Explaining Southern California's economy

Alert! California will be broke in a month!

Justin Sullivan/Getty Images

SACRAMENTO, CA - DECEMBER 08: California state controller John Chiang (D) looks on as California governor-elect Jerry Brown speaks during a briefing on California's state budget on December 8, 2010 in Sacramento, California. With less than one month before being sworn into office, California governor-elect Jerry Brown held a bi-partisan meeting on California's state budget. (Photo by Justin Sullivan/Getty Images) *** Local Caption *** Jerry Brown;John Chiang

Thanks to ZeroHedge for providing the grouchy heads-up on this story from the Sacramento Bee. The state needs to find $3.3 billion and find it fast. Or it will run out of money in March. Here's ZH:

If anyone is tired of the daily European soap opera with surrealistic tragicomic overtones, they can simply shift their gaze to the 8th largest economy in the world: the insolvent state of California, whose controller just told legislators has just over a month worth of cash left. From the Sacramento Bee: "California will run out of cash by early March if the state does not take swift action to find $3.3 billion through payment delays and borrowing, according to a letter state Controller John Chiang sent to state lawmakers today. The announcement is surprising since lawmakers previously believed the state had enough cash to last through the fiscal year that ends in June."

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Freddie Mac scandal, part II: Choosing sides

Foreclosures

David McNew/Getty Images

Refinancing is a key way for homeowners to improve their bottom lines. But did Freddie Mac prevent borrowers from pursuing refis so it could make more money?

Yesterday's NPR/ProPublica story about Freddie Mac's refusal to refinance mortgages so that it can make more money on some high-risk parts of its investment portfolio has divided the blogosphere. As I noted yesterday, Matt Levine at Dealbreaker thinks that Freddie was absorbing a refinancing risk that it would find difficult to pass on to investors. Felix Salmon at Reuters disagrees and disagrees profoundly, basically saying that we should call a duck a duck and conclude the Freddie was putting its own returns above the needs of homeowners.

Arnold Kling thinks not, dismissing the idea that Freddie was engaged in pure speculation:

The authors describe this as only being bad. It is bad for homeowners because it reduces Freddie's incentive to refinance loans. It is bad for Freddie Mac because it means taking on more risk from these instruments. 

There is another possibility. In its normal course of business, Freddie Mac buys mortgages and issues debt, giving it a duration mismatch. These inverse floaters seem to have negative duration, which helps to offset that mismatch.

The article does not discuss the duration issue at all. Instead, it acts as if inverse floaters were a pure speculative play by Freddie Mac, which I think is unlikely to be the motivation.

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Los Angeles' Gores Group spends heavily to acquire Pep Boys

Pep Boys Store

Dwight Burdette/Wikimedia Commons

Pep Boys has been purchased by The Gores Group, a private-equity firm in Los Angeles.

Pep Boys, the auto parts and service chain, is leaving the public markets and leaping into the arms of private equity firm The Gores Group, based in Los Angeles. This is from the LA Times:

Manny, Moe & Jack are going private: Aftermarket auto parts chain Pep Boys is selling itself to Los Angeles investment firm Gores Group for $791 million in cash.

Expansion-minded Pep Boys executives say the total enterprise value of the deal is about $1 billion. The $15-per-share price reflects a 24% premium on Pep Boys’ Friday closing price of $12.08.

Philadelphia-based Pep Boys, which has benefitted from a trend of drivers holding on to their existing cars rather than buying new ones, watched its stock jump 23% to nearly $15 during midday trading Monday.

This is both interesting and worrying. First the interesting. The Gores Group has been around since 1987 and has made, as may private-equity firms have, many millions if not billions of dollars between now and then. The firm closed a third fund early last year, amounting to $2 billion. Now it's buying Pep Boys, all in cash (debt brings the value of the deal up to $1 billion). As the Wall Street Journal points out, the purchase price amounts to $15 per share, but it's been more than two years since Pep Boys closed at that level.

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Dodgers bidding war: Mark Cuban is out but Magic and the money guys are still in

Dodger Stadium Bleachers

pvsbond/Flickr (cc by-nc-nd)

The bleachers stand empty at Dodger Stadium in Los Angeles, California.

Just a quick update on the sale of the Los Angeles Dodgers. The bids were submitted last week and already a few potential buyers have dropped out. Most prominent among these is Dallas Mavericks owner Mark Cuban, who tried to buy both the Chicago Cubs and the Texas Rangers when they available were (he failed in both cases). 

Magic Johnson, the Lakers superstar and successful regional businessman, is still in the running, however. As are two of the big money guys who've been discussed as prospective owners: East Coast hedge-fund king Steven Cohen; and LA-based private-equity duke Tom Barrack

Additionally, St. Louis Ram's owners Stan Kroenke — a player whom I hadn't written about — made the cut, which was managed by Dodgers owners Frank McCourt in concert with the investment back that's advising him on the sale, Blackstone Advisory Partners. Given that the Rams could be the new LA NFL franchise, depending on how things go with the AEG Downtown stadium project (the project is still in search of a team, and it seems to be down to the Rams and Raiders), I'm not sure how Kroenke could own two sports teams in town. But that's for the NFL and Major League Baseball to sort out.

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Facebook IPO? Oh, who really cares...

Getty Images

Facebook founder and CEO Mark Zuckerberg speaks during a news conference at Facebook headquarters on October 6, 2010 in Palo Alto, California.

At Forbes, Peter Cohan isn't exactly thrilled by Facebook's impending IPO. Which, it should be added, is no longer being talked about aa a $100 billion public offering so much as a $75-$100 billion public offering, with the emphasis on that lower number. Anyway, here's Cohan:

It is popular in the media to compare the Facebook IPO to that of Google whose price has risen nicely since its 2004 IPO from $84 to $580. That 30% compound annual growth is good – but Google trades 19% below its 2007 peak of $715.

To be fair, there is a bit of good news for those hoping that Facebook stock will climb after it goes public.  A quick look at Google’s 2004 prospectus reveals that its IPO price of $84 valued Google at a P/E of 80 – the same as Facebook’s estimated P/E (Google had 271 million shares and estimated 2004 net income of $286 million at the time of its August 2004 IPO).

That’s the only glimmer of good news for why Facebook’s IPO might breathe some life into the business of VCs and tech entrepreneurs. But Facebook’s inability to transform the way companies operate their business means that it will remain a niche phenomenon in the grander economic scheme.

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