(c) 2010 F. Bruce Abel
This posting by James Kwak (skip over the Simon Johnson piece for the moment), is a must, must read.
The Baseline Scenario
--------------------------------------------------------------------------------
Greek Bailout, Lehman Deceit, And Tim Geithner
Posted: 13 Apr 2010 04:53 AM PDT
By Simon Johnson
We live in an age of unprecedented bailouts. The Greek package of support from the eurozone this weekend marks a high tide for the principle that complete, unconditional, and fundamentally dangerous protection must be extended to creditors whenever something “big” gets into trouble.
The Greek bailout appears on the scene just as the US Treasury is busy attempting to trumpet the success of TARP – and, by implication, the idea that massive banks should be saved through capital injections and other emergency measures. Officials come close to echoing what the Lex column of the Financial Times already argued, with some arrogance, in fall 2009: the financial crisis wasn’t so bad – no depression resulted and bonuses stayed high, so why do we need to change anything at all?
But think more closely about the Greek situation and draw some comparisons with what we continue to learn about how Lehman Brothers operated (e.g., in today’s New York Times).
The sharp decline in market confidence last week – marked by the jump in Greek yields – scared the main European banks, and also showed there could be a real run on Greek banks; other Europeans are trying to stop it all from getting out of hand. But there is no new program that would bring order to Greece’s troubled public finances.
It’s money for nothing – with no change in the incentive and belief system that brought Greece to this point, very much like the way big banks were saved in the US last year.
If anything, incentives are worse after these bailouts – Greece and other weaker European countries on the one hand, and big US banks on the other hand, know now for sure that in their respective contexts they are too big to fail.
This is “moral hazard” – put simply, it is clear a country/big bank can get a package of support if needed, and this gives less incentive to be careful. Fiscal management for countries will not improve; and risk management for banks will remain prone to weakening when asset prices rise.
If a country hits a problem, the incentive is to wait and see if things get better – perhaps the world economy will improve and Greece can grow out of its difficulties. If such delay means that the problems actually worsen, Greece can just ask Germany for a bigger bailout.
Similarly, if a too-big-to-fail bank hits trouble, the incentive is to hide problems, hoping that financial conditions will improve. Essentially the management finds ways to “prop up” the bank; on modern Wall Street this is done with undisclosed accounting manipulation (in some other countries, it is done with cash). If this means the ultimate collapse is that much more damaging, it’s not the bank executives’ problem any way – their downside is limited, if it exists at all.
The Greeks will now:
Lobby for a large multi-year program from the IMF. They’ll want a path for fiscal policy that is easy in the first year and then gets tougher.
When they reach the tough stage, can’t deliver on the budget, and are about to default, the Greek government will call for another rapid agreement under pressure – with future promises of reform. The eurozone will again accept because it feels the spillovers otherwise would be too negative.
The Greek hope is that the global economy recovers enough to get out, but more realistically, they will start revealing a set of negative “surprises” that mean they miss targets. If the surprises add to the feeling of crisis and further potential bad consequences, that just helps to get a bailout.
The Greek authorities will add a ground game against the European Central Bank, saying things like: “the ECB is too tight, so we need more funds”. We’ll see how that divides the eurozone.
In their space, big US banks will continue to load up on risk as the cycle turns – while hiding that fact. Serious problems will never be revealed in good time – and the authorities will again have good reason (from their perspective) to agree to the hiding of issues until they get out of control, just as the Federal Reserve did for Lehman Brothers. Moral hazard not only ruins incentives, it also massively distorts the available and disclosed information.
As for Mr. Geithner, head of the New York Fed in 2008 and Secretary of the Treasury in 2009: Those who cannot remember the bailout are condemned to repeat it.
The Cover-Up
Posted: 12 Apr 2010 06:59 PM PDT
By James Kwak
Wall Street is engaged in a cover-up. Not a criminal cover-up, but an intellectual cover-up.
The key issue is whether the financial crisis was the product of conscious, intentional behavior — or whether it was an unforeseen and unforeseeable natural disaster. We’ve previously described the “banana peel” theory of the financial crisis — the idea it was the result of a complicated series of unfortunate mistakes, a giant accident. This past week, a parade of financial sector luminaries appeared before the Financial Crisis Inquiry Commission. Their mantra: “No one saw this coming.” The goal is to convince all of us that the crisis was a natural disaster — a “hundred-year flood,” to use Tim Geithner’s metaphor.
I find this incredibly frustrating. First of all, plenty of people saw the crisis coming. In late 2009, people like Nouriel Roubini and Peter Schiff were all over the airwaves for having predicted the crisis. Since then, there have been multiple books written about people who not only predicted the crisis but bet on it, making hundreds of millions or billions of dollars for themselves. Second, Simon and I just wrote a book arguing that the crisis was no accident: it was the result of the financial sector’s ability to use its political power to engineer a favorable regulatory environment for itself. Since, probabilistically speaking, most people will not read the book, it’s fortunate that Ira Glass has stepped in to help fill the gap.
This past weekend’s episode of This American Life includes a long story on a particular trade put on Magnetar (ProPublica story here), http://www.propublica.org/feature/the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble-going a hedge fund that I first read about in Yves Smith’s ECONned. The main point of the story is to show how one group of people not only anticipated the collapse, and not only bet on it, but in doing so prolonged the bubble and made the ultimate collapse even worse. But it also raises some key issues about Wall Street and its behavior over the past decade.
This will require a brief description of what exactly Magnetar was doing. (If you know already, you can skip the next two paragraphs.) It’s now a cliche that a CDO is a set of securities that “slices and dices” a different set of securities. But it’s slightly more complicated than that. First there is a pile of mortgage-backed securities (or other bond-like securities) that are collected by an investment bank. The CDO itself is a new legal entity (a company) that buys these MBS from the bank; that’s the asset side of its balance sheet. Its liability side, like that of any company, includes debt and equity. There’s a small amount of equity bought by one investor and a lot of debt, issued in tranches that get paid off in a specific order, bought by other investors. The investment bank not only sells MBS to the CDO, but it also places the CDO’s bonds with other investors. Whoever buys the equity is like the “shareholder” of this company. There is also a CDO manager, whose job is to run the CDO — deciding which MBS it buys in the first place, and then (theoretically) selling MBS that go bad and replacing them by buying new ones. The CDO itself is like an investment fund, and the CDO manager is like the fund manager.
According to the story, in 2006, when the subprime-backed CDO market was starting to slow down, Magnetar started buying the equity layer — the riskiest part — of new CDOs. Since they were buying the equity, they were the CDOs’ sponsor, and they pressured the CDO managers to put especially risky MBS into the CDOs — making them more likely to fail. Then Magnetar bought credit default swaps on the debt issued by the CDOs. If the CDOs collapsed, as many did, their equity would become worthless, but their credit default swaps on the debt would repay them many, many times over.
The key is that Magnetar was exploiting the flaws in Wall Street’s process for manufacturing CDOs. Because the banks made up-front fees for creating CDOs, the actual human beings making the decisions did not particularly care if the CDOs collapsed — they just wanted Magnetar’s money to make the CDOs possible. (No one to buy the highly risky equity, no CDO.) Because the ratings agencies’ models did not particularly discriminate between the contents that went into the CDOs (see pages 169-71 of The Big Short, for example), Magnetar and the banks could stuff them with the most toxic inputs possible to make them more likely to fail.
Now, one question you should be asking yourself is, how is this even arithmetically possible? How is it possible that a CDO can have so little equity that you can buy credit default swaps on the debt at a low enough price to make a killing when the thing collapses? You would think that: (a) in order to sell the bonds at all, there would have to be more equity to protect the debt; and (b) the credit default swaps would have been expensive enough to eat up the profits on the deal. Remember, this is 2006, when several hedge funds were shorting CDOs and many investment banks were looking for protection for their CDO portfolios.
The answer is that nothing was being priced efficiently. The CDO debt was being priced according to the rating agencies’ models, which weren’t even looking at sufficiently detailed data. And the credit default swaps were underpriced because they allowed banks to create new synthetic CDOs, which were another source of profits. So here’s the first lesson: the idea that markets result in efficient prices was, in this case, hogwash.
By taking advantage of these inefficiencies, Magnetar made the Wall Street banks look like chumps. This American Life talks about one deal where Magnetar put up $10 million in equity and then shorted $1 billion of AAA-rated bonds issued by the CDO. It turned out that in this deal, JPMorgan Chase, the investment bank, actually held onto those AAA-rated bonds and eventually took a loss of $880 million. This was in exchange for about $20 million in up-front fees it earned.
But who’s the chump? Sure, JPMorgan Chase the bank lost $880 million. But of that $20 million in fees, about $10 million was paid out in compensation (investment banks pay out about half of their net revenues as compensation), much of it to the bankers who did the deal. JPMorgan’s bankers did just fine, despite having placed a ticking time bomb on their own bank’s balance sheet. Here’s the second lesson: the idea that bankers’ pay is based on their performance is also hogwash. (The idea that their pay is based on their net contribution to society is even more absurd.)
So who’s to blame? The first instinct is to get mad at Magnetar. But this overlooks a Wall Street maxim cited by TAL: you can’t blame the predator for eating the prey. Magnetar was out to make money for its limited partners; if it had bet wrong and lost money, no one would have bailed it out. Although I probably wouldn’t have behaved the same way under the circumstances, I have no problem with Magnetar.
I do have a problem with the Wall Street bankers in this story, however. Because losing $880 million of your own company’s money to make a quick buck for yourself is either incompetent or just wrong. And allowing Magnetar to create CDOs that are as toxic as possible — and then actively selling their debt to investors (that’s where the banks differ from Magnetar, in my opinion) — is either incompetent or just wrong. But even so, I don’t think the frontline bankers are ultimately at fault. Maybe they were simply incompetent. Or maybe, they were knowingly exploiting the system to maximize their earnings — only in this case the system they were exploiting was their own banks’ screwed-up compensation policies, risk management “systems,” and ethical guidelines.
In which case the real blame belongs to those who created that system and made it possible. And that would be the bank executives who failed at managing compensation, risk, or ethics, endangering or killing their companies in the process. And that would be the regulators and politicians who allowed these no-money down no-doc negative-amortization loans to be made in the first place; who allowed investment banks to sell whatever they wanted to investors, with no requirements or duties whatsoever; who allowed banks to outsource their capital requirements to rating agencies, giving them an incentive to hold mis-rated securities; who declined to regulate the credit default swaps that Magnetar used to amass its short positions; who allowed banks like Citigroup and JPMorgan Chase to get into this game with federally insured money; and who failed at monitoring the safety and soundness of the banks playing the game.
The lessons of Magnetar are the basic lessons of the financial crisis. Unregulated financial markets do not necessarily provide efficient prices or the optimal allocation of capital. The winners are not necessarily those who provide the most benefit to their clients or to society, but those who figure out how to exploit the rules of the game to their advantage. The crisis happened because the banks wanted unregulated financial markets and went out and got them — only it turned out they were not as smart as they thought they were and blew themselves up. It was not an innocent accident.
Showing posts with label hedge funds. Show all posts
Showing posts with label hedge funds. Show all posts
Wednesday, April 14, 2010
Saturday, June 27, 2009
Baseline Scenario -- Hedge Funds and Doctors' Pay
The Baseline Scenario
Questions about Doctors
Posted: 26 Jun 2009 01:30 PM PDT
Greg Mankiw posts data showing that doctors in the U.S. make much more than doctors elsewhere. From a 1999 paper by Uwe Reinhardt, among others:
As a dollar amount, U.S. per capita spending for physician services was the highest in the OECD in 1999: $988, compared with an OECD median of $342. . . .
In 1996, the most recent year for which data are available for multiple countries, the average U.S. physician income was $199,000. The comparable OECD median physician income was $70,324.* The ratio of the average income of U.S. physicians to average employee compensation for the United States as a whole was about 5.5. Germany’s was the next highest, at only 3.4; Canada, 3.2; Australia, 2.2; Switzerland, 2.1; France, 1.9; Sweden, 1.5; and the United Kingdom, 1.4.
Mankiw posts three discussion questions. I’m just going to take a stab at the second one:
On the issue of doctor training: Suppose that in country A physicians get free training through a taxpayer-financed educational system, while in country B physicians finance their own education and then, once trained, are paid higher fees. (a) If country A classifies these training expenses as education rather than healthcare spending, which country would report higher healthcare costs? (b) Is that difference in healthcare costs real or an artifact of labeling? (c) In which country would doctors, once trained, have more incentive to work long hours? (d) In which country would there be more doctors? (e) Which country’s system, in your judgment, is more efficient and equitable?
(a)-(b) I get Mankiw’s rhetorical point. And I guess it makes sense to count educational costs as part of the production costs of healthcare. But $199,000 – $70,000 = $120,000. So the higher med-school costs people pay in the U.S. get made up in two years out of a career of 30-40 years.
(c) The short answer is that physicians would have more incentive in country B (the U.S.), because the marginal return on labor is higher. But do we want doctors working longer hours? Medicine is not like, say, baking bread – the more hours you put in, the more good stuff you end up with. We are already the country with the highest hourly wages, and one of our major problems is not lack of doctoring capacity, at least not in aggregate; on the contrary, we have the problem of overutilization of many types of services (the expensive ones). Put another way, because we have higher wages for expensive procedures, we have doctors working longer hours doing those procedures by prescribing more of those procedures than are medically appropriate. Because we overcompensate for some services and undercompensate for others (relative to each other), we have too few of some kinds of doctors (family practice, for example) – but that is a product of the way we pay for healthcare, not the way we produce doctors.
(d) You should get more doctors in whichever country gives you the higher aggregate returns to being a doctor. Right now that’s the U.S. But the key point here is not the financing of medical school; it’s the constraint on the number of doctors enforced by the American Medical Association. That’s why, as Mankiw points out, we actually have fewer doctors per capita than the average OECD country.
(e) I’ll leave that as an exercise for you.
* Yes, it says “average” for the U.S. and “median” for the OECD. I can’t tell from the original paper if that is accurate or not. The rest of the paragraph says it is dealing with averages. In any case, I think it’s fair to assume that the median U.S. doctor made well over $70,324 in 1996.
Hedge Funds Make A Political Mistake
Posted: 26 Jun 2009 03:08 AM PDT
The political flavor of the month is to push back against even the Obama adminstration’s mildly reformist inclinations on finance (e.g., Peter Weinberg in today’s FT is a nice example). And, of course, once you hire a lobbyist, he or she tells you that “winning” means stirring up Congress in favor of the status quo. Measured in these terms, the hedge fund industry has had a string of notable recent victories effectively preventing tighter regulation.
Advocates have a point, of course, when they argue that big banks rather than hedge funds were primarily responsible for crisis. But this misses where we are in the long-cycle of regulation/deregulation. Look at this picture (source: WSJ; more on Ariell Reshef’s webpage).
If we’re at the top of the long deregulation wave and likely headed for tighter control of the financial sector – if not this year, then soon – where do you want to be in the political equation?
You can resist change, but this is just asking for trouble. You know that individual (lightly regulated) funds – whether or not these are officially “hedge funds” is irrelevant - will have high profile trouble. The latest alleged tunneling details in the case of Danny Pang are a precursor to broader social fascination with this phenomenon – you know that a dozen screenwriters are already at work. Sooner or later, there will be a more focused backlash against specific practices revealed or implied in this kind of case.
At the same time, the broader Treasury attempt to respond with only milder controls over big banks will likely also run into trouble (see my latest Economix column), so more social pressure will appear from that direction also. Big banks repeatedly get into serious scrapes, but their political clout consistently allows them to deflect attention onto others. The idea that big banks and hedge funds have some natural congruence of political interests in this space is simply wrong.
In fact, if hedge funds dig in too deeply with “the crisis was not our fault” position, that is just asking for trouble – and to be scapegoated – down the road. It would be much smarter to get out ahead of the political dynamic, and to propose ways to measure, control, and regulate risk.
Voluntarily keeping hedge funds “small enough to fail,” without endangering the system, would also make sense – particularly if accompanied by a complementary political strategy that emphasizes that it is big banks that have done almost all the damage.
By Simon Johnson
Questions about Doctors
Posted: 26 Jun 2009 01:30 PM PDT
Greg Mankiw posts data showing that doctors in the U.S. make much more than doctors elsewhere. From a 1999 paper by Uwe Reinhardt, among others:
As a dollar amount, U.S. per capita spending for physician services was the highest in the OECD in 1999: $988, compared with an OECD median of $342. . . .
In 1996, the most recent year for which data are available for multiple countries, the average U.S. physician income was $199,000. The comparable OECD median physician income was $70,324.* The ratio of the average income of U.S. physicians to average employee compensation for the United States as a whole was about 5.5. Germany’s was the next highest, at only 3.4; Canada, 3.2; Australia, 2.2; Switzerland, 2.1; France, 1.9; Sweden, 1.5; and the United Kingdom, 1.4.
Mankiw posts three discussion questions. I’m just going to take a stab at the second one:
On the issue of doctor training: Suppose that in country A physicians get free training through a taxpayer-financed educational system, while in country B physicians finance their own education and then, once trained, are paid higher fees. (a) If country A classifies these training expenses as education rather than healthcare spending, which country would report higher healthcare costs? (b) Is that difference in healthcare costs real or an artifact of labeling? (c) In which country would doctors, once trained, have more incentive to work long hours? (d) In which country would there be more doctors? (e) Which country’s system, in your judgment, is more efficient and equitable?
(a)-(b) I get Mankiw’s rhetorical point. And I guess it makes sense to count educational costs as part of the production costs of healthcare. But $199,000 – $70,000 = $120,000. So the higher med-school costs people pay in the U.S. get made up in two years out of a career of 30-40 years.
(c) The short answer is that physicians would have more incentive in country B (the U.S.), because the marginal return on labor is higher. But do we want doctors working longer hours? Medicine is not like, say, baking bread – the more hours you put in, the more good stuff you end up with. We are already the country with the highest hourly wages, and one of our major problems is not lack of doctoring capacity, at least not in aggregate; on the contrary, we have the problem of overutilization of many types of services (the expensive ones). Put another way, because we have higher wages for expensive procedures, we have doctors working longer hours doing those procedures by prescribing more of those procedures than are medically appropriate. Because we overcompensate for some services and undercompensate for others (relative to each other), we have too few of some kinds of doctors (family practice, for example) – but that is a product of the way we pay for healthcare, not the way we produce doctors.
(d) You should get more doctors in whichever country gives you the higher aggregate returns to being a doctor. Right now that’s the U.S. But the key point here is not the financing of medical school; it’s the constraint on the number of doctors enforced by the American Medical Association. That’s why, as Mankiw points out, we actually have fewer doctors per capita than the average OECD country.
(e) I’ll leave that as an exercise for you.
* Yes, it says “average” for the U.S. and “median” for the OECD. I can’t tell from the original paper if that is accurate or not. The rest of the paragraph says it is dealing with averages. In any case, I think it’s fair to assume that the median U.S. doctor made well over $70,324 in 1996.
Hedge Funds Make A Political Mistake
Posted: 26 Jun 2009 03:08 AM PDT
The political flavor of the month is to push back against even the Obama adminstration’s mildly reformist inclinations on finance (e.g., Peter Weinberg in today’s FT is a nice example). And, of course, once you hire a lobbyist, he or she tells you that “winning” means stirring up Congress in favor of the status quo. Measured in these terms, the hedge fund industry has had a string of notable recent victories effectively preventing tighter regulation.
Advocates have a point, of course, when they argue that big banks rather than hedge funds were primarily responsible for crisis. But this misses where we are in the long-cycle of regulation/deregulation. Look at this picture (source: WSJ; more on Ariell Reshef’s webpage).
If we’re at the top of the long deregulation wave and likely headed for tighter control of the financial sector – if not this year, then soon – where do you want to be in the political equation?
You can resist change, but this is just asking for trouble. You know that individual (lightly regulated) funds – whether or not these are officially “hedge funds” is irrelevant - will have high profile trouble. The latest alleged tunneling details in the case of Danny Pang are a precursor to broader social fascination with this phenomenon – you know that a dozen screenwriters are already at work. Sooner or later, there will be a more focused backlash against specific practices revealed or implied in this kind of case.
At the same time, the broader Treasury attempt to respond with only milder controls over big banks will likely also run into trouble (see my latest Economix column), so more social pressure will appear from that direction also. Big banks repeatedly get into serious scrapes, but their political clout consistently allows them to deflect attention onto others. The idea that big banks and hedge funds have some natural congruence of political interests in this space is simply wrong.
In fact, if hedge funds dig in too deeply with “the crisis was not our fault” position, that is just asking for trouble – and to be scapegoated – down the road. It would be much smarter to get out ahead of the political dynamic, and to propose ways to measure, control, and regulate risk.
Voluntarily keeping hedge funds “small enough to fail,” without endangering the system, would also make sense – particularly if accompanied by a complementary political strategy that emphasizes that it is big banks that have done almost all the damage.
By Simon Johnson
Saturday, May 16, 2009
Nocera -- A Very Good Read
http://www.nytimes.com/2009/05/16/business/16nocera.html?pagewanted=1&8dpc
and this further blog from NYT's Executive Suite:
http://executivesuite.blogs.nytimes.com/2009/05/15/a-hedge-fund-exit-interview/#comment-49257
and this further blog from NYT's Executive Suite:
http://executivesuite.blogs.nytimes.com/2009/05/15/a-hedge-fund-exit-interview/#comment-49257
Sunday, April 26, 2009
Hedge Fund Arms Race
This explains why my order is executed before my finger is off the button:
http://norris.blogs.nytimes.com/2009/04/24/hedge-fund-arms-race/
http://norris.blogs.nytimes.com/2009/04/24/hedge-fund-arms-race/
Wednesday, April 15, 2009
Sunday, April 12, 2009
The Wall Street "Talent" Merely Reforms Into Smaller Units
Does that mean all of TARP is for naught, as the problem is in the minds of individuals and not corporations? A core issue:
http://www.nytimes.com/2009/04/12/business/12wall.html?hp
and somewhat related, showing the inverse (obverse? reverse?) issue, What Our College Brightest Are Flocking to These Days, now that investment banking has been disgraced:
http://www.nytimes.com/2009/04/12/weekinreview/12lohr.html?hp
http://www.nytimes.com/2009/04/12/business/12wall.html?hp
and somewhat related, showing the inverse (obverse? reverse?) issue, What Our College Brightest Are Flocking to These Days, now that investment banking has been disgraced:
http://www.nytimes.com/2009/04/12/weekinreview/12lohr.html?hp
Wednesday, April 8, 2009
Thank You For Your Tips on Robbing Me, Robber of My House! Soros Warns
(c) 2009 F. Bruce Abel
Believe it or not this is my first post on just plain "Soros." I see I have one previous blog entry labeled "soros.friedman" which I will now look at. In the meantime read -- and see -- what he said in this interview yesterday. It isn't pretty:
http://finance.yahoo.com/tech-ticker/article/226767/Soros-Says-Fed-in-a-Bind-Beware-Stagflation-Bursting-of-Bond-Bubble?tickers=dia,spy,GDX,GLD,TLT,TLB,TIP
Well, reader I went back and read the earlier entry. Wow! You should do the same.
If you believe that the likes of Soros caused this horrible vomitus, or even partly caused this crisis, then you must conclude there is something unseemly about Soros, whose hedge fund now has been "exposed" as having profited anticipating this mess, allowed to be interviewed and revealed as the genius he is! It's the robber telling you how he robbed your house. Oh thank you robber!
Instead, Robber, why don't you first give us our money back before telling us how you will rob us!
See the problem?
Believe it or not this is my first post on just plain "Soros." I see I have one previous blog entry labeled "soros.friedman" which I will now look at. In the meantime read -- and see -- what he said in this interview yesterday. It isn't pretty:
http://finance.yahoo.com/tech-ticker/article/226767/Soros-Says-Fed-in-a-Bind-Beware-Stagflation-Bursting-of-Bond-Bubble?tickers=dia,spy,GDX,GLD,TLT,TLB,TIP
Well, reader I went back and read the earlier entry. Wow! You should do the same.
If you believe that the likes of Soros caused this horrible vomitus, or even partly caused this crisis, then you must conclude there is something unseemly about Soros, whose hedge fund now has been "exposed" as having profited anticipating this mess, allowed to be interviewed and revealed as the genius he is! It's the robber telling you how he robbed your house. Oh thank you robber!
Instead, Robber, why don't you first give us our money back before telling us how you will rob us!
See the problem?
Monday, April 6, 2009
Oh Shaw Summers!
[Before you delve into what follows, be sure to click onto the 157 "comments" of this New York Times article of this morning. The thoughtful ones are quite articulate on the delicate nature of the problem we are facing, and exactly who can extract us from the problems, and thus exectly who has the knowledge of what's going on, with trillions in the balance, too.]
"It is a quicksilver business and wildly lucrative."
From the second page of that article:
[D. E. Shaw] is nothing like a button-down Wall Street brokerage firm. Jeans, sweatshirts and sandals are common. The firm has not one, but two libraries, where textbooks on computer coding are stacked near academic finance journals dating to the 1960s. For a time, the décor included light bulbs strung from the ceiling on
various lengths of wire, each determined by a computerized random-number generator.
========================
Financial disclosure form, released by the White House:
Lawrence E. Summers, director, National Economic Council
Related
Financial Industry Paid Millions to Obama Aide (April 4, 2009)
Times Topics: Lawrence H. Summers
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===========================
It is a quicksilver business and wildly lucrative. Mr. Shaw is said to be worth $2.7 billion, and today his firm manages $30 billion.
At Shaw, Mr. Summers, the professor, was often the student. The arrogant personal style that turned off some Harvard colleagues seemed to evaporate, Shaw traders say. Mr. Summers immersed himself in dynamic hedging, Libor rates and other financial arcana. He seemed to fit in among Shaw’s math-loving “quants,” as devotees of math-heavy quantitative investing are known. Traders joked that Mr. Summers was the first quant Treasury secretary because he had once ordered dollar bills to
be printed with the transcendental number pi — 3.14159... — as the serial number.
“We could call or e-mail him anytime,” a former Shaw trader said. “He always asked me more questions than I could ask him. He would dig through my entire way of thinking.”At Harvard and at Shaw, Mr. Summers cultivated a small circle of financial professionals — particularly hedge fund managers — to serve as an informal brain trust. He consults with them on policy matters from his perch in the White House. Among these insiders are Kenneth D. Brody and Frank P. Brosens, the foundingpart-ners of another hedge fund, Taconic Capital Advisors, for whom Mr. Summers did consulting work from 2004 to 2006.
Mr. Summers reached out to Mr. Brosens in December to discuss the Obama administration’s economic priorities. This year, he campaigned to have him run
the federal office overseeing the $700 billion bailout program. Mr. Brosens withdrew his name from consideration last month. Others in this inner circle include Nancy Zimmerman, a longtime friend and hedge fund manager in Boston; Laurence
D. Fink, the chairman and chief executive of BlackRock, a large money management company that hopes to play a potentially lucrative role in the administration’s bank rescue plan; H. Rodgin Cohen, the chairman of the law firm Sullivan & Cromwell, who was briefly considered for a senior Treasury post; and three other top fund managers, Orin S. Kramer, Ralph L. Schlosstein and Eric M. Mindich.
Friends of Mr. Summers say he has always been meticulous about avoiding conflicts of interest and that he was just as careful at D. E. Shaw. For instance, Mr. Summers went to lengths to pay the Social Security taxes on payments he made to even occasional babysitters from the 1980s, said Jeremy Bulow, an economics professor at Stanford, who has known Mr. Summers since graduate school.“To Larry, it was not about figuring out where the line is and making sure you’re on one side of it,” Mr. Bulow said. “He would never even get close to it.”
In addition to his salary at Shaw, Mr. Summers enjoyed growing wealth through investments in the firm’s funds. Unlike most hedge funds, which lost money as the markets plunged in 2008, Shaw posted returns of about 7 percent in its so-called macroeconomic fund. A separate multistrategy fund lost 8 percent, far less than most hedge funds.
When investors rushed en masse to withdraw their money from hedge funds last year, Shaw asserted its right to block redemptions from its fund. An exception was
made for Mr. Summers, however, because the White House job he was taking required him to divest. A spokesman for Shaw said Mr. Summers’s main job was
not to act as a salesman. But in the fall of 2007, as the financial crisis simmered, Mr. Summers traveled to Dubai for a series of meetings with Shaw’s marketing staff and potential investors. Bankers from across the region flew in for the event. Mr. Summers spoke at several lavish dinners and met with local parties involved in Shaw’s real estate investments in the area, people briefed on his trip said. Last September, Mr. Summers explained to Shaw traders what appeared to be an aberration in a key interest rate, the London interbank offered rate, or Libor, thus helping its traders avoid losses. He spoke at the firm’s 20th anniversary gathering for its investors and at a prominent hedge fund investor conference in Boston, weeks before the presidential election. In December, he attended the firm’s annual holiday party, held in the American Museum of Natural History in New York, beneath the giant model of a blue whale. Even so, Mr. Summers, who, before the crisis broke out, spoke and wrote about the need for greater financial regulation, has not resisted the efforts to tighten up on hedge funds like Shaw. The administration, for instance, is moving toward closing a tax loophole that these funds have long enjoyed. A White House spokeswoman says his actions supporting hedge fund regulation prove he is not biased.
Some people in the financial world say they have more confidence in the White House’s plans because of Mr. Summers’ time at D. E. Shaw. “He had insights into one of the best hedge funds in the world. That can only add value to the things the government is struggling with right now,” said Robert Borden, chief investment officer of South Carolina’s pension fund, which has invested $350 million with Shaw. Mr. Borden met Mr. Summers to discuss how much money a large institution should allocate to hedge funds. “It was a nice perk to have access to some of his thoughts and insights,“ Mr. Borden said.Mr. Summers’s experience in hedge funds might leave some wondering if he will return to private investing when his latest White House assignment ends, perhaps even to run his own lucrative fund. Asked about that, Mr. Shaw laughed. “Oh, boy, I have no idea,” he said. “Thankfully he’s doing what he’s doing. I’m really glad he’s running this. It’s a scary time, and I can’t think of anybody I’d rather see there.”
As readers of this Blog know, I admire and value Larry Summers. But this article goes deeper into his connection with the Shaw Hedge Fund. Does it trouble me? Not really. Larry has his heart in the right place I believe.
What does trouble me is that articles like this make me realize that there are Masters of the Universe out there with black boxes that "see" things that I never could. Moreover they see things that investment advisers cannot see either. Who can compete with them?
And to invest with them requires more money than I have.
But this is off the point as posed implicitly by the New York Times.
Saturday, April 4, 2009
Wednesday, March 25, 2009
Saturday, January 17, 2009
Andy Redleaf -- You've Gotta Read This
I know, I just used this header yesterday. But it got me a lot of readers. Using it today is an experiment. I don't put the following in the same category as yesterdays. Hence I'll take a hit on credibility for the purpose of experimentation.
Still, Andy Redleaf deserves credit for forseeing what happened in the market. Read on.
http://www.nytimes.com/2007/10/03/business/03hedge.html?pagewanted=1
And then this CNBC interview a day later (note where the Dow was that day, etc.):
http://www.youtube.com/watch?v=iUMC81nNabg
Still, Andy Redleaf deserves credit for forseeing what happened in the market. Read on.
http://www.nytimes.com/2007/10/03/business/03hedge.html?pagewanted=1
And then this CNBC interview a day later (note where the Dow was that day, etc.):
http://www.youtube.com/watch?v=iUMC81nNabg
Tuesday, December 9, 2008
Thursday, December 4, 2008
Fortress the Hedge Fund -- Not!
Market Place
Fortress, the Hedge Fund, Is Crumbling
new_york_times:http://www.nytimes.com/2008/12/04/business/04place.html
By MICHAEL J. DE LA MERCED
Published: December 3, 2008
When Wesley R. Edens and his partners founded their investment firm a decade ago, they chose a name that evoked unshakeable bastions: Fortress.
Wesley R. Edens, a co-founder of the Fortress Investment Group, paved the way for even splashier initial public offerings.
Related
Times Topics: Credit Crisis — The Essentials
Fortress Investment Group Llc
But now their stronghold is under siege — and some of its investors are running for cover.
Cracks are spreading throughout the Fortress Investment Group, once a leading player in the worlds of hedge funds and leveraged buyouts. On Wednesday, Fortress’s shares fell 25 percent to $1.87, a new low, after the company temporarily suspended withdrawals from its largest hedge fund. Investors had asked to withdraw $3.51 billion from the money-losing fund, Drawbridge Global Macro.
But Wednesday’s slide was just the latest turn in a long, downward spiral for Fortress. The once-celebrated company has lost 89 percent of its market value over the last year as hedge funds and private equity, once lucrative businesses that helped define an era of unrivaled Wall Street wealth, have crumbled in the credit crisis.
It is a remarkable turnabout for Fortress, which less than two years ago was soaring along with the rest of Wall Street. Its debut as a public company, in February 2007, was heralded as the dawn of a new age of big hedge funds and buyout firms. Mr. Edens, a former executive at Lehman Brothers and BlackRock, and his fellow founders became instant billionaires. Their deal paved the way for even splashier initial public offerings by the likes of the Blackstone Group.
But life as public companies has proved treacherous for Fortress, Blackstone and the other so-called alternative investment firms that sold stock to the public shortly before the credit crisis erupted. They have had to contend with the harsh judgment of stockholders as the credit on which they depend has grown increasingly scarce.
“Frankly, it’s very difficult to say anything other than that I would have no interest as an investor in holding or buying these shares,” Jackson Turner, an analyst at Argus Research, said. Mr. Turner has a sell rating on Fortress shares.
A Fortress spokeswoman declined to comment.
Fortress’s plight reflects the ills plaguing much of high finance. Investors are abandoning hedge funds in growing numbers, and the industry, once so profitable, is now in the midst of a wrenching shakeout.
Even before Fortress lowered the gates on redemptions at its Drawbridge Global Macro fund, other big-name hedge funds had done so. More are expected to follow suit. Some investors fear that a rush of withdrawals could force funds to dump investments en masse, unsettling already shaky financial markets.
Fortress’s biggest fund is withering. In a regulatory filing on Wednesday, Fortress said that Drawbridge Global would have about $3.7 billion in assets under management as of Jan. 1, compared to the $8 billion it reported having as of Sept. 30.
But while Fortress’s earnings will suffer because of the redemptions — hedge funds earn fees based on both the amount of assets they manage and the performance of those funds — the withdrawals alone do not necessarily spell the company’s doom. Less than 30 percent of Fortress’s $34 billion in assets under management are subject to investor redemptions. Most are locked up in private equity funds that do not allow quick withdrawals of capital.
Still, private equity firms have been hurt by the near-freeze in the credit markets, which has limited their ability to strike new deals and dealt a severe blow to many of the debt-laden companies they own.
Fortress dodged a major setback when it managed to refinance IntraWest, the big Canadian ski resort. But investors worry that Fortress has taken damage from its exposure to the commercial real estate market, which is coming under severe stress. Fortress was a major lender to Harry Macklowe, the real estate mogul, who had to sell off trophy properties like the General Motors Building in Manhattan to pay back his creditors.
Just as it was the first major alternative-investment manager to go public, Fortress is now being watched closely as a canary in the coal mine. The Drawbridge fund’s nearly 50 percent redemption rate far outpaces the 20 to 30 percent that the market had expected at hedge funds on average, said Roger Freeman, an analyst at Barclays Capital.
“From my standpoint, I wonder how many other funds are seeing similar redemption rates,” he said. “This is definitely a negative indicator for the industry.”
For months, Fortress has been the subject of gallows humor suggesting that it might simply buy back its shares and take itself private once more. While the company’s executives have asserted their commitment to remaining public, several analysts said that Fortress’s problems were clearly intensified by the brighter light that comes with being a public company.
“It forces their problems to be out in the open,” Mr. Turner said. “It made the issues that they have much more amplified.”
Fortress Loss Is Larger Than Forecast (November 14, 2008)
MARKET PLACE; Unfazed by Market Ills, Hedge Fund Has Debut (November 14, 2007)
Fortress Investment Battered by Wider Loss (August 15, 2007)
First Offering of a Hedge Fund Is Bid Up 67% on Opening Day (February 10, 2007)
Fortress, the Hedge Fund, Is Crumbling
new_york_times:http://www.nytimes.com/2008/12/04/business/04place.html
By MICHAEL J. DE LA MERCED
Published: December 3, 2008
When Wesley R. Edens and his partners founded their investment firm a decade ago, they chose a name that evoked unshakeable bastions: Fortress.
Wesley R. Edens, a co-founder of the Fortress Investment Group, paved the way for even splashier initial public offerings.
Related
Times Topics: Credit Crisis — The Essentials
Fortress Investment Group Llc
But now their stronghold is under siege — and some of its investors are running for cover.
Cracks are spreading throughout the Fortress Investment Group, once a leading player in the worlds of hedge funds and leveraged buyouts. On Wednesday, Fortress’s shares fell 25 percent to $1.87, a new low, after the company temporarily suspended withdrawals from its largest hedge fund. Investors had asked to withdraw $3.51 billion from the money-losing fund, Drawbridge Global Macro.
But Wednesday’s slide was just the latest turn in a long, downward spiral for Fortress. The once-celebrated company has lost 89 percent of its market value over the last year as hedge funds and private equity, once lucrative businesses that helped define an era of unrivaled Wall Street wealth, have crumbled in the credit crisis.
It is a remarkable turnabout for Fortress, which less than two years ago was soaring along with the rest of Wall Street. Its debut as a public company, in February 2007, was heralded as the dawn of a new age of big hedge funds and buyout firms. Mr. Edens, a former executive at Lehman Brothers and BlackRock, and his fellow founders became instant billionaires. Their deal paved the way for even splashier initial public offerings by the likes of the Blackstone Group.
But life as public companies has proved treacherous for Fortress, Blackstone and the other so-called alternative investment firms that sold stock to the public shortly before the credit crisis erupted. They have had to contend with the harsh judgment of stockholders as the credit on which they depend has grown increasingly scarce.
“Frankly, it’s very difficult to say anything other than that I would have no interest as an investor in holding or buying these shares,” Jackson Turner, an analyst at Argus Research, said. Mr. Turner has a sell rating on Fortress shares.
A Fortress spokeswoman declined to comment.
Fortress’s plight reflects the ills plaguing much of high finance. Investors are abandoning hedge funds in growing numbers, and the industry, once so profitable, is now in the midst of a wrenching shakeout.
Even before Fortress lowered the gates on redemptions at its Drawbridge Global Macro fund, other big-name hedge funds had done so. More are expected to follow suit. Some investors fear that a rush of withdrawals could force funds to dump investments en masse, unsettling already shaky financial markets.
Fortress’s biggest fund is withering. In a regulatory filing on Wednesday, Fortress said that Drawbridge Global would have about $3.7 billion in assets under management as of Jan. 1, compared to the $8 billion it reported having as of Sept. 30.
But while Fortress’s earnings will suffer because of the redemptions — hedge funds earn fees based on both the amount of assets they manage and the performance of those funds — the withdrawals alone do not necessarily spell the company’s doom. Less than 30 percent of Fortress’s $34 billion in assets under management are subject to investor redemptions. Most are locked up in private equity funds that do not allow quick withdrawals of capital.
Still, private equity firms have been hurt by the near-freeze in the credit markets, which has limited their ability to strike new deals and dealt a severe blow to many of the debt-laden companies they own.
Fortress dodged a major setback when it managed to refinance IntraWest, the big Canadian ski resort. But investors worry that Fortress has taken damage from its exposure to the commercial real estate market, which is coming under severe stress. Fortress was a major lender to Harry Macklowe, the real estate mogul, who had to sell off trophy properties like the General Motors Building in Manhattan to pay back his creditors.
Just as it was the first major alternative-investment manager to go public, Fortress is now being watched closely as a canary in the coal mine. The Drawbridge fund’s nearly 50 percent redemption rate far outpaces the 20 to 30 percent that the market had expected at hedge funds on average, said Roger Freeman, an analyst at Barclays Capital.
“From my standpoint, I wonder how many other funds are seeing similar redemption rates,” he said. “This is definitely a negative indicator for the industry.”
For months, Fortress has been the subject of gallows humor suggesting that it might simply buy back its shares and take itself private once more. While the company’s executives have asserted their commitment to remaining public, several analysts said that Fortress’s problems were clearly intensified by the brighter light that comes with being a public company.
“It forces their problems to be out in the open,” Mr. Turner said. “It made the issues that they have much more amplified.”
Fortress Loss Is Larger Than Forecast (November 14, 2008)
MARKET PLACE; Unfazed by Market Ills, Hedge Fund Has Debut (November 14, 2007)
Fortress Investment Battered by Wider Loss (August 15, 2007)
First Offering of a Hedge Fund Is Bid Up 67% on Opening Day (February 10, 2007)
Thursday, November 13, 2008
Hedge Funds
new_york_times:http://www.nytimes.com/2008/11/13/business/13hedge.html
By LOUISE STORY
Published: November 12, 2008
Hedge fund managers usually shun the spotlight. But five of them, billionaires all, are about to come under the glare on Capitol Hill.
The money managers — Philip Falcone, Kenneth C. Griffin, John Paulson, James Simons and George Soros — have been called by a House panel to discuss some of their trade secrets at a hearing on Thursday.
The topics are likely to include the managers’ use of leverage — the borrowed money that fuels investment returns on the way up but can be devastating on the way down — and the managers’ pay.
Also front and center will be the matter of oversight, one of the most contentious issues confronting the loosely regulated hedge fund industry. Regulation, or the lack of it, has been an issue since the 1990s, but it has come to the fore this year as questions have swirled about hedge funds’ role in the financial crisis.
Legislators want to know what went wrong on Wall Street, where hedge funds often play a huge part. The nearly $2 trillion industry manages money for some of the largest pension funds and contributes to the twists and turns of the markets. Hedge fund traders are among the highest-paid workers in finance, commonly making millions, and sometimes billions, a year.
The five managers to testify before the House Committee on Oversight and Government Reform were selected because they each earned more than $1 billion in 2007. They range from industry veterans like Mr. Soros, who is known for his liberal political views and donations, to traders like Mr. Paulson, who foresaw the problems in the subprime mortgage market and made billions betting against mortgage investments.
“Some experts call them the shadow banking system because they operate almost entirely unregulated,” said Representative Henry A. Waxman, Democrat of California, the chairman of the committee. “Very little is known about how they operate and the types of systemic risk they can generate.”
As policy makers consider overhauling the rules that apply to mortgage lenders, bankers and investors, hedge funds may also face new requirements for the disclosure of their trading methods. The Federal Reserve and other regulatory agencies have been studying the effects of hedge funds on the market, and questions linger over what the government would do if a large hedge fund began to collapse.
“On Capital Hill, there certainly is appetite for more hedge fund regulation,” said Houman B. Shadab, a senior research fellow at the Mercatus Center at George Mason University, who will testify at the House hearing. “It’s not obvious to me that hedge funds caused this crisis, but they have been affected by it, there’s no doubt about that.”
Three of the hedge fund managers who are testifying are facing huge losses. Mr. Griffin, who started trading in the 1980s out of his Harvard dorm room, has two funds down more than 30 percent this year. His company, Citadel Investment Group, is viewed as a bellwether for the industry because it trades in most types of assets, but two of his funds are down more than the 20 percent that is the average loss among hedge funds, according to estimates from Hedge Fund Research, a firm in Chicago that tracks the industry.
Mr. Falcone, a stock-picker who runs Harbinger Capital, is down after a disastrous September and October.
Mr. Simons is a former mathematics professor who runs Renaissance Technologies, a secretive trading operation in Long Island that makes bets based on computer models. One of Renaissance’s institutional stock funds is down 14 percent this year. However, Renaissance marketed the fund as one that would beat the broader stock market, which it is doing.
Hedge funds already follow some regulations. Funds that trade in commodities, for instance, have to disclose some holdings to the Commodity Futures Trading Commission. And large hedge funds are required to publicly disclose substantial stock holdings through the Securities and Exchange Commission. Since September, hedge funds have also disclosed short sales to the S.E.C., but not to the public.
The industry’s association, the Managed Funds Association, and a group of hedge funds met with regulators in October to discuss the effects of the crisis. The president of the hedge fund association is Richard H. Baker, a Republican who represented a district in Louisiana in the House of Representatives until earlier this year. For 12 years, Mr. Baker was chairman of the subcommittee on capital markets within the House Financial Services Committee.
Mr. Baker will not be attending the hearing because he was so recently a member of Congress. But analysts said he would be heavily involved in the battle to come over hedge funds.
“He was an early warner about Fannie and Freddie,” said Robert Litan, vice president for research and policy at the Kauffman Foundation, an organization dedicated to the promotion of entrepreneurship. “He’ll say, ‘Look, I called Fannie and Freddie correctly. I know a crisis when I see it.’ ”
By LOUISE STORY
Published: November 12, 2008
Hedge fund managers usually shun the spotlight. But five of them, billionaires all, are about to come under the glare on Capitol Hill.
The money managers — Philip Falcone, Kenneth C. Griffin, John Paulson, James Simons and George Soros — have been called by a House panel to discuss some of their trade secrets at a hearing on Thursday.
The topics are likely to include the managers’ use of leverage — the borrowed money that fuels investment returns on the way up but can be devastating on the way down — and the managers’ pay.
Also front and center will be the matter of oversight, one of the most contentious issues confronting the loosely regulated hedge fund industry. Regulation, or the lack of it, has been an issue since the 1990s, but it has come to the fore this year as questions have swirled about hedge funds’ role in the financial crisis.
Legislators want to know what went wrong on Wall Street, where hedge funds often play a huge part. The nearly $2 trillion industry manages money for some of the largest pension funds and contributes to the twists and turns of the markets. Hedge fund traders are among the highest-paid workers in finance, commonly making millions, and sometimes billions, a year.
The five managers to testify before the House Committee on Oversight and Government Reform were selected because they each earned more than $1 billion in 2007. They range from industry veterans like Mr. Soros, who is known for his liberal political views and donations, to traders like Mr. Paulson, who foresaw the problems in the subprime mortgage market and made billions betting against mortgage investments.
“Some experts call them the shadow banking system because they operate almost entirely unregulated,” said Representative Henry A. Waxman, Democrat of California, the chairman of the committee. “Very little is known about how they operate and the types of systemic risk they can generate.”
As policy makers consider overhauling the rules that apply to mortgage lenders, bankers and investors, hedge funds may also face new requirements for the disclosure of their trading methods. The Federal Reserve and other regulatory agencies have been studying the effects of hedge funds on the market, and questions linger over what the government would do if a large hedge fund began to collapse.
“On Capital Hill, there certainly is appetite for more hedge fund regulation,” said Houman B. Shadab, a senior research fellow at the Mercatus Center at George Mason University, who will testify at the House hearing. “It’s not obvious to me that hedge funds caused this crisis, but they have been affected by it, there’s no doubt about that.”
Three of the hedge fund managers who are testifying are facing huge losses. Mr. Griffin, who started trading in the 1980s out of his Harvard dorm room, has two funds down more than 30 percent this year. His company, Citadel Investment Group, is viewed as a bellwether for the industry because it trades in most types of assets, but two of his funds are down more than the 20 percent that is the average loss among hedge funds, according to estimates from Hedge Fund Research, a firm in Chicago that tracks the industry.
Mr. Falcone, a stock-picker who runs Harbinger Capital, is down after a disastrous September and October.
Mr. Simons is a former mathematics professor who runs Renaissance Technologies, a secretive trading operation in Long Island that makes bets based on computer models. One of Renaissance’s institutional stock funds is down 14 percent this year. However, Renaissance marketed the fund as one that would beat the broader stock market, which it is doing.
Hedge funds already follow some regulations. Funds that trade in commodities, for instance, have to disclose some holdings to the Commodity Futures Trading Commission. And large hedge funds are required to publicly disclose substantial stock holdings through the Securities and Exchange Commission. Since September, hedge funds have also disclosed short sales to the S.E.C., but not to the public.
The industry’s association, the Managed Funds Association, and a group of hedge funds met with regulators in October to discuss the effects of the crisis. The president of the hedge fund association is Richard H. Baker, a Republican who represented a district in Louisiana in the House of Representatives until earlier this year. For 12 years, Mr. Baker was chairman of the subcommittee on capital markets within the House Financial Services Committee.
Mr. Baker will not be attending the hearing because he was so recently a member of Congress. But analysts said he would be heavily involved in the battle to come over hedge funds.
“He was an early warner about Fannie and Freddie,” said Robert Litan, vice president for research and policy at the Kauffman Foundation, an organization dedicated to the promotion of entrepreneurship. “He’ll say, ‘Look, I called Fannie and Freddie correctly. I know a crisis when I see it.’ ”
Friday, October 17, 2008
Wall Street Hedge Fund Crooks re Lehman
[my new technique: take the portable laptop and turn on the TIVO of the previous night's Mad Money. Push "control+shift+n" to bring up Notepad. Push F5 to get the time printed on the top. Then take notes on important things Cramer says] Then cut and paste as appropriate and post to this blog.]
Kesselschlacht, pure and simple.
======
lehman bonds
$158 billion in debt
hedge funds were allowed (Cramer's words) by Chris Cox at SEC to buy $360 billion of insur contracts on those debts. that much "fire ins" ie overinsuring your house and then burning it down for the insurance.
then the hedge funds:
short selling AIG common-- Kesselschlacht
after buying insurance on Lehman's bonds going down, and then "torching" lehman by badmouthing them and calling Wall Street etc.
aig was the biggest underwriter of lehman bonds
so now us govt will have to cover this!
8:06 AM 10/17/2008
oct 21
we will find out just how bankrupt aig is
when leh insur contracts have to be paid off!
Kesselschlacht, pure and simple.
======
lehman bonds
$158 billion in debt
hedge funds were allowed (Cramer's words) by Chris Cox at SEC to buy $360 billion of insur contracts on those debts. that much "fire ins" ie overinsuring your house and then burning it down for the insurance.
then the hedge funds:
short selling AIG common-- Kesselschlacht
after buying insurance on Lehman's bonds going down, and then "torching" lehman by badmouthing them and calling Wall Street etc.
aig was the biggest underwriter of lehman bonds
so now us govt will have to cover this!
8:06 AM 10/17/2008
oct 21
we will find out just how bankrupt aig is
when leh insur contracts have to be paid off!
Tuesday, October 14, 2008
Hedge Fund Down
This story, rather bland, assumes investing is easy during certain periods. Perhaps, with other people's money. Or perhaps the writer is a novice.
new_york_times:http://www.nytimes.com/2008/10/14/business/14hedge.html
By LOUISE STORY
Published: October 13, 2008
Only 10 months ago, Remy Trafelet was so flush that he treated about 100 employees at his hedge fund to a getaway in Venice. He and his crew spent a long, luxurious weekend at the five-star Hotel Bauer, which has Murano glass chandeliers, private gondoliers and a splendid view of a 17th-century basilica.
But now a bit like Venice, Mr. Trafelet’s hedge fund seems to be sinking. His flagship fund has fallen about 26 percent this year, and Mr. Trafelet is struggling to hold on to anxious employees, as well as some investors.
Perhaps the most remarkable thing about Mr. Trafelet is that he is not so remarkable at all. Thousands of hedge fund managers like him — mostly young, mostly male and virtually all unknown outside financial circles — confront a sober reality: for now, the days of easy money are over.
The economics of the hedge fund industry, so lucrative on the way up, are trying even the most seasoned managers on the way down. Hotshots who amassed millions or even billions of dollars from deep-pocketed investors are struggling to persuade those backers to stick with them. For the $2 trillion hedge fund industry, a long-feared shakeout is at hand. Some analysts say one out of every 10 funds could fold.
Mr. Trafelet, who is 38 and first made his name managing money at the mutual fund giant Fidelity, insists his Trafelet & Company will be one of the survivors. He has been through rough patches before and says he is not about to give up now.
“There is an easy way out, but I’m not the one who is going to take it,” Mr. Trafelet said in an investor call on Thursday. “I feel an absolute personal and moral obligation to work as hard as possible especially through a difficult period.”
Still, managers like Mr. Trafelet confront formidable challenges. His fund has dwindled to about $3 billion, from $6 billion at its peak in 2006. It has been three years since he produced the kind of double-digit returns that many funds generated in the industry’s heyday, before thousands of new managers crowded in and made spotting profitable trades far more difficult.
It might be easy to dismiss Mr. Trafelet’s story as a simple tale of a highflier falling back to earth. But the fortunes of the hedge fund industry matter to nearly every investor big or small. In recent years, public and corporate pension funds, endowments and foundations poured money into these private investment vehicles in the hope of reaping market-beating returns.
So far this year, the average hedge fund is down 17 percent, about half as much as the Standard & Poor’s 500-stock index.
As losses mount, hedge fund managers are consulting lawyers to determine whether their fiduciary duty dictates that they should shut their doors, liquidate their holdings and use the proceeds to pay back investors — before the losses get worse — or stay in business and try to trade their way out of the hole.
It was easy to look like a star during the bull market. Mr. Trafelet returned 42 percent in 2005, 17 percent in 2004 and 39 percent in 2003. He made money after the technology bubble burst and others struggled.
Mr. Trafelet says he believes he can survive. He said in an interview on Friday morning that he had shifted half of his Delta Institutional fund’s money into cash and that he thought his bets would turn around.
“We wouldn’t be working this hard and investing in the firm if we didn’t see the massive opportunity,” Mr. Trafelet said.
But Trafelet, founded in New York in 2000, is in a weaker position than other hedge funds because the fund returned only 6 percent last year and 2 percent in 2006, according to an investor. Investors who are evaluating whether to leave Mr. Trafelet’s fund versus other funds may choose to remain with funds that made them more money recently.
Much of Trafelet’s money is Mr. Trafelet’s own, so to an extent, he can choose to keep going regardless of investor flight. In the hedge fund world, traders have remade their fortunes dozens of times over, and Mr. Trafelet may impress again in the coming years.
It has been quite a ride for Mr. Trafelet, who developed his taste for stock-picking while attending the elite boarding school Phillips Exeter Academy. After graduating from Dartmouth College, he took a job at Fidelity. By age 25, he was managing a $500 million mutual fund.
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new_york_times:http://www.nytimes.com/2008/10/14/business/14hedge.html
By LOUISE STORY
Published: October 13, 2008
Only 10 months ago, Remy Trafelet was so flush that he treated about 100 employees at his hedge fund to a getaway in Venice. He and his crew spent a long, luxurious weekend at the five-star Hotel Bauer, which has Murano glass chandeliers, private gondoliers and a splendid view of a 17th-century basilica.
But now a bit like Venice, Mr. Trafelet’s hedge fund seems to be sinking. His flagship fund has fallen about 26 percent this year, and Mr. Trafelet is struggling to hold on to anxious employees, as well as some investors.
Perhaps the most remarkable thing about Mr. Trafelet is that he is not so remarkable at all. Thousands of hedge fund managers like him — mostly young, mostly male and virtually all unknown outside financial circles — confront a sober reality: for now, the days of easy money are over.
The economics of the hedge fund industry, so lucrative on the way up, are trying even the most seasoned managers on the way down. Hotshots who amassed millions or even billions of dollars from deep-pocketed investors are struggling to persuade those backers to stick with them. For the $2 trillion hedge fund industry, a long-feared shakeout is at hand. Some analysts say one out of every 10 funds could fold.
Mr. Trafelet, who is 38 and first made his name managing money at the mutual fund giant Fidelity, insists his Trafelet & Company will be one of the survivors. He has been through rough patches before and says he is not about to give up now.
“There is an easy way out, but I’m not the one who is going to take it,” Mr. Trafelet said in an investor call on Thursday. “I feel an absolute personal and moral obligation to work as hard as possible especially through a difficult period.”
Still, managers like Mr. Trafelet confront formidable challenges. His fund has dwindled to about $3 billion, from $6 billion at its peak in 2006. It has been three years since he produced the kind of double-digit returns that many funds generated in the industry’s heyday, before thousands of new managers crowded in and made spotting profitable trades far more difficult.
It might be easy to dismiss Mr. Trafelet’s story as a simple tale of a highflier falling back to earth. But the fortunes of the hedge fund industry matter to nearly every investor big or small. In recent years, public and corporate pension funds, endowments and foundations poured money into these private investment vehicles in the hope of reaping market-beating returns.
So far this year, the average hedge fund is down 17 percent, about half as much as the Standard & Poor’s 500-stock index.
As losses mount, hedge fund managers are consulting lawyers to determine whether their fiduciary duty dictates that they should shut their doors, liquidate their holdings and use the proceeds to pay back investors — before the losses get worse — or stay in business and try to trade their way out of the hole.
It was easy to look like a star during the bull market. Mr. Trafelet returned 42 percent in 2005, 17 percent in 2004 and 39 percent in 2003. He made money after the technology bubble burst and others struggled.
Mr. Trafelet says he believes he can survive. He said in an interview on Friday morning that he had shifted half of his Delta Institutional fund’s money into cash and that he thought his bets would turn around.
“We wouldn’t be working this hard and investing in the firm if we didn’t see the massive opportunity,” Mr. Trafelet said.
But Trafelet, founded in New York in 2000, is in a weaker position than other hedge funds because the fund returned only 6 percent last year and 2 percent in 2006, according to an investor. Investors who are evaluating whether to leave Mr. Trafelet’s fund versus other funds may choose to remain with funds that made them more money recently.
Much of Trafelet’s money is Mr. Trafelet’s own, so to an extent, he can choose to keep going regardless of investor flight. In the hedge fund world, traders have remade their fortunes dozens of times over, and Mr. Trafelet may impress again in the coming years.
It has been quite a ride for Mr. Trafelet, who developed his taste for stock-picking while attending the elite boarding school Phillips Exeter Academy. After graduating from Dartmouth College, he took a job at Fidelity. By age 25, he was managing a $500 million mutual fund.
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