Explaining Southern California's economy

Facebook IPO? Oh, who really cares...

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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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Freddie Mac scandal: What the heck is an 'inverse floater?'

While Sales Of Existing Homes Rise In July, Prices Continue To Fall

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A recent ProPublica/NPR report on Freddie May refusing to refinance mortgages for struggling homeowners shows that the market is still coming to terms with new ways of measuring risk.

This morning, NPR and ProPublica fired a broadside at the government side of the embattled mortgage market, with a report on how Freddie Mac is refusing to refinance loans, reportedly because Freddie has developed a financial derivative that would suffer if interest rates on loans were lowered. Here's a sampling, and please note that there's something called an "inverse floater" at the core of the alleged problem. The Silversteins are a couple who have been unable to refinance their mortgage after doing a short sale on another property:

Here's how Freddie Mac’s trades profit from the Silversteins staying in “financial jail.” The couple’s mortgage is sitting in a big pile of other mortgages, most of which are also guaranteed by Freddie and have high interest rates. Those mortgages underpin securities that get divided into two basic categories.

One portion is backed mainly by principal, pays a low return, and was sold to investors who wanted a safe place to park their money. The other part, the inverse floater, is backed mainly by the interest payments on the mortgages, such as the high rate that the Silversteins pay. So this portion of the security can pay a much higher return, and this is what Freddie retained.

In 2010 and '11, Freddie purchased $3.4 billion worth of inverse floater portions — their value based mostly on interest payments on $19.5 billion in mortgage-backed securities, according to prospectuses for the deals. They covered tens of thousands of homeowners. Most of the mortgages backing these transactions have high rates of about 6.5 percent to 7 percent, according to the deal documents.

Between late 2010 and early 2011, Freddie Mac’s purchases of inverse floater securities rose dramatically. Freddie purchased inverse floater portions of 29 deals in 2010 and 2011, with 26 bought between October 2010 and April 2011. That compares with seven for all of 2009 and five in 2008.

In these transactions, Freddie has sold off most of the principal, but it hasn’t reduced its risk.

First, if borrowers default, Freddie pays the entire value of the mortgages underpinning the securities, because it insures the loans.

It’s also a big problem if people like the Silversteins refinance their mortgages. That’s because a refi is a new loan; the borrower pays off the first loan early, stopping the interest payments. Since the security Freddie owns is backed mainly by those interest payments, Freddie loses.

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Storifying the Davos dilemma

The annual World Economic Forum in Davos, Switzerland is underway and reports are that the attendees to this exclusive alpine confab — the 1% if ever there was such a thing — are seriously bummed out over the global state of affairs. Twitter lights up with many comments under the #Davos and #WEF rubric when the event is in session. So how better to capture some of this action than with Storify? And so I have. Your end-of-the-week Davos reading is thusly furnished.

Follow Matthew DeBord and the DeBord Report on Twitter.

 

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Will Goldman Sachs lose out on Facebook IPO?

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

The long-awaited day will finally arrive next week, when Facebook files for its initial public offering (IPO) later this year. According to the Wall Street Journal, the offering — which will be fairly limited as far as actual stock sold goes — will price the social network at $75-$100 billion. That would make it one of the biggest IPOs of all time. It could actually help California balance its budget.

But there's more!

The Vampire Squid — aka Goldman Sachs — may not get to lead the IPO. the WSJ reports that Morgan Stanley, Goldman's main Wall Street rival, will get the plumb role. 

Let's not sugar-coat it: This would be humiliating for Goldman, which has been angling to lead Facebook's IPO ever since it set up a private market in Facebook shares in 2011 (and likely before that). It would also be costly. While Goldman will certainly participate, it won't get the millions in fees it was probably expecting, and definitely lobbying for.

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Honda electrifies City of Torrance with Fit EV

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Honda delivers a 2013 Fit EV to the city of Torrance as a part of the Honda Electric Vehicle Demonstration Program.

I unfortunately missed the delivery of Honda Fit EVs (for "electric vehicles) to the City of Torrance last week. I regret that because this was actually an important move for Honda. As I pointed out in conversation with the Wall Street Journal's car critic, Dan Neil, on "AirTalk" as the Detroit Auto Show was kicking off, Honda is going through something of an identity crisis. It was hit hard by the 2011 earthquake and tsunami in Japan that roiled the global auto supply chain. But Honda has also struggled to retain customers and lost market share in the past year to Ford, Nissan, and Hyundai, as well as General Motors and Toyota. 

That's the bad news. The Fit, on the other hand, is the good news. This compact hatchback has been a big hit for Honda. It might be the best small car made by humans on Planet Earth (although Ford and Chevy have some excellent small rides these days, as well — the competition is fierce).

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