Trust and Reputation in Online and Offline Media: ADIA's Investment in Citigroup

When ADIA's $7.5 billion investment in Citigroup was announced and I saw how the transaction was depicted in mainstream media, I felt I had to blog it. MSMs portrayal of the deal was so off-base from an educated financial analyst's perspective that I almost put my fist through my computer screen. But before I did, I surfed around the high-end financial blogs I consume to see what, if anything, had been written. And to my great pleasure, I did find some stuff that began to shine a light on the true underpinnings of the deal, light-years better than anything that had been written in MSM. But there was also plenty of stuff in the blogosphere that wasn't so good and, in fact, was no better than the MSM hype machine. And to raise the "interesting bar" that much higher, one of the best pieces of analysis out there was from FT Alphaville, the blogging arm of a premier MSM publication, the Financial Times, but only after they suffered from a bad case of foot-in-mouth disease arising from some sensationalist rhetoric of their own.

So where does MSM end and the blogosphere begin? And how does one separate the good from the garbage? Not easy questions. My early conclusion is that the issues of trust and reputation have almost completely melded between online and offline media, with both sources showing the same characteristics and incidence of quality and hype. And as a consumer you've got to do your homework. Big brands, whether online or offline, don't necessarily guarantee quality. Only those who can understand quality can truly assess it, which is why the blogosphere is such a powerful medium for checks-and-balances not only when applied to mainstream media, but to the blogosphere itself.

Now on to my story. What was pretty interesting about the Citi/ADIA deal is that while I didn't totally agree with certain of bloggers' analysis, several did get the dialog going in the right direction and shine a bright light on the issue at hand: that the ADIA investment was neither stupid nor ill-conceived on Citigroup's part (In fact, I'd argue that it was a true win/win for both issuer and investor). And that I was able to reach out to these bloggers, add my two cents, and help further refine the analysis in order to get to the right answer.

For me, after frustration with MSMs depiction of the deal, I looked to Andrew Clavell over at Financial Crookery. He was the first I saw to raise the issue of optionality in the deal, and the fact that this needed to be taken into account when considering the differential between Citi's dividend rate and the coupon rate on the mandatory issued to ADIA. I was initially so euphoric that I posted a comment saying "thanks." Mick Weinstein, editor of Seeking Alpha, asked me for my view on the deal and I forwarded him Andrew's post.  This really helped get the ball rolling online after Seeking Alpha posted Andrew's piece. After thinking about it a bit more I sent Andrew a clarifying note on the topic, as I felt his analysis was quite good but could have been explained more simply:

Andrew, after reading the comments it might be easier to describe the structure from Citi's perspective as a stock sale to ADIA at 31.83 and the purchase of a 31.83/37.24 call spread settled in Citi shares. Below 31.83, Citi has sold shares at a fixed price. Between 31.83 and 37.24, Citi has sold shares at the price at which the 31.83 call is exercised. Above 37.24, Citi has sold shares at 37.24. The value of the purchased call spread is what accounts for the difference between the dividend rate and the coupon rate. As it relates to call spread valuation there are issues certainly of volatility levels and skew between the strikes, expected dividend rates (as one of your commenters properly raised), etc., but this is the punch line. Hope this helps.

jck's post over at Alea cited Andrew's post and sought to correct some perceived inaccuracies. Again, I thought jck's post was very good but also wasn't quite right, so I felt compelled to drop him a note as well:

Hey, re: the citi deal, Andrew was not quite correct and I sent a follow up note to him. This is a kind of forward sale and a kind of a mandatory but there IS optionality, by definition, since the number of final shares are unknown. This is the way I think about the deal [then provided the same description I had provided to Andrew above].

Felix Salmon over at Portfolio.com then did a nice job in his post titled "Why Citi's 11% Coupon Doesn't Mean it's Paying Junk Rates," trying to convert Andrew's original post into english for a broader audience.

Then my friends over at FT Alphaville got into the act and added more color and analysis to a deal that still needed a little help, and especially some curative words after suffering from the same news-hype affliction as their MSM parent. One of the comments to the FT Alphaville post, from klandnyc, did an amazing job of making the point of my entire post:

As a major financial newspaper, you should have gotten it right the first time that a comparison to junk bond wasn’t the right way to look at a forward equity issuance. I think the most interesting thing about the deal is actually the media coverage of it. Junk journalism (your word, not mine) is being practiced en mass on both sides of the Atlantic. WSJ has an equally “subprime” coverage comparing the deal to junk bond. In that sense, financial journalists aren’t very different from their counterparts covering political news. It’s all about sensational headlines sans nuance with very little fact checking. The picture is equally dismal in the blogger-sphere, with a few notable exception. For me, this one little deal turns out to a revealing and useful way to judge the quality and integrity of the hundred of so-called experts who blog everyday about developing financial news and deals. It differentiates those who know what they are talking about from those who don’t but talk about them anyway. It’s really not rocket science in this case. Anyone who was comparing the 11% yield to junk bond in this deal should start with learning about the difference between bond and equity - you know - the finance 101 stuff. Better still, they should consider writing about something else other than finance. Perhaps there is an opening in the political news department?

This comment really got me thinking. I had recently been called to the mat for writing a post based on a Wall Street Journal article that itself proved to be wrong (regarding alleged Merrill Lynch accounting trickery). This particularly harsh comment came from a reader who responded to my recent post describing my rage at MSM and the WSJ's shoddy reporting. From David Harper:

Baloney.

This is exactly why the financial blogosphere gets a bad rap; i.e., as merely derivative of the real press.

You cited a single article as your source, without any verification, corroboration or journalistic fact-checking. The WSJ made an error, and so did you. Two errors, not one. Felix Solomon added value by being skeptical, by adding his analysis. You parroted the article. By my analysis, the WSJ was 90+% accurate on 11/2 (i.e., 1+ errors out of of XX articles). Your error rate on this day was 25% or 50% or 100%, etc. (if you posted 4, 2 or 1 time)

The other difference is the WSJ retracted. You did not retract, you blamed your only source.

Ouch. Now I did take issue with some of Mr. Harper's points in my following response, but I must admit that they did provoke subsequent thought:

David, deep breath. Calm down. So first, read my blog. I do, in fact, sometimes use articles in MSM for the basis of certain of my posts. This is not regurgitation. There is generally significant additional commentary and analysis provided that enhances, adds to or critiques the article in question, and sometimes brings the discussion in a different direction. I also write a lot on topics and issues that in no way refer to MSM sources. So if you don't like this, too bad. Don't read my blog.

I am not a journalist and have never purported to be one, either. Some bloggers are and put themselves forth as such. I am not and have never pretended to be. So there.

The post I wrote on November 3rd did qualify the WSJ story, saying "...and if what's described in the WSJ is true..." Also, the Merrill claim was particularly poignant given the abundance of similar transactions done in prior years for similar purposes. As I am not a journalist, the whole retraction concept is anathema to my blogging. I made my readers aware of the issue, discussed it and shared my thoughts. Again, like it or not. It's my blog and this is what you'll get if you read it.

Sorry if you feel I am a cause for giving financial blogs a bad rap. I respectfully disagree. You clearly don't understand why I blog, and if most of my readers felt like you they wouldn't read me. But they do.

I sounded pretty defensive, right? I was. Partly because I was pissed off about being judged so harshly but also because I think I felt part of what David said was right. I state above that I am not a journalist and, therefore, shouldn't be held to the same standards. Is this right? Or is it kind of like me taking a stance like the basketball player Charles Barkley: "I am not a role model." Well, Mr. Barkley most assuredly was a role model whether he liked it or not, and I'm wondering to myself if as a well-read and trusted blogger if I am, in fact, a journalist. And if I don't want to be a journalist, should I only write opinion and run my blog as an Op-Ed page instead of a blog with a mixture of news commentary and opinion? I really don't know the answer. But I'm thinking about it. But what I do know is that Mr. Harper's comment struck a nerve, and the recent coverage of the Citi/ADIA deal only hastened my introspection, and solidified for me that the trusted end of the blogosphere and MSM are being perceived much the same way, with standards of trust and truth that need to be taken very, very seriously.

Comments

[Joe]

Hi Roger, just to touch on the ADIA case again, what do you think of the following calculations on the ADIA case? - just to bring it all back to finance again.

ADIA
Assume spot px of 30
Prices courtesy of Bloomberg

Sell 235.6mm puts @ 31.83 for 33.3%
Buy 235.6mm calls @ 31.83 for 17.4%
Sell 34.6mm calls @ 37.24 for 23.9% (3.51%)

Total return = 19.41%
Divide this by 3 years, u get something like 6.47%/annum

Minus this by the total coupon of 11%, you get a remainder of 4.53%
US 3 yr swaps then were about 4.2% (or thereabouts) with CDS spread at 80-100bp. Total of about 5-5.2%.

WIth all the tiering of the number of conversion, the rates probably matches the 11% ADIA is receiving with a nice spread for the Citi structurers

[Sherman McCoy]

You sure are a master of the arcane. None of your commentary touches on the important part of the ADIA trade. ADIA which was easily the most secretive of the Sovereign Wealth Funds while Sheikh Zayed was alive, is now going very public. with its investments. In the aftermath of the botched Dubai Ports deal, there was no way a UAE government entity could just join the bid if it wanted to buiy 4.9% of a large US bank. It would have caused an uproar in Congress.

ADIA bought a meaningful chunk of Citi on the cheap with the encourageent of management. What's interesting is that Bob Rubin wasn't able to place the deal in Omaha.

America is on sale, and SWF's are going to be much more active in buying distressed securities. That should be a big caution to reflexive market bears, and Hedge Fund short's that brag about giving their unbooked profits to charity before they are booked.

[Yaser Anwar]

Too bad, in a nice way, that you never took up trading, this post tells me that you would have been a good one. Why? Like any successfull trader, you're revaluating your thesis, in this case your blogging style.

I believe you should continue the way you have so far. Most, if not all, of your readers realize that 95% of your blogging is your opinion (from HFs/AIs to Gaming).

And, everynow and then there are bound to be misunderstandings pertaining to the way you look at issues vs. the readers as evident many times on this blog, most recently and best of all, IMO, the valuation post. But that's cool since 99% of the time the discussions/arguments amongst readers and yourself have been informative and value-added.

I would say that you should not be held up to the standards of journalism, but much higher given your experience (at least the finance related posts), which makes me pay a lot more attention to the way you analyze topics.

Hope that was helpful. Keep up the good work.
Y

[David Harper]

Utterly fascinating. Traditional authority figures/institutions have hit a rough patch. It's no longer controversial to say they (newspaper, university, Church, Family?) have a chokehold on the truth. The only obvious difference i can see between MSM and an individual blogger (e.g., Roger Ehrenberg), lacking their resumes, are ECONOMIES OF SCALE: we expect the WSJ to employ an editor and arm its journalist with the resources to increase article accuracy. If Roger writes a blog, I know his limits are the limits of one.

Part of this depends on a worldview that flows, I think, from an ancient, but currently vigorous, debate about the objective versus the subjective. Put another way, is there any truth at all (a ridiculous idea to a scientist, I think) or is there only "what works" or "what is popular" or "what sells."

This may be is a symptom of the 'attention age' where 'everything is miscellaneous?' Against that view, the only thing that matters is readership. Is there any doubt Attention (e.g., Digg) is winning and the Truth is losing? For example, I started reading Roger's blog last week and "succeeded" to engage him in conversation twice; part of me was elated that he even noticed me. This part of me cared only to be noticed. Can't blame a guy for trying...Why did I start 'Baloney' in my comment? For no other reason that to get his attention! (my own harsh tone now embarrasses me). Attention can't be the right criteria. Just because we can't find authority should sent us into the suspicious 'wisdom of the crowds." The crowd can't teach me good finance. So, I have two stakes in the ground: (i) traditional authority is not necessarily real authority, and (ii) we still very much need to identify authority.

But identifying authority is really vexing, now. In particular, even simple truths are not. When someone claims to know "Finance 101" I am reflexively suspicious: in my own career, I revel in teaching Finance 101 exactly because there is nothing basic about it. We had a vigorous debate about 'discounting cash flows to present value' that got me re-thinking my own assumptions. In the last ten years, I thought I mastered capital structure about five times. I've almost given up mastery, I look forward to teaching it again, so that i might learn a new thing about it.

This might relate to how i view MSM: I no longer expect it to be accurate! I no longer *really* read the WSJ or the NY Times for accuracy, when i think about it. I read to get notified (headline: ADIA invests in Citigroup). MSM is my personal ticker tape. If i want good finance, I'll look down Roger's blogroll. Part of this is because, understandably, journalists are not solely trained in, nor (I'd argue) obsessed with 100% accuracy. (Their workload doesn't allow for TQM). They are rightly concerned with narrative, story, characters, etc. In short, the art of attention over the science of finance. I think we are unreasonable to expect 100% accuracy. Flip the criteria on its head: why should MSM be more accurate than bloggers? As i suggested in my comment, if on 11/2, the WSJ only made 2 or 3 errors out of the entire printrun, i continue to be astonished by the quality of their product (my own error rate is higher).

My personal habits reveal an irony: the MSM is about attention (just tell me stuff, quickly) and blogosphere is about truth (in depth analysis)

Sorry for taking a long time to say, I think it is very important everybody agree with your two-part thesis: "(1) Big brands, whether online or offline, don't necessarily guarantee quality. (2) Only those who can understand quality can truly assess it..." Even finance can't afford to give into popular, cultural relativism. (In fact, i think the individual investor is outgunned precisely because he succumbs to the cultural 'mad men' on TV). But, the rub is, now that we've agreed the emperor (MSM) has no clothes, in the age of Attention, and where I am not personally unwilling to hand the keys of the kingdom over to the Facebook and Digg crowd (they don't know what they don't know), there is no template for finding authority beyond a popularity contest brokered by a shouting match.

[wallbang]

Roger, you desire respect for your expert knowledge and choose to blog in-depth analysis of events. Readers will hold you to expert standards, which eclipse any other standard in our society.

Your interlaced emotions and frustration are out of place. Not necessarily a bad thing, but those expecting expert only will call you on it.

You haven't honed this craft, neither has most of your blog role. You have some bugs to fix...