Friday, July 24, 2009

"No matter how bad the economic conditions might be, Macquarie would enjoy an increase in the amount of tolls greater than the rate of inflation."

Australian Toll Road Firm Continues Downward Spiral

Asset value of Macquarie toll roads drops $3.5 billion since June 2008.

Macquarie loo

Copyright 2009

The highly leveraged Australian toll road giant Macquarie Group continues to struggle as the global economy remains soft. On Wednesday, the firm's toll road subsidiary, Macquarie Infrastructure Group (MIG), lashed out at Indiana state House Speaker Pat Bauer (D-South Bend) for suggesting that the company has been "performing poorly internationally" and that the Indiana Toll Road might be sold off to another company as a result. MIG blasted Bauer in an unusual statement to Australian investors.

"In line with previous disclosures, MIG's sound financial position is well documented," the company's press release stated. "Of note, MIG currently has approximately A$900 million of cash on its balance sheet and no corporate level debt."

Bauer's statement followed the release of figures that showed the number of transactions on the Indiana Toll Road decreased 9.5 percent in Fiscal Year 2009 compared to the previous year while total traffic dropped 6.4 percent. Unless it sells its ownership interest in the road, Macquarie will collect tolls until the year 2081.

The situation is the same in other parts of the country where Macquarie runs the roads. Traffic dropped 5.1 percent on the Dulles Greenway in Virginia where Macquarie's ownership lasts until the year 2056. Traffic dropped only 1.9 percent on the Skyway in Chicago, Illinois where Macquarie will collect tolls until the year 2104

Fewer people driving on the tolls roads, however, does not mean any loss in revenue. To the contrary, thanks to toll hikes, Macquarie's US toll roads saw profit grow between 2.9 and 11.6 percent. This is so because the states that signed deals with the Australian company ensured that no matter how bad the economic conditions might be, Macquarie would enjoy an increase in the amount of tolls greater than the rate of inflation. In Chicago, for example, the toll will eventually rise to $21 to take a one-way trip that lasts less than eight miles.

Instead, it is Macquarie's complex and highly leveraged debt structure that has raised questions about long-term viability. In May 2007, New York hedge fund manager Jim Chanos was the first major analyst to suggest Macquarie's financial structure was unsound -- while the firm was at its peak. Chanos is most famous for being among the first to warn of Enron's fall. Now Chanos' predictions are coming true as MIG wrote down its asset value by 28 percent, from $7.1 billion to $5.1 billion. This comes on top of the 25 percent write down last year leaving MIG worth A$3.5 billion less than it was worth in June 2008.

"The anticipated portfolio valuation has been primarily affected by lower forecast traffic volumes, changes to asset discount rates, and the impact of movements in foreign exchange rates," MIG said in a June 30, 2009 release. "However a continuation of higher assumed financing costs, and changes to interest rates and inflation rates across the portfolio have also contributed to this reduction."

Because of the downturn, a number of Macquarie's top executives also saw their salaries slashed. Executive Director N.W. Moore's $14.8 million compensation was reduced to just $1.7 million. A.J. Downe had an $12 million salary cut to $4 million. G.C. Ward, N.R. Minogue and P.J. Maher saw their $3.3 million salaries plunge to $1.8, $1.5 and $1.3 million respectively.

The latter three also rely on derivatives in their own personal financial portfolio. They used the bank to loan themselves between $4.3 and $5.5 million for "zero cost collars," a complex transaction designed to ride out a down market while avoiding the payment of taxes from selling stocks. Non-executive Director D.S. Clark loaned himself $37 million.

The infrastructure division will report its annual profit on August 20.

© 2009

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Thursday, July 23, 2009

"High Frequency Trading might account for as much as a quarter of Goldman's total earnings...You and I just get to foot the bill."

Goldman's Billions

No, this isn't Goldmans High Frequency Trading operation. But you get the idea.


By Kevin Drum
Mother Jones
Copyright 2009

Earlier this month Matthew Goldstein of Reuters broke the story of Sergey Aleynikov, a naturalized Russian immigrant who's been charged with stealing trade secrets from Goldman Sachs.

The secret in question was computer code. In particular, according to the feds, it was 32 megabytes of code that Aleynikov encrypted and uploaded to a UK-owned website in Germany prior to leaving Goldman to go work for a competitor at a much, much higher salary.

And what did this incredibly valuable code do? Answer: it ran Goldman's high frequency trading operation, and it's drawn attention to the shadowy but wildly lucrative HFT trading sector.

Basically, HFT relies on speed. Traders buy and sell stock thousands of times a second and their profits rely on being able make their trades slightly before ordinary traders make theirs. Speed is so important that a key component of HFT — aside from fast computers, big pipes, and rocket science code — is colocation of their servers. That is, they set up their operations physically close to stock exchange data centers so that trading data has less distance to travel before it gets to them. A few milliseconds in reduced latency time makes all the difference. And that's not all: you'll be unsurprised to learn that there's a regulatory loophole that provides HFT traders with yet another advantage over ordinary schmoes. The New York Times provides an example today of how it all works:

It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.

The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.

Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.

The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.

Tyler Durden has been all over this for a while and estimates that HFT might account for as much as a quarter of Goldman's total earnings. And here I always thought that fixed income trading was where all the money was. Live and learn.

Anyway, HFT has turned into an arms race, but it's an arms race that only the elite are allowed to play. You and I just get to foot the bill, a tenth of a cent at a time. Sound familiar?

© 2009 Mother Jones:

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Wednesday, July 22, 2009

Perry appointees on Texas State Board of Education (SBOE) install third rate investment advisor with ties to Spanish toll road builder

Shady deal: State's new financial advisor connected to Cintra contracts

Dirty Rat


Terri Hall
San Antonio Express-News
Copyright 2009

Something smells fishy and it only gets more suspicious the more is known about the decision to dump investment advisors R.V. Kuhns and hire New England Pension Consultants (NEPC), a Massachusetts-based financial consulting company, to provide investment advice for the $18 billion Permanent School Fund. Texas Governor Rick Perry continues to dive headlong into his plan to raid public assets to invest in risky privatized toll road schemes.

Texans nearly universally oppose handing over our Texas roads to foreign corporations, like Spain-based Cintra, and such deals are beginning to incite abject panic among many teachers and public employees who have recently seen their retirement funds cut in half only to face the constant threat of pilfering by politicians overseeing the management of the funds. Texas Monthly Editor, Paul Burka, called the proposal "immoral" and "irresponsible."

After Perry's proposed Revolving Fund, designed to snag public employee pension funds to invest in controversial 50 year foreign-owned toll road contracts, got soundly defeated in the special session July 1-2, the Texas State Board of Education (SBOE), controlled by Perry supporters, wasted no time installing a new investment advisor with ties to Cintra.

Cintra is in the midst of negotiating at least two private toll contracts (public private partnerships or PPPs) that would hand portions of I-635 and I-820 in Dallas and Ft. Worth to Cintra for a half century at a time.

Government likes the big up front sums of cash or revenue sharing schemes that the private operators dangle, and the private operators enjoy sweetheart deals chalk full of non-competition clauses and guaranteed returns on investment.

PPP toll roads are failing all over the globe, and private capital is so scarce that now more than ever politicians are seeking pots of money they control to invest in the deals, like public pension funds.

The Dallas Police and Fire Pension System is an equity partner in those two North Texas projects. NEPC acts as the investment counselor to the Dallas Police and Fire Pension System. Coincidence? Nothing involving the billions on the table is coincidence. It gets of the members of the SBOE, Rick Agosto, has a conflict of interest with NEPC (which the company reported but Agosto did not). According to the Texas State Teachers Association, RVK had been ranked as the strongest management company in all criteria by the agency. NEPC consistently ranked third.

So teachers, indeed, have reason to panic. What initially smelled like a rat, now wreaks of a coup d'etat rife with conflicts of interest. As they did only weeks ago, Texans need to a send a message loud and clear to politicians: hands off our public investments!

© 2009 San Antonio Express-News:

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Tuesday, July 21, 2009

"With new toll hikes, the NTTA is asking some drivers to spend hundreds more a year in tolls... on high-end landscaping projects.".

Toll roads getting multi-million dollar makeover

money forest


Copyright 2009

DALLAS — With new toll hikes, the North Texas Tollway Authority is asking some drivers to spend hundreds more a year in tolls.

At the same time, the agency is spending millions of dollars on high-end landscaping projects to beautify its roadways.

How can they justify that?

In the last half-dozen years — while the local economy was good — the NTTA has spent $14 million on landscaping. But now that the economy is bad, it has no plans to change how much it spends on plants, trees and grasses.

"We've made over $100 million in cuts this year," said NTTA spokeswoman Sherita Coffelt. "If we would have never put a single strip of landscaping on a single road in NTTA history, we'd still be in the positon we're in right now."

The NTTA is about to shell out almost $3 million this year for new landscaping projects, and more landscaping is planned for the future as the agency builds more roads.

But is it wise to spend more money on landscaping when some motorists will have trouble paying higher tolls that were recently authorized?

"When people are driving on toll roads, they expect a safer experience, an asthetically pleasing experience," Coffelt said. "While some people don't want to pay for the asthetics, others do."

Though many drivers say they'd rather have lower tolls, the NTTA also says landscaping is more than window dressing. The greenery cuts pollution, reduces erosion and attracts high-quality business development.

© 2009 WFAA-TV: /

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Indiana Toll Road close to bankruptcy

Company that leased toll road close to bankruptcy



Richard Essex
WTHR/Eyewitness News
Copyright 2009

Indianapolis - The controversial lease of the Indiana Toll Road may soon end up in court. Macquarie Infrastructure Group, which paid the state more than $3 billion to lease the toll road for 75 years, may be close to bankruptcy and is selling off assets to stay afloat.

The details are outlined in a 112-page lease agreement, which says if the company defaults, sells or goes bankrupt, INDOT would take back control of the daily operation of the toll road.

Many Indiana Democrats opposed the deal at first.

"Now, with hindsight, the amount of the sale looks pretty good, given the way the economy has gone," said David Orentlicher, IU School of Law.

But this most recent issue is giving them further pause of the deal.

"I think that they have been operating poorly and now they are performing poorly internationally and may be sold," said House Speaker Pat Bauer (D-South Bend).

The money was paid up front, banking on three-quarters of a century of toll money to recover their investment. According the company, a reduction in tolls is taking it's toll.

"The governor's argument was, 'Why should we assume the risk of future decreasing revenues? Let this private company assume the risk'," said Orentlicher.

The lease agreement makes it very clear what happens if the company performs poorly or fails.

"The payments that have been made would not be returned. In other words, those that negotiated this lease, I think did a very good job of trying to make certain the interests of the state of Indiana were protected by this lease agreement," said Leigh Morris, deputy commissioner of toll roads.

If the management of the road comes back to Indiana, the governor could be a position to lease the road again. If the company were to fail, Eyewitness News has been told the debt would most likely be restructured in bankruptcy court and the management of the road would not come back to Indiana.

© 2009 WorldNow and WTHR: /

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Sunday, July 19, 2009

"TxDOT, NTTA, the cities and counties that received upfront cash payments, and the governor all got drunk on toll road revenue forecasts."

We pay for tollway mistakes


Letter to the Editor
The Dallas Morning News
Copyright 2009

Re: "North Texas Tollway Authority OKs rate hike," Friday news story.

First, we must blame the drivers for ever allowing this to happen. Any successful toll road only begs for more toll roads.

Second, this should be a wakeup call for all Texans. Operators may buy in with low bids and overly optimistic forecasts knowing that once the roads are built, and the state signs noncompete agreements, they can recover additional revenue later.

Third, I can't wait to hear the local city leaders continue to whine about budget shortfalls. I just read a report that indicated that the North Texas "Taxing" Authority had revenue of around $245 million in 2008, but in 2009 the expected costs to just service the debt is expected to rise to $295 million. That's money going directly into the pockets of a few investors and not being spent locally.

Now is the perfect opportunity for drivers to take a stance and to avoid toll roads and send the operators to oblivion.

Its now quite clear that TxDOT, NTTA, the cities and counties that received upfront cash payments, and the governor all got drunk on toll road revenue forecasts.

© 2009 The Dallas Morning New:

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