LinkedIn IPO: Is This Time Different?

I'll quickly state that in my view the answer to the title is a resounding "no". It will be interesting to see how far this can move in either direction over the short run.

As of this post, LinkedIn is valued at $11 billion. I have either lost my ability to "get it" (quite possible) or LinkedIn is simply for suckers that are buying for speculative (i.e. have no interest in understanding what they are actually buying) purposes. My initial questions:

1. Was my assumption that the majority of people signed up to LinkedIn because they felt they "had to" or "why not" vs. they want to regular use the site incorrect?
2. Does this imply Facebook is perhaps the largest company in the world by market value? After all, in my Google search they have 5x LinkedIn's users and 130x the page views (i.e. people actually use the site).
3. Why can't Facebook simply add a broader "professional business" feature for those interested in connecting?
4. Do I have absolutely no sense of the value of niche social networking?
5. Is Monster Worldwide (an online employment company with 4x LinkedIn's 2010 revenues and priced at a 6x lower valuation) actually cheap?
6. When can trading at almot 50x revenue (revenues were $243 million in 2010) be justified by "this time is different"?
7. Should the CEO be happy that the investment banking consortium raised $352 million for the company or upset that it "could have" (if priced at current levels) raised more than $850 million for the same issuance?
8. When can I buy puts and/or sell calls on LinkedIn?

Interesting analysis of what is fair LinkedIn value is over at Musings on Markets.

Update: LinkedIn closed its first day of trading with a $9 billion market cap. Still WAY too high IMO.

Wall Street: The Market Environment Weak But SHOW ME THE MONEY

Dealbook reports:

Despite everything, Wall Street salaries are still on track to reach a record high for the second year in a row, a study by The Wall Street Journal has revealed.

Compensation appears to be going up faster than bank revenue, according to the report, with a pay increase of four percent, from $139 billion in 2009 to $144 billion in 2010, across the 35 firms surveyed by The Journal.

Bloomberg follows that expectations from employees are high, despite the less-than-stellar environment (bold mine):

Half of Wall Street finance professionals surveyed expect their bonuses to increase for 2010, eFinancialCareers.com found.

About 71 percent of the 2,145 people who responded to the e-mailed poll in the U.S. said they are anticipating at least an equal bonus from last year, with 50 percent expecting a bigger payout, the job-search website said in a statement. About 11 percent said their bonus will jump by at least half, according to the survey.

The percentage expecting a bigger bonus increased from 36 percent in last year’s poll, when firms faced pressure from regulators and lawmakers to rein in pay after many accepted billions in government rescue funds. Almost 60 percent of respondents cited market conditions as the biggest concern for their compensation.

So why pay?

“The signs of bonus euphoria may be hard to find, but Wall Street employers will have to deal with professionals who believe they are in contention for fatter paychecks and the inevitable retention issues should their expectations be dashed,” Constance Melrose, managing director of eFinancialCareers North America, said in the statement.

Ah... we're back to the good old days (pay because they deserve it when times are good - pay or they leave when times are bad). Lets break out the old Wall Street Bonus Matrix.



Actually, did they ever change?

When Investors Makes More than Corporations

Comparing the 2009 personal earnings of the top five hedge fund managers and the most recent fiscal year's net income for some of the world's largest corporations.



While these corporations employ millions of people, hedge funds support hundreds / thousands. The result is even greater inequality and capital flowing from productive means (business investment / innovation) to goods for the rich (yachts and indoor basketball courts*).

Source: The Big Picture

Not that I wouldn't have an indoor basketball court if I was worth billions

Update:

Reader Economists Do It With Models counters that wealth transfers to hedge funds does flow its way back (at least in some portion) to the economy.

I object just a tad to your characterization of the productivity of corporation net income versus private net income. Yes, the rich people are buying luxury goods, but they are then employing the people who make those luxury goods. On the other hand, if the rich people aren't buying things with their piles of cash, they are investing it, which provides funds for the development of other businesses. Corporations may be plowing their earnings back into their businesses, but they may also be distributing them as dividends to shareholders and whatnot. Perhaps some of those shareholders are even wealthy people who are going to use the proceeds to, oh I don't know, buy some yachts. :)

At least yachts are safe under any scenario!

Oligopolistic Banking System and Compensation

At this stage, most of us are familiar with the idea that compensation within the financial services industry has grown much faster than compensation outside the system. As can be seen below, this trend has largely gone uninterrupted throughout the crisis.



And while this level of compensation remains exorbitantly high across all of financial services, the lack of competition among the largest banks has caused compensation within the industry to become even more concentrated.

Before specifically detailing those firms, lets go to Wall Street Pit:

The Journal reported that based on its analysis — which includes banking giants J.P. Morgan, Bank of America and Citigroup, securities firms such as Goldman Sachs and Morgan Stanley, and exchange operators CME Group Inc. and NYSE Euronext Inc. — executives, traders and money managers at 38 top financial firms can expect to earn nearly 18% more than they did last year, and slightly more than they did in the record year of 2007.

While 18% seems like a massive jump (it is) from a level that was already too high (in my opinion), it ignores the broader issue of what has resulted from a government (i.e. taxpayer) guarantee on the downside risks of those banks deemed too big to fail... a MASSIVE increase in compensation (the joys of a "too big to fail" title for the select few).

The chart below details the compensation for all of those 38 firms, grouped here by JP Morgan, Morgan Stanley, Goldman Sachs, Bank of America, Citigroup, and "Other" (all others). BUT, slice off Citi and "other" and we can see that the remaining four make up more than 100% of that 18% jump (let it be known that the data below is not an apples to apples comparison - as Felix points out these charts don't account for the fact that JP Morgan and Bank of America have swallowed up smaller counterparts).



That said, my point is that the increase in compensation (and risk) is now concentrated among only these top banks. Bonuses at these "big four" banks are up a whopping 25% since 2007 (all other firms are down 18% since that time) and 40% since 2006 (whereas all other firms are down 2%).



For all the talk and supposed intervention, nothing has changed (actually, with these banks even more "too big too fail", things may actually be worse).

Source: WSJ / BLS

Banker Pay Limits on the Way?

Bloomberg details:

World leaders are poised to crack down on banker pay and better coordinate economic policies as they seek to temper the excesses that helped trigger the worst financial crisis since the Great Depression.

President Barack Obama and other Group of 20 leaders meeting in Pittsburgh are uniting behind a plan to force banks to tie compensation more closely to risk and tighten capital requirements, U.S. officials said.

“There will be broad agreement around many elements of a compensation package,” Michael Froman, Obama’s liaison to the G-20, told Bloomberg Television today.

For those newer to EconomPic, let me dust off the old Investment Banking Bonus Matrix to show everyone how things currently work in the banking world.



As for the new limits... I will believe it when I see it.

Source: EconomPic

The "1-Percenters"

According to the Center on Budget Policy Priorities:

Average pre-tax incomes in 2006 jumped by about $60,000 (5.8 percent) for the top 1 percent of households, but just $430 (1.4 percent) for the bottom 90 percent, after adjusting for inflation, according to a new update in the groundbreaking series on income inequality by economists Thomas Piketty and Emmanuel Saez. Their analysis of newly released IRS data shows that in 2006, the shares of the nation’s income flowing to the top 1 percent and top 0.1 percent of households were higher than in any year since 1928.

Note that the latest data available is from 2006.



Notice the point (in the above chart) at which the top 1% began to earn a greater share of the total pie for the first time after the Great Depression... the early 1980's. Know what else occurred in the early 1980's? Financial professionals began to earn a SIZABLE relative share of national income while all other wages were stagnant.

Thus began a 25+ year run in which financial professionals and the powerful elite both had a huge incentive to keep the financial bubble going. The financial professionals earned their commission, while the elite had outsized gains on their capital. As the NY Times states:

The gains for the richest took place amid a booming economy, in which hedge funds and private equity firms blossomed and the subprime lending machine went into high gear.

In hindsight, it is not surprising to me that this level of income concentration was last seen right before the Great Depression (I assume financial professionals had an outsized share of income then as well). And even though much of this wealth was just saved by the trillions of taxpayer dollars used to keep the financial machine going, the 1-percenters are protecting this wealth at all costs. Truthdig details:

But what really makes the ultrawealthy so fortunate, what truly separates this moment from a run-of-the-mill Gilded Age, is the unprecedented protection the 1-percenters have bought for themselves on the most pressing issues.

With 22,000 Americans dying each year because they lack health insurance, Congress is considering universal health care legislation financed by a surcharge on income above $280,000—that is, a levy almost exclusively on 1-percenters. This surtax would graze just 5 percent of small businesses and would recoup only part of the $700 billion the 1-percenters received from the Bush tax cuts. In fact, it is so minuscule, those making $1 million annually would pay just $9,000 more in taxes every year—or nine-tenths of 1 percent of their 12-month haul.

Nonetheless, the 1-percenters have deployed an army to destroy the initiative before it makes progress.

While a lot of progress is needed, the bigger question is whether national healthcare is just another form of redistribution of wealth or do wealthy individuals owe it to society for all they have extracted from the system? Obama seems to think the latter (back to Truthdig):

For his part, Obama has responded with characteristic coolness—and a powerful counterstrike. “No, it’s not punishing the rich,” he said. “If I can afford to do a little bit more so that a whole bunch of families out there have a little more security, when I already have security, that’s part of being a community.”

If any volley can thwart this latest attack of the 1-percenters, it is that simple idea.

I agree...

Data Source: Emmanuel Saez, BLS

No EconomPic Needed to Explain this Greed

The WSJ reports:

Banking trade groups are lobbying the Federal Deposit Insurance Corp. for permission to bid on the same assets that the banks would put up for sale as part of the government's Public Private Investment Program.

PPIP was hatched by the Obama administration as a way for banks to sell hard-to-value loans and securities to private investors, who would get financial aid as an enticement to help them unclog bank balance sheets. The program, expected to start this summer, will get as much as $100 billion in taxpayer-funded capital. That could increase to more than $500 billion in purchasing power with participation from private investors and FDIC financing.

The lobbying push is aimed at the Legacy Loans Program, which will use about half of the government's overall PPIP infusion to facilitate the sale of whole loans such as residential and commercial mortgages.

Federal officials haven't specified whether banks will be allowed to both buy and sell loans, but a list released by the FDIC and Treasury Department of the types of financial firms likely to be buyers made no mention of banks.

Allowing banks to have it both ways would give them added incentive to sell assets at low prices, even at a loss, the banks contend. They claim it also would free up capital by moving the assets off balance sheets, spurring more lending.

"Banks may be more willing to accept a lower initial price if they and their shareholders have a meaningful opportunity to share in the upside," Norman R. Nelson, general counsel of the Clearing House Association LLC, wrote in a letter to the FDIC last month.

Off balance sheet only frees up capital because it hides risks. This is absolutely mind boggling. Not the fact that they are asking, but how is this even a remote possibility?

Taxpayers Subsidizing Paper?

In the latest installment of "Greed that Makes Me Want to Throw up in my Mouth" we have International Paper. It started innocently enough with the following press release on March 24th:

In January 2009, the company was notified that its registration as an alternative fuel mixer was approved. On March 20, 2009, the company received its first check from the Internal Revenue Service in the amount of $71.6 million related to an alternative fuel mixture produced and used at 15 of its mills for the period of November 14 to December 14, 2008. The company will continue to submit refund claims based on actual mill production and use of an alternative fuel mixture and will provide investors with information relating to future credits during its regular quarterly earnings calls.

No doubt in part to that new taxpayer revenue source, International Paper's stock soared to its most recent peak, up more than 100% from when the S&P hit bottom on March 9th (to be fair, the stock had gotten slammed before this run-up). A win-win-win right? International Paper gets a "first check" of $71.6 million from taxpayers (thoughts are it could become as much as $1 billion this year), while helping the environment, AND the U.S. becomes less dependent on oil... right?

Core Economics with the abridged reasoning as to why that is incorrect:

Congress passes bill to encourage fuel mixtures as a way to weaning the economy off oil. Subsidises usage of that fuel to the tune of 50c per gallon. Paper producers, who had been using a by-product of their process as a fuel for decades, now add diesel to it in order to claim the subsidy.

The Nation with the full details (bold mine):

Since the 1930s the overwhelming majority of paper mills have employed what's called the kraft process to produce paper. Here's how it works. Wood chips are cooked in a chemical solution to separate the cellulose fibers, which are used to make paper, from the other organic material in wood. The remaining liquid, a sludge containing lignin (the structural glue that binds plant cells together), is called black liquor. Because it's so rich in carbon, black liquor is a good fuel; the kraft process uses the black liquor to produce the heat and energy necessary to transform pulp into paper. It's a neat, efficient process that's cost-effective without any government subsidy.

By adding diesel fuel to the black liquor, paper companies produce a mixture that qualifies for the mixed-fuel tax credit, allowing them to burn "black liquor into gold," as a JPMorgan report put it. It's unclear who first came up with the idea--Wrobleski (Ann Wrobleski is International Paper's vice president for global government relations) told me it was "outside consultants"--but at some point last fall IP and Verso, another paper company, formerly a part of IP, began adding diesel to its black liquor and applied to the IRS for the credit. (Verso nabbed $29.7 million at just one of its mills in the final quarter of 2008 for its use of mixed fuel.)

Despite the obvious contrivance of the procedure, Wrobleski is unapologetic: "The credit is supposed to encourage the use of green fuel." Sure, I said, but isn't it a bit weird you're now adding diesel fuel to the process in order to take advantage of it? "It is what it is," she said.

"It is what it is"? Maybe IP should have their traditional PR contact handle these types of media requests going forward....

Source: Yahoo

If Goldman's Selling... Beware of Buying

If I've learned anything, it is that when the "smart money" is selling, you SHOULD NOT be buying. The WSJ reports:

Goldman Sachs Group Inc., riding a rising market, is considering making a multibillion-dollar offering of its shares to investors as part of an effort to repay a $10 billion government loan, according to people familiar with the matter.

The move, which could be announced as early as next week, comes as the firm prepares to report solid first-quarter earnings Tuesday. Goldman executives haven't determined the exact size of the offering, but it is expected to be at least several billion dollars, these people say. They caution a final decision isn't made, and will be based partly on market conditions.

Although Goldman's stock price has been far from immune during this global downturn, a sale at today's equity valuation would be a substantial improvement (more than 2x) than seemed possible just a few months back.



Tyler Durden at Zero Hedge with the conspiracy theory behind this recent run-up (he also makes the case that this low volume rally is poised to crash):

Key to note here is that Goldman's program trading principal to agency+customer facilitation ratio is a staggering 5x, which is multiples higher than both the second most active program trader and the average ratio of the NYSE, both at or below 1x. The implication is that Goldman Sachs, due to its preeminent position not only as one of the world's largest broker/dealers (pardon, Bank Holding Companies), but also as being on the top of the high-frequency trading/liquidity provision "food chain", trades much more often for its own (principal) benefit, likely in tandem with the other top dogs on the list: RenTec, Highbridge (JP Morgan), and GETCO. In this light, the program trading spike over the past week could be perceived as much more sinister. For conspiracy lovers, long searching for any circumstantial evidence to catch the mysterious "plunge protection team" in action, you should look no further than this.

Below is the data he references in chart form...



In other words, Goldman Sachs own trading has made up a HUGE portion of the program trading volume on the NYSE since the market turned in early March (here is a link to the past week of data, a week in which program trading was suspiciously higher than past weeks and one in which we saw a massive rally in financials). The chart below details how unprecedented this level of "program trading share" by Goldman is as compared to the first week of 2007 and 2008.



Goldman's principal trading amounted to 20%+ of all program trading reported on the NYSE, up from between 3-5% one and two years back. In other words, leading up to a period when Goldman may be issuing several billion dollars in an equity offering, their own principal trading has amounted to 4-5x more volume than what had been typical, in an illiquid market, potentially driving up the value of financial equities in the process... interesting.

Update: Zero Hedge has an update to the original post that makes Goldman a part of the run-up, but not the reason for the run-up (i.e. they are just delta hedging their book)

Source: Yahoo

AIG... By the #'s

Infectious Greed details:

• The top recipient received more than $6.4 million
• The top seven bonus recipients received more than $4 million each
• The top ten bonus recipients received a combined $42 million
• 22 individuals received bonuses of $2 million or more, and combined they received more than $72 million; 73 individuals received bonuses of $1 million or more
• Eleven of the individuals who received "retention" bonuses of $1 million or more are no longer working at AIG, including one who received $4.6 million.

In total, 11 of 73 received a $1 million bonus and no longer work there... the chart below shows roughly the same ratio; 6 of 36 to put that in perspective.

Apparently, the $1 million "retention bonuses" weren't enough. After AIG became the "poison ivy" of the financial community, cash in hand no longer served any purpose to stay.

Investment Banking Bonus Matrix: AIG Edition

In my post about AIG's bonuses and backdoor bailouts I got the following comment from 罗臻:

I don't understand why people blame AIG. Instead of letting it fail and getting rid of all the executives, bonuses, and most employees, the government saved AIG and now it is a continuing business. Paying bonuses is what businesses have to do to retain their workers.

"Have to do"?????? Looks like it is AGAIN time to whip out the Investment Banking Bonus Matrix (apologies for those sick of seeing this thing... but apparently I haven't shown it enough to get comments like that). Definitely an argument from the bottom right quadrant.

Shameful Bankers: Bonuses Down ALL THE WAY to a Level Not Seen Since.... 2004?

I was ready to rant, but I saw President Obama already took care of it on my behalf:

When I saw an article today indicating that Wall Street bankers had given themselves $20 billion worth of bonuses -- the same amount of bonuses as they gave themselves in 2004 -- at a time when most of these institutions were teetering on collapse and they are asking for taxpayers to help sustain them, and when taxpayers find themselves in the difficult position that, if they don't provide help, that the entire system could come down on top of our heads," the president said, "that is the height of irresponsibility. It is shameful.

To me this is more than shameful. I'd go with outright criminal to those determining and approving bonuses of this level, in this environment, and with taxpayer money. Lets hope (make that pray) that Christopher Dodd makes good on his promise:

"I’m going to be urging — in fact not urging, demanding — that the Treasury Department figures out some way to get the money back. This is unacceptable."

Because apparently, the Investment Banking Bonus Matrix we detailed back in November is all too accurate:



Source: OSC.STATE.NY.US

Oxymoron of the Day: A Public, Private Equity Shop

Oxymoron:

A figure of speech that combines two usually contradictory terms in a compressed paradox.

When Fortress Investment Group became the first hedge-fund/private-equity group to list in the US back in February of 2007, it stormed out of the gate:

In the most widely anticipated public offering of the young year, Fortress Investment Group (FIG), the first U.S.-based hedge fund to go public, stormed the ramparts. The shares opened trading at $35. At that level the company had a market capitalization of more than $12 billion. A group of five company insiders hold more than three quarters of the company's shares.

In a recent article, the Wall Street Journal detailed just how much Fortress' five principals were able to extract from the firm prior to the IPO:

The firm's five principals -- led by founder Wesley Edens -- cashed out just prior to the IPO, selling 15% of the company to Nomura Securities for $888 million. On top of the Nomura proceeds, the principals received an additional $409.2 million in distributions from the company just before listing.

That adds up to almost $1.3 billion... and it was just in time. Less than two years later, the market valuation of Fortress has since crashed 95%.

That leaves the current valuation of the entire firm at about half of the $1.3 billion the principals were able monetize for a mere ~15% stake just two years ago. The performance (or lack there of) was not a complete surprise to those that thought strategically about what this all meant. Dealbook reported just prior to the IPO:

A hedge fund manager interviewed by The Los Angeles Times sounded even more skeptical about the Fortress offering before it began trading: “These are very smart guys,” he said. “If they’re selling, I probably don’t want to be buying.”

And a finance professor had this observation for MarketWatch’s David Weidner: “When the smart money is pulling out, it’s time to start selling to the dumb money.”

Maybe only in hindsight it was obvious, but why would anyone believe that a company (known for taking publicly traded companies private), was going public for the benefit of anyone except themselves?

The End of Wall Street / Investment Banking Bonus Matrix

Michael Lewis has a great article titled 'The End' in Portfolio which inspired the investment banking bonus matrix below. I wrote back in September about the Downfall of the Investment Banking Model and he goes 1000 steps further, with details that are only possible from starting out in Wall Street's epicenter in the early 1980's. While I highlight some sections of the article, I highly recommend you go and read the whole thing. He doesn't take long to dive in:

To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital—to decide who should get it and who should not. Believe me when I tell you that I hadn’t the first clue.

The amazing part is that after a while, the pure and absolute ego that drives Wall Street makes those that stay feel like they deserve all this money. Even after ALL that has happened over the past year and a half, they can look you in the eye and honestly say they DESERVE another round of massive bonuses. Does the fact that they have accepted hundreds of billions of taxpayer money stop them? Of course not... every situation can be explained by the Investment Banking Bonus Matrix...

Enough of a rant... back to the article. As Lewis points out in a later passage regarding the supposed "changes" that were made on Wall Street in the 1990's:

The changes were camouflage. They helped distract outsiders from the truly profane event: the growing misalignment of interests between the people who trafficked in financial risk and the wider culture.

And he traces this misalignment all the way back to John Gutfreund, the former CEO of Salomon and antagonist of his great book Liar's Poker. John Gutfrend changed the social order of Wall Street by transforming Salomon Brothers from a private partnership into Wall Street's first publicly traded corporation. Why? By doing so:

they transferred the ultimate financial risk from themselves to their shareholders. It didn’t, in the end, make a great deal of sense for the shareholders. (A share of Salomon Brothers purchased when I arrived on the trading floor, in 1986, at a then market price of $42, would be worth 2.26 shares of Citigroup today—market value: $27.) But it made fantastic sense for the investment bankers.

And in a statement that seals my opinion on Gutfrend once and for all, he delivers this doozy:

“When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government. “It’s laissez-faire until you get in deep shit,” he said, with a half chuckle.

Investment Banking Heads Made $1 Billion+

Twelve of the highest paid executives of the investment banking world that helped create the current disaster made over $1 Billion from 2003-2007.

The top paid.... Dick Fuld from Lehman Brothers who (in a leaked email) responded to an internal suggestion that he and other senior bankers forgo their bonus this year:

Don't worry -- they are only people who think about their pockets.

I guess when you rake in more than $250 million over a five year stretch, you no longer have to worry about your pockets...

Source: NY Times