Connelly on Commerce

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

If you want to understand why the meltdown of the credit securitization market is so central to everything that is going on with the economy in the US today, imagine this: All the cellphone towers in the world simultaneously go off. Sure, many of us could get by reverting to landlines and payphones (if there are any left on a corner or two). But those on the fringes who connect with the rest of the world only by their mobile phones would be totally left out. And the pace of commerce generally would be radically curtailed.

Interest rate cuts and stimulus packages are well and good for building a fire break against recession, although the timing is a bit “last minute”. This economy now just needs a pacemaker, but if one doesn’t get implanted soon enough, it will need the paddles! But even more central is a restoration of market trust in the securitization process.

And restoration of trust cannot come until bond insurer financial footings are stabilized to the point where we do not have a ratings downgrade that sets in motion a chain reaction spreading through the municipal bond market and all the investment classes and state and local budgets that depend on their stability.

This risk is even more pronounced as the rating agencies themselves seek to regain their lost honor (due to the subprime ratings fiasco). The agencies may be tempted to re-assert their “independence” by ending their forebearance on the bond insurers’ ratings while regulators and financiers struggle to find a formula to fix the elemental problem caused by the insurers themselves investing way too much in the very dicey securities they were supposed to be insuring!

The financial markets will only stabilize and turn upwards when there is clear and convincing evidence that Central Banks across the globe are fundamentally in poliy alignment with respect to the global implications of the credit crisis especially in securitization. (They need not all have the same interest rate policies or levels, of course; they just need to show they recognize how serious the risk is, as Josef Ackerman of Deutche Bank observed just today.)

In addition, markets need a sense that those concerned have their arms around the bond insurance mess and see a way forward independent of what may or may not be the investment decisions of Warren Buffett and Wilbur Ross (not that there’s anything wrong with their investment decisions…it’s just that it’s not their job to save the economy).

Then and only then, slowly but surely, can the capital markets begin to resuscitate, issue by issue, the securitization process that served us all so well for the past three decades since the S & L crisis (a pre-globalization matter, thank goodness) and that only recently were systemically corrupted by rampant greed.

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Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

Thank you Microsoft for rescuing us all from a downer of a January jobs report last Friday, giving us time to reflect on the fact that the main thing we really know about that jobs report, like the 4th quarter 2007 GDP estimate released a couple days earlier, is that it is probably materially wrong, if recent history is any guide.

Indeed, the same news release corrected the modest 18,000 net job additions count first announced for December to over 80,000 (about 400% outside what the political polsters call the “margin of error”)!

Funny how we have much tougher standards for political pols than supposedly useful government data, on release of which we are prepared to make and lose billions in market value. Imagine how the markets would have reacted earlier in January to  a December jobs report showing an 80,000 gain; would we have started the year with the same sharemarket swoon? So let’s see next what the update in late February will bring to the aenemic GDP estimate. Remember that most actual data for December was not referenced in the .6% positive figure.

But back to the Microsoft bid for Yahoo to challenge Google’s search and ad dominance — or, as this event is otherwise known around these parts, the Stanford intramurals! It has been raining a bit much in Silicon Valley lately, and we can use some good indoor games. (As intrmurals go, this one could be the Super Bowl!)

Now of course it’s a great time for MSFT to bid a 60%+ premium for YHOO with its share price dangling in the teens at the possible onset of a recession. YHOO can’t really blame its problems on the subprime mortgage crisis, but maybe the bid does signal something of a bottom in terms of big-cap technology and interet share prices, which have suffered in the recent market sell-offs linked to the mortgage and credit mess.

In the short run, there are serious competitive disruptions inherent in a hostile bid which, while even at a big premium, really provides only a quiet exit for those folks unlucky enough to enter the YHOO picture at around $28-30 per share not so very long ago. More thrilling indeed would be the prospect of a competing bid or two, but who has MSFT’s cash and market leverage to compete? But also YHOO turned down an approach at around $40per share not so very long ago, and may be anxious to seek out other courses than simply owning up to a blown call.

Enter Google: not likely as a direct bidder, as they might have more trouble with the Justice Department than MSFT will face. (Indeed, the MSFT offer’s timing suggests an effort to get antitrust scrutiny out of the way before the risk of a change in party controlling the Justice Department’s merger philophy come November.) But Google has much to gain from a protracted seize-up of both MSFT’s and YHOO’s creative juices in a proxy battle and tender offer contest. Meanwhile, GOOG may be able  structure a relationship with YHOO and certain of its offshore interests that could bring equivalent or better  value for patient YHOO shareholders.

The question of whether that patience will be forthcoming may hinge on geography: this bid is very much a “road game” for Microsoft in terms of Silicon Valley — and we notice that Stanford’s men’s basketball team beat both Washington and Washington State this weekend — on the road!

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