Follow LA Observed on Twitter here
Stoking the flames: So how exactly did the mortgage mess start? The WSJ traces the beginnings of Wall Street's decade-long interest in packaging mortgage-backed securities that's now the focus of the subprime lending debacle. Unlike a generation ago, when bankers took in deposits and lent that money to homebuyers - simple as that - the process now involves taking those loans to Wall Street (or at least their income streams), which packages them to investors looking for a good yield. The trouble was that they had to keep fueling the fire, which meant mortgage houses lending money to folks who had no business buying a house. Here's how the Journal story opens:
Twelve years ago, Lehman Brothers Holdings Inc. sent a vice president to California to check out First Alliance Mortgage Co. Lehman was thinking about tapping into First Alliance's lucrative business of making "subprime" home loans to consumers with sketchy credit. The vice president, Eric Hibbert, wrote a memo describing First Alliance as a financial "sweat shop" specializing in "high pressure sales for people who are in a weak state." At First Alliance, he said, employees leave their "ethics at the door." The big Wall Street investment bank decided First Alliance wasn't breaking any laws. Lehman went on to lend the mortgage company roughly $500 million and helped sell more than $700 million in bonds backed by First Alliance customers' loans. But First Alliance later collapsed. Lehman landed in court, where a federal jury found the firm helped First Alliance defraud customers.
SEC probing: There's no telling where this will go, if anywhere, but the Securities and Exchange Commission has opened about a dozen investigations involving collateralized debt obligations, which are those bundled financial products that were used to help finance subprime loans. The WSJ reports that a preliminary investigation has been opened into what happened with the two Bear Stearns hedge funds that handled variations of those CDO’s and which had been on life support. One potential regulatory issue is the lack of accurate pricing in the CDO market, which could be a big problem once it comes time to sell.
Was Blackstone overvalued?: That's the inevitable chatter given the firm's underwhelming three-day performance as a public company. On Tuesday, it closed below its initial public offering price of $31 – not so great considering that on the first day, it had traded for as high as $38 (aren't you glad you weren't able to get in on the action?). A poor showing by one of private equity's giants could mean that the buyout boom has finally peaked. By the way, lots of the selling yesterday appeared to involve small investors. (Deal Book)
Guitar Center sold: The Westlake Village-based retailer, sporadically mentioned over the years as a takeover candidate, finally did the deed this morning. Private equity firm Bain Capital is buying the company for $63 a share, or $2.1 billion (including debt). That's a healthy 26 percent premium over the stock's closing price on Tuesday. Bain has been involved in the acquisitions of retailers such as Toys R Us, Burlington Coat Factory and Michael's. (The Street)
Grocery talks resume: It'll be the first face-to-face since last Thursday, when the three big chains - Ralphs, Vons and Albertsons - refused to meet a union demand for a comprehensive contract offer. Meanwhile, Ralphs parent Kroger reported a 10 percent increase in first-quarter earnings. Rising costs for items like dairy products and produce hurt profit margins. (LAT, AP)
MySpace TV: That's the new name of the social network's video-sharing service, and it's an effort to take back a bunch of eyeballs that have been lost to YouTube. (MySpace is owned by News Corp. and YouTube is owned by Google.) MySpace TV can be used by folks who have not signed up for MySpace, and it will have the now-familiar video sharing and watching features. What stands out with MySpace TV is the focus on professional video – much of it network and studio clips - as opposed to the cat-chasing-the-mouse amateur efforts that put YouTube on the map. One example: MySpace is the exclusive site for Sony’s “Minisodes”— five-minute versions of ‘80s sitcoms like "Diff'rent Strokes" and "Silver Spoons." From the NYT:
MySpace has another reason for taking on YouTube more directly. Just as MySpace TV is being fashioned to compete with YouTube, engineers at YouTube are busy developing social networking features. On YouTube’s “Test Tube” page, where the company tests products in development, new tools allow YouTube users to chat while they watch the same clip and share their favorite videos.
Countrywide executives plead guilty: They made tens of thousands of dollars by trading on their inside knowledge that the mortgage company's earnings in the third quarter of 2004 would fall well short of expectations. Prosecutors said they would recommend home confinement and probation if pre-sentencing reports turn up no other wrongdoing. Meanwhile, Calabasas-based Countrywide denied rumors that the FBI had raided its offices as part of an investigation related to sub-prime mortgages. The stock fell 2.6 percent yesterday and continues to be down this morning (LAT)
Pixar's rodent challenge: Disney’s can-do-no-wrong animated division might have its toughest sell yet with Friday's opening of a movie with a title lots of folks can't even pronounce. It's called "Ratatouille" and stars a rat who hangs out in a restaurant kitchen - not exactly an enticing image to most moviegoers (with the possible exception of those who were turned on by “Willard”). There are also a bunch of references to fine dining and gourmet cooking that won't likely make the grade among the small fry. Obviously aware of the potential challenges, Disney held more than 800 sneak-preview screenings of the film - pretty unusual for a Pixar release. From the WSJ:
From 1999's "Toy Story 2" on through "Finding Nemo," "Monsters, Inc.", and "Cars," all of Pixar's movies have grossed well over $200 million domestically. Any Pixar release that fails to make it to that lofty level will undoubtedly cause worries about whether Disney overpaid for Pixar in its $7.4 billion acquisition of the company last year.
Paris talks: She'll be with Larry King tonight on CNN, of course, and she was chatting it up with People yesterday as part of Friday's cover story. Us Weekly, meanwhile, won't have a single mention in the entire issue. NY Post
Topanga bridge?: Actually, a 30-acre commercial bridge that would run between the Promenade and newly expanded Topanga malls and perhaps include a hotel and a bunch of restaurants. L.A. City Councilman Dennis Zine, who represents the West Valley, said he told mall operator Westfield that it needed to make a community-outreach effort before submitting a formal proposal. Westfield is in the midst of a $500 million makeover of its Topanga mall. Obviously, everybody is bringing up traffic. (Daily News)
Mark Lacter created the LA Biz Observed blog in 2006. He posted
until the day before his death on Nov. 13, 2013.