Year 2000: Magic Johnson Builds an Empire

The former Laker great is dragging white businesses into inner cities, fulfilling what he calls his ‘black plan.’ By LARRY PLATT


Photograph by Rishad Mistri for The New York Times.

Around the time his teammate Kareem Abdul-Jabbar declared bankruptcy in the mid-80’s, the Los Angeles Lakers star Earvin (Magic) Johnson found himself inbounding the ball during a game right in front of Joe Smith of Elektra-Asylum Records and Peter Guber of Sony Pictures, Lakers courtside season-ticket holders. Johnson had always been aware of the fates of black athletes past — the fortunes lost by the likes of Jesse Owens, Joe Louis, Muhammad Ali. So before passing the ball to a teammate, Johnson turned to the pair and asked, “How do I get into business?”

More than a decade later, Johnson, now 41, stands in his bustling strip mall in the heart of South Central Los Angeles. Within this complex is his Starbucks and his T.G.I. Friday’s, and it’s only four miles to his state-of-the art 15-plex movie theater.

A parade of evening shoppers stop to hug or high-five Johnson, who is wearing a Fubu jersey and jean shorts. By day, he’s Mr. Johnson to his staff in the Beverly Hills office where he oversees a business empire that includes more than $500 million of property in heretofore depressed inner-city areas. But here, where he can be found three or four nights a week, he is Magic, the former basketball player, a charismatic figure who explains that he keeps coming around so his customers know he’s not just another athlete selling his name and likeness to white businessmen. But he is also driven by an insatiable need for attention: one friend observes that he’s addicted to the spotlight, and Johnson himself admits that he feeds off the love he’s shown here. It’s as though he has found a way to extend the cheers of his playing days.

Some of those flocking to him offer thanks for rejuvenating a moribund neighborhood that others have failed to resuscitate in the years since the Los Angeles riots ravaged these very streets. As Johnson heads toward Starbucks, a baggy-pantsed, backward-capped, morose-looking teenager on a cell phone passes by; glancing up, he does a double take. “Magic Johnson!” he cries, handing the phone toward the former player. “Say hi to my grandma!” Johnson stops, his smile widening. “Hello, Grandma,” he says while the kid bounces on the balls of his feet, the scowl morphing into a grin. “Your grandson was thinking of you — the first thing he said was, ‘Say hi to my grandma.’ So he presents himself well, which means you’ve done your job, Grandma. Who raised him?” Johnson looks at the kid. “Well, you and Moms done your job, Grandma. I love you, too, Grandma. O.K., here he is.”

Inside Starbucks, Johnson’s gleaming face adorns one wall, and H.I.V. and AIDS brochures are at the counter. “See, people say all kinds of things about black people, but look at this,” Johnson says, motioning toward the packed tables. At one, a young man works on a laptop. At another, a couple of college students pore over a stack of open textbooks. On the patio, fathers are schooling their sons in chess. Johnson moves toward them, smiling, hugging his own upper torso. “Man, I want to cry every time I see that,” he says, before stage-whispering: “Because they never had this before here.”

Johnson employs roughly 3,000 people who live in inner-city neighborhoods across the country. Over the next two hours, as Johnson sips herbal tea and tirelessly plays host, he talks about the satisfaction of employing people. In his recent venture in Harlem, Johnson’s multiplex, which opened in July, and the Harlem USA mall it is part of, have sparked a renaissance of 125th Street. Last summer, after the Harlem theater hired 100 people from the 5,000 who had waited in line to apply, Johnson decided that he wanted his new staff to go through four weeks of rigorous training. On opening day, dozens of young men and women stood before him in pressed uniforms. “Just looking at those faces, the hope and pride,” he says, remembering the scene, “that may have been the best moment of my life, right there.”

Later, outside, as he ambles toward his black Bentley convertible, an elderly woman has him sign a paper bag that she says she’ll cherish forever. “We need a bookstore next, Magic,” she pleads, and the exchange is reminiscent of the genesis of his partnership with T.G.I. Friday’s. That deal was hatched last year after a 70-something woman in Atlanta told him she’d never been able to get a salad in her neighborhood.

He gets in the car. “A bookstore,” he says softly. “O.K. We’re going to look into that now.”

Though Michael Jordan is celebrated for his boardroom moves, he accumulated his wealth by simply selling his name. Johnson, on the other hand, is an entrepreneur with Rockefeller-like ambitions who says he wants to do things no black man has ever done. He is becoming a post-civil-rights-era role model for hip-hop jocks who reject the Jordan example and see Johnson as the walking embodiment of Malcolm X’s dream — he is a black-run, inner-city business unto himself. And he predicts he’ll go public in the next five years. In addition to his theaters in Los Angeles and Harlem, there are others in Atlanta, Houston and Cleveland, with more on the way. All rank among the nation’s top 50 theaters in gross sales. In the last year, Johnson has taken part in a joint venture with Starbucks to create more than 20 Starbucks shops. All perform in the top five in their respective regions; the South Central store, for example, where lines snake out the door on weekend nights, is among the most profitable of Los Angeles’s 400-odd stores. In addition, Johnson has started a music label, in conjunction with MCA, and a promotional arm that staged the recent Dr. Dre and Eminem tour and that is readying Prince for the road. There are plans for six T.G.I. Friday’s and a string of Magic Clubs — 24-hour inner-city fitness facilities. He also created a foundation that has raised more than $15 million for H.I.V. and AIDS awareness since 1991 and that each year sends roughly 40 disadvantaged high-school students to college for four years.

A self-described “control freak,” Johnson is up every weekday morning at 6:30. First he downs his twice-daily protease-inhibitor “cocktail” — though there is no trace of H.I.V. in his blood, the virus lies dormant somewhere in his body — and then he calls back East for the previous day’s box-office receipts. Every Monday, just before eating a salad for lunch at his desk in his sparse, meticulously organized office, he holds a conference call with his theater managers and Loews representatives, during which he decides precisely how many screens will show each film.

Johnson has always harbored a business fantasy. As a high-school kid in Lansing, Mich., he cleaned the offices of two African-American real-estate developers and would sit behind their desks when they weren’t around, pretending to be an executive. But it wasn’t until he talked with Guber and Smith, who later introduced him to the Hollywood agent Michael Ovitz, that Johnson’s business career was set in motion. Ovitz was initially grudging in his support of Johnson. The agent handed him a stack of business magazines and told Johnson that he needed to get his “head out of the sports pages.” When Johnson approached the periodicals the way he had always approached playbooks, Ovitz was impressed and agreed to mentor Johnson, walking him through his first deal with Pepsi-Cola in 1988. “We had a meeting with the president of Pepsi-Cola,” says Ovitz. “And Earvin insisted on rehearsing before the meeting. We threw questions at him, and he fielded them. When it came to the real meeting, he knocked their doors off.” The arrangement with Pepsi, 25 percent ownership of a Maryland distribution plant, marked Johnson’s first foray into ownership.

Johnson persuaded Starbucks to put sweet-potato pie on the menu in his stores and to play Miles Davis and Stevie Wonder instead of James Taylor.

In the early 90’s, Johnson teamed up with Ken Lombard, an African-American investment banker who is the president of Magic Johnson Development. Lombard secured a $50 million commitment from California’s largest pension fund for the purchase of three inner-city shopping centers. Soon after, when Johnson approached Loews Cineplex Entertainment with the idea of an inner-city multiplex — conveniently situated near his shopping outlets — he was armed with research from Lombard. Twenty-five percent of all moviegoers are African-Americans, Johnson pointed out to Lawrence Ruisi, the Loews C.E.O.; yet there are hardly any theaters in African-American neighborhoods. Ruisi was sold, especially when Johnson and Lombard explained that rental rates per square foot would be roughly $13, compared with close to $30 in the suburbs; moreover, Johnson argued that even in bad economic times, “black people have always gone to the movies as a way to escape.”

On opening weekend, Johnson fretted that there wouldn’t be enough hot dogs at the theater’s concession stand. The Loews concessionaire told him not to worry. Sure enough, the hot dogs sold out by midnight on Friday.

“See, you’ve got to understand black people,” Johnson says today. “I know my customer base, because I’m it. I told Loews, black people are going to eat dinner at the movies — those hot dogs are our dinner. Same with the drinks. Our soda sales were just O.K. I said black people love flavored drinks, because we were raised on Kool-Aid. So we put in punch and strawberry soda and orange, and the numbers went through the roof.”

Though the theater industry is struggling — four chains have filed for bankruptcy and even Johnson’s 50-50 partner Loews is laboring — Johnson’s theaters are flourishing; by year’s end, they will have served their 10 millionth customer. In part, that’s because the theaters cater to an underserved market, but as Johnson points out, it’s also because they have become de facto community centers, where visitors can get their blood pressure checked and parents can periodically get free immunization shots for their kids. Teenagers are welcome to hang out in the lobby and play video games, even if they’re not seeing a film — as long as they don’t wear gang colors.

It’s this sense of community that sold Howard Schultz, the chairman of Starbucks. Schultz had never taken on a partner before, but he agreed to convene with Johnson and Lombard because as a longtime basketball fan he couldn’t pass up the chance to meet Magic. “It became clear,” Schultz recalls about that first meeting, “that no one knows more about African-American spending power than Earvin. I was expecting a basketball player, but here was this businessman telling me there are 40 million African-Americans who spent over $500 billion last year.”

Schultz agreed to visit the South Central theaters on a Friday night. “At Starbucks,” he says, “we talk about our stores being a third place for our customers between work and home, and I realized that’s what Earvin had done. He’d built a sense of community. I saw graffiti everywhere in South Central — except on his building.”

Johnson told Schultz that his people hungered for meeting places. “If we build it, they’ll come,” Johnson pledged. Over the objections of many within his company, Schultz agreed to a 50-50 partnership with Johnson on seven stores — a limited agreement that was expanded once the spectacular numbers started coming in.

Starbucks is fiercely protective of its brand, so Johnson had to persuade Schultz to tailor Starbucks’ product to the inner city. As a result, there’s a fast-selling sweet-potato pie and peach cobbler on the menu. And since each Starbucks comes equipped with a custom-made CD player that plays only the music compiled by the company’s music department in Seattle, Johnson lobbied for a collection of African-American music. Now visitors to Johnson’s Starbucks shops hear Stevie Wonder or Miles Davis in the background, not James Taylor. (There is no rap music — Johnson knows it’s not palatable to all generations.) When expanding overseas, Johnson points out, companies don’t think twice about strategic partnerships with local experts who can navigate the cultural terrain. But chains haven’t done the same in urban communities.

That may be changing. After it was announced that Johnson’s theaters and a Starbucks were coming to Harlem, other stores followed: HMV, Disney, Old Navy, Modell’s Sporting Goods. It raises some vexing questions for Johnson. For all his egalitarian talk, his strategy pushes corporate commercialism, and it hasn’t jump-started an empowerment trend either. Instead, he has enriched the bottom lines of traditionally white companies and so far has been little more than the lead blocker for white-owned chains, easing their expansion into urban areas. So he recently talked to Puffy Combs about opening an uptown restaurant and to the hip-hop impresario Russell Simmons about bringing Simmons’s retail clothing store to Harlem. “Now white Americans are buying up Harlem brownstones,” Johnson laments. “Black people have been conditioned to live for today. I’m helping to rebuild Harlem, but we as a people won’t own it.”

Magic Johnson is about to do something few businessmen and even fewer athletes do: endorsing a candidate for public office. In the lobby of his theaters, he stands before TV cameras in September next to Jim Hahn, the Los Angeles city attorney and Democratic candidate for mayor. Johnson settled on Hahn, who is white, in part because Hahn grew up in South Central.

Thirty years ago, it was not uncommon for black athletes, led by Ali, Jim Brown and the Olympic sprinters John Carlos and Tommy Smith, to wade into politics. But as athletes have risen to the pinnacle of commodity culture, they have been less willing to speak out. Asked a few years back why he didn’t endorse Harvey Gantt, a credible black challenger to Senator Jesse Helms in his home state of North Carolina, Michael Jordan replied, “Republicans buy Nikes, too.”

Johnson’s smile may engender Jordan-like “crossover” appeal, but his warmth masks a more radical agenda that dovetails with his business interests — unlike Jordan, he’s not selling anything to suburban Republicans. So Johnson plays to the cameras and endorses a white candidate, all the while embracing Dr. Dre and the corn-rowed, tattooed, gangsta-rapping Philadelphia 76ers star Allen Iverson. Yet Johnson’s support of hip-hoppers makes ideological sense, given that they revolutionized the music business by insisting on owning their master recordings, something that crossover artists like Marvin Gaye and Stevie Wonder never did. And like the rappers, Johnson doesn’t mince words for fear of offending white sensibilities. At a panel discussion at the University of Southern California during the Democratic National Convention, Johnson said of the Republicans, “They didn’t want us before; they don’t want us now.” And about the Democrats he said, “People, we’ve got to make sure Gore follows our plan — the black plan.”

For Johnson, the black plan is about ownership. “Black people, we don’t own nothing,” he said at U.S.C. “They’ll let us entertain them. We have always been the best at that. But we don’t own teams, we don’t own record companies, we don’t own movie studios. Now I employ 3,000 black people-” many in the crowd started cheering -I’m not saying that for applause. There are about 5,000 black athletes in all of sports. If you multiply that by 3,000, where are we at? One-point-five million employed black people.”

Johnson is trying to spread that empowerment gospel to a generation of athletes who have come to see themselves not only as entertainers, but as entrepreneurs as well. “When I first met Magic,” recalls Shaquille O’Neal, “he said, ‘Getting your name in the paper is fun, but you’ve got to own things and employ our people instead of just taking money.’ That’s stuck with me.”

O’Neal has become a businessman in his own right, choosing Compton as the location for his record label, T.W.IsM. (The World Is Mine). Every week, athletes ranging from the football star Bruce Smith to the basketball player Patrick Ewing seek Johnson’s business advice. Iverson sought Johnson’s counsel a couple of years back, when Iverson decided to jettison his agent, David Falk, the man who first brought Nike and Jordan together in the 80’s. Iverson and other young players, Johnson says, often ask him how he made the transition from court to boardroom. “I tell them I showed up on time to every meeting. I didn’t come in wearing all the jewelry. And I surrounded myself with people like Ken Lombard who were smarter than me.”

The roots of Johnson’s economic populism can be traced to the moment in 1991 when he announced that he was H.I.V.-positive. He remembers puttering around the house in the days that followed, aware of the silent phone, supported only by members of the South Central church that he and his wife, Cookie, attended. “After the whole myth of being an athlete stops, the only people left are the people in the community,” he says. And he remembers the companies, like Nestle, that rushed to sever ties with him.

“When you’re playing ball, there’s a tendency to be politically correct, to not do or say anything that’ll turn off endorsers,” Johnson says later in his trailer a couple of hours before a star-studded fashion show in front of 4,500 kids to benefit H.I.V. and AIDS research. Though he explains that deep down, he always wanted to take stands on issues important to black America, it wasn’t until his experience with H.I.V., when he realized he had nothing left to lose, that he was spurred into action. In 1992, he not only resigned in protest from President Bush’s AIDS commission, he also publicly lambasted Bush for fighting the disease with “lip service and photo opportunities.”

On the way into the fashion show, Johnson models a leopard-skin overcoat, basking in the attention of a rapt crowd. Then he watches the show enthusiastically, cupping his hands to his mouth and yelling, “This is old school!” when a Motown tune comes on, languidly grooving his shoulders to the beat. His smile is his unique brand, and it is more iconic even than Jordan’s Nike-devised leaping silhouette. The smile sells both him and what he’s selling, be it a money-making venture or a tough-minded prescription for African-American empowerment. It’s there while Johnson talks about how, though the way he got the disease was not heroic, he decided to try and deal with it heroically. And it remains on his face when he gives voice to his latest mission.

“Now I’ve got to teach these young brothers that you don’t have to sell out to do good,” he says. “I tell those guys all the time, you don’t realize how much power you’ve got. Use it in your community. You can make money and keep it real back home and lift all of us up.”

Read more from the New York Times


How To Build A Multi Million Dollar Online Business In Nigeria


How did a 30-year old Nigerian and a Ghanaian – Tunde Kehinde and Raphael Afaedor – grow their local e-commerce startup into a multimillion dollar company in less than year?

VENTURES AFRICA – I was chatting with a colleague, as we drove to Jumia’s Lagos corporate office, when he asked rhetorically: “Why would JP Morgan be so interested in a 5 month old Nigerian startup as to invest millions in it?” Well, I was eager to know too.

Africa, home to six of the world’s fastest growing economies, has caught the entrepreneurial bug but an ubiquitous lack of funds has kept its entrepreneurs from marching. Minutes into meeting Jumia co-founder Tunde Kehinde, he would have me know having an amazing powerpoint business plan isn’t the key to investor funds.

“With the little crowd funding you can get, test your business concept and prove it makes money,” he tells me. “That way you become irresistible for investors.”

His partner, Raphael Afaedor chips in: “We had to quit our jobs and put all our effort in what we believed. Often, working 16 hours a day, sometimes more.”

Raphael was laid back, but spoke with rare speed. Spitting an average of 3 words per second, he would give Eminem a run for his money. His business-like countenance, tucked-in white office shirt and black trousers, made him look like the boss at the Jumia office.

Tunde on the other hand, with the rest of the Jumia team appeared youthful and casual.

At the online retailer’s office, dozens of under-30 year olds carrying Jumia tags could be seen in jeans and sneakers or fashionable clothing. Self expression is uninhibited, ideas are encouraged. It’s the kind of place a millennial would love to work. It isn’t the conventional Nigerian work setting – for a second, I thought I was in some sort of Google workspace.

Hanging on the walls at the lobby are two aluminium frames. One reads: “Best People for the Best Team.” The other, a sort of guideline for interaction between the staff, reads: “Challenge ideas but Respect everyone.”

When Raphael and Tunde first conceived the idea of building an enduring online ‘shopping mall’ for the Nigerian market, they had never met. Raphael was Head of Marketing and Sales (West, Central & North Africa) with Notore Chemical Industries while Tunde Kehinde was in the UK assisting alcoholic beverage multinational Diageo, to acquire valuable African brands. Both had also studied at Harvard Business School (and Tunde had tried his hands on, a dating site for young African professionals) so they had received some training for their impending entrepreneurial pursuit.


Ariel Investments


John W. Rogers, Jr.
Chairman, CEO & Chief Investment Officer
Lead Portfolio Manager

Ariel Small and Small/Mid Cap Value Products and Ariel Fund
Co-Portfolio Manager

Ariel Mid Cap Value Product and Ariel Appreciation Fund
John’s passion for investing started when he was 12 years old when his father bought him stocks every birthday and every Christmas instead of toys. His interest grew while majoring in economics at Princeton University. After graduation, he worked as a stockbroker for 2½ years at William Blair & Company, LLC—a regional investment banking firm. In 1983, John founded Ariel Investments to focus on undervalued small and medium-sized companies. Patience served as the cornerstone of a disciplined approach that still drives the firm today. Beyond Ariel, John is a regular financial contributor to Forbes Magazine and currently serves as a board member of Exelon Corporation and McDonald’s Corporation. Additionally, he is a trustee of both the Nathan Cummings Foundation and the University of Chicago, where he chairs the board of the University of Chicago Laboratory School. John is also a director of the Robert F. Kennedy Center for Justice and Human Rights. In 2008, he was awarded Princeton University’s highest honor, the Woodrow Wilson Award, presented each year to the alumnus whose career embodies a commitment to national service. Following the election of President Barack Obama, John served as co-chair for the Presidential Inaugural Committee 2009. From 2010 to 2013, he was Chair of the President’s Advisory Council on Financial Capability. Today, he chairs the President’s Advisory Council on Financial Capability for Young Americans. In 2013, he was featured alongside legendary investors Warren Buffett, Sir John Templeton and Benjamin Graham in the distinguished book: The World’s 99 Greatest Investors by Magnus Angenfelt. John received an AB in economics from Princeton University where he was also captain of the varsity basketball team.
Domestic Senior Research Team
International/Global Research


Mellody Hobson

Mellody is responsible for firm-wide management and strategic planning, overseeing all operations outside of research and portfolio management. Additionally, she serves as chairman of the board of trustees for Ariel Investment Trust. Beyond her work at Ariel, Mellody has become a nationally recognized voice on financial literacy and investor education. She is a regular contributor and analyst on finance, the markets and economic trends for CBS News. She also contributes weekly money tips on the Tom Joyner Morning Show and pens a column for Black Enterprise magazine. As a passionate advocate for investor education, she is a spokesperson for the Ariel/Hewitt Study: 401(k) Plans in Living Color and the Ariel Black Investor Survey, both of which examine investing patterns among minorities. Mellody is chairman of the board for DreamWorks Animation SKG, Inc., as well as director of The Estée Lauder Companies Inc. and Starbucks Corporation. Her community outreach includes serving as chairman of After School Matters, a non-profit that provides Chicago teens with high-quality, out-of-school time programs. She is a board member of the Lucas Museum of Narrative Art, The Chicago Public Education Fund, and Sundance Institute, where she has been appointed emeritus trustee. She is also on the executive committee of the Investment Company Institute’s board of governors. Mellody earned her AB from Princeton’s Woodrow Wilson School of International Relations and Public Policy. She has also received honorary doctorate degrees in humanities from both Howard University and St. Mary’s College.

Kinder Morgan Energy Partners, L.P.


Business Summary

Kinder Morgan Energy Partners, L.P. operates as a pipeline transportation and energy storage company in North America. Its Products Pipelines segment delivers gasoline, diesel fuel, jet fuel, and natural gas liquids to various markets through approximately 8,600 miles of refined petroleum products pipelines; and operates 62 associated product terminals and petroleum pipeline transmix processing facilities.

The company’s Natural Gas Pipelines segment gathers, transports, stores, treats, processes, and sells natural gas through approximately 33,000 miles of natural gas transmission pipelines and gathering lines, as well as natural gas storage, treating, and processing facilities. Its CO2 segment produces, markets, and transports carbon dioxide through approximately 1,500 miles of pipelines to oil fields. This segment also owns and operates 7 oil fields, and a 450 mile crude oil pipeline system in west Texas. The company’s Terminals segment transloads, stores, and delivers bulk, petroleum, petrochemical, and other liquids products through approximately 113 liquids and bulk terminal facilities; and approximately 35 rail transloading and materials handling facilities.

Its Kinder Morgan Canada segment transports crude oil and refined petroleum products through approximately 2,500 miles of pipelines from Alberta, Canada to marketing terminals and refineries in British Columbia, the state of Washington, and the Rocky Mountains, as well as in the central regions of the United States.

This segment also operates the Jet Fuel aviation turbine fuel pipeline that serves the Vancouver (Canada) International Airport. Kinder Morgan G.P., Inc. serves as the general partner of the company. Kinder Morgan Energy Partners, L.P. was founded in 1992 and is headquartered in Houston, Texas. Kinder Morgan Energy Partners, L.P. operates as a subsidiary of Kinder Morgan, Inc.

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$3 Trillion-Dollar Firms


Bill Gross and Larry Fink manage $3 Trillion-Dollar Firms Dominating Bonds

April 14 (Bloomberg) — A $3 trillion pile of bonds, an amount almost as big as Germany’s economy. Their firms, Pacific Investment Management Co. and BlackRock Inc., doubled holdings since 2008, outpacing the market’s growth of 50 percent.

Some of the largest hedge-fund firms, including Bridgewater Associates LP and BlueCrest Capital Management LLP, have also more than doubled their investments in debt, data compiled by Bloomberg show. At the same time, Wall Street banks are shrinking their stakes in bonds, Federal Reserve data show.

The lopsided bond market has caught the attention of the U.S. Securities and Exchange Commission. Not only is the SEC examining whether the biggest players get preferential prices and access because of their influence, it’s also worried about what happens when the five-year bond rally ends as U.S. policy makers prepare to raise interest rates.

“It’s going to be interesting to see who’ll take the other side of the trade if there’s a meaningful sell-off, which presents a huge risk,” said Arthur Tetyevsky, a credit-trading strategist at Imperial Capital LLC in New York. “We’re much closer to the end of the rally, that’s for sure.”

The biggest funds’ dominance may make it harder for everyone to sell when the Fed boosts borrowing costs from record lows and sends bond prices tumbling. In essence, their selling may crowd narrowed exits, making it more painful as all investors race to get out of a falling market.

Migrating Hazard
While regulators have looked at the threat to the financial system posed by too-big-to-fail banks, hazard has migrated to money managers. Banks, facing stiffer restrictions on borrowing and the amount of cash they need to keep on hand in the aftermath of the credit crisis, have cut the amount of their own money they use to help clients trade. That reduced role leaves the bond market more vulnerable to ripple effects from the actions of the behemoth managers.

More than five years of near-zero interest rates from the Fed has propelled corporate bonds to record performance and the biggest debt managers have ballooned in size. Pimco, Vanguard Group Inc. and Fidelity Investments manage 39 percent of all mutual fund-owned taxable bonds today, up from 18 percent in 1997, according to Morningstar Inc. data. The smallest 205 fund providers manage 0.1 percent of the market.

“When it comes to fixed-income management, there is an oligarchy,” said Robert Smith, the chief investment officer at Austin, Texas-based Sage Advisory Services Ltd., which oversees about $10.5 billion. “That can be good and that can be bad. It’s bad when you have a market that’s feeling like it’s weak and not doing well and selling off.”

Shrinking Dealers
Just because an investment firm is big doesn’t mean it poses more risk to the financial system, according to BlackRock. Rather than size, regulators should look at how much borrowed money a fund uses as a way to screen for systemic importance, it said in an April 4 letter to the Financial Stability Board. BlackRock said it uses very little leverage across its funds.

“The fact that some firms have gotten larger and some firms have gotten smaller, I’m not sure that’s relevant to secondary trading,” said Richard Prager, head of trading and liquidity strategies at BlackRock. “You have to think about it in terms of the different funds. It’s going to affect all of them equally if the dealers are all shrinking.”

Mark Porterfield, a Pimco spokesman, declined to comment, as did Ryan FitzGibbon, a spokeswoman for Bridgewater, and Ed Orlebar, a representative for BlueCrest.

Two Tiers
At the same time, regulators are examining the way larger firms benefit in markets where transactions are often executed the same way they were a decade ago — through telephone conversations and e-mails.

In this two-tiered market, brokers choose which rivals and clients may see their bond prices on electronic trading systems by turning quotes on and off. Dealers often give bigger investors better prices in return for all of the business they do with Wall Street.

The SEC is examining to what extent smaller buyers are disadvantaged, and whether the behavior constitutes market manipulation, according to two people with direct knowledge of the matter who asked not to be identified because the probe hasn’t been made public.

“For the do-it-yourselfer, the disadvantages are growing by leaps and bounds,” said Marilyn Cohen, who manages $315 million of corporate and municipal bonds as founder of Envision Capital Management Inc. in El Segundo, California. “There’s a smaller and smaller market for money managers that aren’t the size of BlackRock and Pimco.”

Worse Prices
Investors typically get worse prices when they trade smaller blocks of bonds. One day last month, dealers sold $15,000 of steel company ArcelorMittal SA’s bonds maturing in 2041 for 3.5 cents on the dollar more than they paid to buy $25,000 of the same securities an hour later. By contrast, two exchanges of $100,000 or more of the debt that day were within 0.05 cent of one another, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Finra is examining whether Wall Street firms overcharge investors and whether they unfairly allocate new corporate debt issues to reward certain clients, Nancy Condon, a spokeswoman, confirmed in an e-mail last week.

It’s getting tougher to trade bonds as the business gets less profitable for Wall Street. Corporate-debt trading volumes in the U.S. have failed to keep pace with issuance, increasing 14 percent since 2010 as outstanding notes grew by 33 percent, according to Finra and Bank of America Merrill Lynch index data.

Bondholders Hurt
Requirements that banks hold more cash in the event their investments tank have prompted dealers to reduce their inventories, giving the biggest managers even more sway in the market. The largest dealers had slashed their holdings of corporate bonds to $56 billion as of a year ago from $235 billion in 2007, according to Federal Reserve Bank of New York data. The inventories worked to cushion against price swings and made it easier to trade in larger sizes.

“There may be limits to what regulation can achieve,” New York Fed analysts Samuel Antill, David Hou and Asani Sarkar wrote in a March 27 report. “Financial growth has occurred in the more opaque and harder-to-regulate sectors.”

All bondholders are hurt when the biggest funds unload securities. When investors yanked a record $61.8 billion from broad-market bond funds in the first nine months of last year, it helped spur about $410 billion of losses on $20.5 trillion of U.S. government and corporate debt, Bank of America Merrill Lynch index data show. That was the securities’ worst performance since 1994.

Biggest Withdrawals
Barclays Plc strategist Jeff Meli noted in August that flows are “showing up real time in performance” since dealers aren’t buffering against such lurches as much as they used to.

The New York Fed routinely monitors market liquidity as part of its financial stability role for the central bank, and officials are seeing what they can learn from last year’s bond market sell-off. New York Fed researchers said in an Aug. 5 blog post that the sell-off was “steeper than most historical episodes.”

The funds that attracted the most assets in the previous four years experienced some of the biggest withdrawals. The world’s largest bond fund, Pimco’s Total Return Fund, for example, reported $8.3 billion of outflows in the first three months of 2014. That overwhelmed $6.4 billion of inflows into the rest of funds in its category, Morningstar data show.

Verizon Deal
The largest bond-fund managers have been able to amass a disproportionate amount of securities over the past five years partly by getting first dibs on new corporate-bond sales. The SEC is also investigating whether banks are fairly divvying up new issues and whether they give preferential treatment to top clients.

Bankers gave almost half of Verizon Communications Inc.’s record $49 billion bond sale in September to just 10 firms, people with knowledge of the matter said at the time. The price instantly jumped, handing those buyers about $2.5 billion in gains just one day after issuance.

Newport Beach, California-based Pimco purchased $8 billion of the Verizon debt and BlackRock bought about $5 billion, people familiar with the sale said at the time. Fink, 61, is chief executive of New York-based BlackRock and Gross, 70, is chief investment officer and co-founder of Pimco.

Robert Varettoni, a spokesman for Verizon, declined to comment on last year’s bond sale.

Being Big
“With the bond market you want to be big,” said Michael Rawson, an analyst at Morningstar in Chicago. “If you’re too small, it’s hard to get a decent allocation and good pricing.”

Being big can cut costs by having many different funds rely on the same people to trade, analyze and process specific bonds.
“They can lower their fees,” said Andrew McCollum, a managing director at Greenwich Associates in Stamford, Connecticut. “That’s the reason the big managers are getting bigger — they can basically do the same thing for a lower cost.”

BlackRock oversees $1.2 trillion of debt, compared with $483.2 billion in December 2008, according to the firm’s financial filings. Pimco manages $1.9 trillion of assets, with more than 90 percent in bond-related funds, versus $960 billion of assets five years earlier.

Enjoying Perks
Bridgewater’s All Weather fund, which emphasizes debt- related investments, has quadrupled since the end of 2009 to about $80 billion in assets, according to data compiled by Bloomberg. BlueCrest, co-founded by former JPMorgan Chase & Co. proprietary trader Michael Platt, has expanded to include about $32 billion of assets since its 2000 inception.

Hedge funds with more than $1 billion under management hold 59 percent of debt assets among similar firms, up from 29 percent in 2008, according to data compiled by Eurekahedge Pte Ltd., an alternative investment research firm, on relative-value strategies.

While they enjoy perks, bigger funds can also have a harder time being nimble as trading falls as a proportion of the overall market.

Pimco has faced withdrawals at the same time former Chief Executive Officer Mohamed El-Erian resigned in January.
Worst Returns

Its $232 billion Total Return Fund produced the worst risk- adjusted return over the past year among 16 U.S. intermediate- term funds with at least $5 billion in assets, according to the Bloomberg Riskless Return Ranking. As shorter-term debt tumbled in anticipation of rising interest rates, Gross’s fund posted the second-worst returns and second-highest volatility in the group.
When Gross sells, it resonates throughout the market — and a world of falling bond prices may be about to take hold. Analysts surveyed by Bloomberg predict yields on the 10-year Treasury note will climb to 3.33 percent at year-end and to 3.6 percent in the first half of 2015 from 2.62 percent on April 11.

The SEC’s priorities for the year include monitoring “the risks associated with a changing interest-rate environment and the impact this may have on bond funds,” according to a January memo from the agency’s Office of Compliance Inspections and

“There’s a market until there isn’t one,” said Tim Gramatovich,
who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management LLC. “What happens when there’s no bid?”

–With assistance from Charles Stein in Boston, Alexis Leondis, Miles Weiss and Craig Torres in Washington and Christine Harper in New York.

To contact the reporter on this story: Lisa Abramowicz in New York at To contact the editors responsible for this story: Bob Ivry at Caroline Salas Gage

Bitcoin 101 – How to Make a Digital Currency (pt.1)

Published on Nov 18, 2013

Part 1 of 2

What is Bitcoin? Many find Bitcoin difficult to understand. These high-school-level videos provide an introduction to bitcoin by looking at the historical problems of creating currencies (both traditional and digital currencies). This video could prove useful for a classroom activity or for anyone struggling to understand the basics of bitcoin.

This episode covers the important features of a currency and the advantages of going digital (instead of old fashioned currency)

This is the 11th episode in our blackboard series — a beginner’s course in bitcoin. Despite the name some of the episodes are designed for experts and others for beginners. We hope you’ll find just what you need, and we hope you’ll enjoy James’ presentation. If you do, please like, subscribe or drop some comments, suggestions or critiques.

Thanks, WBN

Chamath Palihapitiya – how we put Facebook on the path to 1 billion users

black power magazine-chamath-palihapitiya

Chamath Palihapitiya started off making investments on the side while still employed at Facebook, including investments in Playdom (bought by The Walt Disney Company) and Bumptop (bought by Google). In 2011, he had enough money to quit his job at Facebook and start his own fund called The Social+Capital Partnership. The fund was praised by Peter Thiel, who invested in it and expressed enthusiasm for Palihapitiya’s approach.

Palihapitiya has invested (through the fund) in a number of companies since then, including Yammer and SecondMarket.

In March 2013, Palihapitiya confirmed that his venture fund had raised over $275 million in its second round of fundraising.

Read more Chamath Palihapitiya

Bitcoin Tops $1,000 as Virtual Money Gains Popularity



Bitcoins were trading at $1,003 apiece today on Mt. Gox, one of the exchanges where the digital money can be traded for other currencies. On Bitstamp, the most active dollar-based marketplace among online exchanges, they were at $949.90. Bitcoins were trading at $12 to $13 a year earlier, and have quintupled this month.

Bitcoin Origins

Introduced in 2008 by a programmer or group of programmers going under the name of Satoshi Nakamoto, Bitcoins exist as software, which contain the rules governing their supply. New Bitcoins can only be created by solving complex problems embedded in the currency, keeping total growth limited. There are more than 12 million Bitcoins in circulation, according to Bitcoincharts, a website that tracks activity across various exchanges.

Bitcoin is being used to pay for everything from Gummi bears to smartphones on the Internet. The virtual curency can also be traded without being tracked, potentially reducing banking-transaction fees and making it an attractive tender for those seeking to buy and sell via the Web or in stores.

When Silk Road was shut down, the virtual currency lost a third of its value within days as holders sold, predicting a crackdown. Instead, the willingness of authorities to stamp out illegitimate use has come to be seen as an endorsement for Bitcoins, making users and investors more comfortable taking risks with digital money.

Bitcoin also gained further legitimacy and attention when a subsidiary of Baidu Inc. (BIDU), China’s top search engine, started accepting Bitcoins on Oct. 15. Chinese Bitcoin activity has exploded, with the number of yuan-based trades jumping 30-fold in the past two months and making BTC China the top online-exchange by volume.


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