Thursday, October 09, 2008

Shit Happens

Shit happens. Whether by happenstance, negligence or for no apparent forecastable reason, things beyond our control sometimes go awry. It could be that that the short-term funding sources of your longer-term leveraged illiquid assets dry up. Or perhaps you were the victim of vicious rumours (only partly true) and a concerted short-selling campaign, or that the equity benefactors of your hedge fund just decided en-masse that they prefer "vintage wines" (which at least they can drink), or worse, "gold". Maybe you've just discovered your prime-broker is belly-up and your assets are in fact not segregated (reading fine print should be a prerequisite to managing other people's money) or maybe you've been sufficiently unluckly to find out that ALL your clients are private equity firms, or that your widget business is, in fact, unduly correlated to household expenditure.

Yeah shit happens. But how does a company"hedge" themselves or, at least attempt to protect the enterprise with which they are charged with stewarding from the most egregious of the vicissitudes of flying shit? "Capital Structure" would be a fine place to start, for while one might actuarially diversify one's customer base, or revenue streams, events may cause even the best attempts to come unstuck and find themselves correlated. So one can only do what one can do, and relying upon the munificence and continuity of creditors (e.g. Fortis: "Here Today Where Tomorrow?) is of questionable prudence, begging the question as to the wisdom of pursuing uber-optimized capital strucutures championed by Stern-Stewart, which pryed the door open for carpetbagging Activists to cajole and blackmail managements to swap debt for equity, clean out the rainy-day kitty and the suspend contributions to pension funds, in order to tart-up short-term earnings to provide a quick exit thus leaving the ravaged enterprise without a Plan-B (unless one considers selling more equity at rock-bottom prices or convertible preferreds as usurous rates an acceptable Plan-B).

Weather, is notoriously unpredictable, as perhaps is predicting the precise moment when capital markets close. But eschewing umbrellas or prudent financial management for the sake of placating activists, speculators, and yes asymmetrically-incented senior management carries risks that do not merely threaten the share price at some indeterminate time in the future, but in the extreme, threatens all constituents - management, suppliers, customers as labour, both past and present, not to mention The Public who must pick-up the tab of the job-losses, and plug the holes of retirement shortfalls. Proponents of such dubious pedal-to-the-metal balance-sheet engineering would do well to ruminate upon the old joke about the man who tempts fate by leaping off the skyscraper, giving progress reports as he descends past each floor: "So far, so far so good"....


Anonymous said...

Great picture (I mean the rocket - although the cars down the hole is pretty good too.)

CV said...

Excellent write up Cassandra, as per usual.

Just out of curiosity ... where is that last metaphor taken from? I always thought it was french from the youth flick La Haine ... "jusque ici, tout va bien", but I guess they nicked it from somewhere else?


"Cassandra" said...


I nicked it from Sir Anthony Giddens during his delivery the BBC's 1999 Reith Lectures" entitled "Runaway World. He used it in the context of Globalization, changes wrought and whether certain aspects were "good or bad".


The rocket was a US underwater cruise missile test somewhere in the north atlantic in the early 1990s. I think every UK broadsheet and tabloid had this picture (in colour no less) on their front page - even the sober FT, with all manner of sarky headline...

Anonymous said...

Ah, Stern-Stewart -

You know, back in the day they used to keel-haul people like those. Unfortunately, we don't have many keels available anymore. But I'm willing to pony up a few bucks in taxes to build one....

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