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.

The U.S. taxpayer has unwittingly been the lead underwriter of the
tremendous marketing success of the for-profit higher education sector but
bearing most of the downside risks with few rewards.

Over the past three decades, for-profit colleges have designed a most
successful business model, growing their enrollment at six times the rate
of all universities.

Our future economy will need at least 40 percent of its citizens to earn
college diplomas, but we are producing graduates at a rate of less than 30
percent of the population – and taking six years to do so. To their
credit, the for-profits have made important progress in addressing the
nation’s graduation gridlock by catering to working adult students while
traditional universities have made only modest efforts to accommodate
them.

For-profits have thrived by turning the long-standing operating model of
U.S. universities virtually upside down: treating higher learning as a
business, students as customers and traditions as disposable; creating
year-round schedules and online degrees convenient for students with jobs
and families; and adopting a cost-efficient instruction program featuring
contract professors and a centralized course design.

The for-profits have attracted substantial equity investment by their
willingness to innovate as well as because their consumers are
preconditioned to annual tuition price increases even above the inflation
rate, for essentially the same product. Most importantly, their healthy

operating margins are underwritten by federal student loan programs, which

shift the credit risk from the school to the U.S. taxpayer.

For-profit college revenues are generally about 90 percent tuition-driven,
and many operate close to the limit of 90 percent revenue dependence on
federal education aid.

The question of whether for-profit colleges prepare students for “gainful
employment,” as required by federal student loan rules, raises fundamental
policy issues beyond the concern of about their high loan default rates
(which are close to 25 percent).

Annually, about 25 percent of for-profit colleges’ government-subsidized
tuition revenue is spent on aggressive student recruitment programs.
Taxpayers are thus financing not just educational expenditures but
expensive advertising campaigns and sophisticated call centers.

The University of Phoenix spends nearly $1 billion annually on promotion.
It used its federally subsidized profits to purchase naming rights to a
sports stadium. Bridgepoint Education reported spending 28 percent of this
year’s first-quarter revenue on promotion, compared with only 25 percent
spent on instruction costs and services.

There are many lessons traditional colleges can learn from the successes
of the for-profits. But imagine taxpayers’ reactions if traditional
schools decided to divert a quarter of their already constrained budgets
away from the classroom to carry out massive self-promotion campaigns.

Just as Congress and the administration are paying attention to the
percentage of subsidized health insurance premiums that go to actual
medical care as compared with administrative costs, they would do well to
consider the appropriate relationship between for-profits schools’
marketing expenditures and their investment in learning content and
delivery.

Surely the taxpayer is not intending to subsidize their ability to provide
“gainful employment” primarily for the advertising industry.

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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.

Several media commentators and reporters have recently raised the question (even at president Obama’s press conference) why the US Government has not commandeered a fleet of supertankers to proceed to the Gulf of Mexico  and siphon-up the oil spill into their gigantic holds  before it reaches the shores of the Gulf states and the wetland breeding ground for endangered fish and waterfowl. They point out that this method was used in the case of a massive spill in MidEast waters by the Saudis, with considerable success.

No direct answer has been forthcoming, from the President or anyone else in authority.

The reason may be that the vast majority of the world’s supertankers are already floating around the world full to the brim with oil purchased for future delivery by commodity traders betting on a rise in future spot prices. Most of these traders took their position, of course, prior to the BP spill in April. But even though the price of oil in today’s  market has declined over 10% e from its 2010  peak due to concerns of about global economic growth being stunted by the European debt crisis that emerged full-blown this May, the traders bets still look pretty good given the prospect of substantial curtailment of offshore drilling activity in US coastal waters for what the Federal Reserve might call ‘an extended period”.  The longer the spill goes on, the more valuable the oil in the holds of the worlds’ supertankers may become.

So the traders who own the oil already fuilling the tankers have no interest in bringing that oil to port just now so that the ships can be emptied for a Gulf of mexico clean-up operation.

And guess who has been one of the biggest speculators in oil for future delivery: that’s right, Goldman Sachs, led by  premier commodities trader Lloyd Blankfein, out there doing God’s work on God’s ocean.

So could one of those inquiring commentators of reporters put in a call to Goldman headquarters and a number of other well-known traders in oil futures to see just who is holding what oil in what tankers parked idly somewhere on the Ocean Blue (or that part which remains blue) waiting for oil prices to head back-up after the ‘offshore shortage’ that is bound to come?

Is it possible that Goldman and others are holding out on the President when his folks call about maybe borrowing the supertanker fleets they have chartered to hold their crude?

Or is it possible that the folks at Goldman could be so  ”crude’ as to be holding out for, you guessed it, some sort of “trade”? Like, we’ll let you have a tanker or two if , say, the SEC could be persuaded to  let us off on a “lesser charge”?

Someone should at least get an answer as to why the  supertankers that are merely storing oil for suture price speculation cannot somehow  be pressed into national service.

blank bounty?

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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.

Like all tools, high frequency trading is subject to abuse both at the hands of humans and by the ghosts in the machines. That said, sometimes in life speed is truly of the essence, and as we saw last Thursday, sometimes a pause  does not refresh but actually retards resolution of an imbalance in orders. 

 Relatively small scale moves at the same instant on the futures market can trigger geometrically larger reactions on the broad tape, but there have been times when such moves have been highly salutary –as in the case when several large Wall Street firms conspired (with Fed encouragement) to stop the market rout during the 1987 crash (albeit at a distinctly human speed). Imagine if the events of Thursday had occurred (as they might have) on a rousing “up’ day on the Dow rather than during a not-unwarranted sell-off: would we be as equally engaged in today’s “glitch hunt”? The right answer is “Yes”, but not the probable one. 

 Ordinary folks like you and me cannot possibly play the markets at the warp speed of Goldman Sachs, which chooses to use the electronic tools at their disposal to compete in a nano-paced league with their digital trading peers.  In most cases, however, their private game tends more to perfect than distort the price you and I pay or receive on the slower-paced executions we rely on. 

 The best way to protect ourselves is with limit orders (which, by the way, also can be abused), and to protect our markets with cross-market circuit breakers that effect all trades equally  –  not by a futile attempt to reverse the processing pace of the modern semiconductor. Time-outs are a necessary response when events spin seemingly out of control, but they must apply to all players simultaneously.  

 When we do have a crash in the high-frequency system, however, we need to engineer a (forgive the phrase) “black box” recording like on airliners that will yield a much more precise sense of the causes of the breakdown that we have been able to glean from the latest episode. High frequency is no excuse for claiming that the tracks of trading tragedies are too complex to tease out, and only a clear sense of what actually went wrong will allow appropriate remedies to be applied to adjust trades that resulted from system malfunctions rather than wrong bets on market direction.

Terry Connelly

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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.

Let’s try this:

1)  Does the SEC have a good case against Goldman Sachs/ Better than a lot of commentators think. Of course sophisticated private buyers knew that short sellers were on the other side of the trade, and GS was not an underwriter but just a placement agent; BUT GS should have disclosed that the securities were picked from deck supplied by a known short-seller — that looks like an omission of a material fact, because that information would have made a difference to a reasonable buyer at least on PRICE, if not on the decision whether to buy at all.

2) Is Goldman’s (or any other investment bank’s) basic business model as a financial intermediary unethical because they don’t “put the client first”? NO: by definition, a financial intermediary has two clients — one a buyer and one a seller– GS has an obligation to deal with them each fairly and above board, but how can they pick just one to “put first’” — you can’t be a fiduciary for both sides of a trade. And remember some clients want to take risks. One of the long-taught lessons to apprentice investment bankers is — “if the client wants a red suit, sell them a red suit” … and in 2007, a whole lot of folks wanted to go long the mortgage markets, because they didn’t perceive it was a “red suit” waiting to happen. Goldman apparently did perceive that, but if it had refused to sell the mortgage products then and there, the business would have just gone someplace else (say Bear Stearns, and the risk profile of the financial industry (and the US taxpayer) would have wound up the same.

3) BUT what about when Goldman trades for it’s own account against the interests of its customers? Well, here it gets interesting. Sometime a firm like GS will take a position for itself just because it likes the bet  — it has a view of the market informed by its day-to-day experience. But other times it takes a position onto its own book to accommodate a client or to facilitate making a market, like after an IPO, which means its taking a risk on that security, and if it hedges that risk, it is in a real sense protecting its “own account”. The proposed “Volcker rule” says that a deposit-taking institution can’t just trade for its own account because it puts taxpayers at risk, but where do you draw the line for the situation just mentioned where it starts with accommodating a client?

4) What about derivatives: if they are “instruments of mass financial destruction” or whatever Warren Buffet called them why does he use them and ask Congress to exempt his from the new rules?  Well, derivatives have legitimate uses (airlines hedging the price of jet fuel; farmers hedging their crop return) the clearly should be bought and sold through a “clearing” house, which would mean that both sides would have to put up enough collateral to be sure they can pay off. Banks are really trying to fight off another step which would require them to be traded through a public exchange (most of them would be done in Obama’s hometown Chicago companies)…this would make their pricing transparent, and banks have been making a boatload of money on derivatives precisely by keeping the trades private and this not transparent, so only they know the true market price.

5) What’s really going on here: Look, we are in the middle of a fight about proposed legislation which will set the framework for the financial industry for the next two or three decades at least. There is a lot at stake, and the lobbying is fierce, and firms like Goldman have a lot of lobbying power at their disposal (and a lot of friendly media, too. Obama has been quite clear about wanting the banks to call off their dogs in this fight, and it would be that the case vs. Goldman and leaks about Justice Department investigations are what we know if baseball a s “brush-back” pitch in the Ninth Inning of a close World Series seventh game. If I’m right, the folks who think Obama is a “weak sister” who can’t play hardball have got another think coming: and remember that Goldman definitely knows how to play hardball. So maybe all that’s really going on is a process of evening up the odds. The contra view, of course, is that Obama is clearly playing hardball just to push some of Wall Street’s business over to Chicago!

6) Why don’t we have a “product recall’ practice for Wall Street securities that go sour just like we have for Toyota’s and Tylenol? NOW There’s a Good Idea! We do have some securities Act provisions about recession, but they are cumbersome and not used: but would the earth stop spinning for a moment if some investment bank one day admitted to the buyers what it tells itself in e-mails — namely, that this deal we did stinks to high heaven, and we’re going to recall it, and fix it or eat it ourselves! Maybe then, Goldman Sachs would rate as high as Johnson & Johnson in public respect, and even keep its stock price up, too.

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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.

This week we will see the whites of the eyes of third quarter GDP: again, the number itself will almost certainly be wrong by a factor of 10% to 25%, owing to the fact that it will contain mostly proejctions for the month of september rather than hard data. Nevertheless, it may clue the next turn in the financial markets, more so than various consumer confidence and other measures expected by Friday.

That said, which way would a “good” number turn the markets in terms of the US currency, oil, bonds and stocks?

At week’s start, stocks were under stress due to a snap-back of the US dollar (since almost the whole world was short, this should be no surprise and is probably interim). Bonds suffered a bit due to the overhand of huge Treasury issues in the next few days. Gold traded off along with hard commodities (but sugar and coffee stayed sweet and perky).

So let’s say GDP comes in at 3% or better: does this encourage the stock market that the rally over the past six months is somewhat more justified than many believe (especially those sitting on the sidelines waiting for a chance to come in and dress up their portfolios)? Or does it foretell an earlier than expected increase in the Fed funds rate and thus a panic out of stocks? Could go either way on the same data. Practically everyone would discount the sustainability (if not the credibility — see above comment) of a number with a “3″ on it; perhaps, then, there will be less panic about the Fed moving more quickly.

It is also evident that hedge funds that have missed the rally will be trying to drive the market south in advance of Thursday’s GDP announcement in anticipation of getting some stocks on the cheap by nightfall Wednesday, ahead of a GDP-induced run-up.

Also on deck this week are Senate action on extending or phasing out the new homebuyers tax credit..look for this by mid-week or not at all. First inklings of a stretched out “compromise” on this sent bank and homebuilder stocks reeling. We do love ou own bailouts but not the others guy’s.

Also coming will be weekly unemployment numbers, with perhaps a clue to where the monthly report wil come out Friday November 6.

Meanwhile the Congress and the Fed will also progress their work on financial institution reform and banker pay limits, and the Yankees will be in at home in the World Series against some pretty tough pitching from the left-side (and featuring a couple tough lefty hombres of their won): perhaps there is someting to this rise of Socialism theory of Rush Limbaugh’s; but only rich traders can afford World Series tickets, so let’s hope they are not disappointed by the Yankees, the Congress or the Fed (the latter two, however, lack a Derek Jeter as captain).

And speaking of banker pay: remember, Warren Buffett tried to rein that in single-handedly (I believe he’s a lefty, too)  when he ran Salomon  Brothers in 1991-1992; but in his own words he failed to do so, because the other firms took  out his best talent rather than follow his lead. No wonder then that only the Government can serve as the great equalizer and save these institutions from themselves.

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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.

Filed under: Uncategorized

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.

Filed under: Uncategorized