Thinking about Cerberus

Cerberus, the private equity group, bought Chrysler from Daimler in 2007.

I've been thinking of that deal anew in recent weeks with the continued disintegration of the US auto industry.

Here's a fascinating blog entry written by someone else who has obviously also been giving it some thought Robert Farago.

Farago's unnamed source says that he thinks Cerberus was really hoping to merge Chrysler's finance company with GMAC, thereby creating a massive auto lender which it could sell to a big bank. Given that plan, the Cerbereans had to keep the auto company alive in order to preserve the real prize, that finance company.

There is some plausibility to that, and I'm beginning to understand the flaw in some of my own earlier theorizing about the future of the auto industry. I've been focusing on the auto/petroleum connection, or lack thereof. I've long thought it would be natural for Exxon/Mobil to buy an auto company, for the same reason that hot dogs and relish are generally sold by the same vendor. Exxon/Mobil could afford the losses at the showroom, just as Gillette sells its razors for a loss -- it does so because it makes a profit from the stream of blades that the customer who buys the cheap razor is thereafter committed to buy.

I now see that neither analogy really works. The hot-dogs-and-relish combo is only natural because at appropriate events we want to buy them at the same time. We want the hot dog, and just enough of a condiment to go with the dog. But of course if we're buying condiments for use at home, we'll go to a grocery store not a ballpark, and there is no great tendency toward consolidation of the relish and hot dog companies who supply such stores.

The lose-on-razors-to-profit-on-blades trick only works for Gillette because its blades are specially designed to fit its razors. So do those of Schick. Were blades fungible (as if petroleum) that model would break down.

Autos and auto finance is a natural combination for the same reason that hot dogs and relish are. The need is simultaneous. The car dealership is the ball park. I want to get the loan to spread over my new car.

What Farago is suggesting, though, is that Cerberus was banking on a decoupling of auto companies with finance comapnies. A GMAC/ChryslerFin combination would presumably be a company interested in financing anybody's car.

That doesn't seem to have worked out all that well for them.

So what lesson might I draw here? Perhaps that though the times through which we are passing are difficult, they aren't revolutionary. What has been bundled will stay bundled (cars and their finance companies, blades and their razors) and what has been separate (car and petroleum companies) will remain asunder.

UConn Huskies

On the women's side, the UConn Huskies are college basketball champions this year (their sixth championship during the reign of coach Geno Auriemma, and their third undefeated season) -- an eminence they acquired by defeating the Louisville Cardinals 76 to 54.

The Huskies have been so dominant this year that not only did no one defeat them int he 39 games of the season, but no one came close. Every game they played ended with the Huskies ahead by more than 10 points.

Tina Charles was the stand-out of the championship game, scoring 25 points and getting 19 rebounds.

On the men's side, the Huskies also had a fine year, getting into the Final Four Round, but they lost to Michigan State Saturday night in the semi-final. The Spartans in turn lost to North Carolina's Tarheels on Monday night. So congratulations to the Tarheels on their championship.

Alas, though, the final stages of the UConn Huskies' year, on the men's side, were somewhat over-shadowed by a recruiting scandal, one that reminds me of the movie "Hoop Dreams" and the unsavory side of college sport's in general.

As is the custom, college basketball ends just as professional baseball begins, and as the trees in my region are budding. Enjoy the new season, in both senses of the term.

Greg Newton, Rest in Peace

Greg Newton has passed away. He was a witty and incisive contributor to the economoblogosphere.

Newton warned in September 12, 2005 that the Gaussian cupola, the basic mathematical trick used for pricing credit derivatives, was not entirely suited to the weight it was being made to bear. That blog entry ended with the words "tick, tick, tick."

In recent months, other analysts have returned to the issue of the Gaussian cupola and its over-use. They have had the benefit of hindsight -- but it was Greg who warned us that the timebomb was ticking before it went off.

Until the day I die I expect that I'll consider it a badge of honor that Greg gave me a "forelock tug" in August 2007. That was when a committee of the US Senate issued a report on the whistle-blowing controversy surrounding the SEC and former staff member Gary Aguirre. Greg was covering the story of what he called "L'Affaire Aguirre" closely. He ran an item on August 6 entitled "Empty suits and selective 'enforcement'" in which he expressed the hope that the chairman of that agency would soon "be greeted with a stack of resignation letters from several senior members of the division of enforcement, and the agency's inspector general."

When I read that I had just written a story on Aguirre myself for my former employer, HedgeWorld. As part of preparing that story, I had learned that the IG was no longer around. His office told me he had just retired. Quelle coincidence!

I hadn't made enough out of this at the time, but I did pass the information along to Greg.

On August 8, Greg wrote this, "One Down: Stachnik Out as SEC IG."

I'm the "Mr. F" referenced at the end of the piece. So my life hasn't been entirely in vain.

I took vastly more from Greg's blog than I was able to return to it. One of his most memorable calls came just one year and one week ago, involving the country of Angola, a country which (I'll keep this in mind if I'm ever in trouble) has no extradition treaty with the United States. Greg managed to find the most newsy nugget in a 280 page court filing involving the demise of the Plus Funds.

So here's to him. One last long forelock tug of my own.

Palm Sunday verses

John 12: 12-16

(KJV)

12 On the next day much people that were come to the feast, when they heard that Jesus was coming to Jerusalem,
13 Took branches of palm trees, and went forth to meet him, and cried, Hosanna: Blessed is the King of Israel that cometh in the name of the Lord.
14 And Jesus, when he had found a young ass, sat thereon; as it is written,
15 Fear not, daughter of Sion: behold, thy King cometh, sitting on an ass's colt.
16 These things understood not his disciples at the first: but when Jesus was glorified, then remembered they that these things were written of him, and that they had done these things unto him.

An "almost historic" compromise in London.

The leaders of the industrialized nations (more than twenty of them, at last count, but the low-ball term G20 has stuck) have packed up and left London with their respective retinues, and they'll each try to make their case back home that they got what they wanted and needed from this week's summit.

The governments of France and Germany went into this with a unified agenda. They wanted everyone to agree that the "shadow banks," i.e. the hedge funds, were the real problem, and that a new international scheme of regulation or at least of ensuring the transparency thereof will be some part of the solution.

In April 2005, during the national election campaign in Germany, the chairman of the German Social Democratic Party, Franz Müntefering, referred to hedge funds as "locusts." This has struck a chord with the public there, and Germany has been on a Mormon-like look-out for chances to shoo some seagulls in the locusts' direction ever since.

France is a more recent convert to the regulate-hedge-funds cause, but the country has long bridled at the dominance of the "Anglo-Saxons" of both London and New York in international finance, so this theme comes naturally enough to the fore there.

So, with the big conference in the history books, what did the Merkel/Sarkozy alliance achieve?

The G20 has agreed to turn the Financial Stability Forum, which has in essence been a wonkish study group, into the Financial Stability Board, which will work with the IMF "to identify and report on macroeconomic and financial risks and actions needed to address them." It still sounds rather like a wonkish study group to me.

There's also a general understanding that the countries of the G20 should extend regulation and oversight to all systemically-important financial institutions, instruments and markets, including the largest hedge funds.

In a somewhat related move, the G20 has agreed to crackdown on offshore tax havens and secret account. The wording of THAT bit of the communique darned near blew apart the necessary facade of amity. The Organization of Economic Cooperation and Development (OECD) was expected to release a list of rogue jurisdictions that have refused to co-operate with international efforts at financial transparency and other good things. The G20 communique said that the participating nations stood ready to "deploy sanctions" on behalf of their "public finances and financial systems." It also said that it would "take note" of the upcoming G20 list.

China, which is not a member of the OECD, objected to language in the communique that would have made it sound like the G20 was deferring to that body. President Obama brokered compromise language to the effect that the G20 would "take note" of the OECD list. The language was weak enough for China to accept, yet still the threat of sanctions against somebody-or-other was strong enough to make France and Germany happy.

All in all, the results are rather paltry. I'm happy about the fact that they are paltry. I don't think hedge funds are part of the problem and I don't think characteizing them as "locusts" is any part of the solution.

My point at the moment though is that I don't believe that in their heart of hearts either Merkel or Sarkozy believes that they've accomplished very much in the way of creating a grand new regulatory system on the global plane. Yet for their domestic audiences they need to pretend that they've accomplished a good deal.

Accordingly, Chancellor Merkel has put out a statement to the effect that the meeting has found "a very good, almost history, compromise in a unique crisis."

Almost historic? That blows my mind. Everything past is in some sense "history," and surely any meeting of more than 20 heads of states is "history" even in the narrowest of kings-and-battles understandings of the term. So this historic convocation produced an "almost historic" compromise?

I'm almost amused.

Plagiarism detection

Where there is a demand, there will arise a supply.

In the contemporary world, where any child with a research assignment can find a closely related paper on the internet with unprecedented ease, and then with a couple of clicks copy it to his own file and put his name on it, there is a great demand for plagiarism detection software. Teachers want to know, quickly and reliably, which of their students has done just that.

Apparently the two best known programs marketed as the answer to this prayer are: turnitin and Safe Assignment.

Unfortunately, there are still a few bugs in such efforts.

I have no profound point to make here, I'd just like to encourage anyone with any talent in the area of software development whose talents aren't already fully deployed to think about this as one field for their exercise. The teachers of the world could use your help. And market forces will make it worth your while.

T.S. Eliot

A few lines from BURNT NORTON, perhaps?

Words move, music moves
Only in time; but that which is only living
Can only die. Words, after speech, reach
Into the silence. Only by the form, the pattern,
Can words or music reach
The stillness, as a Chinese jar still
Moves perpetually in its stillness.
Not the stillness of the violin, while the note lasts,
Not that only, but the co-existence,
Or say that the end and the beginning were always there
Before the beginning and after the end.

lines 137 - 148