Lion's Gate

The annual high tide of shareholder's meetings and, accordingly, of proxy contests arrives in the late spring and early summer. That tide is now going out.

Still, there are some waves incoming that continue to lap against the sandcastle of our attention -- one of them is the possibility of a proxy contest at the September annual meeting of Lion's Gate, the entertainment company.

There was a fascinating article on this in the L.A. Times yesterday. It said that Carl Icahn owns 17.7% of the company and after a period in which he was very critical of the board has become suspiciously quiet lately, as if mulling whether he will put up a challenge slate for September.

Lion's Gate has had some very big cable-television hits, notably Mad Men and Weeds. I have illustrated this post with a photo of the irresponsible bachelor uncle of the series Weeds, Andy Botwin by name, played by Justin Kirk. Easily my favorite. But this isn't supposed to be a television show fanboy type of blog.

Let me close, then, by saying that should Icahn seek to cause trouble, Lion's Gate does have some large shareholders who are friendly with management, among them Michael Steinberg, whose Steinberg Asset Management owns 14.6%, and Gordon Crawford, whose Capital Research Global Investors holds about 9.5%.

Stephen Bainbridge

Stephen Bainbridge, a professor at UCLA School of Law, has written on "Shareholder activism in the Obama Era."

His thesis is that the financial crisis of last fall and the new administration it did so much to give us have allowed a certain theory of corporate governance to gain new traction -- an institutional-investor-centered theory would shift power toward pension fund managers and their like. Bainbridge is somewhat wary about the likely effects.

My own view is that in general Bainbridge is too enamoured of boards of directors. He is a believer in a board-centered theory of corporate management, one in which boards are possessed of enormous discretion, and any interference therewith is likely to be a bad thing because ... well, because it hampers them.

Such worries are misplaced. As I believe recent history shows, boards that are not held accountable from outside can become locked into disastrous strategies, as at LTCM, can trust untrustworthy managers, as at Enron, etc. There must be a disruptive influence. Andrew lo's work on the "path dependency" to which boards can become maladaptively prey may shine some light here, I think.

B of A and Merrill Lynch

DealBook, the New York Times affiliated service that follows M&A, venture capital, and hedge funds in a blog-like format, has risen to the defense of Kenneth Lewis, the Chief Executive of Bank of America.

Lewis' critics complain that he pressed for B of A's acquisition of Merrill Lynch, while withholding crucial information from shareholders on what it would cost them. The Securities and Exchange Commission shares this view.

But DealBook quotes at length from Richard X. Bove, of Rochdale Securities, who believes shareholders have benefitted from the deal.

I'll leave it there.

New board at Carlisle Goldfields

The dissidents prevailed at the July 31 shareholders meeting (mentioned as one of the thre brief items in my entry on this blog on Sunday, August 2) of Carlisle Goldfields.

Carlisle has defined reserves of 412,000 ounces of gold in the Lynn Lake Greenstone Belt of Manitoba. Here's some more information about the geology of it.

The only incumbent director re-elected was Carl McGill, who thus represents the voice of continuity. In a statement, McGill said the usual good-sport stuff: "It was a well-fought proxy contest....Now that the shareholders have made their decision, the new board of directors intends to pursue its vision and to implement plans to achieve the common objective of all - to enhance shareholder value."

The new board members are: Steven Mintz, Bruce Reid, Donald Alexander Sheldon and Frank C. Smeenk.

Those names don't immediately ring a bell for me. I googled the first of them. There exist, unsurprisingly, a number of fellows named Steven Mintz. Though I could be wrong, I believe the pertinent one is this fellow.

The long-running CMKM diamond saga has developed in me some interest in Canadian mineral claims, so I'll keep on eye on this company.

Goldman Sachs & JP Morgan on board

The FT reports that two major US investment banks are supporting the CFTC's plan for stringent limits on speculation in energy commodities.

The CFTC seems ready to put a ceiling on traders' positions, as a reaction to the surge in crude oil prices last summer that brought them to $147 per barrel.

The FT quotes Blythe Masters, the head of global commodities for JP Morgan, saying, "It would make sense to impose position limits across all markets," but that the limits should look through to the end-market participant.

That quote, and the accompanying black-and-white photo of Ms Masters, drew my attention to the story rather forcibly. I knew that I had read about Blythe Masters recently. It is a striking name, and so draws attention to itself. "Ah, that's it!" I said after a moment of head scratching. "She was featured in Gilliam Tett's book!"

Tett's recent book, FOOL's GOLD, was aout (in the words of her subtitle), "how the bold dream of a small tribe at J.P. Morgan was corrupted by Wall Street greed and unleashed a catastrophe." Ms Masters was a central figure in that tribe, and he disillusionment is one of the threads that runs through Tett's tale.

The "bold dream" in question was the aggressive use of credit derivatives as a risk management instrument and their marketing as such. It was Masters who said, in 1997: “Credit derivatives will fundamentally change the way banks price, manage, transact, originate, distribute, and account for risk.”

Masters, too, was one of those within the truibe who felt discomforted by the way other institutions soon employed credit derivatives in the context of mortgages. She said, "We [at JPM] just could not get comfortable" with such an application.

Perhaps her eagerness now to embrace government re-regulation of energy derivatives should be considered a new step in her continued disillusion with her own youthful boldness. If so, it is a pity.

BS v. BS: An update

Last December, the Financial Times ran an opinion column by Nassim Nicholas Taleb, author of Fooled by Randomness (2001) and The Black Swan (2007) with co-author Pablo Triana. They used the ongoing market chaos to reinforce an argument they had made before, that contemporary financial risk management in general is misguided and that the Black Scholes Merton model is part of the reason. I cannot help but think of this as the "Black Scholes versus Black Swans," or the BS v. BS controversy.

"Ask for the Nobel prize in economics to be withdrawn from the authors of these theories," they urged their readers. "Boycott professional associations that give certificates in financial analysis that promoted these methods. The fraud can be displaced only by shaming people, by boycotting the orthodox financial economics establishment and the institutions that allowed this to happen."

I've written of this here before and now seek only to update.

In May of this year, GQ ran a flattering article on Taleb called "The Thinker," in which the writer, Will Self, describes Taleb as "a genuinely significant philosopher ... someone who is able to change the way we view the struicture of the world through the strength, originality, and veracity of his ideas alone."

Taleb claims, naturally, to do a good deal more than theorize about finance -- he claims to have proven his own views in practice. In this regard, I note that the above passage in Self's essay appears soon after a quotation with a startling number in it, a number ($20 billion) that has attracted a lor of attention since the appearance of this issue of GQ, and has in fact become a new battleground in the war of BS v. BS.

"We didn't short the banks -- there's not much to be gained there, there were all these complex instruments, options and so forth. We'd been building out positions for a long while ... when they went to the wall we made $20 billion for our clients, half a billion for the Black Swan fund." So Taleb supposedly told Self.

So presumably, in addition to the profit he made for and through his own fund, he made another $19.5 billion for outside clients. Janet Tavakoli picked up on this right away, and she contacted Nassim about that $20 billion figure. He told her that the magazine made an error there. Did they just make the number up? Perhaps not. The $20 billion, Taleb said, "might correspond to the face value of positions."

The mistake is not a trivial one. It relates to the whole issue of the "scalability" of results. It is one thing to claim you've made some money picking up pennies in front of a steam roller because you've been nimble enough to dart in and out safely. It is another thing to say that the strategy can be increased indefinitely to any scale -- to even a $20 billion scale -- that there is that much money in front of aforesaid steamroller.

Last week, Tavakoli -- the principal of Tavakoli Structured Finance -- revisited the matter of the disappearing $20 billion on her website, in a piece called "Where Were the Drama Pundits [Whitney, Taleb, and Gasparino] When It Mattered?"

She notes that Taleb has posted the GQ article, with its $20 billion figure, on his website, www.fooledbyrandomness.com, and he is silent there about the error. Indeed, Taleb praises Self's profile of him as one of the "most representative overall" yet done.

Silence on a little matter of $20 billion may be taken, Tavakoli submits, "as endorsement whatever the source of the original error," an endorsement of the suggestion that a strategy of running in front of the Black-Scholes steamroller applies to large investments -- a point for which there is "actually no empirical evidence."

It is a good point, and reinforces my suspicion that, pennies notwthstanding, there may be life in the old BSM steamroller yet. Enough life so that it is better to be in its driver's seat than to dart around in front of it.

P.S. Tavakoli has asked that I clarify two points in the above. First, she says, "I wrote that Taleb has 'corrected' the error [re: the phantom $20 billion], but he did so more than two months after his original posting, and only in the face of media pressure."

Taleb's more recent position is that the $20 billion figure stands for a "notional amount," and that the actual gains produced thereby were between $250 and $500 million. This is the subject of Tavakoli's second requested clarification. she questions "how Taleb made so little on bearish derivatives for the 2007-November 2008 timeframe in question...." The top of that range, $500 million, is only 2.5% of the $20 billion notional amount.

Three brief items

1. Ruisi Leaves Rowan's board

Rowan Companies Inc., an oil and gas drilling company based in San Francisco, Calif., said in a filing July 29th (Wednesday) that Lawrence Ruisi has resigned from its board of directors.

Ruisi was there at the designation of Steel Partners II LP, which named him to the board back when Steel Partners owned 9.5% of Rowan's equity, and was seeking to change the strategic direction of what it saw as an undervalued company. Those days are gone. Steel Partners' attention has moved elsewhere, and it now owns only 3.8% of Rowan.

2. Children's Place to Buy 2.45 million shares from Dabah

Ezra Dabah is a former chief executive of Children's Place Retail Stores Inc., a children's apparel retailer. He left that post at the recommendation of the board in September 2007.

Dabah tried to buy the company last year, and this year he seemed poised to wage a proxy fight to gain control of Children's Place at the stockholders meeting July 31, Friday. He had a slate of three allies in the running. If they had all won, then (given his own seat and that of his father-in-law, Stanley Silverstein) he would have had that control.

It was not to be. Instead, the company agreed to buy half of Dabah's stake from him, i.e. 2.45 million shares.

3. Carlisle Goldfields Ltd (CGJ), a Canadian firm engaged in the exploration and development of mineral properties, held its annual shareholders meeting Friday, July 31.

One of the bones of contention between management and dissidents was the cause of the de-listing of CGJ from the Toronto Stock Exchange on June 16, 2009. Dissidents appear to have blamed it on the incompetence of the incumbents. Incumbents reply that the TSX was concerned over two issues -- martket capitalization and the fact that the CEO and the CFO were at that time one and the same.

"Market capitalization issues are not uncommon at this time at the TSX, with numerous companies under the same scrutiny; however, the trading price of the Company's shares is not something over which management or the Company has any control. Regarding the dual role of CEO and CFO by the same individual, the Company could not afford a CFO at the time so the President and CEO took on the second role by becoming CFO on an interim basis to ensure that the Company could file its financial statements and avoid serious regulatory penalties."

Management says that it has a plan to be re-listed soon after the election. We'll se how the votes tally up.