March 26, 2008

Ye Olde Fable of the Shoeshine Boy, Revisited

SO I WAS DRIVING into work this morning when the disc jockey on the radio -- I will not use the term "radio personality" -- started complaining about the alarming fall in his company's stock.

Now our disc jockey in question works for a station belonging to Clear Channel Communications Inc. (NYSE: CCU). Today, much to the horror of the firm's investors, the much-discussed buyout deal that would have paid shareholders $39.20 per share for the company officially blew up. It blew up because the banks funding the deal got snakebit.

Apparently, loans for leveraged-buyouts aren't worth what they once were, and so the $22 billion the banks were going to put up would have resulted in huge losses on their books. Now, why would a big loan, generating immense amounts of interest, somehow result in huge losses? The idea on its face makes no sense and at first glance is, to use the technical Wall Street term, "completely insane."

However, there's a good reason. It's because the banks would have to value the giant loan on a mark-to-market basis. Since the credit crunch has thrown the whole business of loan pricing into turmoil, what was once a sought-after deal has become the financial equivalent of Dutch Elm disease. So the banks essentially told the private-equity buyers and CCU shareholders they were out of luck. This has infuriated the buyers and shareholders, who argue that a deal is a deal, so loan us the money you told us you would loan us. The matter will almost certainly head to court, and the deal could still well happen -- although the outcome is now very much in doubt.

But back to our disc jockey. This morning, CCU shares suffered a project beating: they fell to $27 per share, which is not Bear Stearns bad but still a drop of 17 pc. In after-hours trading, they recovered a bit, but still -- they got hammered. So it was understandable that our disc jockey, on the air and broadcasting to the Greater Boston area, would wail and gnash his teeth about his losses. Exactly what his holdings were weren't clear. They could have included both stock and options, as the word "underwater" was used, although one draws inferences from a disc jockey at one's own peril. Still, that the man had suffered losses was clear, and he was morose.

It was at this point that one of the man's cohosts made the salient, although untimely, point that everyone on the show still had each other and that all they needed was love. Although I cannot argue with the sentiment, I daresay this was not exactly comforting at the time. When I have a bad day on the market, it takes me six or seven minutes to get to a "love and sunshine" moment. In the interim, I think about disemboweling the wretched, short-selling hedge fund trader who has conspired against my positions, and pray that he contracts syphilis and the gout. Still, the disc jockey showed admirable restraint, and ended the show with some shared gallows humor.

On the remaining minutes of my drive, I pondered the following alarming thoughts:

* When the hell did radio people start worrying about their investments? It's radio, for God's sake. Hardly anyone makes anything in radio.
* The disc jockey on the Top 40 station, one of approximately six stations I receive clearly up here, is talking about his investments. On a typical day, this station breathlessly talks about celebrity shenanigans and chides the people who call into it. It's not like it's Les Nessman being alarmed that his shares in Polaroid went kaputski.
* If a disc jockey is talking about his declining investments, it means we're clearly in a recession.
* Why the hell didn't the disc jockey talk about his investments when CCU was doing somewhat well? I mean, it was around $46 just a few years ago and was rangebound in the $30s for a long time.
* If the disc jockey had talked about his investments when they were going well, I could have applied the Joseph Kennedy Principle and switched all my holdings to cash, thus spectacularly timing the market and saving myself a bundle of money. (So the story goes, the elder Joe Kennedy sold his stocks in 1929 when he got a hot tip from a shoeshine boy).

But oh well. Such are the breaks of investing -- and one learns quickly that hindsight is 20-20. Also, it did highlight one benefit to recessions: as Fred Schwed once put it, "Are you quite sure you would care to see all those people who had big money then have it again?" That is not a bad point. Besides, as it turns out, hedge funds are among those suffering losses as a result of this whole mess. And how could one turn down an extra helping of schadenfreude?

Posted by Benjamin Kepple at March 26, 2008 11:02 PM | TrackBack
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