The Non-7% IPO Underwriting Fee

Monday's Wall Street Journal (online subsription required) has an interesting article on IPO underwriting fees. Since Ritter and Chen's 2000 article, it's been pretty well known that there's an inordinate number of underwriters fees at the 7% level for bringing a company public.

However, lately there have been a lot more deals coming in at less than a 7% fee. Some of this is due to deals being reduced in size (an underwriter will negotiate a lower percentage if there are more proceeds. If the deal proceeds end up less than expected, the percentage isn't renegotiated. So, the underwriters end up with the originally agreed upon percentage.

But, the more interesting factor could be the increased number of private equity firms being involved in the IPO process. Compared to the owner of a private company, these investors tend to be sophisticated "repeat" customers. As a result, they understand the limits of how they can negotiate far better than the relatively unsophisticated owners. Consequently, they're likely to negotiate a lower percentage fee.

Hard to work up much sympathy for the investment bankers - they've merely gone from having an incredibly lucrative business to one that's just slightly obscenely profitable.

Click here for the whole article.

Housing Prediction Markets

John Whitehead at Hypothetical bias has some excerpts from recent articles on how players in housing prediction markets view a couple of major real estate markets (like New York San Franciso, etc...):

San Diego? Prices will rise another 5 percent in the third quarter, according to the bettors at HedgeStreet, another Web site. New York? They will inch up 2 percent. In Los Angeles, they will jump 7 percent. In each of the cities, as in San Francisco, prices will be more than 10 percent higher than they had been a year earlier.

HedgeStreet began accepting bets this year on house values in a handful of major cities. In the weeks leading up to the release of new numbers from the National Association of Realtors, bettors can buy contracts that make a payout according to a metropolitan area's average price.

Click here for the whole thing (note: the original NYT article Whitehead mentions is available only if you have an online subscription).

Here's a link to the Hedgestreet contracts.

This Week's Carnival of The Capitalists

This week's COTC is up at Strange Brand. There's a lot of good stuff there, but I'll highlight two that are particularly finance related:

Searchlight Crusade gives a nice explanation of Mortgage Rate, Points, and Closing Costs. It's worth reading -- I've bought a couple of houses, and I'm just now beginning to understand some of the subtleties.

View From a Height has a piece that talks about some of the ways analysts make forecasts, titled Markets That Aren't Always So Wise. He argues that their forecasts of stock prices already are based on stock prices, so...

As usual, look around - you may find some new sites to add to your list.

A National Sales Tax (via About Economics)

The Boortz/Linder book on the Fair Tax Proposal has been getting a lot of press lately. While I personally think the chance of a National Sales Tax replacing our current tax system is somewhere between slim and none, the book will probably have an impact on discussions about tax reform.

Mike Moffatt at About Economics has a very thorough and even-handed analysis of what might happen under a National Sales Tax. He addresses the following questions:

1. What impact will the change have on consumer spending and the economy?
   
2. Who wins and who loses under a national sales tax?
   
3. Is such a scheme even feasible?
   

It's probably the best "plain language" analysis of the topic I've read yet.
Click here for the whole thing. It's worth a read - you'll probably hear more about the issue in the months to come.

Money Management For College Students (via Sound Money TIps)

It's getting near the time that the younguns are going off to college. Many will be on their own for the first time. Sound Money Tips has a link to a great guide put out jointly by ScholarShop and the National Endowment for Financial Education. The guide, titled '40 Money Management Tips Every College Freshman Should Know', and can be found here (in PDF version). Look in the section titled "Money Management".

Ah well, off to more useless meetings...

This Is The Best Article Title I've Seen In A While

The article is actually about agency problems, but I loved the title (from the Fund Industry Discussion Forum):

Dwarf-tossing Is No Smoking Gun, And The Idependent Chairman Rule Is No Silver Bullet…

It sounds like the Jerry Springer show.

Good Advice On Arguing (via Catallarchy)

While on vacation, I didn't spend all that much time on blogging. Mostly, I marked things I found interesting for later use. So, over the next few days, I'll be spending a bit of time emptying the cache.

Patri Friedman at Catallarchy gave some excellent advice on arguing (from some reading he's doing on Ben Franklin):

When another asserted something that I thought an error, I denied myself the pleasure of contradicting him abruptly, and of showing him immediately some absurdity in his proposition. In answering I began by observing that in certain cases or circumstances his opinion would be right, but in the present case there appeared or seemed to me some difference, etc.

Click here for the whole thing.

He's on to something, particularly in the academic world. All too often, we have a tendency to take each argument as a one-shot game. So, without humulity we try to win the current argument at all costs. Unfortunately, this is counterproductive both in the short run and in the long one.

I'm a bit of a "conference rat" (I've averaged better than two conferences a year for the last five years). I've seen a lot of work presented over the years that was seriously flawed (some of it was my own). Sad to say, but I wasn't a very good follower of Franklin's advice early in my career. As a result, some of the people I made comments or suggestions to not only didn't give the comments a fair hearing, but they also were less likely to want to share a drink with me after the presentation. While I'm not the brightest bulb in the lamp, I am teachable, so I eventually learned better (mostly due to good advice given in Franklin's style). Once I loosened up, I not only found people listening to what I had to say, I also found myself with a lot more people to hang out with, and both are good things.

One of my grad school mentors (I'll call him Dr. Jones) was notorious for the way he would ask questions/make comments during presentations at our school. Near the beginning of a presentation, at some point he would typically scratch his head and look mildly puzzled. Then he'd start out by saying something like, "I'm sure this is me, and I'm just missing something. But, it seems to me like.... Could you explain to me why...". At this point, he's ask a question that typically cut to the heart of the matter.

It was so effective (and fun to watch) because he was always polite and non-confrontational. It was kind of like seeing an academic version of Columbo (without the sloppy appearance - Jones was a very stylish dresser).

To this day, a couple of my classmates call this style of questioning "pulling a Jones". Sometimes when we're in a presentation, one of us will start scratching his/her head just to get a smile out of our friends.

Pandering vs. Warmth in The Classroom

Robert Bruner (at the U. of Virginia's Darden graduate school) has probably written more good material about teaching than any other currently active financial academic. He has another excellent (and better yet, short) one on SSRN titled 'Do you Expect Me to Pander to the Students?' The Cold Reality of Warmth in Teaching.

In it, Bruner answers a colleague who thinks that being "warm" to the students is equivalent to pandering to them. He discusses how the two things are quite different, and how being "warm" in the classroom can significantly aid in the learning process. Here's the abstract

Many instructors struggle with the role of rapport in teaching. For some, the response is a cool and distant teaching style. This essay argues that a style of appropriate warmth can promote student learning. It offers definitions, examples, and implications for the instructor.

From a purely cynical (i.e. getting better teaching evaluations without much more work) perspective, being a little warmer in the classroom helps a lot. I've found that when students think you care about them, they'll forgive you just about anything (including tough assignments, difficult tests, and high standards for grading); if they think you don't care, they'll forgive you nothing. Of course, warmth can be faked, but it's a costly signal. If you're like some of my former colleagues, it's just too hard to fake it, since they'd rather be done with the class so they can get back to their research. .

Since I'm accused of always thinking in terms of quotes, here are two to leave you with:

"The secret to success is sincerity. Once you can fake that, you've got it made" - Jean Giraudoux

"Tact is the ability to tell someone to go to hell in such a way that he looks forward to the ride" - unknown, but I'll claim it if no one wants it. .

HT to Jim Mahar at Financeprofessor.com for pointing out the article.

This Week's Carnival of Personal Finance

Monday is Carnival day. This week's Carnival of Personal Finance is up and running at Blueprint For Financial Prosperity. As usual, here are my picks for the week:

MMB’s Personal Journal has ten tips to help you boost your credit score. It's worth reading --numbers 7 & 10 were new to me, and I occasionally teach this stuff.

Ironman of Political Calculations has excerpts of a speech where Rob Arnott makes the claim that better returns may be obtained by restructuring how stock market indices are put together, titled Indexing Fundamentals. Given efficient market theory, I'm not sure I buy it, but it's thought provoking.

Searchlight Crusade has an article that explains Exclusive versus Non-Exclusive Buyer’s Agent Agreements.

JLP of AllThingsFinancial has ten tips to hep you avoid investment fraud.

As usual, browse around. People have different tastes and needs, so other pieces might also interest you.

This Week's Carnival Of The Capitalists

This week's Carnival of the Capitalists is up at Weekend Pundit. It's the usual fine job associated with the Carnival. While there are a lot of interesting posts, here are the ones that particularly tickled my fancy:

The Skeptical Optimist has an excellent diagram of how money and bonds flow into and out of the US Treasury. It's suitable for classroom use.

Patri Friedman at Catallarchy illustrates the concept of “regulatory capture”, where certain interests take control of the regulatory agency that was supposed to regulate them.

David Tufte at voluntaryXchange has been watching the share prices of the parties involved in the Unocal takeover bidding war. The prices haven't followed the usual pattern (i.e. "bidder prices drops while target price rises").

Kim Snider discusses “Where to put your safe money?”, since she feels that we won't likely see any great returns in stock or bonds for the foreseeable future.

Barry Ritholtz at the Big Picture describes signs he interprets as some softening in the market.

Dan Melson explains mortgages, the providers thereof, yield spreadsheets and why we have to be careful when shopping for mortgages.

As usual, your mileage may vary. Check out the whole Carnival if you have the time.