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Physics Class Inspires Hedge Fund

Michael Seckler and John Alberg, from the Euclidean Techologies "About the Founders" page

Michael Seckler and John Alberg, from the Euclidean Techologies “About the Founders” page

 

Physics week at EphBlog continues. Ozy.com profiles Michael Seckler ’94 and John Alberg ’94, the co-founders of Euclidean Technologies, and Williams College Professor William Wootters is featured prominently:

OZY caught up with lanky, silver-haired financier Seckler, 43, in his office, where a custom-painted portrait of Euclid hangs, along with imagistic representations of the man’s theories. Neither he nor Alberg majored in finance or logged time at banks or hedge funds. Instead,they met at Williams College, where Seckler double majored in geology and history. What hooked them on their current path was very liberal-artsy: an “incredibly thought-provoking course” from William Wooters, a founder of quantum information theory (a mysterious field that covers everything from blackholes to teleportation). Rapt in the lecture hall, the young men found themselves in long debates about technology, the business happenings of Microsoft and IBM, and theories of competition.

Discussions of competitive theory in physics class? What a great plug for Professor Wootters and the Physics Department.  That Prof. Wootters, the Barclay Jermain Professor of Natural Philosophy, is the faculty member cited should be no surprise: in 2007, he received an award from the American Physical Society for his “prolific engagement of undergraduates” in research, and last year, teamed up with Philosophy Professor Keith McPartland to teach “Philosophical Implications of Modern Physics.”

Beyond the classroom, another quintessential Eph experience makes an appearance:

[J]ust a year into his professional life, at a college reunion over Fourth of July weekend, the 22-year-old Seckler found himself in another dorm-room conversation with Alberg. Netscape was on everyone’s tongues; on the drive back to Boston, three hours in the pouring rain, Seckler and Alberg couldn’t let it drop.

Soon, they hashed out the beginnings of what would become a multimillion-dollar tech company, an HR software firm called Employease. They quit their jobs eight months later and began working 100-hour weeks, “eating ramen and drinking cheap bourbon,” Seckler said.

 

Route 2 map via mohawktrail.com

Route 2 map via mohawktrail.com

When else would two Ephs come up with a $100M+ business than on a harrowing drive across the Mohawk Trail in the rain?

As part of the History Department’s alumni feature series, Seckler has also credited Sue & Edgar Wachenheim Professor of History Thomas Kohut with helping instill the discipline and perseverance needed to make a startup business thrive.

Alberg is less of the public face of the duo. Perhaps his thesis — he majored in Mathematics — proved relevant to his career: “Projection Methods for Neural Networks“?

Although the Ozy article references machine learning, data mining, and fundamental investing, the story is short on details about what Euclidean Technologies actually does. Seckler and Alberg have authored several articles at the ValueWalk portal, however, which will tell interested readers more about the value investing philosophy that they cite for their investment decisions.

 

 

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Purple Valley Capital

Purple Valley Capital is run by Don Wieczorek ’08. Is he the next Andreas Halvorsen ’86 or Chase Coleman ’97? Time will tell. Is there an 11 year sunspot-like cycle to Eph investment success? You have to like the firm name he choose . . .

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Repackaging of Inside Information

Naked Capitalism comments on the business model that made Michael Gerson ’94 rich.

So What Is Insider Trading? Andrew Ross Sorkin. This story bothers me. Why is the SEC cracking down on this pair, and not on Gerson Lerman, which pays low and mid level employees to sell information about corporate activity, usually shipment and inventory levels? Gerson Lerman has institutionalized the use and repackaging of inside information. But it would take time and effort to develop a case against Gerson and its competitors.

Recall my discussion of Gerson’s business from five years ago.

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$305 Million in Debt. What could possibly go wrong?

From hwc:

Thanks Ronit for the heads up.

Williams College is selling two bond issues this week, totaling $93 million.

A $50 million fixed rate bond issue (new debt) is being used to partially finance the library. Moody’s notes that additional debt for the library is planned for 2013.

A $43 million variable rate bond issue will refinance two existing bonds (from 1998 and 2007, I think).

Moody’s reaffirms the Aa1 bond rating with a stable outlook. This brings Williams debt to $305 million. The bond prospectus is not yet available at the muni securities site. I’ll keep checking. These usually show up pretty quickly.

0) Background reading.

1) A Bloomberg writer is interested in some non-Administration views on this topic. What do you think? Tell us in the comments. Links to the actual documents would be much appreciated. Perhaps someone could ask Jim Kolesar to post the prospectii . . .

2) My opinions are unchanged. From 2006:

Why does the College, with its $1.5 billion endowment, need to sell bonds? What interest rate does it pay on these bonds? What sort of fees does Morgan Stanley generate from the deal?

“Neither a borrower or a lender be” was good advice in 2006. It is good advice today.

From 2008:

As long as the endowment keeps on going up by more than the interest we pay on the bonds, Williams has a money machine! Why not just borrow $100 million and invest it in the endowment itself? We pay 3% in interest but make 10% in returns. Presto! The 7% spread means that Williams has made $7 million, and at no risk! Even better would be to borrow $1 billion and invest in the endowment. Then we make $70 million a year, enough extra to make tuition free for all!

The problem, obviously, is that endowment returns aren’t always positive, as folks with more than a year or two in finance realize. Leverage is a dangerous thing, for both hedge funds and small liberal arts colleges.

More detail:

Despite 25 years of excellent returns, it was deeply suspect of Williams (or any college) to assume that it could make 8% returns (or 5% real returns after inflation) forever. After all, world GDP growth is definitely lower than 5%, probably closer to 3%. If world GDP grows at 3% and the Williams endowment grows at 5%, then, with mathematical certitude, Williams will eventually own the entire world. Since that outcome seems unlikely, one of our assumptions is false. It may not have been obviously stupid for the folks that run Williams to borrow hundreds of millions of dollars in 2006. Who knows? In some alternate universe, it might have worked out! But it was stupid (it is still stupid!) to assume, for planning purposes, that the Williams endowment could, over the long term, grow at 5% in real terms. That is impossible.

The lesson? Make sure that your assumptions about the world have some connection to reality. Don’t assume 5% real returns just because everyone else assumes that. Note the psychological bias in favor of such pleasant assumptions. The higher the EXPECTED return, the more money that we can spend now!

Should Williams learn from this mistake and pay off the debt now? I don’t know.

In 2008/2009, it was reasonable for Williams to keep its debt steady in order to avoid liquidating equities and equity-like positions (real estate, buyout funds, et cetera) at the bottom. Well done! But markets have rebounded dramatically in two years. (Yes, my Wolf warning was made at the bottom.)

Regardless, Williams should not be issuing more debt. Instead, we should be paying off some of the debt that we have now. Odds of that happening? Zero. The trustees believe that they can borrow money at 3% (or whatever) and invest it at 5%. Forever. What could possibly go wrong?

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Hiring Interns for Quantitative Equity Finance

I am hiring interns for paid summer positions in quantitative finance. Current Williams students who have worked for me in the past include: David Phillips ’11, Ville Satopaa ’11, Hai Zhou ’11 and Andrew Liu ’11. Contact them if you want to know what I am like. Summary: There is no better internship for someone interested in the intersection of finance, statistics and technology.

If you are interested in this job, e-mail me now (dkane at iq.harvard.edu). I plan on filling these positions very quickly, certainly before Winter Study is over. Related posts here. A message should go out soon to OCC and on WSO with more details, but I prefer to keep those company-specifics (I am at a new job) separate from my existence here at EphBlog. Please respect those wishes in the comments.

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Bethany McLean ’92: 11 Hours in Omaha …


Photograph by Annie Leibovitz. Vanity Fair, January, 2011

… perhaps seems like a long time in the Gateway to the West, but not when those hours are spent with Warren Buffett.

Already alert for mentions after reading Eric Soskins’ review of her new book All the Devils are Here on EphBlog http://www.ephblog.com/2011/01/08/eph-bookshelf-10-all-the-devils-are-here/, I was delighted to see her in print again in Vanity Fair, when the mailman carrying a Prada bag dropped off the January issue (I think that Conde Nast insists on certain standards of delivery).

Here is a short shot for non-subscribers direct from the open to the public Vanity Fair website:
http://www.vanityfair.com/online/daily/2011/01/warren-buffett-speaks-candidly-to-vanity-fair-about-who-might-succeed-him-at-berkshire-hathaway.html

Ed note: spelling of Ms McLeans’ name corrected. Swart must have been thinking of Mr Clean. Thanks to Eric!!

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Eph Bookshelf #10: All the Devils Are Here

With All the Devils are Here, Bethany McLean ’92 has likely landed herself atop the list of best-read Eph authors of 2010. All the Devils are Here is a highly-readable primer on the pre-history of the financial crisis. In a tightly-wound 364 pages, the book demystifies the companies and financial instruments at the core of the financial crisis while providing illuminating sketches of many of the central personalities.

McLean and co-author Joe Nocera, a New York Times financial columnist, trace the converging narratives of the principal players: the real-estate market lenders and originators creating subprime (and higher-caliber, but similarly flawed) loans, the Wall Street companies investing in and securitizing these loans and related products, and the government-sponsored enterprises (GSEs, most prominently Fannie Mae) competing with the private players. Their account goes back thirty years to the beginning – the securitization of loans that allowed lenders to divorce themselves from their interest in loan repayment and reduce the importance of repayment ability in lending.

Read more

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Goldman Sachs Visit

Goldman Sachs visited Williams yesterday. Did any readers attend the presentation? Tell us about it. Do you have questions about GS or finance careers? Ask them in the comments. Want to know what it was like? Check the first hit for “elaborate” in this book. (By the way, is there an easy way to copy and paste (or get a jpeg) of a page from an Amazon “Search Inside” book? Reader advice is welcome.)

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Finance Talk Tonight in Boston

I am giving a talk tonight in Boston. If you are an EphBlog reader interested in finance, stop by and say Hi.

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Beyond The Log: Institute of Finance

The 9th installment of our seminar series on “Beyond the Log: Williams Presidents in the Gentleman’s Era” (pdf).

Bob Stegeman: Do you have anything further to say about the Institute of Politics?

Fred Rudolph: I think the students resented it because it had nothing to do with them, except that it took the president away for a couple of months each year as he was lining up the program. It was a summer operation that started in 1921 and lasted until about 1932 or 1933. It attracted about 800 to 900 people, which was a great boon to the Williamstown economy. People paid to come. It was a chance for countries to explain themselves and argue for their policies. Mussolini sent people from Italy. Like Chautauqua, the institute was a good way to combine a vacation with intellectual stimulation. It was undoubtedly good PR for Williams and Williamstown. According to Garfield’s account, the idea came to him one restless night at the President’s House. So he talked with his old college roommate Bentley Warren (Class of 1885), chairman of the Board of Trustees. Warren liked the idea. Then Garfield talked with Bernard Baruch, who said, “Let’s do it. I’ll pay for it.”

1) There is a great senior thesis to be written about the Institute of Politics. If you are a political science major, you ought to write it.

2) In some sense, the Summer Institute in American Foreign Policy, led by our own Professor James McAllister, is a direct descendant of the IOP. Did any readers attend this year? How did it go?

3) The single most important thing that Adam Falk could do to ensure the future wealth (and, therefore, success) of Williams 200 years from now is to make Williams the best undergraduate college in the world for students interested in finance. We need a finance concentration, followed by a finance major and then a finance department. Along with that, we ought to establish an “Institute of Finance,” modeled directly on the history of the “Institute of Politics.”

Invite Ephs in finance for a week or two meeting each summer in Williamstown. Much time would be spent on golf and hiking (just as at Herb Allen’s ’62 annual Sun Valley meeting). There would be panels and discussions, featuring both alumni and faculty. Several dozen students would be invited to spend the summer in Williamstown, preparing for the meeting, working with professors on finance-related research and so on.

Over time (and with much hard work), this event could grow in significance and importance, even if most/all of the attendees were Ephs. It would make Williams famous for the quality of its finance education and more likely to appeal to applicants interested in finance, especially those that we currently lose to Harvard/Yale/Princeton. An Institute of Finance would bind the community of finance Ephs — students, faculty and alumni — together and more tightly to Williams as an institution.

Perhaps the only question is: Which (rich) finance Eph can play the role of Bernard Baruch? I nominate: Greg Avis ’80, Andreas Halvorsen ’86 or Chase Coleman ’97.

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NYT claims administrative overload at Williams

Posted without comment:

WILLIAMS is the second-oldest college in Massachusetts. Its bucolic campus hosts just under 2,000 undergraduates, attracted by its small size, traditional liberal arts curriculum and generous faculty-to-student ratio of 1 to 7. Attention from teachers is usually what one has in mind when selecting a small college like Williams, and when writing the hefty checks that it asks for. But what may surprise parents is where much of their money is going: the proportion of administrators to students matches that of teachers.

Williams’s annual report to the Department of Education reveals that of 1,017 total employees, 720, or over 70 percent, are doing something other than teaching. Among them are 84 coaches, 73 fund-raisers, a 42-member information-technology crew and a staff of 29 at its art museum. The college has a “baby-sitting coordinator,” a “spouse/partner employment counselor” and a “queer life coordinator.”

Are all these positions necessary?

Read more

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2009 Williams College Form 990

Here’s a little light reading for the holiday weekend (right-click to save, it’s a large PDF file):

2009 Williams College Form 990

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Eph Index

Eric Smith ’99 writes:

I’ve recently been doing more stock market related programming and thoughts, which in turn made me think of this.

Using that cumbersome url, one could hit that every N days/weeks/months/etc, and generate an index of companies with Ephs in their company officers (at least per Reuters, at whatever frequency and accuracy that allows). Could then compare the performance of that index to that of others. (noting that it doesn’t discriminate as to what level they show up at – does it matter more if they are CEO vs CFO, etc – this just shows that they are in there – the code wouldn’t have to be all that smart, as the urls that show up have tickers in there, so it could just go through and cherry pick those off)

I’m still sorting out a few programming issues on my database about pricing feeds, but I plan on having a page that does the above –
figured you might be amused by it.

It seems fairly obvious, so maybe you’ve already done it. It came to me while I was working on some code to scan for signs of lying in company webcast transcriptions, as warning signs (shorts) – but I suspect that instead of triggering warning signs, it will merely show that everyone’s always lying in those things and therefore nothing stands out any more than others.

I was going to have a few bots track various trading strategies, one of them being an “Amherst Monkey” just as a joke, that makes totally random trades – the others then being my various automated bots, and then my own person value investing picks.

I’ll have it up at cardboardutopia.com/stocks if you are curious.

Excellent stuff. Any Williams students interested in finance ought to take Eric’s idea and run with it.

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The 2:45 Crash

This is what the 2:45 Crash looked like to Erin Burnett ’98 live last Thursday.

“The machines broke down.” Don’t blame me! I was blogging . . .

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Salary freeze lifted, endowment spending limit raised

Message from the new President’s office:

Dear Faculty and Staff,

As you may know, the College has been exploring ways to build a budget for the coming year that would both meet the target for spending from endowment and provide for some level of raises.

In a bit of doubly good news, the College managed, through the efforts of many across campus, to construct a budget that met the target while providing for a raise for all continuing faculty and staff of one percent, and the Board of Trustees chose to increase the endowment spending limit in order to extend an across-the-board raise in 2010-11 to two percent.

In doing so, Trustees expressed their appreciation for the thoughtful, principled, and effective process of reorganization that the campus is engaged in, which is positioning Williams for its strongest possible future. I couldn’t agree more.

While work remains to align completely our operations with the new fiscal realities, a great deal of progress toward that goal has already been made. The Board thanks you for that as do I.

We will increase spending from endowment even further in 2010-11 to take advantage of the Early Retirement Program, which in time will save money. Some 72 percent of eligible staff and 21 percent of eligible faculty have formally expressed interest in the program. We won’t, however, know for more than a month how many will ultimately take part.

Thank you again for the impressive, collaborative way that you all are pitching in to help the College face these challenges.

Best wishes,
Adam Falk
President

(thanks to Vicarious ’83)

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A question about finances

Roughly how much has Williams spent on major construction projects replacing or massively renovating existing buildings in the last decade?

Since we’re now at a point where the cuts are starting to hurt, with raises on hold for faculty, a hiring freeze on staff (along with headcount-reduction-by-attrition?), a couple million saved by going back to loans, another million by getting rid of need blind admissions, etc., I would like to get a sense of how much cash Williams sank into replacing Baxter, replacing the Adams Memorial Theater, semi-replacing Stetson-Sawyer, and major renovations to buildings like Mission and Morgan. What, at the end of the day, was the cost of all that construction during the bubble years?

Any ballpark estimates or educated guesses would be much appreciated.

If, for any reason, you don’t feel comfortable commenting in the thread below, please email me at ronitb at gmail dot com. Your anonymity will be protected.

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Abso-efin-lutly

This prescient comment appeared on EphBlog on November 8, 2007.

Having run Citibank’s MBS trading desk some years ago I would suggest that you have only seen the tip of the iceberg in the credit disaster. It is not an issue of which CEO to fire, or having made loans to “risky” borrowers. Back in the 80’s S & L’s went belly up mainly due to the disintermediation that was permitted on the liability side of the balance sheet. To past the “thrift test” a savings bank needed to have 85% of it’s assets in mortgages. In NY State the usury rate for mortgages was 8%. Volker inverts the yield curve, short rates go to 16% and then you have to compete with the Merrill RAT for short term money…instant insolvency…add to the that the Fed disallowing regulatory net worth certificates as RAP capital and bang. Fast forward to 2003-2006. Mortgage loans are now originated by fly by night companies with no capital, sold to the street, for inclusion in CDO’s and SIV’s. The rating agencies run their Monte Carlo simulations, and determine the likelihood of defaults, monoline insurers, subordinate tranches, and suddenly a residential mortgage with no down payment, inflated appraisals, and no income verifications, are now AAA. And who ends up the owners of these 30 year term 8 yr duration negatively convex instruments…hedge funds who then lever them 6 to 1 and fund them overnight to ride the curve …in order to garner 25% returns. It is highly likely that they have in the past 3 years refinanced a trillion dollars of home loans 30% above the real value of the properties. That puts the real losses near 300 billion not the 14 billion at citi or the 8 at Merrill. Just because you can create a derivative security doesn’t mean you should. And where the hell were the regulators? They have a role because home mortgages are the last remaining deductable debt…because…property taxes are the backbone of local governments and school finance. If the fed doesn’t flood the market with cash (driving the dollar to an additional 25% decline and oil to 125, and gold to 1000+)…the housing market has 30% more to go on the downside, financial stocks down the same, insurers chapter 11…etc etc etc…The street has just inadvertently created hundreds of billions of dollar of junk bonds with no natural buyers…that’s why they keep writing them down but never sell (superfunds, SIV rescue funds)…once they sell all hell will break loose…can you spell depression?

Amazingly accurate! I sure wish that I had paid closer attention at the time. A year later (November 2008), this Eph wrote “The bailout will fail and the economy will crater.” Right again!

Of course, no one is perfect. On February 23, 2009, he wrote: “I should charge for the advice. Hope your readers shorted the market.” This was just a few weeks before my Wolf! post. The market is up more than 50% since then. The shorts have been crushed. Can’t win them all!

What to know what this Eph is worried about today? Me too! Default by the US Government.

Under my old moniker I predicted the financial crisis on Ephblog with uncanny accuracy six months before it happened (have to change names from time to time because my child gets furious at me for commenting here), so I should have some credibility on the financial side. Just for the record fortunes have been made shorting treasuries, they do not as you seem to think have to default in order to lose value, higher yields, lower dollar, spreads to other sovereign debt, etc, and I seem to recall the rating agencies commenting recently on a potential downgrade for US Debt, so I am surely not alone. The income comment regarding the CEO’s was not a criticism of them, it was to point out the age old dilemma that regulators are not as smart or well paid as the participants and therefore never are able to head problems off, hence as Dimon said there is a new crisis every 7 years or so. Can the US default? Abso-efin-lutly and that is brand new, and why the deficit is an issue in the Mass Senate race.

I had promised myself that I would buy gold when it broke $1,000. Then it did, and I kept waiting for a pull back. Still waiting.

If Ephling is right, what should you or I or the College be investing in?

I would love for Ephling to provide a thorough overview of his current thinking.

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Haverford endowment disaster

hwc writes:

The first of many interesting June 30th, 2009 annual reports just popped up and – wow! – is it ugly.

Haverford posted a staggering 35.6% drop in endowment value from one year earlier. No wonder there hadn’t been any “updates on the economy” from the President.

With a total endowment of $336 million. $140 million is in Level 3 assets — the new accounting lingo for assets such as private equity partnerships for which there is no established market price.

With a total endowment of $336 million, they have about $192 million that is liquid within 12 months. They have $104 million of debt. And they have $140 million of outstanding cash calls that they expect to be called within the next four years.

I don’t know what their budget calls for, but last year’s endowment spending would be 7.3% of the new endowment number.

Essentially, they are going to have to cash out the entire liquid portion of their endowment to cover operating expenses and private equity cash calls over the next four years.

Breathtaking. I think there are going to be many more of these reports to come.

Also:

Link:

Haverford 2008-2009 Annual Report (PDF)

Page 13, far right column:

$335,977,000 Total Endowment Net Assets (June 2009)
$521,199,000 Total Endowment Net Assets (June 2008)

It’s a 36% year to year decline. The actual investment loss was 32.8%, then you have subtractions for operating draw and additions for gifts.

BTW, Bowdoin and Middlebury have posted their year end reports, too. Nothing stood out about Bowdoin except high cash call commitments (relative to their endowment size) and they borrowed $20 million in taxable bond debt in May 2009. I haven’t looked at Middlebury.

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High Frequency Trading

Arthur Levitt ’52 interview on high frequency trading. See also his Wall Street Journal op-ed.

The debate over high-frequency trading may seem remote and irrelevant to small investors. After all, they may think, if you’re only buying and selling stocks and mutual funds occasionally, what difference does it make whether some traders are able to move quickly in and out of those same stocks, squeezing an extra penny or two of profit here and there?

But this debate is not just about the rarified world of high-frequency traders, dominated by superfast computing and trading by advanced algorithms. It’s fundamentally about the competitiveness and health of U.S. markets, and the ease with which all investors are able to find willing buyers and sellers. Small investors may never directly use a high-frequency trading strategy in their lives, but they have a very large stake in whether such strategies are regulated out of existence, as is now urged by some in Congress, the media and Wall Street.

High-frequency trading is, in many respects, just the next stage in the ongoing technological innovation of financial markets. Just as paper tickets for trades were replaced by computer orders, and the trading floor seen on television was made largely irrelevant by electronic exchanges, so has high-frequency trading revolutionized the way most U.S. stocks and related investment products are priced and sold.

Read the whole thing. Levitt is 100% correct. For a dissenting view, see here and here.

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24/7

Interesting article on Wall Street financier Chris Flowers features this quote.

Flowers may appear nerdy, but he has a quirky charm. And his low-wattage exterior belies a steely determination, whether at the chessboard or in the ongoing battles among Wall Street alpha males, that has served him well. He may not be outgoing, but he’s the sort of person a top executive can feel comfortable trusting. “I like someone who is 24/7, always reachable, keeps their cool, thinks through problems carefully and as a partner,” says James B. Lee Jr., a vice chairman at J.P. Morgan Chase who has worked with Flowers in myriad capacities and whose company is a limited partner in his funds. “He’s a very, very good and natural partner.”

1) This is another example of Lee ’75 sucking up to a past (and future) client. Not that there is anything wrong with that!

2) A phrase like “Wall Street alpha males” will go unremarked in an article like this. How will our grandchildren read that?

3) Why is the male:female ratio among the finance elite at least 10:1 and more like 25:1 or even 100:1? Excellent question. At least one reason is the “24/7, always reachable” portion of Lee’s quote. Success in finance, especially at a place like Goldman, requires exactly that. Are you the sort of person who might not want to be reachable 24 hours a day, who might want to visit your daughter’s class, go on her field trips or coach her soccer team? Good luck with that if you want to climb the greasy pole at Goldman. Women or more likely than men, I think, to make sensible choices with regard to those trade-offs, so they are much less likely to make it to the top.

What explanations would readers give to the puzzle of female underrepresentation in elite finance?

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College Endowments and Private Equity / Venture Capital

From David: Useful article on private equity. No specific mention of Williams, but lots of good background for those interested in how the endowment does/should invest.

From hwc: Year end endowment numbers are starting to roll in. Here’s a Bloomberg article today with year end estimates from the finance people at Swarthmore, Pomona, Davidson, and Smith.

From David: Useful overview article on the venture capital industry. Williams has appoximately 10% of its endowment in venture capital. It is a very hard question as to whether or not a better number would be 2% (closer to the average of large institutions) or 20%.

Vicarious’83 asks: As a practical matter, I wonder how much flexibility the college even has to adjust its allocation to these types of investments in the short run?

Comments have been moved over from Speak Up!

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Collete Chilton’s Pay: $726,556

According to the College’s Form 990, Chief Investment Officer Collete Chilton’s total compensation was $726,556 in FY 2008 and $686,053 in FY 2007. Comments:

1) The Record should do an article about Chilton’s compensation. Don’t the editors believe in muckraking anymore? I bet that some of the more left-wing Williams professors would provide good quotes, either on or off the record. Don’t think that there is anything suspect going on here? Perhaps you failed to read the College’s letter to the Senate Finance Committee.

Some members of the Investment Office are eligible for bonuses based on the return on our investments, though the office is so new that we have not completed the first year of returns on which bonuses would be computed. So, in the past ten years no such bonuses have been paid.

In other words, the College worries that Chilton and other (how many?) investment professionals won’t work hard enough even though Williams is paying them hundreds of thousands of dollars per year. So, in addition to all that guaranteed money, we need to pay them extra bonuses or else they’ll —- what exactly? Spend all day at the movies?

I think that this is the sleaziest arrangement at Williams today.

2) How did this happen? Tough to know. I am still trying to get the inside story. My guesses/speculation:

a) Both Morty and key trustees were in favor of starting an Investment Office and other steps for turning Williams into Yale.

b) No one worried too much about Chilton’s compensation. The Trustees, of course, see their role as more supervisory. They don’t set salaries. There may have been a head-hunter or compensation consultant involved. Morty, while in theory worried about the College’s overall budget, had no real incentive to pay Chilton less.

Never forget that Morty, for all his many wonderful qualities, is not — How to put this politely? — immune to the siren song of worldly wealth. It is not out of the goodness of his heart that he serves on the board of MMC. It was not an accident that he failed to take a pay-cut, unlike presidents at some other schools, during the budget crisis. It is not irrelevant to him that the Northwestern job pays around twice as much. It was not via random motion that his annual salary increased by hundreds of thousands of dollars during his time at Williams.

So, subconsciously or not, Morty would realize that a proposal to pay the new Chief Investment Officer substantially more money than he was then making would only provide a (dramatic?) upward push to his own compensation.

c) This deal was made in the bubble years. There is no way that Chilton could find a comparable job paying this much money today. Even for 2006, the compensation is excessive. Professionals I quizzed felt that someone with Chilton’s resume — modest compared to others in the field — would be somewhere in the $300,000 to $500,000 range when her contract was signed three years ago.

3) What should be done? The College ought to close the Boston Investment Office. (Read the whole comment thread for details and background.) Most/all of the senior investment professionals (like Chilton) would decline to move to Williamstown. Problem solved, without any nasty firings or salary cuts. In a financial crisis in which Williams can’t afford to spend a few thousand on the Williamstown Jazz Festival, we can’t afford a Boston Investment Office.

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Pssst… Want to make $30/hour?

One of the oddest aspects of going to a elite college are the “business” opportunities I’m sometimes sent, especially those relating to undergraduate admissions editing/counseling. I just got an e-mail today inviting me to join a certain company as a paid editor of undergraduate admissions essay. Click the “more” for the letter/commentary. Read more

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Classic Pastry Art

Somewhat dated Bloomberg article on the financial crisis:

The shakeout in global banking has untethered more than a quarter of a million people, most of them in New York and London, who thought they were in secure, well-paying jobs. Some were investment bankers and traders who, with cheap credit and a gambler’s view of risk, raked in millions of dollars in annual bonuses over the past five years.

All are now displaced, forced to reflect on their fall and to find their way in a job market where the biggest U.S. and European banks may spill tens of thousands more workers before the carnage is over.

Some young bankers in London and New York have happily ditched plans for a future in finance. Elizabeth Woodwick, 24, joined Lehman Brothers’ debt capital markets group in July 2006, after graduating from Williams College in Williamstown, Massachusetts.

She worked 15-hour days, she says, and after a year moved into an apartment with a spiffy new kitchen. That’s when she began baking to relax, throwing cookies or muffins in the oven before and after work. In June 2008, as markets wobbled, she quit Lehman and signed up for the French Culinary Institute’s program in classic pastry art.

“I liked the people, but it was so intense,” she says of her stint in banking, taking a break from a class assignment for which she was making a chocolate showpiece of the Berkshire Mountains. She calls Lehman’s demise just three months after she left “surreal.”

Now, she’s contemplating moving back to Minnesota, where she grew up, to work in a restaurant.

Since Woodwick, unlike several other Ephs, left Lehman Brothers before it exploded, it is not clear that she is a good example for the article. It is common for analysts to leave after 2 years. But the printed article does feature a great photo of her in baking gear. Alas, it does not seem to be on-line.

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Hard Times at Harvard

Nina Munk in Vanity Fair:

“There are going to be a hell of a lot of layoffs. Courses will be cut. Class sizes will get bigger,” conceded a Harvard insider, who, like every other administrator on campus, was not permitted to speak openly to me on the classified subject of alignments and resizements and belt-tightenings.

Radical change is coming to Harvard. Fewer professors, for one thing. Fewer teaching assistants, janitors, and support staff. Shuttered libraries. Less money for research and travel and books. Cafés replaced by vending machines. Junior-varsity sports teams downgraded to clubs. No raises. No bonuses. No fresh coats of paint or new carpets. Overflowing trash cans.

Read the whole article; there is too much I want to quote, though the story does drift at times into dramatics. Some on this blog have argued and will argue that Williams is in similar trouble, but at least we don’t have an equivalent to the Allston Science Complex.

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Cheerier Markets

News on college endowments:

Williams’s endowment was valued at $1.81 billion on June 30, 2008, 4.4 percent less than a year earlier, according to the National Association of College and University Business Officers. The school in Williamstown, Massachusetts, planned for a 35 percent loss for the fiscal year.

“While it will be months before we have a final audited figure, it is likely that our investment return will be better than the minus 35 percent that we conservatively used in our planning model,” Wagner, the interim president at Williams, said in a July 1 letter posted on the college’s Web site. “If that proves to be true and if our return for the next two years comes close to the zero that we have been modeling, that would reduce to some degree the extreme pressure that we had projected the college facing a couple of years from now.”

Williams, tied with Amherst College, in Amherst, Massachusetts, for the top liberal-arts institution in U.S. News & World Report rankings, plans to continue cutting costs, Wagner said.

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Williams gains some prime Manhattan real estate

From EphNotes:

Williams Club Donates Its Building to College

The Williams Club has completed the donation of its Manhattan
headquarters to the College, which is leasing it to the Club to continue
its operations. The move benefits both sides financially.

“The College is very grateful to the Club and its leaders for the care
that has gone into the planning of this generous gift to Williams,”
Interim President Bill Wagner said. “It represents the close, fruitful
working relationship that has long existed between the College and the
Club.”

The Williams Club was founded in 1913 by such noted alumni as Herbert
Lehman and Francis Lynde Stetson, and counted President Harry Garfield
as its first contributor.  The Club has operated out of its present
structure, a double brownstone at 24 East 39th Street, since 1924. The
property was recently appraised at $21 million.

“This gift fits well with the Club’s purpose, which since its founding
has been ‘to advance the interests and influence of Williams College in
New York,'” said Jeff Urdang ’89, President of the Club’s Board of
Governors. “In addition, the College has been gracious when the Club
building needed renovations. This has been a chance for the Club to
return that generosity.”

The Club will continue to operate as before, offering its members
lodging, food, beverages, programs, and reciprocal club access.

A celebration of the gift, involving senior representatives of the
College and Club, will take place at the Club on Oct. 1.

  1. Is the college charging anywhere near a market rate for the lease? If not, what is the extent of the subsidy being granted by Williams to the club and its mostly-wealthy members?
  2. Is the club’s revenue anywhere close to where it needs to be in order to afford such a prime location?
  3. What exactly is the accounting treatment of a gift like this? Does it help the endowment in any way?
  4. In the long term, this is a valuable addition to Williams’ assets regardless of what happens to the club, which probably will not survive much longer than the current generation of elderly patrons who seem to frequent the place.

Here, by the way, is the club’s location –


View Larger Map

What do you think Williams should do with the building?

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Heart of Securities Fraud

Matt Taibbi‘s Rolling Stone article on Goldman Sachs mentions Arthur Levitt ’52 and includes this fun section.

The bank [Goldman Sachs] might be taking all these hideous, completely irresponsible mortgages from beneath-gangster-status firms like Countrywide and selling them off to municipalities and pensioners – old people, for God’s sake – pretending the whole time that it wasn’t grade-D horseshit. But even as it was doing so, it was taking short positions in the same market, in essence betting against the same crap it was selling. Even worse, Goldman bragged about it in public. “The mortgage sector continues to be challenged,” David Viniar, the bank’s chief financial officer, boasted in 2007. “As a result, we took significant markdowns on our long inventory positions …. However, our risk bias in that market was to be short, and that net short position was profitable.” In other words, the mortgages it was selling were for chumps. The real money was in betting against those same mortgages.

“That’s how audacious these assholes are,” says one hedge-fund manager. “At least with other banks, you could say that they were just dumb – they believed what they were selling, and it blew them up. Goldman knew what it was doing.” I ask the manager how it could be that selling something to customers that you’re actually betting against – particularly when you know more about the weaknesses of those products than the customer – doesn’t amount to securities fraud.

“It’s exactly securities fraud,” he says. “It’s the heart of securities fraud.”

Who was the Goldman Sachers in charge of those short positions? Michael Swenson ’89. You go, Swenny!

Taibbi, although a good writer, is fundamentally clueless on this topic. In any large institution, there will be different departments doing/selling different products, often with no knowledge of each other. My local supermarket sells both low-fat yogurt and Ben & Jerry’s Brownie Batter Ice Cream. The former makes health claims that the latter implicitly denies. Yet, there is no “fraud.”

The same applies to Goldman. The Goldman folks selling ABS securities to idiots pension funds and municipalities probably believed (more or less) in what they were selling. It is hard to be a good salesman if you can’t even convince yourself. And — Look at history! — housing prices had never fallen nationwide. Isn’t part of a liberal arts education learning from history?

Swensen, and the other proprietary traders at Goldman, probably had little if any interaction with the people selling to ABS securities. They drew their own conclusions and made their own bets. They did what they were supposed to do: forecast future prices more accurately than the market and position their capital accordingly. No fraud here.

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Get it Back

Erin Burnett ’98 asks if we taxpayers are ever going to get back the money that we have “invested” in GM?

Answer: No. Full analysis here.

UPDATE: Why doesn’t the embedded video that I have inserted in the post (but which you can’t see the code for unless you are an EphBlog administrator and click the edit button) work? I don’t know. When I click through to the original web page, the CNBC video plays fine for me.

UPDATE 2 from RB: fixed

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Naked Shorts

Those evil naked short sellers! We hateses them.

Naked short selling is the practice of selling stocks short without borrowing them. That leads to failures to deliver shares, although there is no agreement on just how bad a problem that is.

Wall Street firms tend to see it as a minor ill, and point out that naked short sellers will still have to pay up if the stock price rises. They also say that not all failures to deliver are caused by short selling, although no one seems to have any data on just how many failures come from other causes.
barry
The S.E.C. adopted a rule — called Regulation SHO, for short — in 2004. It led to the release of lists each day of stocks with a large number of failures to deliver shares. Earlier this year, the commission proposed amendments that would toughen the rules, making it harder to execute naked short sales or to keep the positions open. Wall Street has protested that the changes could go too far, while some companies call them inadequate.

“We believe that some of the volatility in our stock may result from manipulative short-selling practices,” Barry McCarthy, the chief financial officer of Netflix, a DVD-rental firm, told the S.E.C.

An analysis he submitted indicated that the highest volume of naked shorting in his stock tended to be at the highest prices, which would seem to be an indication that the short sellers knew what they were doing. The company dropped off the failures list in late September, a few weeks before the stock shot up on good earnings.

McCarthy ’75 is one of the more prominent Ephs in corporate America. Anyone who thinks that naked shorting is an important issue in the US equity markets is an idiot. It isn’t clear from this brief article exactly what McCarthy thinks. After all, his job is to be a great CFO, not to regulate the financial markets.

But, even if you believe his analysis, it sure looks like the short sellers were doing exactly what they were supposed to do. When the stock price was unsustainably high, they sold it short, thereby preventing the price from getting even more out of whack. When the price was too low, they bought (thereby covering their shorts) and keeping the stock price nearer to where it ought to be then would have happened had they not acted.

Side note: I drafted this post 2+ years ago. (I have several hundred (!) unfinished posts in the queue.) Since then, the article was updated with this correction:

The High & Low Finance column in Business Day yesterday misstated the pattern of trading in Netflix, a DVD rental company. Data submitted by the company to the Securities and Exchange Commission indicated that the highest volume of short selling appeared to be at relatively low prices, not relatively high prices.

Maybe. But common sense suggests that this is just bunk, at least on average. If the shorts sold at low prices, then they would lose money and go out of business. They can only earn a living if, they sell high and then buy low. That someone at NetFlix spent time gathering this data and then submitting it to the SEC is not a good sign for the health of the company.

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