Asymmetrical Information

Now Jane, if you only had $11 billion, we could implicate you in an international conspiracy as well.

I got a lot of mileage during the O.J. Simpson trial relating to friends that a) I knew one of the witnesses, and b) an old girlfriend of mine catered the party O.J.'s wife went to the night before she was murdered (by whom we may never know, of course).

But this is as silly as the Bechtel conspiracy theory. People have all knids of connections to others, especially when you go a few steps out.

Just as when you get a group of 30 students together and ask everyone's birthday. Everyone is surprised when it turns out two kids have the same birthday, but it is not at all unlikely.

its as silly as those wacky commercials suggesting that americans smoking weed in america or snorting cocaine are actually responsible for deaths in mexico or columbia...

/me wonders how cas jumped to THAT train of thought...

Those anti-drug commercials are the worst. They just beg for a counter-ad, in which the pot-head leans over and throttles the pious moralizer, while shouting, "You idiot! Why don't you think anyone is getting gunned down outside the Budweiser brewery!!"

Actually, I have a dedicated post all about conspiracy theories today, including the mechanics of how they spread and a model that gives us a starting point on how to fight them: a bit of Richard Dawkins, and a bit of Malcolm Gladwell.

"Conspiracy Theories & Memetic Epidemics."

I grew up next to a guy who's now married to a woman whose first husband catered barbeque for all three of G.W. Bush's inaugurations (twice for governor, once for Pres).

So I've got that going for me.

My stepmom's second cousin's former girlfriend's sister's best friend dated Bill Clinton at Georgetown AND I've been to a 2000 GW Bush rally. Sign me up for the conspiracy! I've already got the bar code tattoo!

My sister put this in my comments a couple of days ago. I gently reminded her that, at least since the Enlightenment, Westerners haven't generaly ascribed the moral stains of one person to his entire family. And that they'ddisowned him, too.

"its as silly as those wacky commercials suggesting that americans smoking weed in america or snorting cocaine are actually responsible for deaths in mexico or columbia"

Its Colombia, not Coumbia, and yes, there is a direct relationship between snorting illegal cocain here and in Europe, and violence in Colombia. Were we successful in driving narcotics out of Colombia, we will see violence increase wherever it next goes. The former Soviet Union perhaps?

Sorry to crash the party, but let me point out that your interpretation of these numbers leaves much to be desired.

A $10 million "stake" means a $10 million investment. We don't know what that investment is worth today, or what percentage of ownership the Bin Laden family has in Fremont.

"$11 billion in assets" doesn't tell us a lot either, unless we have the other side of the balance sheet available. What is their debt, for example?

Now this is basic stuff, Jane, and you know better. To claim that the Bin Laden family has only a 1/1000 th interest because their stake is 1/1000th of Fremont's assets is total BS.

Are you applying for Ari Fleischer's job?

If you'd invest some of that energy furtively wasted on attempting to score points on Jane into actually clicking through and reading, Bernard, you'd find that her estimate may even be high:

Rick Kopf, the general counsel of the Fremont Group, which manages some eleven billion dollars in assets, confirms that the bin Laden family invested about ten million dollars in one of Fremont’s private funds before September 11, 2001.

So it is cost, but I'd wager it ain't worth much more now, given that the average private equity fund (which is what Fremont is)has been sucking wind in between. In fact, let's look at their 2002 CEO letter:

The past year was a challenge for Fremont Group, and indeed, for most investors in the public and private equity markets. The long-awaited turnaround that many hoped for in the markets didn't materialize, as the U.S. equity markets fell for the third year in a row, posting their steepest declines since the 1930s. Not surprisingly, Fremont Group’s performance in 2002 reflected this difficult environment.

Sounds like a good year, huh? Ari Fleischer's job is secure.

On another note, bin Laden hardly means Osama. There are loads of 'em, many of whom have publicly disowned OBL. That doesn't mean they are cuddly puppies, obviously, but a "Bin Laden connection" is not necessarily an OBL connection, calling into question the reason the theory is worthy of attention.

From the article:

Bin Laden’s estranged family, a sprawling, extraordinarily wealthy Saudi Arabian dynasty, is a substantial investor in a private equity firm founded by the Bechtel Group of San Francisco. Bechtel is also the global construction and engineering company to which the U.S. government recently awarded the first major multimillion-dollar contract to reconstruct war-ravaged Iraq.

Jane yoy know you just sketched out the plotline for Michael Moore's next documentary? We will hold you personally responsible if he wins another Oscar :-).

Jane you know you just sketched out the plotline for Michael Moore's next documentary? We will hold you personally responsible if he wins another Oscar :-).

I assume this is the same Bechtel that has responsibility for destroying tons of chemical weapons in the US.

I can tell you this much, they have a chem agent job set up in Iraq, and they're already looking for people, so all youse folks dat has chem demil experience, sendz dem youse resume.

Kal

I work in private equity, and $10 million out of $11 billion is even less important than it might sound. Once funds are raised from limited partners, the limited partners typically have absolutely no control (except as outlined in the partnership agreements) as to how the money is invested. Most fund managers insist on pretty substantial levels of discretion, as otherwise it would be truly impossible to manage large sums of money (if constant approval were needed from the cast of hundreds who had invested in your limited partnership).

Second, Bernard has no idea what he's talking about. Fremont Group likely has no debt, unless it purchased it. It's an investment group that raises equity capital from outside entities and puts that money to work in various markets and projects. It's not a company in the normal sense that borrows money to finance its activities, except perhaps when using leverage to implement different investing strategies. Similarly, the bin Laden family likely has no ownership whatsoever in the Fremont Group itself. Investment groups are typically structured as management companies (usually LLCs) that are the general partner of a series of limited partnerships (sometimes offshore, for various tax reasons), into which investors contribute money. So whoever invests in the limited partnership (whether bin Laden or the Stanford endowment or GM's pension fund) doesn't actually own any of the Fremont Group management company--they only have an interest in a particular partnership. Out of $11 billion, $10 million is truly small potatoes. They almost certainly have no role whatsoever in determining how it is invested.

Not only that, but if memory serves, the same Bechtel that possibly almost released contained radioactive materials from the Three Mile Island cleanup -- were it not for an engineer/whistleblower who spoke up against some underspec'd temporary structural members and was fired for his trouble (but vindicated by a later investigation).

Humphrey,

"Second, Bernard has no idea what he's talking about. Fremont Group likely has no debt, unless it purchased it. It's an investment group that raises equity capital from outside entities and puts that money to work in various markets and projects. It's not a company in the normal sense that borrows money to finance its activities, except perhaps when using leverage to implement different investing strategies."

Actually I do know what I'm talking about. "Using leverage to implement different investment strategies" is, in fact, borrowing money. And at least some investment partnerships do a lot of this. So throw your "likely's" around as much as you want. they're not facts. Unless you know what the right side of the balance sheet says, and what investments they make, it's you who don't know what you're talking about.
My point was that the calculation Jane made was nonsensical. I stick to it.

Mindles,

So they invested before 9/11 and the value of their stake has declined, or held even, perhaps. So what. So did the value of the other investors' stakes. Jane was writing about the percentage they had, not its value. If they bought x% on 9/10, and the fund's holdings declined in value by some amount, they still hold x%.

And my point stands. There is no way to determine from the numbers given the percentage the Bin Laden family owns.

It is simply wrong to claim otherwise. And I'm not just trying to "score points." The whole post was based on a spurious calculation.

Keep reading -It's a FUND, Bernard. Fremont has "$11 billion in assets under management". By convention in the money management business that means client assets. It doesn't include any debt incurred within the funds, only client assets. So $10 million is a minute slice of that $11 billion.

The bin Laden family's size as a client would be $10 million/assets under management at the time of their investment, which was likely MORE than $11 billion given the intervening period.

It's true that their percent share would hold constant (given no new investors) but Jane's point about their relative importance stands.

The only part of your criticism that stands is that we don't know the exact percentage. We do know, however, that it is tiny, and tiny at the approximate magnitude Jane suggests. All of which totally supports her point that this "link" is meaningless. (futhermore,the connection between the investors and OBL is in question as well).

So your objection is completely irrelevant to Jane's post. Therefore I interpreted it as cheap point-scoring. The "crash the party" attempt at condescension also seemed to support this thesis. If it isn't, I apologize, but it sure looks like it.

cheers.

Is it just me, or has the New Yorker been almost unreadable for the past 2-3 months? I used to love when it would pop up in my mailbox, but now I just sigh.

Actually, I'll stick to my guns. If the Fremont Group took on additional debt what difference does it make? All it would do is further dilute the influence of $10 million, as then the total amount of money under management would be greater than $11 billion, making a $10 million equity piece even more insignificant.

Unless they borrowed a substantial amount (> several hundred million) from the bin Ladens directly (which is extremely unlikely, as it's far easier to just go into the market and borrow or lend using standard instruments), it makes no difference at all.

Bernard is incorrectly assuming that the additional assets purchased with borrowed funds would show up as net assets.

Simple accounting even for a manufacturing company would show this doesnt work unless the assets prices appreciate A LOT, which they haven't -- they've gone down, not up.

Jane,

My incorrect assumption was that assets meant assets, not net assets or assets under management or funds supplied by investors. There is little in your post to suggest otherwise, so I won't flagellate myself too much.

Humphrey,

If the $11 billion includes borrowed funds, then you have it backwards, since then the Bin Laden portion of the equity would be larger than otherwise.

Mindles,

I understand "assets under management" to have the meaning you describe in the mutual fund business. Fremont does more than that, having a significant real estate operation, for example. Maybe it means the same in real estate, though I'm not certain. The balance sheet of a real estate partnership I am an investor in lists all properties as assets, with of course the mortgages listed as liabilities.

And I accept your apology. Thanks.

First, your original point was that one can't simply make that calculation. Clearly, you are no longer contending that, as you are making a %-based argument (which is what you objected to in the first place).

Second, the amount of debt they can take on is limited. The overall leverage is almost certainly no more than 2 or 3 to 1 in the portfolio, and big portions of it (the private equity pieces) are entirely unleveraged. Even if they only have $3-4 billion in equity capital, the influence of an limited partnership investor will not increase. If anything, the debt is far more important, as it has a senior claim on the assets of the fund. An investment firm's capital under management is the total amount of money it can allocate to investments--whether raised from equity sources or from debt sources. This is not an ordinary corporation where only the equity shares have voting control, so their impact may be magnified relative to the overall balance sheet (eg, GE has $XX billion in assets, but only $X/100 in contributed capital). It's an investment company, in which the limited partners (who contribute the equity) have virtually no say in how the money's invested once they've sent their checks.

Finally, the standard in the industry and in the press is to refer to your *equity capital* only. When hedge funds and private equity funds are described publically, they are described as $X million/billion in assets under management. This generally DOES NOT include leverage. For instance, Long-Term Capital was described as having $4 billion under management (at the time), though its actual balance sheet was $100 billion, because their leverage was so extreme. Yes, every bit of equity capital is important. But the real issue is whether the bin Laden family has any influence on the operations of the group or its investments. Based on my experience (working for a smaller fund and having dealt with limited partners who have contributed far larger amounts in actual dollars and in % terms), I can tell you that they don't. And I believe there are legal restrictions on limited partners' ability to be involved in the actual operations and investment decisions of the fund managers.

Re: rodger dodger
No, it isn't just you. They have brilliant reporters that do incredible articles. But the core is, well, rotten. They haven't gotten over the election, for instance. They are petty (gratuitous smacks at Bush as a preppy, the famous comment that Republicans are afraid of seeing a black/white friendship - with an administration that doesn't have token African-Americans but appointees who happen to be African-American and for God's sake run the country) and blind. I'm sorry Hertzberg's Carter didn't solve the country's problems; I was really sorry then and voted for him. I'm really ashamed now - how did I ever think that someone that was surprised Russia would march into a neighboring country was a good president?Anyway, you touched a nerve. I learned to read in the fifties piecing together the New Yorker cartoons, my father sent each of us off to college with a subscription, and I've kept mine going pretty much since then (I'm 57). Last week the last one came into the house. The subscription is over. I came to dread seeing the magazine on the dining room table. I kept wondering - was I always this foolish, were they always looking down their nose at the rest of us, were they always that petty and snotty? I thought it was wit; I'm older and find more thing funny now, but find them much less so. (Of course, with Tina Brown they were even more superficial, but I held on, thinking it was a passing fancy.) Being insulted in the in-your-face way that they do now is worse than having your intelligence insulted, as it often was with her.
(Sorry it's so long and off the subject. You hit a nerve. I grew up and my children grew up looking forward to those wonderful human interest bits - the kind of generous and affectionate treatment of the ordinary man by writers who seemed to have sympathy. I'm from the midwest and, well, I guess what I wonder now is how long were they laughing at us and not with us. Calvin Trillin's belief that he was bringing his daughters up in Greenwich Village but it was always a little like Kansas City was nice - it seemed, well, part of what I'd felt. Was I wrong?

Bernard, I'm sorry the shorthand was confusing. Nonetheless, there is simply no chance that you are substantially correct, and that "assets under management" refers to gross assets. It doesn't, and it would be exceedingly silly to talk about them. Which is why I assumed, incorrectly, that when I said assets, people knew I was talking about client assets, not the office chairs.

Jane,

It really wasn't the shorthand, but the context.

You are almost certainly correct. The point I was trying to make is that it was not clear to me that Fremont was an investment management company, rather than, say, a manufacturer. Hence I took "assets" to mean what it would mean in that context.

Assets wouldn't mean that there, either -- it would be net assets, not the amount of physical plant.

Comments are Closed.