Someone Didn't Meet Investment Banking Thresholds In San Francisco

Investment banking is a fast-paced, high-powered business. Deal flow drives egos, reputations, and compensation. Bankers place large amounts of capital into circulation. The bigger the deal, the harder they work. They do not waste time with small deals. That is why it is so hard to believe some San Francisco blowhards who have claimed in my presence that their small-time reputations came from really big deals.

The Dummies book series describes the revenue threshold separating investment banks from business brokers. Small businesses don't need the specialized services of expensive investment bankers when they are better off finding a generalist intermediary. Most entrepreneurs who have bought or sold a small business figure this out on their own. Hilarity ensues when someone who has never owned a business tries to claim they know how this works.

I met the biggest lying phony of a lifetime a few years ago in American Legion Post 911 in San Francisco. The Legion took forever to shut that phony Post down but its sad legacy lives on in the denials of its former prime movers. The lying phony once claimed on Yelp that he had hired Goldman Sachs to sell his unspecified business, which of course never existed. Try getting a Goldman banker on the phone for any deal worth less than $100M or so and you'll be lucky if they don't just bust out laughing. Maybe a young top-shelf i-banker would take a deal under that threshold if they were totally stupid, or if they worked for a managing director who wanted to force them out for lack or revenue.

Another pathological liar crossed my path around 2012 through some investor relations events that I no longer attend. The guy's claimed record of bulge bracket deals in remote islands made no sense, especially after he started promoting penny stocks. That's a step down in prestige and income from globetrotting i-banking. His further connections to "deals" with companies having no verifiable revenue or visible operations made me shake my head. I can't be around people with such bizarre notions of successful deal-making.

Glib talk about deal thresholds can fool a lot of otherwise intelligent people. It doesn't fool me. I just love studying financial minutiae. Red flags fly fast and furious when someone within earshot brags about closing deals that can't be verified with simple sleuthing. The SEC doesn't always pursue small-fry liars like the Legion Post 911 idiot or the island-hopper. I enjoy picking up the trail where regulators leave off.

The Limerick of Finance for 03/08/15

Goldman Sachs set to lose from stress test
No longer shall they be the best
They have so little slack
After shares they bought back
They should replenish their cash chest

The Haiku of Finance for 03/05/15

Stressing the cushion
Capital ratio too weak
Too many buybacks

The Haiku of Finance for 04/29/14

Big bank bad bond bet
Exposure to inflation
No hard asset hedge

Basic Thinking In Life Sciences Transactions

I spent some time perusing a few materials I picked up at the JP Morgan 32nd Annual Healthcare Conference last month in San Francisco.  Understanding the life science sector is not high on my priorities list.  Checking out hot single women, for example, is a much higher priority.  I noted a few things unique to deal flow in the sector that deserve a mention.

Some investment banks present a range of possible deal structures to a corporate client looking to sell.  My impression of contingent price purchase payments that are tied to specific milestones is that they reflect events that drive share prices higher.  FDA approvals for medical devices and successful drug trials spring to mind.

I listen to plenty of investor relations pitches from small-cap drug companies trying to get through Phase 2 trials.  I now suspect a lot of them would be better off if a Big Pharma player came along and gathered them into rollup transactions.  This would achieve economies of scale in capex for research even if the acquired targets outsourced a lot to CROs.  The single-drug small caps that don't get acquired have very slim chances of succeeding on their own.  If they don't make it, some kind of distressed acquisition or Section 363 sale probably awaits if they're lucky enough to get DIP financing.

Plenty of law firms have published white papers on freedom-to-operate (FTO) studies they perform as part of a client's IP strategy.  I still think these kinds of tactics are little more than full employment programs for attorneys.  Life science startups can do their own patent searches cheaply.  I think startups should search the World Intellectual Property Organization (WIPO) before hiring a potentially expensive attorney for an IP strategy.  Free research at the start can save money by forgoing unneeded expenses.

If my career had taken a different turn after graduate school, I may very well have become fluent in these kinds of investment banking transactions.  It was not meant to be, as investment banks would not consider my resume because of my non-elite background.  The investment bankers I've met personally just sneer at me and tell me to get lost.  I'm not an investment banker or attorney, so don't ask me how to structure any transactions.  I don't handle mergers, spinoffs, divestitures, distressed sales, or any other such deals.  I am a mere spectator to corporate finance action in life sciences.  Any arbitrage opportunities from announced transactions in publicly traded firms are always available to every other retail investor watching this sector.  I buy and sell things that are right for me.  

Financial Sarcasm Roundup for 08/19/13

This particular roundup goes out to the moron who accused me of slandering him online after I was generous to him at a conference.  I didn't slander the guy; I insulted him.  He's too dumb to know the difference.  My sarcasm is meant for stupid losers just like him.  

BofA is legally assimilating Merrill Lynch.  This is one more nail in the coffin for those Merrill loyalists who thought their former parent would eventually be spun out.  BofA got a pretty raw deal when it was talked into saving Mother Merrill during the 2008 crisis.  It just goes to show how easily investment bankers can outwit commercial bankers in deals.  

Greece's debt holders no longer need to fear haircuts.  Germany is backstopping the hedge funds that hold Greece's post-bailout sovereign debt.  Someone at Davos must have made an algorithm-laden threat at the CDS spreads of leading Germany companies.  Germany's public statements on Greece are no longer reliable.  Frau Merkel is bending with the trans-Atlantic consensus that quantitative easing is good enough.  

The tech sector is slumping.  I got the impression from keynoters at several enterprise IT conferences that the tech sector has been having an increasingly difficult time lately squeezing additional margin out of services.  That's one reason why they're pushing cloud so hard.  The tech slowdown also indicates that social media has reached saturation and cheaper smartphones will add less to bottom lines.  You tech people need to go back and read everything I've blogged about enterprise IT, "innovation premiums," and overpriced smartphones to see how your darling business models are turning out.  There's still lots of room for disruption within inefficient IT models and tech providers know it.  

Major energy producers are buying less land for shale exploration.  The hot air is slowly escaping from the shale balloon because shale drilling is a victim of its own success.  The booms in North America have flooded the markets with so much cheap natural gas that there's little point in drilling for more.  This tempts me to look into natural gas royalty trusts to see which ones are undervalued.  

Pension funds are cutting out their middlepeople.  Investing by committee is a great way to underperform the broad market but the investment committees at plans and endowments are determined to keep doing it.  The dumb money is not going to get smarter but at least they'll be saving money on fees.  This development is good news if it forces underperforming hedge funds and private equity firms out of business.  

The Haiku of Finance for 05/01/13

Slick I-banker dude
Claim many deal flow conflicts
Call it a red flag

UBS Pays Bonus to Execs Who Lost Money

It doesn't get any dumber than this at one of my previous employers.  UBS lost $2.6B in 2012 but paid its executives exactly that much in bonuses.  I do give the Swiss credit for precision in matching the bonus to the loss amount.  The supervisors I witnessed there in 2005-06 were sometimes competent and sometimes clueless.  They should note that moving up the ladder will require them to be more clueless than ever.

UBS also paid its new head i-banker $26M before he even showed up.  I'm not sure what this guy did at BofA to justify that kind of incentive, since BofA has only survived the last five years thanks to government handouts.  The clawback provisions won't matter because they won't be used.  The promise of future M+A action will largely go unfulfilled as the global economy re-enters recession.

The financial sector is the only part of our economy that rewards leaders who do not deliver shareholder value.

Full disclosure:  No position in UBS at this time.

Financial Sarcasm Roundup for 12/17/12

It's been some time since my last blast of outright sarcasm.  That's too long.

The U.S. has finally enacted permanent normal trade relations with Russia, more than two decades after the Cold War ended.  Uncle Sam sure takes his sweet time recognizing reality.  The Jackson-Vanik legal regime was a Cold War blunt instrument intended to hold the Soviet Union and its Warsaw Pact allies accountable for their human rights violations.  Now Russia's internal freedom is on par with that of the West, which says more about the West than it does about Russia.

Uncle Sam will probably be just as slow in recognizing the weak demographic assumptions underpinning entitlement spending.  The slowdown in legal immigration due to the prolonged recession is probably offset by the large numbers of illegals who remain here and have kids.  The irony of illegal immigration is that our own government encourages illegals to apply for benefit payments while they are paid off-the-books income that can;t pay into Social Security or Medicare.  Illegal immigration makes the unfunded entitlement problem worse and no one in our business or political elite even cares.  My solution is simple.  If you apply for benefits, please include your U.S. birth certificate or naturalization papers with your application.

Meanwhile, private equity firms have learned nothing since 2008.  They are using more leverage than ever to buy companies whose earnings will be destroyed in the next round of the recession.  Borrowing at record-low interest rates isn't such a great idea when the earnings needed to pay back those debts won't be there.  I'll be watching the headlines for the first private equity firms that go bankrupt next year.

Sell-side analysts have learned nothing from last decade's master settlement.  Some Morgan Stanley banker got his firm smacked for coaching Facebook on how to materially mislead analysts.  That $5M fine is peanuts, so this is hardly going to hurt anyone other than that one banker.  State regulators are paying attention while the SEC is asleep.  My readers should be grateful that all of my articles reference facts already in the public domain.  Anyone idiot can mislead analysts on a conference call.  Only a genius like me can tell the truth.

I think I'm losing my touch.  These boring news items aren't getting me fired up enough to be truly sarcastic.

The Haiku of Finance for 11/14/12

Goldman partners shrink
Not enough cash to go 'round
Senior ones must leave

The Haiku of Finance for 10/26/12

U-B-S job loss
Bunch of bankers getting cut
Too bad, hit the road

Hints On Due Diligence In Rare Earth Mining

My genius readers have the chance to read my interview today with The Gold Report, which I've noted has also been picked up by other online media outlets.  I mentioned the logistics trifecta - water, power, roads - as something absolutely critical to a productive mine.  I also need to elaborate on the subject of production costs.

Investment banks and resource industry sources regularly publish information on the cost production curves for specific mining sectors.  Professional investors and analysts prefer to invest in projects whose cash costs of production are in the bottom quartile of their peer group.  I'm not sure how 25% became the threshold or whether it's been academically validated as a useful cutoff, but it's become an industry truism.  This business rule holds true for minerals, oil, natural gas, coal, potash, and any other resource that must be extracted from the earth's crust.  That's why junior miners whose executives have good business sense will tell you whether their cash costs place them in the cheapest 25% of their peer group. 

The problem with rare earths and other critical metals is that there are too few operating mines worldwide to construct statistically valid cost curves.  The rare earth sector is currently dominated by Chinese mines whose financial reporting may not be transparent.  The important point to remember is that investors must use factors besides the cost of production to evaluate new resource projects, especially those in the exploratory stage.  I'll recap some of those factors below.

Management experienced in the sector.  I get impatient whenever I sit through investment conferences and roadshow presentations and listen to a mining company CEO whose background was in investment banking, management consulting, financial brokerage, or something else unrelated to mining.  That tells me the insiders and founders are just looking to dress up a bad property and quickly flip it to the next round of suckers and bagholders.  Yes, folks, there really is some of that from time to time in resource investing.  Effective mining CEOs need to be operating geologists, without exception.  They should ideally have a career history encompassing an entire project lifecycle, from exploration to shut-down.  It's also nice to see other geologists and mining engineers on a junior resource company's management team. 

National Instrument 43-101 compliant report.  The SEC's rules for companies disclosing resource reserves are much more restrictive than Canadian securities rules.  The SEC requires disclosure of a company's resources that can be economically extracted.  Canada, with a more liberal bent to encourage development of its resource sector, requires companies preparing for production to publish what's commonly known as a 43-101 report.  The importance of the report for investors is its disclosure of a company's proven and probable reserves, aka "2P reserves."  This reserve category is the most useful estimate of what a company can economically extract, and does not include inferred or implied resources that may later be added to the 2P category after production begins.  The 2P number can be plugged into a valuation model to determine the company's worth. 

Burn rate.  This is the amount of money a junior company is spending monthly to operate.  Divide its annual net losses by twelve, then divide that monthly loss into its cash on the balance sheet.  I also like to subtract shot-term liabilities from the cash on hand just to see if the company will survive for a year.  Companies that run out of cash before their exploratory results are complete will need to return to investors hat in hand.  Raising more capital will dilute shareholders immediately (through common stock issuance) or eventually (through warrants and PIPEs). 

Logistics trifecta.  I've said it before and I'll say it again.  Water is for heap leaching a mineral deposit, which will also require plans for treatment and disposal of tailings (either in a pond or dry-stacked after baking) that retain traces of toxicity.  Electric power is for the equipment and base camp; the company must either be a mile or two away from a transmission line and have planned capex for a step-down transformer, or must have large volume diesel tanks on site.  Roads to the project site can be of the gravel and unimproved variety but they must at some point lead to a metals refinery by linking to other hardball roads or a port. 

There you have it, critical elements investors.  Please do your own homework while researching investment opportunities.  I can't do investors' homework for them because nobody pays me anything to do so. 

UBS Not Minding The Store While Trader Wipes Out $2B

I can't resist taking a swipe at a former employer that treated me poorly.  A loose cannon at UBS decided to play some unauthorized games with the firm's capital and lost $2B.  I think that's just great.  I'm not surprised at all given the lack of competent people there.  If you're dumb enough to gamble with somebody else's money with no regard for consequences, work at UBS.  If you don't know how to design risk management systems that can catch irregular trades, work at UBS.  This firm touted its Dillon Read internal fund while I was there and had to fold it up a year later because the people running the fund were clueless.

Go down hard, UBS.  You've had it coming for the longest time. 

Full disclosure:  No position in UBS at this time. 

Large Fed Bailout Sums Confirmed Three Years Late

It took three years to get the Fed to cough up the numbers.  Bloomberg News conducted the legal equivalent of a scorched-earth campaign to confirm the $1.2T our government handed to Wall Street's big shots.  The term "aristocrats" is not hyperbole.  It describes an elite class that no longer sees itself subject to the rule of law in a democratic society.  The American aristocrats are no different from their European cousins, who also benefited from bailouts for the banks they have controlled for generations.

The Fed's claims of "no credit losses" are funny.  I guess such a claim is technically true if the junk mortgages the Fed took onto its balance sheet can't be written down thanks to favorable accounting rule changes.  The bailouts have not purchased any solid improvements in U.S. banks' financial performance. Bank of America is a joke, losing money like crazy.  The rest of the banking sector only looks healthy as long as they can pretend their bad mortgage loans will someday recover cash flows. 

Nota bene:  No positions in any U.S. banks at this time.

Financial Brands That Should Disappear

The folks at 24/7 Wall St do a great job stirring up controversy with their annual list of familiar brands that are in danger of disappearing.  It takes guts to go out on a limb and claim that some venerable companies are on their way down the tubes.  In the spirit of the moment, let's think about why some financial brands that should have disappeared are still around. 

Merrill Lynch.  These guys were spiraling down pretty hard in late 2008 until Bank of America agreed to buy them out.  The deal made little sense for BofA; they already had a presence in wealth management and investment banking and would have been stronger had they just stayed away from Merrill Lynch.  This is where ego trumps business sense.  CEOs who want to be known for closing the biggest possible deals retain the prerogative of throwing due diligence out the window.  Way to go, BofA.  Grabbing Mother Merrill did nothing but make your TARP bailout needs grow. 

Goldman Sachs.  Do a web search on this firm and you'll see its tentacles in every business sector on the planet.  The firm is insanely profitable but the way they do business raises questions about whether the firm has a conscience.  "Vampire squid" pretty much nails it.  Warren Buffett considers GS to be a good investment precisely because its amorality enables it to be so dominant in the financial markets.  Amorality is not necessarily a recipe for immortality.  Someday their enemies list will reach a critical mass and their moles at Treasury and the SEC won't be able to save them. 

AIG.  The continued existence of this firm is a strong argument that U.S. financial markets are rigged by the government.  The firm's credit default swaps in 2008 were so radioactive that they almost single-handedly took down the economy.  Hundreds of billions in TARP assistance later and taxpayers still hasn't received a decent return on their "investment." 

Compiling this list is depressing.  These firms will probably be around for a while.  That doesn't mean I have to do business with them. 

You And BS Dress Code Hilarity

I couldn't pass this one up:

It took no fewer than 43 pages for the human resources department at the Swiss bank UBS AG to establish what bank personnel should consider acceptable corporate attire.

The spoiled brats and trust fund babies running You and BS think a detailed dress code can make up for years of poor strategy and illegal tax advice.  Flesh-colored pantyhose would make the perfect stocking stuffer for a certain Victoria's Secret beach bunny manager type I used to know when I worked there.  Good luck getting senior managers to give up cuff links. 

I used to work in one of their San Francisco offices several years ago.  The rich preppies running the show despised my honesty and competence.  They thought I was a joke.  Actually, their dress code is the real joke. 

Nota bene:  I have no position in UBS stock. 

The Limerick of Finance for 09/19/20

Big action on Wall Street turns down
Lack of business makes i-bankers frown
Prop trading's so bad
No mergers to be had
Former big shots will head out of town

Greece Threatens US Banks Instead Of Paying Debts

What to do when you can't solve your own financial problems?  Blame someone else:

Greek Prime Minister George Papandreou is not ruling out taking legal action against U.S. investment banks for their role in creating the spiraling Greek debt crisis.

U.S. investment banks probably do deserve some blame for selling garbage products to sovereign clients.  They also weren't the only banks doing this, so why not sue European banks as well?  Maybe Greece doesn't want to antagonize the rest of Europe any more than it has already now that the bailout's terms have been set.  BTW, the article also mentions another German economist who doubts Grece's ability to pay up. 

I'm certain that Greece will have as much success suing Goldman Sachs et al. as the SEC will have in pursuing fraud charges; that is, zero success.  Bankers own governments now.  Greece got the memo but used it to wrap a gyro instead of reading it. 

Bankers Assemble Monster Products for Amusement

SEC actions are always a fun way to pull back the curtain and see how Wall Street really works.  Peering inside the Goldman Sachs sausage factory, we see how bankers put together their wonderfully innovative products:

As the U.S. housing turned downward in January 2007, a Goldman Sachs trader wrote in e-mails to a woman he apparently was courting that investments he had sold were "like Frankenstein turning against his own inventor."

Apparently when sharp MBAs get bored with ripping off their clients and hoodwinking regulators, they create mystery products that serve no useful purpose but somehow command a premium.  They then create proprietary indexes against which they can measure the performance of their mystery products, and these indexes are just as meaningless as the products.

Does any of this matter to investors?  Only if they're dumb enough to buy these Frankenstein securities.  Smarter investors (like yours truly) just wonder what all the fuss is about and move on. 

Full disclosure:  No position in GS at this time. 

Buyout Hunger and I-Bank Starvation

PE firms think they can find public equity bargains even in a stock market rally driven by hype:

Buyouts are finally returning for the deal-hungry private equity industry, which is looking at 2010 to deploy huge cash reserves into deals that buyers hope could get back up to double-digit billions.

Good luck with that search. Plenty of investment banks will jump at the chance to help, given the paucity of merger deal flow headed their way:

Advisory fees generated by M&A deals totaled $18.9 billion, down 46 percent from 2008 -- the worst annual level since 2003. For the first time in six years, M&A was not the main source of fees for investment banks, representing just 27 percent of all fees earned this year, according to Thomson Reuters.

The time is ripe for a bunch of fee-starved i-bankers to push questionable deals to PE managers desperate to show off for their clients. Gotta look busy to earn those fees. Deal pitchbooks in the near term will be long on optimistic growth assumptions (headwinds: declines in consumer spending) and short on explaining how PE firms can wring operational efficiencies out of public firms that are already cutting to the bone.