It’s Nate Silver’s World, And We Just Live In It

With less than two weeks to go in the election, that Jay-Z song has been running through my head, because indeed, “Who is gonna run this town tonight?”

But the answer I keep coming back to isn’t Mitt or Barack, but rather Nate Silver and his Five Thirty Eight site.  Everyone I know is absolutely addicted to his analysis and will be until November 6th.

Silver is the true thug, the mack-daddy, the baddest brother up from the housing projects of the statistics profession.  He runs this town tonight, and for the future.

Silver interprets polls and statistics unlike any other writer out there.

Traditional journalists on television, radio, and print have a need to hype as much as to inform.  Columnist Peggy Noonan absolutely predicted the future when she wrote – before the first Presidential debate – that Romney would be declared the winner, if only because the media needs a horse race.  Traditional media has advertising space to sell, which means emphasizing outlier polls showing a tight race.  Or it means national polls – which are largely meaningless in an electoral college world – get hyped beyond their true meaning.

But Silver consistently brings a probabilistic, nuanced, and data-oriented approach to predicting the Presidential outcome, and why it may hinge on Ohio.  He incorporates the information from political betting markets in a sophisticated way.

His writing reminds me of working with the brightest traders in the bond markets, sifting through data and models to come up with probabilistic scenarios.

What’s so amazing about Silver is how rare he is in journalism.  He relies not on anecdote but on data.  He’s willing to debunk myths and de-hype a situation, if the data warrants it.  Why can’t we get more of this?

It’s a Nate Silver world now, and we just live in it.

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Ask an Ex-Banker: Home Loans and Home Equity Lines of Credit

Q. Dear Banker, My wife and I are planning an addition to our house. We need the additional space, but I do not want this project to stretch our overall budget. Since I have a specific idea of how much I want to pay, a rise in interest rates would cause us to make different decisions on the project details. Unfortunately, we need to make those decisions now but will not need the money for another 8-12 months. I don’t care if interest rates go down, I like where they are now, but borrowing money before you need it sounds foolish. How does your average Main Streeter hedge against interest rate swings?

Bradley T., San Antonio TX

 A. I understand your question to be whether you should borrow money now, before you need it, because rates are ‘low enough,’ and because you worry rates will not be this low in another 9 months when you actually need the money for the home renovation.

My short answer is: “Maybe, although I personally would not” as to whether you should borrow now and lock in today’s low fixed rates, in anticipation of needing money 9 months from now.  I’ll explain what I mean by that in a moment.  The longer answer, which I’ll detail more fully below that, is that you really need a home equity line of credit, not a fixed-rate home equity loan.

The Short Answer                                      

Should you lock in a loan 9 months early because rates are ‘low enough?’  I’ll make a bunch of assumptions to be able to answer the question specifically, and I hope you can adjust the answer to your own particular situation.

I’ll assume you can get a Prime[1] rate home equity loan for a pretty major $100,000 home renovation at 5%.  That means you’ll pay $5,000 per year in interest, or an extra $3,700 for borrowing 9 months early.

$3,700 is not the end of the world for peace of mind, and so I’ll answer “maybe” borrow this way to lock in an attractive low rate like 5% today.

There are a few reasons, however, why I would not borrow money early myself.  Foremost, we really have no idea which way interest rates will go in the future.

As a former bond guy,[2] I pay quite a bit of attention to interest rates.  Had you asked me at almost any time in the last 10 years whether interest rates were likely to go higher or lower in the next 18 months, I would have said ‘higher’ approximately nine out of ten years, and I would have been wrong approximately nine out of ten years.  That’s not because I’m ill-informed, it’s just because it’s much harder to forecast the future direction of interest rates than it seems.

Because of my own deep uncertainty about the future direction of interest rates, I would argue your choice to borrow 9 months early ‘locks-in’ a loan interest ‘loss’ of $3,700, whereas the rate available to you has a 50-50 chance of being higher or lower 9 months from now.  If you accept my view, then your interest cost for the next 9 months, by not borrowing, is $0, which is much more attractive than losing a guaranteed $3,700.

But what if, 9 months from now, your fixed rate jumps to 7% from today’s 5%, and you’re locking in a 10 year $100,000 loan at $7,000 a year, rather than the more attractive $5,000 a year interest cost?  Well, in that case, if you carry the full sized loan for 10 years, you’ll pay a total of $20,000 more in interest over the life of the loan.  In that stark (probably-worst-case-scenario) example you will have lost out, and you will curse my advice, as well as my children’s children.[3]

Given that the starting position of borrowing early is that you’re $3,700 poorer, however, I see many more scenarios in which you come out ahead by not borrowing early.

If you plan to pay down the loan principal faster than 10 years, for example, or rates shoot up less than 2% over 9 months, or rates stay the same, or rates go down even further, you will have broken even or ended up better off by not borrowing early.  So that’s why I wouldn’t take today’s rates.

The Longer Answer

Instead of a home equity loan locking in today’s good fixed rates, what you actually need is a home equity line of credit (HELOC) from which you can borrow money and pay down at any time.[4],[5]

When I started a business in 2004, I met with an elderly entrepreneur who gave me great advice: Obtain the largest possible home equity line I could, not because I needed it now, but, because as an entrepreneur I needed to be ready to take advantage of opportunities whenever and wherever they might arise.

He was right.  In fact, any person who is both a home owner and a business owner, needs to stop everything right now and start applying for a home equity line of credit.  Why are you still reading this blog post?  Go, do it, now.  I’ll wait.

Ok good, you’re back.  You’re welcome.

In your case, Bradley, the potentially higher rates one year from now will be more than made up by the fact that you can borrow only the amount you need, as you need it, for your home renovation.  The slower drawdown of debt principal and the faster payoff of principal via a home equity line of credit is virtually certain to save you interest costs in the long run.

I believe the fact that HELOC rates are floating – they may go up or they may go down over time – are more than made up for by the variable amount of principal you can take out only as and when you need it.  Over the course of your planned home improvement project, if you borrow for example $33,000 for some period of time, rather than the full $100,000 loan, you’re obviously paying 1/3 of the interest costs than you would on the full amount, during the period of the smaller borrowing.  My point is that even if you end up with the same peak amount of borrowing, $100,000, you’re likely to have paid significantly less in interest in getting to that point.  Most of the time, those savings will outweigh the probability-weighted cost of higher future interest rates.

A special note for small business owners, new and old:  If you’re just starting out, the HELOC may be your only ticket to borrowing money cheaply and flexibly.  Banks only pretend to lend to small businesses, and they certainly do not lend to new small businesses, so it’s hardly worth trying that route.  Banks do lend, however, against houses and home equity, so you’ve got a shot there.

For experienced small business owners: You still need the largest home equity line of credit possible.  You never know when the commercial property right next to your office may become available, and when having $50,000 in ready cash is the difference between acquiring the real estate of your dreams and paying more to lease office space for the next 30 years.  If you have to go to your bank to apply to get the loan to buy the property next door, you’re too late.  You need the home equity line so that you can credibly represent to the sellers your ability to close the transaction within 1 week, in ‘cash.’  That is how the pros do it.[6]



[1][1] Meaning, you have excellent credit, at least above a 720 FICO.  The FICO people sell their scores from all three major credit rating agencies here for about $35.  It’s worth it to pull your score once in a while, so you can confirm you’re eligible for the best rates and there’s no weird activity on your credit reports.  Don’t let FICO trick you into paying $14/month.  That’s stupid.

[2] No, not the Daniel Craig type of Bond guy, much to my wife’s chagrin.

[3] Which is as good a segue as I can think of for repeating Jack Handey’s Deep Thought: “I believe in making the world safe for our children, but not our children’s children, because I don’t think children should be having sex.”

[4] This entire ‘Ask an Ex-Banker’ advice column today assumes you are a responsible borrower, and that debt incurred through a home equity line of credit will go toward productive home and business improvements and not be blown on subsidizing your unsustainable consumer-driven lifestyle.  In your case, Bradley, since you live in San Antonio, that means you can’t blow the whole line of credit on Alamo Lego miniatures and bad Tex-Mex food.   But since www.bankers-anonymous.com readers are, almost by definition, extremely responsible with debt, this hardly bears mentioning.

[5] Most HELOCs give you a drawdown period of, say, 10 years, followed by a payback period of another 10 or 20 years.

[6] While I’m very much in favor of HELOCs for small business owners, I need to acknowledge in the fine print here that things can and have gone wrong for small business owners putting their houses at risk.  Of course this would be terrible.  When you get a HELOC for your small business, make sure you save it for an opportunistic can’t lose situation, not use it to keep your flailing, unsustainable, small business alive.

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Midlife Muppet Crisis

With the impending release of Greg Smith’s tell-all book about his time at Goldman Sachs, it’s finally time for me to vent a little about his ridiculous New York Times Op-Ed last Spring.

Immediately following the online release of the New York Times Op-Ed that would launch a thousand Muppet jokes , I printed it out and handed it to my editor in chief[1] because I knew she would be interested.  I knew everyone would be interested.  Smith nailed the 2008-2012 financial Zeitgeist [Goldman is greedy!] and he made a credible witness as an insider.[2]

Now, there’s three things that must be said about Smith’s bombshell of an Op-Ed, two of them complimentary and the third one, not so much.

First, Smith’s letter, compared to Lloyd and Gary’s dead-speak corporate response, was an unfair fight the likes of which we haven’t seen since Mike Tyson took down some of his patsy opponents in the late 80s.  Smith can write some interesting sentences, while Lloyd and Gary, just as clearly, cannot.  Their passive voice construction, reference to a workplace poll about employee satisfaction, and clear put-down of his status at the firm[3] simply did not respond to Smith’s main accusation.

Second, and most importantly, Smith’s main accusation is absolutely true.  Yes, Goldman collectively only cares about the money.[4]  Yes, you get promoted at Goldman for profitable behavior.  Yes, higher complexity products have a greater chance of being profitable than lower complexity products, so you will be rewarded for trafficking in higher complexity products.  Yes, Goldman employees tend to favor their employer’s needs over the needs of their clients in the long run, and sometimes, in some cases, even in the short run.  All true, although I’m not sure why any of this is news.

Third, and most problematic, however, is Smith’s assertion that “Goldman has changed” during his ten year career from 2002 to 2012.  That, my friend, is complete malarky. [5]  Goldman didn’t change.  Goldman was like that when I started there in 1997.  Goldman was like that in 1985.[6]  Goldman was, no doubt, like that in 1931.  Goldman didn’t change.  Greg Smith changed.  He became a middle-aged guy who no longer wanted to compete and win at everything, at all costs.  He grew up.

And yet, he does still need to compete, and that’s the worst part.  There’s a kind of pathetic part of Greg Smith that does want to compete and win at everything, so he must tell New York Times readers about his scholarship to Stanford, the bronze medal in the Maccabiah Games in table tennis, and about being a finalist for the Rhodes scholarship.[7]  He must enumerate the size of his hedge fund clients and their assets under management.  After ten years he has evolved enough to know there is more to life than ripping clients’ faces off, yet he can’t quite break the habit of telling you how much size matters to him.

I wish you well, Greg Smith[8].  But I sense this is going to take some time for you.



[1] Mom

[2] albeit on his way to becoming an untouchable outsider in record time.

[3] Their roundabout way of highlighting what a no-status worker Smith was: while commenting that 89% of clients found service from the firm positive, and “for the group of nearly 12,000 vice presidents, of which the author of today’s commentary was, that number was similarly high.” Very clever, Lloyd and Gary.  We get it, Smith is a Vice President nobody in your eyes.

[4] If this is too blunt, we can treat you like a child and tell you the opposite: Yes, Virginia, there really is a Santa Claus, and yes, your friendly bankers at Goldman really want what’s best for YOU.

[5] As Joe Biden would say, to his good friend Paul Ryan.

[6] See e.g. Michael Lewis’ Liar’s Poker

[7] On the one hand he’s bragging.  On the other hand, the evil voice in me has to say: The what games? Never heard of them.  In table tennis, you say…Is this a joke?  Are you trying to undercut yourself?  And you’re bragging about being a Rhodes finalist?  And this is what you’re most proud of ten years later?…let’s just move on.

[8] But forgive me if I don’t rush out to read the book you’ve produced with a reported $1.5MM advance, chock full of descriptions about the size of your client base.

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Book Review: The Price of Inequality

I began with so much sympathy for the ideas in The Price of Inequality, by Nobel-Prize winning economist Joseph Stiglitz, so why did I grudge-read the book the whole way through?

I concur about the causes and problems of persistent and rising inequality in the United States, and I suspect Stiglitz and I would vote for similar political candidates.  But my goodness, this is a painful book to read.[1]

First, Stiglitz writes lazily about banking, making errors and relying on simplistic generalizations to match his political points.  As an ex-banker, I’ve got a little problem with Nobel-Prize winning economists getting basic facts wrong about banks in this country.

Second, Stiglitz never surprised me – not with his descriptions, his anecdotes, nor the economic studies he cited. Instead, any consistent reader of the New York Times and Wall Street Journal will know, in advance, the arguments and examples he cites.[2]

Finally and worst of all, Stiglitz is a hammerer, not a sifter, of ideas.  He pounds away at the inequality problem, always from the same left-of-center perspective, until all current events have been beaten into the same shape.

A bit more sifting, or a weighing of alternative perspectives would have won me over to his side.

No, that’s not exactly right.  I started out on his side.  A bit more sifting of competing thoughts would have prevented me from wanting to jump to the opposite side and point out all the ways he simplifies and distorts the left-of-center perspective.  I read a hammer book like The Price of Inequality and I just want to throw the hammer away.

If the last book I reviewed Unintended Consequences has one set of opening assumptions – that growth is the most important goal of economic policy and that financial incentives are a key to growth – then The Price of Inequality takes the opposite view of economic policy based on a very different set of starting assumptions.

While Unintended Consequences built a measure of good will with me, as a reader with banking experience, The Price of Inequality quickly gets my hackles up with a series of incorrect statements about banks.

MF Global did not, as Stiglitz incorrectly states on page 36, falter primarily as a result of derivatives trades – but rather it declared bankruptcy after a series of overly aggressive bets taken by its head Jon Corzine.  Corzine thought European bonds were cheap, so he loaded up his firm’s balance sheet with them, in the hopes that European bond prices would recover.  He was wrong, and the firm went under.  Derivatives were irrelevant.

There are not, as Stiglitz incorrectly states on p. 46, “hundreds of banks,” in the United States.  In fact there are over 7,000 banks in the country.

More troubling than these factual mistakes, however, is Stiglitz’ oversimplification in describing bank misdeeds.  For example, banks did not, as stated on page 47, systematically rig LIBOR ‘enabling them to make still more profits.’  The LIBOR rigging, perpetrated by a small number of cheating traders, had an unknown effect on profitability of the banks overall, and a reasonable argument could be made that systematically lowering LIBOR actually hurt banks’ overall profitability, as their lending portfolios would suffer from the lower interest rates sought by the riggers.  The rigging was wrong, and the cheaters will be and are being punished, but Stiglitz’ simplification doesn’t help his credibility.

Most egregiously, Stiglitz perpetuates the view, mistaken in my opinion, that predatory mortgage lending constituted a predominant bank strategy in the years leading up to the Credit Crunch.  Stiglitz describes the ‘rent seeking’ behavior of mortgage banks exploiting the poor through predatory lending, which he claims brought the banks extraordinary profits.

Ah, where to begin on that one?  Perhaps with those “extraordinary profits?”  Did anyone else notice the extraordinary losses banks took due to lending to poor people?  The write-downs and bailouts of 2008 and 2009 were a direct result of losing money, not making money, on the sub-prime debacle.

And then, if predatory lending was such a winning strategy, why aren’t banks falling all over themselves now to lend to the poor?  There are certainly more poor, and more unemployed now than there were during the boom years.  It should be a real boom time to pile up all those banking profits lending to the poor – right now, no?

What, you say, banks aren’t lending to poor people now?  Why do you think that is Mr. Stiglitz?

The real answer, the logical answer, is that lending to the poor is generally a terrible banking idea, and that banks don’t do it in the ordinary course of business.  The lending that led to the Credit Crunch was a short-lived, devastating experiment.  A near-death-experience-type experiment for banks.[3]

Look, lending to poor people is a damned-if-you-do, damned-if-you-don’t situation for bankers.  For the past thousand years, traditional banks did not do it because it’s not profitable.  To make up for that lack of profitability, federal government policies[4] demand some measure of lending to disadvantaged neighborhoods, while Fannie Mae, Freddie Mac, FHA/VA and USDA (among others) each in their own way incentivize mortgage lending to poor households.

For a brief decade – 1998 to 2007 – banks responded to a combination of government and market incentives, and the sub-prime market boomed. They did it from 1998 to 2007 based on a misunderstanding of market incentives, primarily rising real estate values and history-naïve modeling.

Sub-prime mortgages – before they became a bad word – were praised as an ingenious way of expanding home-ownership, of inviting more Americans into the American Dream.  Stiglitz’ narrative of the banker as profit-making predator and the poor homeowner as naïve victim – while common – is a distorted myth that ignores history and reality.[5]

Why do I get so agitated over Stiglitz’ simplification?  Just this:  If we completely mischaracterize the financial debacle of 2008, we’re likely to learn all the wrong lessons from the Crisis.  I realize its politically appealing to blame the greedy bankers and absolve the plucky poor people exploited by the greedy bankers.  I’m a creature of the same culture as Stiglitz and I love to criticize bankers too.  But please can we agree not to lie to ourselves so much about the mortgage debacle?

Ok, now back to the other problems with Stiglitz’ book.

If I assume I’m a pretty good representative of the intended audience for The Price of Inequality – Non-academic, informed on current events, politically opinionated, concerned with inequality – then why is this book such a chore to read?  I think it has something to do with the fact that Stiglitz’ examples all come from the same headlines and articles I’ve already read in recent years.[6]  I kept waiting for the original idea or surprising, counter-intuitive insight, but I waited in vain.

He offers statistics on the terrible state of wealth disparity in the United States, but in the driest way possible.

In the final analysis, I expected a more thoughtful weighing of evidence and ideas.  Stiglitz’ book wades into an important ‘Battle of Big Ideas,’ but he has no taste for engaging the opposition on its own terms.  He’s a warrior for his own side who does not speak the language of his enemy and cannot conceive of their humanity.

When someone wins the Nobel Prize in Economics, does that confer a monopoly on all the good ideas about a complicated topic like socio-economic inequality?  Are there, possibly, unintended consequences[7] to his policy prescriptions?  Does the opposition deserve a careful and open hearing?

Stiglitz really knows how to put the dismal back into the dismal science.  For a more intuitive, specific, sometimes funny, and interesting read on inequality and its societal costs, can I interest you in an excellent book here?

 

Please see related post: All Bankers Anonymous Book Reviews in one place.

 


[1] This is the opposite of my reaction to Ed Conard’s Unintended Consequences, which I reviewed earlier in the month, and which forms a neat book-end as the opposite worldview to Stiglitz’ The Price of Inequality.  Even though I disagree with many of Conard’s proposals, I enjoyed reading the book and would recommend it.  I guess I’m a contrarian that way.

[2] The New York Times’ Thomas Friedman is guiltier of this than anyone.  Never read his books.  I picked up The World is Flat only to discover that he’d retreaded his and his colleague’s columns and observations from the previous 5 years.  If you read newspapers regularly, you don’t need one of his books.  Did you know that hedge funds are allocating capital quickly around the world?  Did you know globalization is having far-reaching effects, visible even in small villages in foreign countries?  Wow.  Give that guy another $45,000 speaking fee.

[4] Primarily via the Community Reinvestment Act, known as the CRA.

[5] An interesting time-capsule on sub-prime lending comes from The Federal Reserve Bank of St. Louis in January 2006, characterizing the risks and rewards of the booming sub-prime mortgage market.  The research article has the advantage of not being tainted by the moral outrage that followed every subsequent discussion of sub-prime lending after 2008.  Accurately enough, the article states “subprime lending is simultaneously viewed as having great promise and great peril.”

[6] One example of rehashing known headlines and anecdotes:  He cites on p. 163 the infamous (and possibly apocryphal) Tea Partier whose protest sign read “Govt hands off my Medicare.”  Nevermind the silliness of citing one foolish protester to make a point, the recycling of Jon Stewart zingers does not win him any originality points.

[7] See what I did there?

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Hedge Fund as Pirate, Seizes Argentine Navy Ship

Earlier this week hedge fund Elliott Associates seized the ARA Libertad, a tall ship from the Argentine Navy in a Ghanean harbor, as partial payment for unpaid sovereign debt dating back to 2001.

I love this story, because I’ve got some history with both sides of this dispute.

Argentina’s debt default, of course, is why I ceased selling emerging market bonds at the end of December 2001, and became a mortgage bond salesman.  At the time, Argentina’s was the largest sovereign default in history, capping a financial train wreck we had watched develop for the entire previous year.  My emerging markets desk at Goldman shrunk from 13 salespeople to 3 salespeople in the few short weeks following Argentina’s default.  I moved from a bi-lingual, exciting dream job to pursue my passion for devising weapons of mass financial destruction for AIG.

More interestingly, Elliott is a former client of mine, and they’ve been doing this kind of unpaid debt enforcement thing successfully for a long time.  In the Fall of 2000, Elliott successfully and single-handedly threw the Peruvian government into temporary sovereign default, for similarly failing to make good on its defaulted debt obligations owned by Elliott.

The lead-up to that Peruvian event, like this week’s seizure of a tall ship in Ghana, also took years in the development.  The Harvard Law School case study is available here.[1]

To win the Peru situation, Elliott first had to overcome and overturn on appeal a century old law – called the Champerty Doctrine – that forbade New York lawyers from purchasing debt for the purpose of initiating a lawsuit.[2]  Since Elliott, as a distressed debt investor, does purchase debt obligations that it knows will involve litigation, it needed to prove that the Champerty Doctrine did not apply.  Instead, Elliott made the courts agree that it had purchased a valid Peruvian debt, and the lawsuit was merely the enforcement of the valid debt.

Next, Elliott managed to force bond payment servicers, first Chase Bank and later the bond-payment system Euroclear, to withhold payment on all Peruvian bonds, if the Elliott-owned debts remained unpaid.  Elliott got the New York and Belgian courts to recognize that it’s illegal to treat holders of equal-status debt unequally.

This forced Peru into default on its September 7, 2000 bond payments, despite the fact that Peru had the willingness and ability to pay all its bonds – at least all those bonds not owned by Elliott.

Elliott’s timing was also impeccable, in the sense that Peru’s strongman President, Alberto Fujimori, faced a political crisis at home that same week with a corruption scandal involving his closest ally, and Fujimori would flee the country by November 2000.  After about a week of political and financial squirming under the forced default, Fujimori’s government found the $50 million or so it owed Elliott and the problem was solved.

The seizure of the Tall Ship in Ghana this week is just another sign that Argentina will pay, one way or another, on the debt it owes Elliott.  The hedge fund reportedly owns $1.6 Billion in unpaid, unrestructured Argentine debt dating back to the 2001 sovereign debt default.

Obviously though, this story of the seized Argentine Navy ship raises as many questions as it answers.

  1. Will the 200 sailors reportedly aboard the ARA Libertad ever be able to hold their head up in a port town again after they got overwhelmed and seized by a nerdy hedge fund?  I mean, how does that happen?
  2. Will Elliott Associates’ Paul Singer challenge John Devaney’s Positive Carry to a real-life game of Battleship?
  3. Can the ARA Libertad offer Elliott’s outside investors the ultimate offshore vehicle?
  4. Is it true Johnny Depp will play Paul Singer in the movie?


[1] You can tell from the narrative that Elliott acts with extreme patience and careful, dogged determination.  As a betting man, I am sure they’ll get paid by Argentina in the end.  In the meantime, they’ve got that cool ship!

[2] The original idea of Champerty was that lawyers might try to generate unwarranted legal fees through the trick of purchasing debt and initiating litigation.  It was not meant to prevent the enforcement of valid debts, although Peru successfully argued the application of Champerty for a while, before losing on appeal.

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Cracker Barrel Amateur Hour

The San Antonio Express-News reported that San Antonio-based Biglari Holdings failed last summer to notify the Justice Department of its intent to initiate an activist approach to investing in Cracker Barrel Old Country Store Inc, as required by law.

Sardar Biglari operates in the exceedingly small financial sandbox of San Antonio, where his firm’s $850,000 Justice Department fine makes news, or for that matter where $10 million in city initiatives constitute a significant portion of local venture capital investments over a three year period.

Does the Biglari fine matter?

It matters mostly to Biglari’s image, something he cares quite a bit about.  This is a businessman who has managed to get every single press mention of himself in recent years to compare him to value investor Warren Buffett.

Nevermind the fact that Warren Buffett has never engaged in hostile, aka activist takeovers, or management shake-ups – Biglari’s preferred investment style.

Biglari, and activist investors like him, seek to acquire enough shares in a target company to demand a board seat, and from that vantage point of power demand changes in management or company direction.  This is the kind of thing explained and exemplified in the popular culture by Michael Douglas’ Gordon Gekko.  Biglari’s fine from the Feds is precisely for not declaring his intent as an activist investor in Cracker Barrel.  Buffett, by contrast, famously only purchases companies in which he already admires and supports management.  Buffett is the opposite of an activist investor.

Also, nevermind the more important point, that a Buffett comparison is best bestowed by the investment world, not claimed by the investor himself.

Biglari’s is the kind of hubris and obfuscation you only can get away with locally in San Antonio, where comparing oneself to Warren Buffett isn’t immediately met with a snort of derision and a rolled eye.  For one thing, people are too polite for that around here.  For another, the wide gap between Biglari’s style and Buffett’s style would be too obvious to anyone from the larger sandboxes of the financial industry to take his self-proclaimed similarities seriously.

Besides just Biglari’s image, does the fine matter to Biglari’s actual business?

It should.  To the extent that a hostile takeover practitioner like Biglari depends on outside capital – as it no doubt does – he needs to credibly present himself as an expert in the field of activist investing, to attract sophisticated capital.  When you miss something as obvious as a regulatory filing – to declare your intent at activist investing – you really are declaring to anyone paying attention that you are not exactly covering all your bases.

This is not necessarily a problem the first time around.  But if I had money with Biglari – I don’t and I don’t plan to – I’d be a lot more skeptical about his claims of expertise as an activist investor as a result of this news.

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