focused on the purchase of troubled assets such as mortgagebacked securities, but, after passage of EESA, the Treasury determined that the severity of the crisis required more powerful steps to stabilize the financial system and restore the flow of credit. The Treasury’s plan to use part of the $700 billion to purchase troubled assets was subsequently put on hold in favor of a new plan. The Treasury enumerated three critical priorities for the TARP funds.
- First, use the TARP funds to continue to strengthen the capital base of financial institutions. The Treasury indicated that banks and non-banks may need more capital given troubled asset holdings and stagnant economic conditions.
- Second, use the funds to reinvigorate the securitization market. The market for securitizing student loans, auto loans and other consumer credit has ceased to function and thereby reduced the availability of consumer credit.
- Third, explore ways to reduce foreclosures by developing a plan to maximize loan modifications.
April 1st, 2009
The federal government and its agencies have taken, and continue to take, a variety of steps to thaw credit markets, restore confidence in financial institutions, and stimulate the economy. Secretary of the Treasury Henry M. Paulson remarked that there is no “playbook” for responding to the turmoil in the economy. Federal actions are by no means limited to banks and credit unions. The crisis extends to other financial organizations and other parts of the world economy due to the seemingly ubiquitous presence in investment portfolios of mortgage-backed securities and the instruments insuring those securities, credit default swaps.
Federal stimulus programs, policies and rescue packages have come rapidly and on a grand scale. Programs have been announced and then changed or abandoned as the federal government searches for the most effective use of its resources. Though the government has done much thus far, there will be more initiatives to come as ideas are translated into action and a new U.S. President implements his own national economic policies.
The Emergency Economic Stabilization Act of 2008 (“EESA”) was passed on October 3, 2008 and is one of the most notable efforts, thus far, to stabilize the credit markets and restore investor confidence. The purpose of EESA is to restore liquidity and stability to the U.S. financial system and to ensure that the newly granted authority is used in a manner that:
- a) protects home values, college funds, retirement accounts, and life savings;
- b) preserves homeownership and promotes jobs and economic growth;
- c) maximizes overall returns to the taxpayers;
- d) provides public accountability for the exercise of the new authority.
March 31st, 2009
As the U.S. real estate markets decline and certain mortgage terms become onerous, many loans, particularly subprime and predatory loans, stop performing and enter foreclosure. These foreclosures are causing severe hardship and dislocation to many individuals and families. As mortgage loans continue to fail, the institutions that made or invested in the loans, as well as those institutions insuring the investments, experience significant losses and financial stress.
In reaction to the crisis, financial institutions in the U.S. have
- written down the value of assets,
- increased loan loss reserves
- assumed a cautious approach to lending, including inter-bank lending.
Some financial institutions around the country have experienced difficulties with liquidity, struggling to meet depositors’ withdrawal requests and borrowers’ credit needs. Liquidity pressure arises from a number of factors including the decline in value and marketability of mortgage-related investments, the reluctance of banks to lend to one another, and deposit flight. No deposit institutions have failed in Maine, but liquidity problems played a large role in some highly publicized failures of large banks outside the State. These actions and economic circumstances have frozen the credit markets, and made it difficult for businesses and consumers to borrow. Given the importance of credit in the economy, the curtailment in lending has a direct impact on business activity, consumer spending and employment. The declining economic activity creates a negative spiral as more homeowners encounter financial problems and havedifficulties repaying their mortgages.
March 31st, 2009
The U.S. and world financial systems are undergoing the most significant market and credit disruptions since the Great Depression. Though economists will debate the origin of the crisis for years to come, it is apparent that the cause is due, in part, to the combination of low interest rates, excessive risk-taking and investor demand for mortgage-backed securities that existed earlier in the decade. Low interest rates and
strong secondary market funding sources drove up mortgage lending volume and real estate markets throughout the U.S. Mortgages, both prime and subprime, were sold into the secondary market where they were packaged into mortgage-backed securities and purchased by investors all over the world. Maine was an early adopter of laws designed to control this increased loan activity, curb predatory lending and prevent
consumer hardship when the Maine Legislature passed the Act to Protect Maine Homeowners from Predatory Lending in 2007.
September 26th, 2008
The rhetoric of both the U.S. administration and U.S. banks increasingly annoying. The people want the Hau-jerk politics fortunately no longer follow.
Fortunately, an early election in the United States of America. The country is manageable in that phase of approximately two to three months in which the White House and Capitol Hill times not only to the mass of money, but according to the mass of voters must. Or at least it must do. That Hank Paulson in Congress are left, from members of both parties, shows that their representatives know how badly the 700-billion .- $ packet arrives in the population. Meanwhile, you can also convince you a little if the U.S. financial blogs durchstöbert.
Even if we repeat: But the current crisis is not only because of their preventable causes such enervierend. Just annoy the pathos and the hypocrisy with which the U.S. administration called their rescue operations to the public. Paulson mainly by I-need-now-quite-quick-a-blank check-else-are-we-all-be lost rhetoric one feels at George W. Bush ante portas Iraq recalls. Either you’re with us or you’re against us. But in the case of the rescue of high finance by the taxpayer in circumvention of all lessons, which the Americans after the Asian crisis in the local countries or even China recently issued, the U.S. seems the people cheer patriotism anheimzufallen less than initially when the Iraq invasion.
Not only the government, even in their own junk products drown banks erblöden not a style to choose which - mildly - quite the situation under it. So Goldman Sachs hailed the new shareholder as “the world’s most esteemed and successful investor.” His entry to confirm Goldman’s “fantastic statement” and strengthen “the already strong capital and liquidity base.”
Wow, if the dot is so strong, the financial gurus of Goldman one time to explain why they Buffett lush ten per cent dividend guarantee and with the option package still an ordinary lay it snaps.
September 26th, 2008
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