Archive for March 11th, 2010
Report: Lehman Brothers Used “Accounting Gimmick” To Hide The Size Of Its Balance Sheet
Lehman Brothers was cooking the books far more than we ever imagined, if the allegations of bankruptcy court examiner Anton Valukus can be trusted.
At the height of the financial crisis in 2008, Lehman used what Valukas describes as an “accounting gimmick” to make it appear as if it had off-loaded risky assets and reduced its balance sheet.
The gimmick was known inside of Lehman as a “Repo 105.” In an ordinary repo transaction, Lehman would raise cash by selling assets with a promise to buy them back later. It’s a common form of short-term financing. And because it was really a financing rather than a sale, the assets remained on Lehman’s balance sheet.
But in a Repo 105, Lehman would treat the transaction as a genuine sale and take the risky assets off its books. Apparently, accounting rules permitted this because the assets valued at 105% or more of the cash recieved. Lehman never disclosed it was doing these transactions.
This was no small thing. In the first and second quarters of 2008, Lehman Brothers used the Repo 105 deals to reduce its balance sheet by $50 billion. That had a large and material effect on its leverage ratio, bringing it down from 13.9 to 12.1.
Here’s perhaps the most damning quote from the report (via Michael Corkley at the WSJ):
“Lehman’s own accounting personnel described Repo 105 transactions as an “accounting gimmick” and a “lazy way of managing the balance sheet as opposed to legitimately meeting balance sheet targets at quarter end.” Lehman used Repo 105 “to reduce balance sheet at the quarter end.” In 2008, Lehman knew that net leverage numbers were critical to the rating agencies and to counterparty confidence. Its ability to deleverage by selling assets was severely limited by the illiquidity and depressed prices of the assets it had accumulated.”
Tyler Durden at Zero Hedge has a great discussion of the report, which runs over 2,000 pages.
It’s useful to remember the context in which this book-cooking took place. At the time, Lehman was involved in a very public battle with David Einhorn. Einhorn had given a detailed analysis of Lehman at the Ira Sohn conference in May of 2008 that hammered Lehman for its “accounting ingenuity.” (You can download a pdf of his presentation here. Months before that Einhorn made a less-damning presenation that argued that Lehman needed to delever and raise capital. As time went on his view of Lehman’s health got more negative.)
As it turns out, Einhorn was underestimating how badly Lehman was manipulating its balance sheet.
Join the conversation about this story »
See Also:
- Joe Gregory’s Wife Forced The Other Lehman Wives To Come Look At Her Shoe Closet
- Erin Callan, Former Lehman CFO, Is Retiring From Wall Street
- Number Of The Day: Weil Gotshal Has Billed Lehman $296,631 Per Day Since Bankruptcy
NYT’s Arthur Sulzberger On Overlord Carlos Slim: He Believes In Us, But He Won’t Buy Us (NYT)
New York Times Co. (NYT) chairman Arthur Sulzberger Jr. won’t be letting Carlos Slim buy up the Times.
Although he is “delighted” to have him as an investor, Sulzberger told the crowd at the Bloomberg BusinessWeek Media Summit in New York.
“He has invested because he believes in our mission and he believes in the quality of what we do and that his shares will in fact rise,” Sulzberger said, according to a Bloomberg report.
The Times’ stock shot up last week amidst rumors that the richest man in the world was going to buy the rest of his stake in the company. He owns a nearly 7% stake in the company and holds warrants for another 15.9 million shares, for a 16% total share in the company.
Join the conversation about this story »
See Also:
- Carlos Slim Denies He’s Buying The New York Times
- New York Times Shares Soar On Rumor That Carlos Slim Will Buy The Paper
- Is The NYT Ignoring A JPMorgan Bombshell Because It Makes Investor Carlos Slim Look Bad?
The FCC’s Strict Rules Are Strangling TV
From the WSJ:Recently named FCC “Scholar in Residence,” Duke University’s Stuart Benjamin, has been trying to live down an academic article in which he proposed that the FCC simply strangle the old-style broadcasters with rules until they quit the business and surrender their spectrum. Well, kidding or not, the FCC is doing exactly that.
Ask the media bankers and investors at a recent FCC roundtable. To a man and woman, they said the FCC’s stringent ownership rules have only cut broadcasters off from the capital to remake their businesses for the digital age.
Join the conversation about this story »
See Also:
- Time Warner Cable Cablers Ask FCC To Referee TV Fee Brawls
- FCC Will Likely Recommend Easing Media Cross-Ownership Rules
- FCC Commissioner: Government Needs To Stay Out Of Journalism
Apple’s HTC Patent Suit Could Be Another Reason For Someone To Buy Palm (AAPL, PALM, GOOG)
This is a guest post from Gregor Schauer, who has worked in tech in Silicon Valley since 2000. Gregor has also recently spent 2 years in equity research at JMP Securities and Jefferies, covering the Internet sector and enterprise software. You can follow him on Twitter here. Disclosure: Gregor owns Apple and Google shares.
One of the more curious things about the patent infringement lawsuit that Apple filed against HTC is why it didn’t file one against Palm first. There had already been a lot of speculation about Apple suing Palm, but virtually no one saw them taking on HTC first. Interestingly, an unintended consequence of this lawsuit is that it potentially increases the value of Palm’s patent portfolio, and strengthens the case for them to be acquired.
So what is the market valuing Palm at? After the huge smack on the head that the stock got after the company’s recent miserable revenue guidance, it’s $759 million for WebOS + all of Palm’s patents + their existing business. This is the enterprise value of the company, or what the company would cost to an acquirer if it was purchased for its current market value. (Though, a buyer will likely have to pay a premium.)
The issue is how to make sense of that valuation. Here are some mobile heavyweight market caps for context: Apple $205 billion, HTC $8 billion, Research In Motion $42 billion, Nokia $54 billion and Motorola about $16 billion. So roughly chump change in this neighborhood.
Obviously there is a lot of doubt whether Palm can even survive, but that is exactly why the question should now shift to what WebOS and what the patents are worth, especially if the patents could buy some bad Apple immunity (pun intended). But let’s backup first to see why Palm’s patent portfolio is the likely reason Apple did not go after them first (and why it might then be quite valuable).
Why Palm Was the Obvious First Choice for a Lawsuit
Just a month ago there was an obsession with the reasons why Android devices in the US did not have multi-touch enabled in key apps, such as Google Maps and the Android Browser. Third party apps, such as the Dolphin browser had multi-touch, as did the European version of the Droid (the Milestone). Clearly something funky was going on.
There was some speculation that this was related to an IP issue but everyone kept pointing to the Palm Pre, which has multi-touch at launch, as proof that that this was a bogus claim. If Palm could do multi-touch and not get sued, why couldn’t Google? A popular report was that there was a so-called gentleman’s agreement between Apple and Google, in which Google agreed not to implement multi-touch to not weaken Apple’s patents. This seemed a little odd for a few reasons, but especially since lack of multi-touch was restricted to the U.S.
The biggest thing everyone seemed to overlook was Palm’s patent portfolio. It’s well known that filing patents is part of a defensive Cold War strategy; unless your name is Nathan Myhrvold and you run a company called Intellectual Ventures. It typically plays out along the lines of “you don’t sue me, I won’t sue you”. However, for this strategy to work you need to have patents that are threatening to a potential aggressor. And if you have enough key patents you might start strutting around, beating your chest and threatening those that don’t have comparably good ones. Which is just what Apple has been doing.
Apple Threatens to Wield its Patent Ax (and against Palm in particular)
When Jobs unveiled the iPhone 3 years ago he also said, “We’ve been innovating like crazy for the last few years on this and we’ve filed for over 200 patents for all of the inventions in the iPhone. And we intend to protect them.“ My emphasis added.
A year later, we got some more explicit warnings from COO Tim Cook on Apple’s Q1 fiscal year 2009 earnings call, when he said, “We like competition, as long as they don’t rip off our IP, and if they do, we’re going to go after anybody that does.” Everybody knows that Cook was referring to Palm which had just announced the Palm Pre earlier in the month.
So the question then is: Why didn’t Apple take any action against Palm when the Pre launched last year? Clearly there is no love lost between Palm CEO Jon Rubinstein and his old boss Steve Jobs. Rubinstein has rebuilt Palm using the blood, sweat and tears of former Apple employees. And he’s also annoyed Jobs by having the Pre pretend it was worthy of syncing with iTunes. If Jobs is incensed with anyone, it’s Rubinstein and his merry cohort of traitors over at Palm.
Speculating about Good vs. Not-So-Good Patent Portfolios
The only reason that seems fathomable is that in Palm’s 15-plus years of existence as a PDA/smartphone maker, it has acquired a lot of patents that could be used by Palm in a countersuit and Jobs did not want to risk fighting against these. If Apple wanted to fire a shot across the bow against Google, then lashing out at Palm would have been the perfect mechanism for that. They could have done this a long time ago; before Google decided to cross the multi-touch line. Instead, Apple decided to take on HTC instead.
It’s hard to know how valuable the thousands of different patents are; Palm reported having over 1,650 patents and Motorola 23,019 patents in their most recent annual reports. Apple and HTC don’t note their patent counts in their annual reports, but it was separately reported that Apple has 3,000, Google 316 and HTC a measly 58. And of course quantity doesn’t equal quality, but there are some more basic grounds for speculation.
One key difference between them is that Palm, Motorola and Apple have arguably had revolutionary impacts in the cell phone/PDA/smartphone industry (at various points in the last 20 years) and HTC not so much. It seems logical that the depth and quality of a patent portfolio is somewhat correlated to the time a company has been in an industry and the extent to which it has held leadership positions, which is presumably when it might have sewn up some key patents. Companies can also acquire patents through acquisition but to our knowledge HTC has not made any big acquisitions that might have bumped up their patent portfolio.
HTC Is a Relative Newbie in the Mobile Space
In contrast to the others, HTC is a relative newcomer to the mobile scene. It was founded in 1997 and spent the most of its early years making white-label phones for carriers and really made its mark making Windows Mobile phones. HTC has never developed their own OS and it’s only recently with Android that HTC has started to make a significant mark in the software realm with its “Sense” UI which is overlaid on Android.
Given its more recent, and arguably, less revolutionary innovations (when compared with Motorola, Palm and Apple), it seems reasonable to speculate that HTC had the least defensible patent portfolio. It’s also worth noting that Nokia recently filed a lawsuit against Apple claiming the iPhone infringed on 10 patents; not surprisingly, Apple countersued. This supports the notion that big old patent portfolios are very valuable — not many people really think Apple ripped off Nokia’s IP to make the iPhone.
So we still don’t really know what the patents are worth, but if Palm’s patent portfolio does buy bad Apple immunity, then $750 million for the patents + WebOS does seem pretty cheap, especially if another company could leverage WebOS more than Palm can. The current Palm devices are arguably good but not great, but this is more of a hardware issue than a software one (WebOS is well acclaimed as an OS).
The Patents are Likely Valuable But WebOS Still Constitutes the Crown Jewels
Actually, WebOS is likely significantly more valuable than the patents themselves, but this could vary depending upon the potential acquirer (some might be more interested in WebOS than the patents and vice versa).
A company that could really leverage WebOS, for example, is Nokia, which has Amazon-sized distribution channels (this is another post in itself), but suffice it to say that Nokia sells almost a million phones a day and Palm would be thrilled with a few million unit sales in a year. It’s not hard to imagine that Nokia could simply slot the Palm Pre and Pixi into its channels and double or triple their unit sales.
Yes there are branding and other considerations, but even with a Nokia brand on it, it could ramp sales quickly. More importantly, Nokia is messing around with a new, but unfinished OS, recently christened MeeGo. But time to market is a huge issue for Nokia as the iPhone and Android have all the platform momentum (and even Research in Motion, to a lesser extent). Then there is Windows Phone that’s launching later this year.
Simply, Nokia is running out of time to get an OS in the game and the market is not going to support a plethora of smartphone OS’s. With Meego, they’ve also pretty clearly signaled that Symbian won’t cut it for smartphones, regardless of their official comments. With WebOS, Nokia could simply scrap MeeGo and voila, it has a very good new platform that already has some traction, but could be ramped extremely quickly.
And of course, Nokia initiated a patent infringement lawsuit against Apple, so getting the Palm patents could help amp up that battle.
Buzzing Boardrooms
There are many other potential acquirers and this is just one. All the big Android device makers are doing custom Android devices, showing that they can’t kill the appetite for more control of the OS in their devices. The key players here are HTC, Motorola and Samsung. And then there are all the PC OEMs that are looking to get into the Smartphone market, such as Dell, Acer and others.
One thing that is pretty certain is that boardrooms are abuzz right now and one of the things they are likely wondering is what WebOS and the Palm patents are worth. Palm would probably prefer to go it alone – which company really wants to be acquired? — but that is not likely to stop possible bids. (Especially Palm, which has already been through one nightmare acquisition in its history; 3Com.)
But maybe some company was wondering whether to buy Palm for WebOS or not, and this patent quagmire might just seal the deal.
This is a guest post from Gregor Schauer, who has worked in tech in Silicon Valley since 2000. Gregor has also recently spent 2 years in equity research at JMP Securities and Jefferies, covering the Internet sector and enterprise software. You can follow him on Twitter here. Disclosure: Gregor owns Apple and Google shares and contemplating a position in Palm.
Join the conversation about this story »
See Also:
- Palm’s New Gaming Platform Won’t Save Palm
- Palm CEO Explains To Employees Why The Company Is Toast
- CHART OF THE DAY: The Rise And Fall Of Palm
New Mind-Reading Technology Is Great News For Insider Traders
Now inside traders don’t have to worry about a paper trail: there’s new mind-reading technology that might allow them to transfer thoughts without any proof whatsoever.
According to the AFP, a scan of brain activity can effectively read a person’s mind, researchers said Thursday.
The new technology is in its very first stages.
In science-terms, researchers discovered that “traces of episodic memories are found in the brain, and are identifiable, even over many re-activations.”
Basically, what researchers are now able to do is, for example, correctly predict which one (out of three) movies participants are thinking about, after the researchers first sat them down in front of the three movies and recorded their brain activity.
Still, if they wanted, we bet insider traders could made this technology work this in their favor pretty easily.
Here’s how:
Step 1. Set source up to have his brain activity recorded
Step 2. Show source images of an assortment of stocks going both up and down
Step 3. Ask source to recall which is actually going to happen
Voila! Stress-free insider trading. It might even be legal.
Read more about the new mind reading technology on the AFP.
Join the conversation about this story »
See Also:
- BLATANT Insider Trading In US Airways Ahead Of Capt. Sullenberger’s Retirement Announcement
- Here’s The Secret Of How One Hedge Fund Trader Spotted The Housing Bust And Made A Fortune
- SAC Capital Trained In "Deception Detection" By The CIA