Portfolio.com: Top 5

Mortgage Vultures

Wed, 25 Feb 2009 05:00:00 GMT

Back in 2006, hedge fund manager Steve Persky says, the opportunities for distressed-asset investing were so limited that he shut down his $300 million fund in the sector and returned the cash to investors.

"Everyone was flush. Things were too good," recalls Persky, the co-founder of Dalton Investments, a 10-year-old hedge fund based in Los Angeles.

That benign environment has given way to a new reality in which foreclosure and defaults are rampant. There are now ample opportunities for distressed-asset investors, including not only Dalton but also Marathon Asset Management, Private National Mortgage Acceptance Corp., and others.

When Dalton re-entered the market in July, Persky targeted mortgage-backed securities composed of loans that didn't qualify for a government agency guarantee. That's a $1 trillion market in which nearly all securities are in distress and few investors are willing to venture.

"It's not that we're optimistic. We're pessimistic. Very pessimistic. We think things are going to get a lot worse," says Persky, 50. "But if you have cash, this is a great time to invest in distressed assets."

President Obama may have made it an even better time. His administration's aid plan, outlined last week, could boost returns for investors such as Persky by limiting foreclosures and extending the life of loans in default.

Even before Obama acted, Dalton raised $400 million for the mortgage strategy, which has generated a return of almost 22 percent between July 1, 2008, and the end of January 2009. The Standard & Poor's 500 fell 35 percent during the same period of time.

It's a complicated and costly strategy to pursue, which helps explain why there are so few players in the market. As he prepared to re-enter the distressed-mortgage market, Persky hired a team of three mortgage-backed security experts with experience at Countrywide Financial and Ocwen Financial.

To sift through the mountains of toxic mortgage-backed assets being offered for sale, they use software to analyze the complex, idiosyncratic securities—each of which may contain thousands of loans, and no two of which are identical.

Human analysts make conservative assumptions about the performance of each security, and traders then try to buy them at a price that will allow them to make a significant return. That price can range from 40 cents on the dollar for the very highest quality assets to less than a penny on the dollar for the very worst.

Three things distinguish one from the other: the number of defaults among the loans in the security, the amount that is lost in each foreclosed loan, and the risk of prepayments on the loans that don't foreclose. Prepayments reduce cash flow for the bondholder.

Few fixed-income assets that trade for pennies on the dollar pay interest, but one of them is residential mortgage-backed securities. Mortgage-servicing companies continue to make payments on loans even when borrowers themselves stop.

Payments from the servicing company usually continue for a number of months until the loans in the security are foreclosed upon.

Dalton determines what it's willing to pay for the securities in much the same way others do for similar securities: by estimating the likely number of defaults, the size of the actual losses, and the risk of prepayments by borrowers whose loans are in good standing.

Prices for such securities are very low, even considering the awful state of the economy. That's because the market for mortgage-backed securities is flooded with sellers, as banks, hedge funds, and other investors in collateralized-debt obligations, or CDOs, head for the exit.

In many cases the owners of these mortgage-related investments are forced to sell them because they're required to hold assets with a high credit rating; this gives them little leverage with buyers, so prices are low. At the same time, few potential buyers are willing to take a chance on assets that are at the center of the global financial and economic crisis; this helps push prices even lower.

The strategy faces plenty of risks, though. As economic pressure increases, for example, banks may try to accelerate the foreclosure process, which would lower Dalton's return.

Phil Phan, professor of strategic management at Johns Hopkins University's Carey Business School says investors "have to keep a close eye on the recovery rate"—the rate that lenders push for faster and more foreclosures—because as the crisis deepens, lenders feel more pressure to turn around assets quickly.

This, of course, not only reduces investors' returns on these failed mortgages, it pushes more families out of their homes faster.

Persky says the carnage in the housing market and the economy is likely to get worse, and remain a problem for a number of years.

"What's going on is horrible. I wouldn't gloat about making money from this," Persky says. "But this is a historic opportunity for distressed-asset investors."Related Links
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Pirates on the Plank

Mon, 23 Feb 2009 05:00:00 GMT

As the landmark trial of The Pirate Bay wrapped up its first week Friday, the prosecutor fought to tie the last two defendants to the daily operation of the world's most notorious file-sharing site.

Four defendants in all are accused of contributory copyright infringement for allegedly deliberately facilitating the making available of copyrighted works to the public. Establishing intent is crucial for a crime to have been committed under Swedish law, and the prosecutor and civil plaintiffs have tried to show that the overriding purpose of The Pirate Bay is to encourage unlawful sharing of copyrighted material.

With the Pirate Bay trial half over, the defendants have reason to be hopeful. First, the government stunned observers on Tuesday by dropping half the charges in the joint criminal-civil prosecution, resulting in a partial acquittal. And despite aggressive questioning by the prosecutor and a battery of entertainment industry lawyers, defendants Gottfrid Svartholm Warg and Fredrik Neij stuck to the story that the sole purpose of The Pirate Bay is to let internet users transmit whatever material they want.

Warg and Neij were never public people, and that showed in their sometimes awkward testimony. But Friday's first witness, Peter Sunde, a.k.a. Brokep, is The Pirate Bay's official spokesman, and he's accustomed to the spotlight. He wore a gray hoodie as he took the stand to defend the website, even as he sought to distance himself from its operations.

The first questions posed to Sunde by prosecutor Hakan Roswall focused on his ideology, prompting Pirate Bay supporters in the blogosphere to cry foul. Referring to the open-culture activist organization that founded The Pirate Bay, the prosecutor asked: "Is it correct that the Pirate Bureau discusses copyright and is critical of copyright as it is today?"

"What is your personal opinion on copyright?" the prosecutor followed up.

When recording industry lawyer Peter Danowsky asked the same question later, Sunde fired back. "That is a political question," Sunde said. "Is this a political trial or a legal trial?"

Danowsky's answer: "In what way is copyright a political question?"

Danowsky then produced printouts of news articles on The Pirate Bay, pointing out statements made by Sunde. One exhibit came from a 2006 Wired.com article, from which Danowsky read the last paragraph aloud: "We're also into educating people about the consequences of piracy. We're teaching them how to do it."

Sunde said that he meant that The Pirate Bay educates people about file-sharing in general. He quoted the paragraph before to show that his statement was a response to MPAA, which claimed that it was "educating people about the consequences of piracy and getting involved."

Likeable with a boyish face, Sunde can argue with die-hard enemies on TV and still carry a winning smile while his opponent resorts to cursing. He testified Friday that he was "only" a media contact for the website, and that he never actively participated in the acts charged by the prosecutor—namely, "organizing, systematizing, programming, financing, or running" Pirate Bay. But Danowsky confronted Sunde with e-mail printouts taken in the 2006 police raid, which seemed to show that Sunde was more involved than he's acknowledged.

Carl Lundström, a wealthy 48-year-old businessman, has a far more tenuous connection to the site, and he did not face any ideological questions on the stand. The prosecutor tried to tie Lundström to The Pirate Bay as a "co-owner," but Lundström claimed that he has only sold hosting and internet services to the site's operators.

Fredrik Neij, one of the young defendants, was hired by Lundström's CTO as a network technician in 2004, while Neij was already running the then-tiny file-sharing site.

Lundström admitted giving The Pirate Bay's crew moral support and sympathy, but said he'd rejected becoming a business partner with them, finding the prospect too legally risky. "I didn't want to get into potential illegal things when I had 50 employees," he stated.

Testimony is set to resume Tuesday afternoon. Among the scheduled witnesses is John Kennedy, the chairman of the International Federation of Phonographic Industries—the international version of the RIAA. The trial is expected to wrap up at the end of next week. The three civilian law judges, and a fourth professional judge, will decide the defendants' guilt or innocence by a majority vote. In the event of a tie, the professional judge's vote will prevail.

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Abstinence at the Orgy

Mon, 23 Feb 2009 05:00:00 GMT

Unless you're in the small minority of economists who doubt man-made climate change and think the government should do nothing in the current economic catastrophe, you want more spending. Now. A lot of it.

Forget all the talk about thrift and budgetary restraint and entitlement reform. You know that for the economy to get going, the feds need to spend because, hey, no one else will.

When people are hunkered down, the government has to step up. There may have been a debate about what kind of stimulus bill to pass earlier this month, but there was no debating that we needed something.

And yet...at some point the recession/depression will end and we'll be faced with not only the incredible debts we had before this mess, but all the money we borrowed to pay for the recovery.

The sums are so staggering that you kind of want to get up and get a stiff drink, both to steady yourself and because the statistics are so mind-numbing they're hard to understand.

Look at it this way. The United States has a GDP of more than $14 trillion. Before all this bailout mess started, we had national debt of about $11 trillion. But that number is low because we have something like $56 trillion in national debt and unfunded liabilities, money we've promised the baby boomers in Medicare and Medicaid mostly (Social Security has a shortfall but it's small by comparison). And we've just tacked on another $9.7 trillion in guarantees from the Federal Reserve and the federal government. At some point, a truly monstrous bill will come due.

That's part of the reason why the White House isn't crazy to schedule a fiscal responsibility summit and why there will be so much interest in the president's budget address to the nation tomorrow along with the release of his first budget on Thursday. Right now we're in a frenzy of spending, but it won't always be this way. Thinking about what we could do now to lessen the impact of what's to come later, well, that's not crazy even if having a responsible money summit in the midst of a spending spree is like teaching abstinence education at an orgy.

Today's summit will include the likes of Pete Peterson, who pledged a billion dollars of the money he made at Blackstone to a foundation aimed primarily at restoring thrift to the federal government and citizenry. If we really can reform Medicare and Medicaid and get some real savings into the health care system it will save us a lot of pain later. One thing we should not get distracted by is Social Security. The system is actually pretty sound and efforts to privatize it are likely to cause more heartache than not. Imagine if George W. Bush had gotten his way and Social Security had been partially privatized. In this market? Eeek!

This week, we'll see if the fiscal discipline side of Obama's brain is working. Will he come up with innovative solutions to make the day of reckoning better than it could be? Will he, as he promised during the campaign, eliminate programs that aren't working? Putting a stake through the heart of the V-22 Osprey, an aircraft so bad that Dick Cheney tried to kill it repeatedly when he was Defense secretary, might be a good place to start.

We got an early preview of the budget over the weekend. Obama's fiscal blueprint envisions the deficit declining from close to 10 percent of GDP to about 3 percent by the end of his term. It's an ambitious goal, but given the economy—and given the track record of recent presidents—it's a target the nation's 44th chief executive is likely to miss.

So if we don't pay off the debt, what happens? More than likely, as Michael Kinsley and others have noted, is that we will have a period of severe inflation. Inflation would make it easier to pay down the debt because the dollar becomes so much cheaper. "Just three or four years of currency erosion at, say, 10 percent a year would slice the real value of our debt—public and private, U.S. bonds and jumbo mortgages—in half," Kinsley notes.

Of course anyone who lived through the inflation of the 1970s, as I did, doesn't want to go back to that. Though I was but a wee lad at the time, it's hard to forget things like the "meat boycott" where grocery shoppers attempted to reign in the soaring price of meat by avoiding it. Inflation is a wealth-destroying phenomenon, but it may be the way the nation finally writes down a lot of this debt. I'm not saying that would be a happy ending, but at least it would be a conclusion.

Let's hope that doesn't happen. Let's hope Barack Obama can do two things at once that are seemingly contradictory—saving while spending, and preparing for austerity while being profligate—to forestall something much worse.

Austerity and hyper-spending sounds odd—well, like teaching abstinence at an orgy—but these are odd times.

Oscar Gets Lean

Thu, 19 Feb 2009 13:30:00 GMT

From Sharon Stone to Ginnifer Goodwin, the 40-person table beneath the stone colonnade at the Chateau Marmont here was filled with Champagne-drinking stars.

It appeared to be business as usual for Dior Beauty, back to host its sixth annual Oscar week dinner on Tuesday night.

With the worldwide economy in turmoil, glamour lives in the run-up to Hollywood’s annual Academy Awards extravaganza on Sunday night, but brands are finding ways to save a buck: staging a cocktail party instead of a dinner, flying in fewer staffers or cutting back on or eliminating gift suites.

Some New York-based jewelers, including Kwiat, have not returned with Oscar week suites. Others, such as Verdura, are bringing select pieces for one-on-one stylist appointments. Harry Winston and Chopard, which have stores on Rodeo Drive, are simply working out of their boutiques.

Even at Dior Beauty, where Oscar week marketing has been a significant piece of the events budget, cuts have been made. The Chateau Marmont dinner was identical to last year’s, but the company will eliminate its presence at the Independent Spirit Awards talent lounge, the day before the Oscars, for the first time in five years. It also trimmed the staff that comes to Los Angeles.

“Having a presence in L.A. during Oscar week remains important for our brand image, but just like with everything else, we need to adapt and adjust,” said Dianne Vavra, Dior Beauty spokeswoman.

In terms of what to expect on the red carpet, a general consensus is forming that the emphasis on glamour will be about the same as ever.

“It’s still the Oscars,” said Elizabeth Stewart, a Hollywood stylist who works with Calista Flockhart and Kristin Davis. “It may be a little more toned down, but the few awards shows so far have generally been business as usual.”

Jennifer Lopez said the question of what looks appropriate is slightly ridiculous because nothing people wear to events is anything more than public relations for the designers.

“I don’t think there’s anything wrong with playing dress up right now,” she said. “Who wouldn’t want to wear borrowed dresses and borrowed jewelry? And anyway, I think you can get criticized if you’re wearing borrowed dresses now because it’s borrowed, and I think you can get criticized for it if it’s not because you bought it during the current economy. So I say do what makes you happy and wear what you want because the only thing that really matters is if your mother calls you up the next day and says, ‘What were you wearing?’”

Almost every major fashion house (Oscar, Donna, Ralph, Chanel, Gucci, Versace, Dior, Armani among them) is cooking up a gown in hopes that a stylist and her celebrity client will choose it. There are many approaches to the game. Some houses, such as Armani, Prada, Versace and Dior have staffers based in Beverly Hills who work year-round on VIP dressing. Others, such as Ralph Lauren and Oscar de la Renta, have sent New York-based staffers to Los Angeles to facilitate fittings in years past. Several of those brands aren’t in town this year because of New York Fashion Week. Still others, including Donna Karan, Vera Wang, Caroline Herrera and Narciso Rodriguez, work with stylists and celebrities when they are in New York.

“I’m the stylist who takes a dress right off the runway and on the plane with me back to L.A.,” said Rachel Zoe. “You do what you need to do.”

The calendar for the week seems to be as full as ever. It includes marquee events such as Variety’s pre-Oscar party and Vanity Fair’s post-Oscar blowout. The VF event went on hiatus last year because of the Writers Guild strike. It had been at the now-closed Morton’s, but this year will be at the smaller Sunset Tower hotel restaurant.

At the Chateau Marmont, the trend is to reduce quantity, not quality. In the past, major studios have thrown 1,000-person parties, but those have been replaced by events for 300, such as Paramount’s pre-Golden Globe party last month. And financier and socialite Nicolas Berggruen downsized his Oscar week gala Wednesday night to about 600 guests from 800.

“Everything is smaller, said event planner Lara Shriftman, a guest at Berggruen’s party. “Everyone is budget-conscious, and when you are trying to save, you invite fewer people, make the party shorter and don’t serve dinner. People also don’t spend what they used to on flowers and invitations and more people are entertaining at home.”

The Oscars show, which producers hope will at least match last year’s record low viewership of 32 million, generates $130 million for the local economy (plus ancillary publicity and sales that companies worldwide get from Oscar-related placement). That is no small number in a state that is in financial crisis with a $42 billion budget deficit.

“The Academy Awards is a signature event for Los Angeles that creates jobs and has a big overall impact on our economy,” said Jack Kyser, chief economist for the Los Angeles Economic Development Corp. While he underscored that parties may be fewer or more low key, he stressed, “They haven’t reached the point [of shuttering Oscar Week] and they never will.”

Jimmy Choo co-founder Tamara Mellon has been operating an Oscar week suite since 1999. The brand is opening the suite later than usual, but Jimmy Choo has maintained its presence not only during Oscar week but also at the Golden Globes and the British Academy of Film and Television Arts awards, as well as for the Cannes Film Festival in May. Mellon will again host an Oscar lunch on Friday for 100 people.

“The Academy Awards act as the biggest global red-carpet platform for luxury brands and has offered [us] a huge awareness opportunity,” she said.

Nadja Swarovski who heads her family company’s fashion division, is another 10-year Oscar week veteran who has partnered with Jimmy Choo in past seasons to create custom Oscar accessories.

“Nonetheless…we are sensitive to the climate,” she said.

Swarovski was the host at a cocktail party for 250 people on the rooftop of the Thompson Beverly Hills hotel Wednesday night, which was a more intimate gathering—cocktails only, no dinner—than in previous years, when she had taken over the Ace Gallery in Beverly Hills for a runway fashion presentation and 500-person-plus event.

“The Oscar season…provides an opportunity to highlight how crystal remains an affordable luxury for women in spite of the economic climate,” Swarovski said.

But simply giving things away is not as economical, so while swag suites still abound—there are no fewer than 10 offering everything from diamond facials to eyelash extensions—the booty has considerably dropped in value.

“This year, as everyone’s marketing budgets are tightening up, I suspect the gifting will be more focused on A-list actresses, and still those will be small discreet modest things,” said Sally Morrison, president of the Diamond Information Center. “If someone fabulous comes through the door they will get something, but it’s much less of anyone coming through the door and leaving with a little bag of stuff.”

The center used to have a multiday suite for stylists and press but this year is sticking with a 50-person dinner hosted by Julianne Moore as its sole marketing event.

“I’m not sure if the gifting will be missed in terms of overall marketing results,” Morrison said. “I don’t know what the return on investment is vis-à-vis a suite, but it’s not immediate and at a time when dollars are under pressure it’s a relatively easy thing to give up.”

Of course, it’s all relative.

Montblanc hopes to make a splash by launching a new initiative with longtime charity partner UNICEF on Friday night at a 250-person seated dinner on the Paramount Studios lot .

“It’s an intimate private dinner with a more modest atmosphere, not a big party or show,” said Ingrid Rooson, the company’s director of cultural affairs. “We have the feeling celebrities like to sit down to dinner surrounded by people they know.”

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You and Us (and the IRS)

Thu, 19 Feb 2009 01:00:00 GMT

The walls of Swiss bank secrecy came tumbling down Wednesday when UBS agreed to pay $780 million in fines to settle tax-fraud charges—and, significantly, to hand over the names of Americans who had parked money in Switzerland to evade hundreds of millions of dollars U.S. taxes.

Exactly how many names are coming remains to be seen. Estimates range from a few hundred to several thousand clients.

The Wall Street Journal and Financial Times put the number at 250. The Neue Zuricher Zeitung said it could approach 300 clients.

The New York Times and Associated Press say the number could eventually approach 17,000 or even 19,000 people, based on earlier assertions by federal authorities.

A list of the clients was included in the 18-page deferred prosecution agreement UBS struck with the U.S. Justice Department, but that list was sealed by the U.S. District Court in Fort Lauderdale, Florida.

The names are scheduled to be released when the federal district court accepts the agreement. That could be as soon as Thursday.

In the past, prosecutors have said that UBS helped Americans hide $20 billion in assets and thus avoid $300 million a year in taxes from late 2002 through 2007.

UBS faced a difficult task in answering the federal allegations that its bankers deliberately marketed Swiss bank secrecy to U.S. clients who were interested in evading income taxes in this country.

In 2004 alone, for example, about 32 UBS bankers traveled to the U.S. to meet with American clients nearly 3,800 times to discuss their clients’ Swiss bank accounts, according to court documents. The government said that UBS bankers tried to hide their business by using code words, encrypted laptops, and "other counter-surveillance techniques."Related Links
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A Refashioned Fashion Week

Wed, 18 Feb 2009 15:00:00 GMT

New York Fashion Week is hitting the reset button to cope with economic reality.

The most important designer marketing event in the U.S. is featuring pared down presentations, fewer parties and a lower key celebrity focus to match a national mood in which ostentatious consumerism is translating into a flawed business strategy.

Among others, Vera Wang, Carmen Marc Valvo, Reem Acra, Betsey Johnson and even Marc Jacobs, whose elaborate runway shows at the 69th Regiment Armory in recent years set the standard for lavishness, are toning down.

With costs of the most expensive runway events estimated to be as high as $500,000, the luxury sector weakening and inventories being cut to the bone, the 200 or so labels showing during this week have had to weigh questions of costs, efficiency and tone during a damaging recession against the payoff of international publicity to sell their brands.

Beyond the flashbulbs, the air kisses and all the other attendant hoopla, return on investment has never been more important.

“I think the industry is getting back to being what it used to be all about—which was selling clothes,” said Steven Kolb, executive director of the Council of Fashion Designers of America.

Change is the order of the day.

“We’re in a transitional stage now,” Kolb said. “With the [economic] collapse in September after our last New York Fashion Week, any designer in the industry would be remiss not to approach things differently.”

From Beyoncé Knowles at Oscar de la Renta to Renée Zellwegger at Carolina Herrera, celebrities have been as much a part of fashion week in New York as the tumult and limos. But they are not immune from outside forces.

Major buyers will now get as much attention, Kolb said, adding that as business gets tougher, parties have been scaled back and designers will focus on smaller gatherings with retailers, their staffs and friends.

Marc Jacobs, the hottest fashion week ticket in town, downsized to 700 guests from 2,000 and did away with a post-show party.

“This isn’t the time to spend money to entertain the entire world,” Robert Duffy, president of Marc Jacobs International, told WWD this month.

At Calvin Klein Inc., celebrities who support the house add glamour and excitement, “as long as they make sense for the designer and don’t detract from the clothes themselves,” said Malcolm Carfrae, executive vice president, global communications.

For more WWD coverage from New York Fashion Week, click here.

In general, designers need to be creative in ensuring events are appropriate to their needs during the financial crisis, said Fern Mallis, senior vice president, IMG Fashion, which produces Mercedes-Benz Fashion Week at Bryant Park. IMG will move to larger space—87,000 square feet compared with the current 70,000 square feet—in Lincoln Center’s Damrosch Park in September 2010.

“Maybe they can just use less costly paper for invitations, or e-mail instead of mailing them, but it’s time for them to reinvent, change and refocus,” she said.

Companies can reduce expenditures for shows by trimming the number of lines they display and eliminating excess, she said. “If instead of 50 looks they can do 30, and that saves on fabric, accessories, zippers, models, labor—everything.
More on Subject

“We’ve been living in the days of the Roman Empire too long,” Mallis said. “Now it’s time to do things a little smarter.”

That’s what Vera Wang, who had shown in Bryant Park tents since 2004, is trying to do by moving her runway event to her new boutique in SoHo.

Wang said the decision “just makes sense. I didn’t abandon the tents. I have always been a supporter of CFDA and IMG because I believe in American fashion. But when 1,300 people come to a show, they can’t see beautiful stitching. Entertaining at a tent is like entertaining at the Super Bowl.”

Her setting needs to be intimate, with no “bells and whistles,” and should emphasize “details, not the awe of a massive runway show,” the designer said. “I’ve always worked ‘micro’ on my clothes, but had to work ‘macro’ for shows. Now I’m doing 10 percent macro and 90 percent micro.”

Kolb said Wang’s decision is astute.

“Vera just opened a beautiful new store in SoHo, so why wouldn’t she make it the centerpiece of her collection when she worked so hard to get it up and open?” he said. “It’s a creative way to bring attention to the business growth she’s had, and is a positive, not negative thing.”

In another sign of the times, designers are cooperating in an effort to maximize marketing benefits and lower costs, even sharing venues when needed, said Kolb, noting Michael Bastion was invited to show at Charles Nolan’s downtown studio. “That’s a case of a designer helping another designer, and I think there’s more of that happening in a creative way,” he said.

Three newer brands joined in one presentation: Nicholas K, Sergio Tavila and Mara Hoffman showed at the tents on February 15 in a show created by publicist Kelly Cutrone, CEO of People’s Revolution, who cited the need for brands to cooperate to save on expenses.

“Even an off-site show ‘for nothing’ means paying $10,000 for a location, $7,000 to $10,000 for lighting, $7,000-$10,000 for hair and a generator for 20 blow driers; you need to pay for a permit—and all of a sudden the show you planned for nothing has cost $35,000,” Cutrone said.

“The marketing mentality today has gone from the ‘Me Generation’ to the ‘We Generation,’” she said.

Combining forces means the charges to each designer will be one-third the overall costs for models, invitations and seating charts, postage, a DJ and miscellaneous expenses. And Cutrone directed the show for free.

Citing a decline in attendance among buyers and editors at his show last September, Valvo is among the designers who are shifting from the runway to a showroom presentation at Citrine in the FlatIron District. The aim, after more than 10 years of runway events, is to give buyers a quicker, simpler way to see offerings and allow them to “inspect, touch and feel” whatever they choose, said Frank Pulce, the brand’s vice president of public relations.

“Runway shows are no longer an efficient method to build attention and business considering the economic climate today,” he said. “It will be easier for them to come for 10 minutes than to sit through a three-hour show. The whole runway concept now is almost passé.”

Reem Acra echoed the focus on buyers. She will offer a presentation in her 10,000-square-foot showroom instead of the runway and believes it will play into strengthening connections with merchants whose budgets have been slashed in the downturn.

“Relationships today mean everything,” Acra said. “It will be nice for the press to see my work in my own house, and for me to mingle and meet with them so they can get to know me as well.”

Her presentation at 730 Fifth Ave. for at least 400 people is more cost effective than showing in the tents, she said.

Timing and positioning are key in designers’ decision-making regarding how they market their brands during fashion week.

Tommy Hilfiger is returning to Bryant Park from Lincoln Center for the first time since 2005 after recent seasons in which the company has been in turnaround mode.

For Hilfiger, who will be able to seat as many as 1,000 people in the main tent, the venue offers economic and logistical benefits, said Avery Baker, executive vice president of global marketing and communications.

Although costs of the show vary depending on creative direction and production, Hilfiger limited some areas of the presentation, including stage design, in light of the economy, and will offer a show that is “simple, yet elegant,” Baker said.

“Creativity must continue as we look forward to better times,” he said. “If you have a show for a show’s sake, instead of imparting a strong brand message, it may not be as impactful.”

Like Hilfiger, J.Mendel has strategic motives for showing in Byrant Park. The label, known for its dresses and furs, is trying to boost its ready-to-wear and sportswear components.

“Presenting our runway collection is a more important tool than ever as we look to expand our reach,” said Susan Sokol, president and chief operating officer. “Maximizing the opportunity for retailers and press to view the collection as it is covered in print media, broadcast, and the Internet makes the return on the investment massive.”

J.Mendel will present a show to 300 key buyers and editors at Bryant Park and its small size will better highlight the workmanship and details of the collection, a spokesman said.

Calvin Klein Inc.’s women’s runway event will be the same size and format as last season in its space at 205 West 39th Street. But the brand’s men’s show, previously held at Klein’s European headquarters in Milan, will be brought to New York, spotlighting the line to retailers and editors who do not attend Milan’s men’s fashion week, Carfrae said.

The company does not disclose the cost of its shows, but presenting them in its own space saves rental fees, Carfrae said.

Despite the current economic difficulties and related pressures, a presence at fashion week is a necessity, said Patti Cohen, executive vice president of global marketing and communications at Donna Karan International.

“Some people have tried shows on the Internet, they’ve sent look books, but I don’t feel we’ve come up with any better way at this point,” she said.

For more WWD coverage from New York Fashion Week, click here.

Mr. Bubble

Wed, 18 Feb 2009 14:00:00 GMT

Former Federal Reserve Chairman Alan Greenspan was shocked—shocked!—that financial executives failed to regulate themselves during the euphoric run-up to what he described as the current global solvency crisis.

Speaking to the Economic Club of New York on Tuesday night, Greenspan, who served four presidents from 1987 to 2006, said he had long-believed that banks and other financial institutions would regulate themselves, holding prospective counterparties up to reasonable business standards to protect their own interests.

"When that premise failed, I was deeply...dismayed," he said. "Self-regulation is a first-line defense."

Greenspan said he was "appalled" by the risks that financial institutions assumed to create the credit bubble that developed under his leadership of the Fed, a period of low interest rates and minimal government regulation.

Greenspan said he has since "reluctantly" concluded that there is no alternative to more rules and regulations in the financial sector.

He said efforts to predict or avoid another crisis by micromanaging complex financial institutions were likely to fail. Instead, he said that regulators should make sure that financial institutions maintain higher levels of capital, boosting their ability to survive shocks to the system.

Not so long ago, it was common for transactions to be conducted with a ratio of 50 percent debt to 50 percent equity; toward the end of the 20th century leverage rose so that 20 percent equity was not unusual. Only in recent years did equity levels of 10 percent become common.

Until private capital returns to the market, Greenspan said, the government will have to make up for the shortfall. He added that the cost of the bailout will exceed the money that has been spent so far.

Greenspan said that regulators understand bubbles and the crises that follow them. But they need to develop a better comprehension of the timing from the upside of the cycle to the downside.

Many critics say that Greenspan could have done a better job of managing the economy by being less accommodating with low rates, but the former Fed chief yielded no ground at the Economic Club.

When Jacob Frankel, vice chairman of American International Group, asked Greenspan how, in hindsight, different economic policy decisions in the boom years might have minimized the current pain, Greenspan argued that the only way to avoid price bubbles is to keep interest rates high all the time.

The Fed raised rates in the mid 1990s to tamp down rising stock prices, and that effort was successful for a year, he noted. But as soon as the Fed began to ease, stock prices rocketed right back up.

"It would be very desirous to find a way to suppress asset bubbles," he said. "But the trouble is, it has never been done and I am very skeptical that it will be done."Related Links
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Tech Stars' Pet Peeves

Mon, 16 Feb 2009 05:00:00 GMT

The world is full of technologies that the most influential people in tech could hate—like nuclear weapons, dental drills, and Microsoft Vista. But they are most frustrated by electrical wires.

"What an archaic way of doing things!" says John Yemma, editor of the Christian Science Monitor, a newspaper taking the lead in shutting down its printing presses and going all-electronic. "Bury wires inside of a wall, run them to an outlet, and then snake a cord around the room. Lamps should not have to be static. TVs shouldn't be locked down."

Here at Condé Nast Portfolio, we pulled together a list of 25 people who, through technology, are having an outsized impact on their industries. As part of that effort, we asked those who made the list a series of questions, including "What tech product frustrates you the most?" and "What do you wish someone would invent?"

Unexpectedly, many of the answers revolved not around the woeful lack of Jetsons-style flying cars and robotic maids, but around electricity and power cords. David Bohrman, the CNN executive responsible for advances such as the "teleporting" of Will.I.Am into the studio on election night, wants someone to invent wireless electricity.

Jon Wellinghof, President Obama's new chief of the Federal Energy Regulatory Commission, wants someone to invent a portable energy storage technology (which most of us would call a "battery") that can improve at the same pace as information storage devices like hard drives. "Most of our current energy problems would be solved with such a device," he says.

Google Vice President Marissa Mayer at least wants a universal power cord so we don't have to carry a different one for every single gadget we own.

Other than the common gripe about electricity, answers were all over the map except for this trend: Responders are frustrated by the mundane but get all whimsical about what they want someone to invent.

Jeffrey Katzenberg, who runs DreamWorks Animation, can't stand "that a keyboard is still the best way to get something (into) my computer."

Joe Rospars, the Obama campaign's Internet wizard, is most frustrated by clocks; Bohrman, by TV remotes.

Jason Kilar, CEO of Hulu, hates "the first 45 seconds after turning on my computer," and wishes for a PC that turns on instantly.

Reid Hoffman, CEO of LinkedIn, is most aggravated by Microsoft Outlook.

Going against the public's love affair with the iPhone, Twitter CEO Evan Williams declared it to be the tech product he finds most frustrating.

But what do these great thinkers want invented? Katzenberg: "A 26-hour day." Rospars: "A cure for cynicism." Kilar: "Teleportation—preferably by Toyota, given its historically low defect rates." (Maybe Kilar should talk to Bohrman....)

From Ray Ozzie, Microsoft's chief software architect: "I dream of technology that can effectively aid in delivering a real sense of empathy among people." Sites like Facebook and Twitter are "an amazing foundation" because they connect people, but he's hoping for something bigger. He didn't share specifics—like whether there's some kind of world peace technology brewing inside Microsoft Research.

Oh, and we asked about Facebook friends. Rospars said he had 977; Williams, 483; Kilar, 159 and Yemma, 112. Wellinghoff confessed that his teenage kids won't let him join.

And the dogs do eat their own dog food, as they say. LinkedIn CEO Hoffman has 1,810 LinkedIn connections. Twitter's Williams has about 85,000 Twitter followers.Related Links
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The Evolution of William Rast

Fri, 13 Feb 2009 05:00:00 GMT

As Justin Timberlake heads to the Bryant Park tents for the first time, he has renewed confidence in his ability to make William Rast a player in the industry.

The singer-actor-producer and his reinforced design team, Johan and Marcella Lindeberg, believe their Los Angeles-based contemporary brand is hitting its stride.

“What we learned is that we really needed the brand to have a strong voice,” Timberlake told WWD. “Johan and Marcella [Lindeberg] are not only extremely creative, but they have balls. They are not afraid of anything, not afraid of any setbacks and they don’t let anything affect their creativity. They’ve definitely taught me to be much more confident in this business.”

Timberlake and his childhood friend Trace Ayala launched the label about three years ago. At the time, Timberlake, who’s never pretended to be a designer, acknowledged that he wouldn’t have much time to spend on William Rast. He left much of the day-to-day operations up to Ayala, who had the idea to launch a fashion line in the first place. Ayala took up fashion design as a hobby as a teenager—even creating jeans for Timberlake when he was on tour with ’NSync.

The line launched in 2005 with the help of the brand’s parent, People’s Liberation Inc., which produced the product and sent it to retail with much fanfare, as many celebrity lines receive. There was a personal appearance at Bloomingdale’s in New York and a concert-runway show in Los Angeles. But the brand seemed to fade as the seasons progressed, until three seasons ago when Timberlake turned to the Lindebergs—two of his favorite designers—for help.

Although the couple also works on several other design projects, including the J. Lindeberg line, they (along with their eight-year-old daughter, Blue) have just moved to Los Angeles from New York to be closer to Timberlake and Ayala.

“The move makes it easier for us to spend more time with Justin and Trace,” Marcella Lindeberg said. “We need to absorb their lifestyle in order to really be inspired and make the line work.”

Timberlake said the cross-country move has been a big help.

“We speak all the time and now we are together all the time,” he said. “I’ve even babysat their daughter, which was fun. We are like an extended family. It’s all about communicating.”

Now, as the company prepares for its first fashion show at Bryant Park today, Timberlake said he has never been more ready to showcase what William Rast is all about. The entertainer’s inspiration for the fall collection came from what he calls “a new America.”

With President Obama in the White House, Timberlake said he has been inspired to showcase a line that’s full of what American fashion should be about—leather motorcycle jackets, oversize flannel plaid shirts, black skinny and acid-wash denim jeans. And, while this isn’t the brand’s first runway show in New York—William Rast showed at the Roseland Ballroom here last season—he said being at the tents makes the show seem like a much bigger deal.

“From what I understand, a lot of people are backing out of the tents,” he said. “But we want to show that we are ready to be there, we are employing people and we are going to take it to a whole new level.”

For a slideshow of William Rast images, clck here (WWD subscription required).

Colin Dyne, chief executive officer of William Rast, said despite the recession, the brand is growing at retail and women’s wear has become an overall larger portion of the business. The brand sells in major department stores, including Bloomingdale’s, 500 specialty stores, such as Saks Fifth Avenue, Neiman Marcus and Nordstrom, and 180 stores throughout Europe. Nordstrom in particular, Timberlake said, has been an ideal partner. Anita Ortiz, national merchandise manager for Nordstrom Savvy and Individualist departments, said the brand has been selling well.

“William Rast has continued to attract our customers’ interest because it has evolved into a full collection that offers a juxtaposition of feminine and masculine styling,” she said. “The customer can build her wardrobe within the brand with their denim jeans and their feminine jackets.”

Although the spring line has just hit the sales floor, Ortiz said it is already doing robust business.

“I love William Rast’s spring line because they built on what they do well: boy meets girl with a sexy edge,” she said. “And for the spring season, they injected the line with new silhouettes like the boyfriend short and oversize silk boyfriend blouses.”

And, even as many brands are looking to cut back, William Rast has big plans as they move forward. There will be a women’s shoe line launching for spring (produced in-house, not through a licensing agreement) and while Dyne wouldn’t divulge the details, they are working on a plan to open William Rast stores. In addition, there’s a new marketing campaign in the works for fall and a plan to work with retailers on a more personal level.

“In this economy, it’s so important for us to support our specialty stores,” Dyne said. “The more we can do to promote our brand can only help their businesses.”

To take promoting the brand a step further, Johan Lindeberg has signed on to be Timberlake’s stylist. He’s creating everything for him—from the tuxedo he wore to this week’s Grammy Awards to a suit for when Timberlake hosts the Costume Institute gala at the Metropolitan Museum of Art in May. A sampling of Timberlake’s made-to-measure outfits will be showcased on the runway next week, and Lindeberg said he hopes to eventually offer them for wholesale, but only to a select few stores.

“He’s going to wear only William Rast from here on out,” Lindeberg said. “For me, it has been great to work with him on his style and infuse that into William Rast.”

Timberlake expressed his excitement about what’s to come from the brand.

“I feel like when the four of us are all together, William Rast is like the coolest new band that people are just starting to talk about,” he said. “We just haven’t made it big-time yet, but we will—we are just coming up.”

For a slideshow of William Rast images, clck here (WWD subscription required).

Madoff: A Family Affair?

Fri, 13 Feb 2009 05:00:00 GMT

Could the $50 billion Bernard Madoff scandal turn out to have been a family affair?

Close relatives of Bernard L. Madoff who held senior positions at his investment firm all say they had no inkling anything was amiss until he stunned them in December by saying that Bernard L. Madoff Investment Securities was a Ponzi scheme.

Through lawyers or spokesmen, all have said they were shocked to learn of the scheme. Several of them, or their spouses, are said to have lost significant sums of their own money invested in the Madoff fund.

But as investigators piece together what happened, new information is raising doubts among lawyers involved in the case and experts on the operation of brokerage firms about whether the mammoth fraud could have continued for so long without the complicity or at least willful blind eye of one or more family members.

Focus is falling particularly on Peter Madoff, Bernard's brother and senior managing director at the firm, who as its registered chief compliance officer was responsible for ensuring that securities rules were followed and that regular tests were done to uncover fraud or other potential wrongdoing.

Steven Gomberg, a Chicago lawyer who specializes in financial industry regulation, said the compliance officer at Madoff's firm would have been obliged to check into where the trading was occurring, to learn why it was done outside the firm, and to confirm Bernard Madoff's public statement that the investment business was generating tens of millions of dollars in commissions.

New questions are also emerging about how the other close relatives could have been unaware of gross anomalies at the firm. All were bright, well educated, and familiar with the mechanics of securities trading and investing. Three of them had served on panels advising regulators on complex technical changes to securities rules.

To date, other than Bernard Madoff, no one at the firm has been charged with any wrongdoing. There is no word that any of the family members are under investigation. In addition to Peter, the close relatives there included Peter's daughter, Shana Madoff, a lawyer whose job was to give legal guidance on compliance with securities regulations, and Bernard's sons, Mark and Andrew, who together ran the firm's trading desk.

In particular, the recent discovery that billions of dollars worth of securities trades that Bernard Madoff claimed to have made for his investment fund never occurred is raising new questions about what family members knew or should have known, according to interviews with legal and regulatory experts involved in the case or familiar with it.

After Bernard Madoff's arrest, investigators rushed in to try to trace the missing money. They had expected to find records of many thousands of trades made for the investment fund by the firm's own large trading operation, which was run by Peter Madoff and Bernard's two sons.

They were shocked to find no evidence that such trades had occurred, according to the Financial Industry Regulatory Authority, the industry self-policing group that is among the organizations investigating. Monthly customer statements purporting to document the trading were phony, Finra said.

The legal and regulatory experts said it should have been apparent to those running the Madoff trading operation that Bernard Madoff wasn't using his own firm to make any of the thousands of trades he claimed to be making for his investment fund. If he had, they would have handled his trades and been required to keep detailed records of them.

The absence of such trades should have raised questions about where Bernard Madoff was doing the trading that generated the hefty commissions he said he was earning, said two securities law experts, Gomberg and Tamar Frankel of Boston University. Those are the kinds of questions a chief compliance officer would have been obliged to investigate, they each noted in separate interviews.

The trading volume had to be heavy because Bernard Madoff told Barron's magazine in 2001 that commissions on those trades was the only way the management firm made money. Unlike other fund managers, who charge clients upfront fees and often take a share of any gains, Bernard Madoff told Barron's: "We're perfectly happy to just earn commissions on the trades."

At one point, years later, Bernard Madoff told a Securities and Exchange Commission official that he couldn't produce his own trading records because he was using foreign brokers to make the trades for his investment fund.

But that, too, should have set off alarm bells for Peter, Mark, and Andrew Madoff, said a former Madoff competitor, Kenneth Pasternak, a founder of what is now known as Knight Capital Group. "Why would you execute a lot of equity and options derivative trades someplace else when you already have your own infrastructure, and the cost of clearing the trades is almost zero?" said Pasternak, who retired from the company in 2002.*

The Madoff firm was registered as a single corporate entity, but had two separate businesses, on different floors of the distinctive oval-shaped Lipstick Building in Midtown Manhattan.

One was its legitimate securities-trading operation. Bernard and Peter Madoff had pioneered advanced computer systems to execute trades in New York Stock Exchange-listed stocks and other securities away from the floors of the exchanges, and they were leading market makers in Nasdaq stocks.

Its customers—mainly institutions and discount brokerage firms—bought and sold stocks there because of low transaction cost, rapid execution, and the chance of getting a better price for their stock than on the floor of the exchange.

The other business was Bernard Madoff's investment fund, which his lawyers and spokesmen say he operated without involvement by the other family members from his private office two floors below the trading operation.

The fund drew in hundreds of wealthy individuals, charities, and educational institutions with its amazingly steady record of exceptionally high returns that varied between 10 percent and 20 percent a year, even when all the markets were down.

As compliance officer, Peter Madoff was obliged to do periodic testing to make sure that records were accurate and legitimate, and that commissions matched actual trades.

Pete Michaels, a Boston lawyer who specializes in brokerage firm regulatory matters, says that because of the broad requirements for the job, normally "the chief compliance officer is going to be cognizant of all the trading activity in the firm, cognizant of what the net capital of the firm is, what the cash flow is, and where the money comes from."

Gomberg, the Chicago lawyer, said the chief compliance officer is "the house policeman."

Peter Madoff's lawyer, John Wing, declined to answer questions or comment on his client's specific actions and responsibilities at the firm. In an e-mailed statement, Wing said: "Peter Madoff's wife and daughter are among the many victims of Bernard Madoff's alleged Ponzi scheme, having lost millions of dollars that were invested with Peter's brother. Any suggestion that Peter Madoff knew that his brother was engaged in this Ponzi scheme is absurd."

While the SEC didn't find evidence of any serious wrongdoing at Madoff's firm during several investigations over the last decade, it did in 2005 require that Madoff's fund register with it as an investment adviser because of the number of investors and amount invested.

SEC records show that, to comply, Bernard Madoff registered the overall firm, including the trading operation, rather than register the investment business as a separate entity. The investment advisory registration form filed with the SEC listed Peter Madoff as the chief compliance officer of the investment operation as well.

Frankel, the Boston University law professor, says the fact that trading operation and investment fund existed as a single legal unit establishes Peter Madoff's responsibility over the investment fund. Since Peter Madoff was chief compliance officer for the whole firm, he had a duty to know about the investment fund's operations in detail, and to take action if anything was amiss, she said.

"I don't understand quite frankly how he [Peter Madoff] couldn't either know what was going on or, if he didn't, he violated his duties as chief compliance officer," said Frankel, who was called to testify before Congress earlier this month about the Madoff case and financial fraud in general.

Michaels says that based on past interpretations of SEC regulations, Peter Madoff would have been required to establish the source of commission income and document any agreements with outside firms to share commissions. Other experts on brokerage regulation concurred.

In fact, the bankruptcy trustee and other investigators said that the books and records of both the trading and investment fund operations were in serious disarray, with much information missing or inconsistent.

Investigators and bankruptcy trustees in the U.S. and in Britain also are trying to piece together information about the Madoffs' affiliated firm in London, Madoff Securities International, so far with scant success.

The unit, wholly owned by Madoff family members, evidently was mainly a trading and investment vehicle for Madoff family money. People working on the inquiry say officials have determined that the trades Madoff claimed for his now-collapsed investment fund for clients weren't executed by the London affiliate.

Aside from the missing trades, the claimed consistent, amazingly high rate of return in the investment fund should have caused family members to question how he was doing it, and the chief compliance officer would have been obliged to check, securities law experts said.

"If I was chief compliance officer and my company was returning those rates I'd be all over that just based on my experience alone," Samuel Edgerton, a lawyer who formerly served as an SEC enforcement attorney and a federal prosecutor, said. "If it [sounds] too good to be true, it probably is."

Shana Madoff's official title at the firm was "compliance counsel," a job that doesn't require registration with regulatory authorities, and isn't defined by securities rules. Brokerage firms commonly, though, have lawyers on staff who aren't registered with regulators but whose job is to give legal advice on compliance and make sure that the firm stays out of trouble.

Eric Starkman, Shana Madoff's spokesman, said in a brief phone interview that she had had only "an advisory and research role" and dealt only with the trading side of the business.

"Why would she have any inkling into what was going on in the money management business?" Starkman said. Later he e-mailed a statement: "Shana had absolutely no prior knowledge of the fraud and is understandably distraught by the financial carnage it has caused untold individuals and charities."

Martin Flumenbaum, a lawyer who represents Mark and Andrew Madoff, also declined requests to answer questions. In an e-mailed statement he said: "Mark and Andrew Madoff were not involved in the firm's asset management business. They had no knowledge whatsoever of the fraud before their father informed them of it on December 10, 2008. They immediately reported the fraud to the U.S. Department of Justice and the SEC and continue to cooperate fully with the authorities on their investigations.

"Mark and Andrew Madoff are among the many victims of this scheme," he added. "They are devastated by what their father has done."

Representatives of Finra and the SEC declined to comment on whether their agencies are investigating Peter Madoff's actions as compliance officer, or the role of any of the other family members.

* An earlier version of this story omitted the fact that Pasternak is no longer at Knight Capital.