Wednesday, November 23, 2011

Ted Forstmann

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

In a world where evidence often shows the bad do well, memories of a good, rich man may lift the spirits of the disillusioned.

Ted Forstmann died of brain cancer on Sunday, November 20, 2011. He was 71. Obituaries and tributes that describe his life are accessible in newspapers and elsewhere.

We met at Michael's in New York after the publication of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession. "I really enjoyed your book," were his first words. This was gratifying, since the number who have read the book is probably in double-digits.

Ted was a former friend of Alan Greenspan's, so, it was especially nice to hear, "You were very fair to him." I told him this was not difficult since Greenspan's own words condemned his Federal Reserve chairmanship. Recording his life and statements before 1987 (the year he became Fed chairman) was evidence enough that he lacked personal character to a sufficient degree for the Wise Men to satisfactorily conclude Alan Greenspan would act as expected. I went out of my way to suggest higher motivations for Greenspan's blemishes, allowing the reader to decide in which direction the evidence fell.

In Ted's opinion: "His own words showed how confused he was."

Ted thought my chapters about the 1980s were accurate. This was received with some relief. Few played a more central role than Ted, during the period I proposed (in Panderer to Power) as the sharp break in American finance. In particular, 1984 to 1986 was the time when Wall Street corruption was institutionalized. Alan Greenspan's participation in the S&L swindle (in 1984 and 1985) was akin to a Triple-A, minor-league, first baseman batting .360: the consulting economist was major-league material.

(From a letter written by New York Senator Daniel Patrick Moynihan on August 15, 1990: "Consider the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) more commonly known as the 'S&L bailout bill.' Has there ever been an equivalent phantasmagoria of evasion, avoidance, incompetence, muddle, and panic, all with the nice overlay of swindle? From a Treasury Department once handled by Alexander Hamilton! The largest scandal in the history of the national government; for which no one is responsible. That being the first sign of a government whose true energies and talents are directed elsewhere.")

There were more pages in Panderer to Power about the 1980s than some wished. Yet, the times and the man were Siamese twins. A grounding in that period is a foundation to understanding the final and accelerating finish of venerated U.S. institutions today: financial, academic, media, and government.

Without saying it should be so (to the best of my recollection), Ted supported my conclusion that Too-Big-To-Fail banks should be shut. He didn't know his banker anymore: "I don't know what a bank is. I've been doing this for 30 years. I went for a loan for one of my companies recently. The room was filled and I couldn't figure out if there was a person, a banker, who decided [whether I would get] the loan. None of them knew who I was."

Ted did not think derivatives should exist "except to hedge gold, crops [or similar physical materials]."

I had not known, until reading the New York Times obituary, that Ted Forstmann "coined, if inadvertently, a phrase that set the public image of the leveraged buyout industry. While he was golfing in the late 1980s with Richard L. Gelb, then the chairman of Bristol Myers, the discussion turned to a surge in takeovers by buyout firms. 'What does it all mean?' Mr. Gelb asked Mr. Forstmann. 'It means the barbarians are at the gate,' Mr. Forstmann replied. 'And they'll be coming for you next.'"

The obituary quoted from a Wall Street Journal column that Ted wrote in 1988: "Watching these deals get done is like watching a herd of drunk drivers take to the highway on New Year's Eve."

I graduated from business school in 1985 and played a bit part in the leveraged buyout spectacle. As a bit player though, with investment bankers grasping for every company's business (even to the unlikely degree of wooing a very junior analyst), I knew the gossip. Ted Forstmann was in the thick of deal-making at that point (Forstmann, Little), but his name was above reproach.

Ted thought younger people today combine a strange mix of materiality and immateriality. People he talked to in their 30s or 40s wanted to make money. They didn't really care about producing or making something.

Ted thought Alan Greenspan, via the Federal Reserve, was the central spigot of our current plight. In Ted's words: "They print the money. When they print too much, it goes into activities that aren't economic. When the interest rate is too low, people aren't careful. Borrowers can pay back in depreciated dollars. They barely need to put any of their own money into a project. If interest rates are 7%, they need to calculate its potential profitability."

Ted recommended Nicole Gelinas's book: After the Fall: Saving Capitalism from Washington and Wall Street. He thought she successfully made the case we did not need a slew of new financial regulations. If the Federal Reserve and other regulators had enforced the rules then in place, there would not have been a financial crisis. These are wise conclusions that could never penetrate the interests in Washington, Wall Street, academia, and the media. For each of these parties, such an acknowledgement would reveal their failure to halt the obvious beforehand. (See Moynihan, 1990, above.)

I presumed Ted did not think Federal Reserve Chairman Ben Bernanke was an improvement. Whenever his name was mentioned, Ted either winced as if he had bitten into a lemon or exhaled a low moan.

Ted was disappointed, but maybe not surprised, that I saw no other solution than to let prices, including assets and incomes, settle at a lower level, at which point the U.S. will be competitive again. This may have been a reason he simply could not speak at the mention of Ben Bernanke's name.

Ted Forstmann was a sterling example in a tarnished field.

Wednesday, November 2, 2011

Gold Stocks

A compelling argument to steer clear of gold and silver miners is their poor management. "Those companies are run by a bunch of miners. They don't know how to manage a company." Most often this criticism refers to gold miners' seemingly insatiable desire to issue new shares. By issuing new shares, a company reduces the value of shares already in the hands of the public. For instance, a company has issued 10 million shares of common stock. Now, it sells another 10 million shares. The profit-per-share to current shareholders (before the new issue) is cut by one-half.

This argument sometimes stops here. By not looking further, the necessity to raise more capital over the past decade is not addressed. During the 'oughts, the price of gold was too low for many of the miners to continue prospecting - without receiving more funding. To this, the complaint often goes: "If miners weren't such a bunch of miners!, they would have stopped prospecting, and let the price of gold rise to a profitable level."

Long-time shareholders also lament that miners too willingly issue shares. Common stock is only one way to meet accounts payable. The managers of mining companies can, and have, borrowed from banks, from the bond market, and from private investors. They have sold mining rights, and used other means to get money.

The tendency of gold-mining managers to behave like diggers rather than owners is less important today. Thus, the reasons stated above to not own miners is less compelling. "Gold and Silver Stocks" discussed some reasons why this is so.

Several miners have announced they will pay or increase dividend distributions to shareholders. Implicit in this trend is the recent profitability of gold mining.

Many miners are now able to finance their capital expenditures from cash flow. Where this is so, the digger-managers are less likely to act in contradiction to interests of the common shareholders. The Gold Stock Analyst has discussed companies that are now able to meet capital needs from cash: Goldcorp, Yamana, Newmont, and New Gold (funded by Goldcorp) are a few.

Not by any means are all gold and silver miners in this position. Nor should they be. Miners that issue shares in the future should not be summarily dismissed by shareholders. The companies are in different stages of the prospecting-to-production cycle and hold different opinions about internal growth or growth by acquisition. But all in all, gold and silver miners are in a much better financial position than during the Evil 'Oughts. If Simple Ben runs the Fed just awhile longer, $10,000 gold will solve all financing questions.