HEDGE FUND NEWS
@ Wed 20 June 2007 : GMT

FINTAG COMMENT

Today we only have one story.

A large US broker with ambitions to lead the world in Alternatives falls into an Amaranth like state and rips its bonus pool apart as it tries to save a subprimed exposed asset management business from being the laughing stock of Wall Street.

With Private Equity incubating start-up hedge funds, maybe they should look at helping out distressed Investment Banks* because there isn't much appetite from the likes of Merrills or JP Morgan. Hedge Funds are garnering up the crumbs but it is all a bit messy and with mass uncertainty about possible litigation re the changing of ISDA's and the political hotcake of throwing out the poor from their houses, it may make sense to keep away for the time being.

* Blackstone tries to save Bear Stearns hedge fund (financialnews-us)

Does Bear Stearns Website Really Say This?

NON BEAR STEARNS NEWS

Wall Street II's new Gordon Gekko character to be based on Finbar Taggit (ftalphaville)

Something To Worry About (breakingviews)

World's oldest man says sorry for his long life (times)

Barclays could drop Eagle logo following Dutch objections (ft)

Hedge funds act to head off the regulators (independent)

China Exploits Children (independent)

China overtakes US as world's biggest CO2 emitter (guardian)

Hedge funds boost Guernsey (icfa)

WE ARE NORMAL

Trichet says hedge funds not irrationally exuberant (reuters)
Hedge funds and the risks they present warrant close monitoring, but do not constitute a bubble, European Central Bank President Jean-Claude Trichet said on Monday.

Asked whether the highly-indebted investment instruments represented the same sort of "irrational exuberance" described by then-Federal Reserve chief Alan Greenspan regarding the stock market in the 1990s, Trichet said: "I would not repeat the words of Alan."

Trichet said he supported a hands-off mechanism of self-regulation for such funds, which would allow them to determine benchmarks for the industry without the coercion of regulators.

Overall, he believes that the global underpricing of risk that has emboldened investors to put money in hedge funds has been "somewhat" corrected. "It can be corrected progressively in a gradual fashion."

He also said an environment of stable prices that allows consumers to maintain their purchasing power is key to achieving sustainable economic growth.

"By ensuring price stability we can create stable growth."

Earlier, in a speech, the ECB chief said globalization does not always lead to lower inflation and should not derail central banks' efforts to keep price increases in check.

Trichet said it would be wrong to conclude that increased economic integration has caused lower inflation, even though this has been the case since the mid-1990s.
"Indeed, the sudden emergence of fast-growing economies in the global economy is exerting upward pressure on prices for mining products and fossil fuels. This phenomenon has been particularly visible since 2003," he said.

Instead, he pointed to structural reforms, rapid technological progress and fiscal and monetary discipline as factors helping to keep prices stable.

Trichet warned against complacency on inflation in the current environment of strong economic growth, arguing that rapid changes in the weighting of various continents in the global economies makes predictions based on historical experience less reliable.

"Globalization does not affect the overriding role of central banks to preserve price stability," he said.

As world financial markets become increasingly linked, he urged regulators to seek common standards internationally for bank supervision and for hedge funds and private equity funds to adopt "best practices" benchmarks to improve their management of risk.

RESIDENTIAL SALE AND LEASEBACK

Should you sell then rent back your home? (thisismoney)
he double bind of bad debts and rising interest rates has led to a growing number of sale-and-rent-back property companies targeting overstretched homeowners.

Sale-and-rent-back agreements allow homeowners to sell their property at a discount price to a company, which will then rent it back to them at market rate.

Despite the fact that they will sell their home for tens of thousands less than it is worth, the advantages of sale-and-rent-back may seem attractive to borrower in arrears, especially as deals are advertised on the basis that they can be conducted swiftly and quietly with no need to tell neighbours or even family.

But there are major drawbacks to dealing with these unregulated firms, some of which may be looking to turn a quick profit from others' misfortune.

Here is what you need to know about the new trend:

What is sale-and-rent-back?

Sale-and-rent-back companies purchase people's homes for less than the market value, typically 70% to 80%, generally paying all fees and costs, and then rent the property back to the original owners at market rent, or sometimes less than their mortgage payments if these were lower than the rental value.

Homeowners can use the cash to settle their existing mortgage and any outstanding debts, while remaining in their own home. Some companies offer the opportunity to buy the house back at market value at a later date.

Why would someone choose sale-and-rent-back?

Selling your home for tens of thousands of pounds less than it is worth is not an attractive prospect. But those fearing repossession due to mortgage arrears and facing large personal debts may see it as a simple way out of trouble.

Companies heavily promote their ability to complete in a week if necessary, their payment of legal fees and willingness to help customers sort out their debts.

Most sale-and-rent-back operators claim vendors may only get 85% of their property's value by selling on the open market and say they will pay between 70% and 90%, depending on a surveyor's valuation.

Firms that offer sale-and-rent-back also promote discretion, saying that neighbours need not know there has been any change in status, while families can stay in the same home and children can continue to attend the same school.

HELPFUL PIRATES

BlackRock sets sights on hedge funds (financialnews-us)
BlackRock said it will buy small stakes in startup hedge funds as traditional fund companies try to replicate the flourishing returns from alternative asset managers.

BlackRock executive Howard Berkowitz, who heads the asset manager's hedge fund group, told a Monaco conference that his company would seek to invest in young alternative assets managers in order to "be on the ground floor and be able to get a great rate of return."

Hedge funds have been hotly pursued by financial services firms: 25 alternative asset managers raised $10bn (€7.4bn) in the past 12 months by selling ownership stakes.

Traditional asset managers, particularly, have struggled to imitate the dramatic returns earned by hedge funds through a variety of methods. Some have established their own internal alternative asset investment groups, as BlackRock has done.

Old-line fund managers have also put over $30bn (€22.5bn) in a relatively new investment method that allows them to short stocks as hedge funds do. The method is called 130/30 investing partly because it allows fund managers to short sell 30% of their portfolios, and it has attracted asset managers including State Street Global Advisors and Barclays Global Investors, according to data from Pension & Investments. State Street alone has $6bn invested in 130/30 strategies and their variations.

Asset managers are not the only financial firms trying to get more access to the lucrative returns hedge funds promise. Pension funds and endowments have also been increasing their allocations to alternative assets. Calpers, the biggest pension fund in the US, said it would double its investment pool for activist hedge funds.

Investment banks were among the first big financial institutions to capture the strong performance of alternative assets. Morgan Stanley has investments in five hedge funds, while JP Morgan owns a stake in Highbridge Capital Management. Goldman Sachs and Citigroup have internal hedge funds, and Lehman Brothers owns minority stakes in five hedge funds, including DE Shaw.

LTCM ALL OVER AGAIN?

Hedge funds/subprime (ft)
Does it matter if a hedge fund managed by Bear Stearns blows up? For a part of Tuesday, it seemed to matter a lot to Wall Street, as some of its larger banks prepared to hammer out a rescue plan. As creditors who lent $6bn to the highly leveraged fund, they might have worried about the market turmoil that a fire-sale of the fund's assets could cause. These assets include subprime mortgage-backed securities and interests in collateralised debt obligations. Wall Street banks have exposures to these markets in many ways. They lend to other hedge funds, secured on similar types of assets. They also underwrite big securitisations of such assets and may hold unsold inventory.

In the event it appears some, if not all, of the banks thought the market risk was containable and the potential deal simply not attractive enough. Merrill Lynch, for instance, is set to take bids on $850m of its collateral on Wednesday. Certainly, it is understandable why the Wall Street banks could not swallow one of the conditions of the deal: that they make no margin calls for a year. To ask them to take such a market risk - and create a dangerous precedent - was unlikely to fly. In fact, agreeing to such a dramatic condition could have induced a panic of its own, since it would have underscored how fearful the banks were of systemic risk.

We do not know how easily the market will absorb the hedge fund paper. The pricing is likely to be all over the place, given how uncertain liquidity is for some of the more esoteric securities. CDOs, in particular, are difficult to price. Pricing will be on everyone's minds, because, if large discounts are inflicted, it will set new levels at which similar assets held by others have to be marked to market.

HELP ME!

Bear Stearns Bails Out Own Hedge Fund With Emergency $1.5B Loan (huffingtonpost/bloomberg)
Bear Stearns Cos., the biggest broker for U.S. hedge funds, offered to provide $1.5 billion in loans to help rescue a money-losing fund run by its asset-management unit, a person familiar with the situation said.

The plan calls for New York-based Bear Stearns to provide the money only if some of the hedge fund's creditors, which include Merrill Lynch & Co. and JPMorgan Chase & Co., inject $500 million of cash into the fund, said the person, who declined to be named because the negotiations aren't public.

Bear Stearns, seeking to stave off liquidation of the fund, made the commitment yesterday in a meeting with creditors after losses forced the sale of $4 billion of mortgage bonds last week. Merrill Lynch and JPMorgan had planned to sell another $800 million of bonds of so-called collateralized debt obligations owned by the fund this week, the person said. The fund's potential closure sparked concern about wider losses in the market for subprime-mortgage bonds and CDOs.

``It's tough to tell whether this was an isolated event or whether there will be other funds like this that have bought this type of paper and are facing mark downs or redemptions,'' said Peter Nolan, a product portfolio manager who runs the CDO business at Chapel Hill, North Carolina-based Smith Breeden Associates Inc. The firm manages about $34 billion in fixed- income assets, about a third of which are asset-backed bonds.

Bear Stearns spokesman Russell Sherman didn't immediately return calls seeking comment. Jessica Oppenheim, a spokeswoman for New York-based Merrill Lynch, declined to comment, as did Brian Marchiony, a spokesman for New York-based JPMorgan.

`Ripple Effect'

The banks may be considering a bailout because asset sales could force them to revalue their own investments and those of other funds they lend to, said Josh Rosner, managing director at New York-based investment-research firm Graham Fisher & Co.

``The value that assets are being carried at may well be proved to be far above'' what they're really worth, Rosner said.

The bailout is reminiscent of that of Long-Term Capital Management LP in 1998, which lost $4.6 billion, Rosner said. At the time, lenders met and agreed to take a 90 percent stake in the Greenwich-based fund and slowly liquidated the assets to limit the impact of its collapse.

An ``unraveling'' of the Bear Stearns fund ``threatens to have a ripple effect on valuations,'' Kathy Shanley, a senior analyst in Chicago at Gimme Credit LLC, an independent corporate- bond researcher, said in a report today.

Halted Redemptions

The 10-month-old fund, known as the High-Grade Structured Credit Strategies Enhanced Leverage Fund and run by Bear Stearns senior managing director Ralph Cioffi, began with about $600 million in investors' money. It halted redemptions after investors sought to withdraw $300 million by June 30.

The fund has lost about 20 percent this year, while a sister fund that uses less borrowed money is down a smaller amount. Blackstone Group LP, based in New York, helped prepare the rescue plan, the New York Post reported today.

The fund had borrowed at least $6 billion. Other lenders include London-based Barclays PLC, which would invest about $250 million under the plan proposed yesterday, the Wall Street Journal reported today. New York-based Citigroup Inc. is leading a committee of creditors that may supply another $250 million, the Journal said, citing people it didn't identify.

UBS Shutdown

UBS AG, Switzerland's biggest bank, shut down its Dillon Read Capital Management LLC hedge fund unit last month, after losses executives linked to turmoil in the mortgage-bond market, where delinquencies and defaults on so-called subprime loans, or ones to bad-credit borrowers, are at the highest since 1997.

The Bear Stearns fund's positions that were to be sold this week included bonds from a variety of CDO types, including securities mostly backed by subprime-mortgage bonds, buyout loans and other CDOs, according to offering documents.

Bank of America Corp. this week is also offering some other CDO securities on behalf of the Bear Stearns fund as part of a previously planned sale, the person said. Louise Hennessy, a spokeswoman for the Charlotte, North Carolina-based bank, Danielle Romero-Apsilos, a Citigroup spokeswoman, and Tom Vogel, a Barclays spokesman, all declined to comment.

CDOs are investment vehicles that repackage loans, derivatives and bonds into new securities, providing managers with ongoing fees and underwriting revenue to banks. Some of that new debt gets higher credit rating than the underlying assets and some offers potentially greater return.

Hedge funds are private, largely unregulated pools of capital whose managers participate substantially in any gains on the money invested.

Weakening Demand?

The record pace at which CDOs are being created may be obscuring weakening investor demand, Pamela Brill, a portfolio manager at Allstate Investments LLC, said at a June 6 conference in New York.

``We've heard that there's decent amount of overhang of securities left over, that they've securitized but haven't been able to sell, and they're still holding a couple of months after the fact,'' said Brill, whose unit of Northbrook, Illinois-based insurer Allstate Corp. owns about $2 billion in CDO securities.

LASTMINUTE.COM

Blackstone brings forward landmark IPO (ft)
Blackstone plans to list on the New York Stock Exchange as early as Friday, bringing forward the US private equity group's landmark initial public offering by several days amid doubts about its valuation.

The proposed $32bn (£16bn) market capitalisation of Blackstone came under pressure last week when two powerful US senators proposed legislation that would significantly raise the company's tax bill in 2012.

The political challenge to the listing coincided with tougher conditions in the bond markets. The cheap cost of financing leveraged takeovers has helped underpin the core business of Blackstone and other private equity firms in recent years.

Blackstone declined to comment on the timing of the listing or the reason it brought the IPO forward.

On Tuesday, Morgan Stanley, one of the IPO's lead underwriters, disclosed that the pricing of the Blackstone units would occur tomorrow, paving the way for trading to begin on Friday. Wall Street bankers and executives had until recently said the offering was scheduled for next week. Blackstone has estimated its units will be sold for between $29 and $31 each, raising as much as $7.8bn.

People close to the offering on Tuesday denied that the price would have to be cut and insisted that demand for Blackstone units continued to be extremely healthy.

But critics of the private equity industry said Blackstone might have brought forward the IPO in order to avoid further political scrutiny.

They said the political temperature on Capitol Hill was set to rise next week, with senior House of Representatives members working on legislation similar to that presented by Max Baucus, the Democratic chairman of the Senate finance committee, and Republican Charles Grassley last week.

Hearings on financial matters in the House financial services committee could have raised questions about the IPO.

Blackstone's plans have also drawn the scrutiny of the Securities and Exchange Commission, the main financial regulator, as a result of letters sent by unions and the senate finance committee to chairman Christopher Cox last week.

Mr Cox said on Tuesday: “Of course we are going to respond professionally to the questions that they raise, and those issues are also of interest to the SEC.”

The SEC could examine whether there were any implications for the capital markets if a change in tax policy could become an inducement or a deterrent to entities seeking public listings, or could affect investors' choices in the markets.

Preparation of a response to the letters is being handled separately from the SEC's routine examination of Blackstone's IPO filing, and could come after the pricing of the issue.

SSSSSH

Secrets to Keep: Insider Trading Hits Golden Age (wsj)
The buyout of credit-card processor First Data Corp. started with a single conversation in December. By the time the deal was announced on April 2, the $25.6 billion transaction involved at least nine banks, six law firms, three private-equity groups, various accountants and technology advisers -- and one very suspicious streak of options and derivatives trading.

We have entered a Golden Age of insider trading, an era of expanding outlets for information and lightly regulated venues for trading on it. The size and complexity of private-equity deals makes it a wonder when traders don't catch word of a deal before it is announced. Perhaps that is why some evidence of insider knowledge has cropped up in the purchases of HCA Inc., Freescale Semiconductor, Harrah's Entertainment Inc. and 57 other companies in 2006, according to an analysis of trading patterns done by Credit Derivatives Research.

While the Securities and Exchange Commission has hauled up the occasional rogue for a photo-op, these players are only minor at best. Amid the flashbulbs, the agency and the press have failed to get to the essential question: Are there broad, institutionwide abuses going on, helping information get repeatedly funneled from Wall Street's Deal Machine to its friends in the hedge-fund world and beyond?

There are all sorts of ways to do this. A bank trading desk may let a hedge fund know that the bank put a company on its no-trading list, implying a deal may be in the works. Someone at a private-equity fund -- which are constantly bombarded with information from banks -- tips off a friend on a deal in which he has no intention of taking part. Or a bank lining up financing ends up on the doorstep of a hedge fund, where the firm might take the information and run with it.

In the case of First Data, the right bet in the right market would have netted a 350% return in four months. Might that have been from some lucky coincidences? Sure. But what coincidences. At least when matching up trading data against the day-by-day narrative of the deal from the proxy statement filed with the SEC.

Only a few people in the world knew about Kohlberg Kravis Roberts & Co.'s designs on First Data when Henry Kravis first approached company director James Robinson III last winter.

On Dec. 1, it cost about $32,000 to insure $10 million of First Data bonds against default, according to data from Markit Group. This insurance, also known as a credit-default swap, is an important part of the insider-trading picture. The closer a company is to going private the greater the risk of a debt default -- because in these transactions the company is loaded up with a pile of new debt -- and the more expensive to insure against it.

These swaps are private contracts between two parties but the aggregate of these contracts has effectively become a market unto itself, with prices fluctuating by the hour based on market information. Options and equity investors obsessively monitor the price movements. Swaps are traded only by the most sophisticated players -- hedge funds, banks and insurers -- and it is difficult to identify who is trading these instruments. While the SEC looks at basic stock and option trading, a lot of the insider-trading action appears to be moving to these swaps, and it isn't even clear whether the agency has regulatory authority over them.

By Dec. 19, First Data swaps were trading at $49,000 each. On Jan. 17 -- the day First Data told KKR that the company's board wanted to pursue a transaction -- the per-contract cost jumped sharply, to $70,000 from $60,000.

By Feb. 21, one bank and two firms were at work on the transaction, a relatively small number by modern deal standards. Still, word had gotten out to other private-equity firms. A number of firms began making inquiries to First Data about a deal, according to company filings. How they learned of First Data's existing dalliance isn't explained. Regardless, the potential for other sources of leaks or favor-trading had expanded.

The swap price was largely stagnant until mid-March. Around that time First Data's board decided to invite two other private-equity groups in to study the company's finances, each with their own advisers.

First Data on March 19 told KKR and these two rival groups to deliver proposals to the company's board, including details on price. Wouldn't you know it? The default swaps jumped by $10,000 to $76,000 the next day.

Here one can only surmise what happened: These bidders might have started sounding out financing sources about pricing a bid, exposing yet another group to the looming $26 billion secret.

By March 23, the "tent" of confidentiality was getting crowded. According to the filings, First Data then began calling customers and strategic partners, while KKR contacted its financing sources, a group of five banks each with its own staffs and lawyers. On March 23, swaps were selling at $82,000 each. Two days later the price was $112,000.

Stock market investors also were keyed into the First Data buyout saga. Options traders were getting wind that something was going on, either by following the credit-default market or by getting information on their own. There was a spike in trading in First Data options on March 22, according to information analyzed by the Johnson Research Group, with an even larger increase coming on the afternoon of March 23.

A deal was announced April 2. How many people learned of the deal along the way? Using back-of-the-envelope calculations that assume an average of 25 people at each law firm and bank while factoring in the losing private-equity firms, their advisers, and First Data itself, one can easily get to 500.

Sen. Arlen Specter, the Pennsylvania Republican who sits on the Judiciary Committee, last year held hearings to investigate insider trading and the SEC's response. He didn't like what he heard, declaring that he was "interested in indictments, even more interested in convictions and most interested in jail sentences. How about it? Any jail sentences?"

Even Federal Reserve Chairman Ben Bernanke has tried to draw attention to the subject, in remarks on May 15, saying that "U.S. securities laws against insider trading and market manipulation apply broadly to all financial institutions, including hedge funds, and to trading in a wide range of financial instruments, including securities-based over-the-counter derivatives transactions." Translation: Don't insider trade on credit-default swaps.

Folks like Mr. Specter and Mr. Bernanke are just beginning to understand today's insider-trading game. Before the buyout boom is over, let's hope we learn the secrets of how it is really done.

MORE BEAR

Some Lenders Dislike Plan to Save Bear Stearns Fund (nytimes)
An effort to save a troubled hedge fund at Bear Stearns hit a major hurdle yesterday when Merrill Lynch signaled that it would move forward with plans to auction $850 million in subprime securities that had been held as collateral.

While negotiations are continuing and the auction could be averted, the move signaled that some lenders in the High Grade Structured Credit Strategies Enhanced Leverage fund are not happy with some terms of the Bear Stearns bailout plan.

Executives at the bank have been scrambling to shore up the fund since three lenders — Merrill, Citigroup and JPMorgan Chase — asked the bank to put up more capital. The executives had offered to inject $1.5 billion in new loans into the fund, and a consortium of other banks, including Citigroup and Barclays, would infuse $500 million in new capital.

In return, the Wall Street banks and brokerage firms that had provided nearly $6 billion to the hedge fund would have had their own exposure reduced but would have had to agree not to demand more cash or collateral from the fund for a year, according to people briefed on the plan who were not authorized to speak for attribution.

If Merrill moves forward with an auction, it could make it much more difficult for Bear Stearns and the longtime portfolio manager of the fund, Ralph Cioffi, who has spent the last few days scrambling to try to bring in new money, to save the 10-month-old fund. If other lenders decide to follow Merrill's lead and seize and sell assets, it could lead to the dissolution of the hedge fund.

Late yesterday, some people briefed on the plan said that one option might be for Bear Stearns to buy out Merrill's stake. Representatives at Bear Stearns and Merrill declined to comment.

But if the assets — securities and bonds backed by subprime mortgages that can be difficult to value — are sold at prices well below where they are currently valued, the reverberations across Wall Street would be strong. Not only would Merrill be forced to post losses on its holdings, but other banks, hedge funds and investors owning similar securities would have to mark down the value of those holdings to new, lower prices.

“If we end up seeing these assets sold at significantly distressed prices, it will likely cause other funds to have to re-evaluate how effective and fair the values that they have been carrying these securities have been.” said Josh Rosner, a managing director at Graham Fisher, an investment research firm in New York.

The potential for a large ripple effect across the financial markets has been one reason many of the other lenders, even those unhappy with the terms of the bailout plan, stayed at the negotiating table with Bear Stearns, according to people briefed on the talks.

Started just last year, the Bear Stearns hedge fund was hit by a combination of bad bets on bonds backed by subprime mortgages as well as high levels of leverage. Investors originally put $600 million into the fund and another $6 billion was borrowed from the Wall Street banks.

Through the end of April, the fund had lost about 23 percent, prompting investors to try to redeem their investments. In May, the fund froze redemptions and soon faced margin calls from its banks.

While Bear Stearns has little exposure to the fate of the fund — the company and individual executives invested just $40 million in it — its stock nonetheless declined 2.2 percent, to $146.79. in the last two days.

Investors are probably concerned about how the outcome could affect the larger Bear Stearns business of underwriting and trading bonds backed by mortgages.