Sirius (SIRI) Headed for Bankruptcy; Don't Cry for Howard Stern - Just more Transfers of Wealth

I have always been fascinated with the retail investor's love for Sirius (SIRI) and the former XM Radio (now merged). Every era seems to have it's "battleground" stocks, way back from Iomega onward. I'd go to Yahoo message boards once in a great while and see thousands of posts a day... I have no idea why.

I also loved the thesis behind the merger - because when you merge two bad business models you somehow make magic and create... a good business model? Not so much. (same thesis for our banks ironically) Today in a totally not surprising news report we hear about potentially impending bankruptcy for Sirius + XM.

• Shares of Sirius XM Radio Inc (NasdaqGS:SIRI - News) fell on a report about the satellite radio provider's ability to meet its looming debt payments and the possibility that it might seek bankruptcy protection. The shares, which had languished in recent weeks around 11 cents a share, fell after the New York Times reported that Sirius has been working with advisers on a possible Chapter 11 filing.
• Analysts said that while Sirius Chief Executive Mel Karmazin had boasted that the company would meet its debt obligations, the tight credit market may have made that task more difficult as the payment date draws near.

Once more the stock market has engendered a great transfer of wealth from the many (stock holders) to the few (usually just CEOs and the C level executives but in this case some of the on air talent). Oprah, Martha, Howard... I remember my jaw dropping when I heard of the announcement of the $500M contract (that's HALF A BILLION) for 5 years for Mr. Stern. That's when half a billion meant something young man!

• Howard Stern announced yesterday that he is leaving the Viacom broadcasting empire to join the world of satellite radio, creating what could be a breakthrough moment for a three-year-old medium.
• The raunchy radio morning man stunned his staff by saying he has signed a five-year, $500 million deal with Sirius Satellite Radio

So where did they get this money? From the hopeful debt holders and equity holders. Equity holders have been in a death spiral for years due to a business model that stunk and which overpaid for talent and exclusive sports rights. But said talent still laughs all the way to the bank. (no clawbacks here)

Sometimes you have to wonder if this stock market thing is just the greatest Ponzi scheme of all time; the minions (investors) struggle to make their 7% annual return while huge sums of their wealth is aggregated and handed out to 3-10 people in each company. [Sep 17: Thain's Aides May Get $200M for Weeks of Work] [You're Fired! Now Here is $160M to Help Ease the Pain] Meanwhile the investment banks pile on the fees for bringing such lovely stuff to market; and their analysts who STILL in the worst 10 year period in stock market history have a 80%+ "buy" ratings credo. "Sell" is evil; it might kill future investment banking fees.

I wrote about this in detail on why exactly all these investment firms went public instead of their private partnerships in [Feb 11, 2008: Investment Banks - Are you Dear Investor...the Sucker?] Keep in mind this was a year ago before Bear was government assisted, Lehman flat lined, Merrill suckered Bank of America into acquiring it and Goldman and Morgan ran to the government to protect them from short sellers. (meaning their stock values were much higher when this article was written)

So, are we all suckers? One day I think we will look back and say, yes those people were. But it might be decades before people realize it. Anyone who brings up such subjects is suddenly anti-capitalist as capitalism decrees the top 2-3 people in a corporation by birthright deserve hundreds of millions.

Four of the five biggest U.S. securities firms lost about $83 billion of market value last year, almost 90 percent of their net income since 1999, data compiled by Bloomberg show.

The private partnerships that once dominated Wall Street guarded their capital, used less leverage and limited their risk to trading blocks of stock for clients and shares of companies in mergers. Since raising money from the public, many of the biggest firms have abandoned that caution.

``Shareholders share in the downside and not necessarily in the upside, that's the whole story,'' said John Gutfreund, 78, who ran Salomon Brothers in the 1980s when it was renowned for the size of its trading bets. ``It's OPM: Other People's Money.''

`We're essentially running all these investment banks and even the large universal banks on the same basis as if they were hedge funds,'' said Smith, the NYU finance professor. Executives ``make big gains on any gains in the firm's income, whereas they're not exposed, they don't have to pay it back in the loss.''

``When the firms were private partnerships, you had to worry about how you were going to replace the capital'' when a partner retired. ``After we went public, we upped the cash compensation dramatically.''

`So they don't share in the losses and gains the way they should, they are able to shed those on to shareholders.''

`The partners at Lehman Brothers and the partners at Goldman Sachs and the partners at Morgan Stanley didn't take risk that was disproportionate to their resources, and when they did, they paid the consequences so they tried not to,'' Solomon said. These days, ``shareholders and the customers are the people who are financing these guys. They're financing casino operators.''

Then you see stories of Goldman Sachs (GS) and Morgan Stanley (MS) happy to take tax payer money and hide behind the umbrella of mother government... UNTIL Obama says executive compensation might have limits. Then they scurry to pay it back "as soon as possible". Coincidence? Yeh of course. This blurb below really made me think about the alignment of interests - why would the CEOs turn down such a low rate loan? (please don't tell me about the heavy hand of government interfering in Goldman or Morgan's day to day operations) These loans don't accelerate to a higher rate for half a decade - where can you get a better deal? Far better rates than they can get on the market or even from Warren Buffet. Is paying it back as soon as possible really in the best interest of the COMPANY? Or just the best interest of the executives at the top? I think the answer is very clear.

• Banks shouldn’t hurry to pay back cash injections they received under the Treasury’s Troubled Asset Relief Program. Certainly they would like to get Uncle Sam off their backs, especially now that the Obama administration is pushing those who receive taxpayer money not to give their top executives fat bonuses.
• All this helps explain why executives at Goldman Sachs and Morgan Stanley have said they would like to reimburse the government as soon as possible.
• But rushing to repay the money would run counter to their shareholders’ interests. Among other things, the banks received capital from the government at fantastic rates. The banks that got $125 billion in the original TARP round pay only a 5 percent coupon on the preferred shares. They also gave the government warrants to buy common stock equivalent to 15 percent of its investment.
• The cost of refinancing this in today’s blighted capital markets would be humongous. For example, when Goldman tapped Warren E. Buffett for $5 billion of capital in September, it had to pay a 10 percent coupon on his preferred stock and give him warrants to buy the same amount of common stock. If Goldman refinanced its $10 billion of TARP money at such rates, it would take on an extra annual interest cost of $500 million, plus nearly seven times the dilution when and if the warrants kicked in.

I don't know dear reader - it really makes me think about things sometimes; in theory the stock and debt market is supposed to be here to help companies raise money to fund operations. It's been bastardized by executives and board of directors to line their pockets. I have been sickened to see so many "stock offerings" over the years which raise $0 for the company itself but simply a way for insiders to sell shares to the public. Or even the "good" offerings which are 40% for raising money for company and 60% for insiders to sell their stock to you. That is not what the "market" was made for. The longer you stick around and the more you see, the more you get disgusted with it. Apparently I just don't get "free market capitalism" in this form - hence my term; reverse Robin Hood. Steal from middle/poor, give to the rich.

Anyhow, raise your kid to be a CEO of a public company... meanwhile I'll be scrounging around with the rest of you rats, looking for bits of cheese, and trying to make my 7% annualized in "the Casino". It's less of a distance than Las Vegas anyhow...