28JAN09:
Q1-09 DOW: 8900
Q2-09 DOW: 7250
Q3-09 DOW: 5810
Q4-09 DOW: 3960
CITI NATIONALIZED
OBAMA GETS SICK 27AUG09:
Mini Crash 21SEP09 Predicted correctly:
Bailout=Bonuses
Demise of Bear Stearns
Demise of Lehman Bros.
Demise of AIG
Subprime would cause problems
Date of 2007 crash
CRAs were to blame
G20 riots were a party
Northern Rock run
Northern Rock Nationalization
HBOS and RBS demise
UBS really was Useless
While America enjoys July 4th, we in London bask in glorious hail and snow. Global Warming is obviously an academics' conspiracy to gain large research grants and so my electric car is now on eBay. With my Bentley restored to full health, today I will be spewing out enough CO2 to put your average 747 to shame. The roof will be staying on, of course, unlike center court at Wimbledon which doesn't have one.
Elsewhere, order is restored.
Our Favourite Logos
Today's Rants The words "B*** S******" are hardly uttered today but to compensate my other favourite pet hates rear their ugly heads. Pirates. Brown. Globeop.
$$$ As we predicted a few weeks ago, KKR is to IPO
$$$ Our favourite administrator, Global Cockup, is at last being sued - as first noted in November 2006. So you want a piece of the Globeop IPO which is happening tomorrow, 5 July 2007, with a potentially large contingent liability hanging over it?
$$$ Gordon Brown is the Pirates "Godfather"
In other developments, United Capital denies it is closing due to loses on trading the ABX.
IPO's are the order of the day. With so many, it is like reliving the dot com days again except this time the research analysts don't need to exaggerate the valuations - the markets are doing a grand enough job as it is. And the only winners are the principals who are walking away with pay checks that are bigger than most hedge funds Assets Under Management. Seeing Och-Ziff IPO to retain staff makes me weep with joy! I had an email yesterday from one of my minions asking when we were going to IPO because they want to retire early. And if we didn't IPO they would leave the company.
I thought the world was mad; now I know it is completely insane.
Going long tip Agricultural Commodities and China.
Archeus hedge fund sues GlobeOp over fund's demise (reuters) Archeus Capital Management LLC, a hedge fund manager which collapsed last year, sued its fund administrator GlobeOp Financial Services LLC in a New York court late Monday, contending GlobeOp was responsible for its failure.
Archeus, whose assets shrank from $3 billion in May 2005 to about $700 million by October 2006, blamed GlobeOp for "colossal failures" in reconciling billions of dollars in trades in the Animi funds that are managed by Archeus. The suit, filed in New York State Supreme Court, asks for at least $465 million in damages.
The suit could dampen investor enthusiasm for GlobeOp's pending initial public offering. GlobeOp disclosed June 15 that it plans to raise 52 million pounds ($104 million) in a listing on the London Stock Exchange.
"GlobeOp acted with reckless indifference to the rights of Archeus, the Animi Funds and their investors in a manner that smacked of intentional wrongdoing," Archeus said in its lawsuit.
A representative of GlobeOp could not immediately be reached for comment.
Archeus, which was managed by mostly ex-Salomon Brothers bond traders, told investors in an Oct. 30 letter that it planned to shut down and return money to investors by year-end. The firm blamed GlobeOp for delays in providing timely statements to investors, causing them to pull money out of the Animi funds, resulting it their failure.
"GlobeOp pushed the Animi Funds into a "death spiral" from which they could never recover," the suit claimed.
Fintag says I watch with interest. As regular readers know I am not a great fan of LTCM's old administrators. They were poor then and they are poor now. That is my opinion but many others disagree. They are wrong and this court case will prove I am right. They are not known as Global Cockup for nothing.
WE WERE WRONG
United Capital says hedge funds to stay open (reuters) United Capital Asset Management said on Tuesday it will continue operating its Horizon Strategy group hedge funds that invested in subprime-mortgage bonds after temporarily halting payments to investors.
"We wish to emphasize that UCAM (United Capital Asset Management) and Horizon are not liquidating and intend to continue in operation," it said in a statement.
The company said it had received an unusually high number of redemption requests from investors -- including one from an investor who had put up about 25 percent of the funds' money -- due to volatility in the structured finance market in June.
The firm said it had temporarily suspended redemptions for the Horizon Fund L.P., Horizon ABS Fund L.P., Horizon ABX Fund Ltd and Horizon ABS Master Fund Ltd., but was not liquidating its hedge funds.
The funds hold most of the firm's assets under management, which stood at about $619 million as of March.
UCAM said it reduced many cash bond and synthetic positions in June and sold a large amount of cash securities into the market without issuing bid lists or conducting auctions.
In addition, UCAM said it had "entirely" stopped trading synthetic debt markets, including the ABX subprime mortgage index.
Fintag says Good PR. Whether it will work or not we will see. I hope so as I never like to see a Hedge Fund fail.
PricewaterhouseCoopers says repaying money borrowed, and the interest on it, now takes up 19% of the average UK household's disposable income.
That is more than the previous peak of the domestic debt burden, which was 18% of household income in late 1990.
With the Bank of England expected to raise interest rates again soon, PwC says consumer spending will slow down.
"Many households have faced a squeeze on their finances due to a combination of modest earnings growth, rising utility bills, higher petrol prices and increased debt repayment costs," said John Hawksworth, head of macroeconomics at PwC.
"Looking ahead, we expect rising debt service costs to contribute to slower consumer spending growth over the next 2-3 years," he warned.
Economic slowdown
PwC calculates that the income of households that was left after paying off debts and household bills, rose by just 3.1% a year between 2004 and 2006,
But that was less than the rise in their gross incomes of 5.2% per annum.
Partly as a result of this process, PwC predicts that the UK's economic growth rate will fall slightly in the coming year, falling from 2.75% this year to 2.5% in 2008.
With the accountancy firm predicting that interest rates will rise to 6% by the end of this year, it suggests there will be no let up in the squeeze on personal spending.
"The relatively rapid growth of debt service costs throughout the whole period and of utility bills during the past three years are major factors tending to squeeze household discretionary spending power," said Mr Hawksworth.
Fintag says Imagine a world were we are born with debt hanging over our necks, passed on from the previous generation? Not nice. History tells us, for example the Jewish money lenders in 1215, that once a critical mass is reached of people in debt, they will rebel against the lenders and kill them.
Happy times.
WHO IS AFRAID OF THE BIG BAD BEAR?
Buyers avoid Bear Stearns' cut-priced sale (ft) Investors in the worse-hit of two stricken Bear Stearns hedge funds are offering to sell their holdings for as little as 11 cents on the dollar but still finding no buyers, according to unfilled trades on Hedgebay, a secondary market for funds.
Vulture funds and others have been quick to bid for holdings in the two funds, but the best bid for Bear Stearns High-Grade Structured Credit Strategies Enhanced Leveraged Fund, the more geared of the two, is just 5 cents on the dollar.
Private sales of stakes are the only way investors can exit the two Bear funds, after the bank suspended redemptions in May amid a wave of withdrawals.
"There are buyers but they can't agree on price," said Jared Herman, co-founder of Bahamas-based Hedgebay.
The less-geared Bear Stearns High-Grade Structured Credit Strategies Fund, which the bank has rescued with a $1.6bn loan, is being offered at about 70 cents on the dollar. The fund is only attracting bidders at about 30 cents, according to people who use the system.
However, the last valuation, for the end of April, was before the near-collapse of the two funds, when lenders seized collateral held against the funds' borrowings. Most of the funds' assets are bonds issued by collateralised debt obligations - complex, illiquid and hard-to-value securities.
Bankers said initial valuations of the Enhanced Leverage Fund's assets indicated a strong chance that investors' cash had been wiped out. Estimates for the less-geared older fund suggest it has enough to underpin the $1.6bn rescue loan and leave about $400m for investors.
The Enhanced Leverage Fund's net assets of $638m were more than 10 times geared in March, meaning a drop of just 10 per cent in the value of its holdings would wipe out investors.
Market participants estimate the CDOs the Bear funds held would sell for at least 10 per cent less than the values calculated by lenders. "Where things transact is still many points below where dealers have been marking them," said one manager of CDOs and hedge funds. "That is the big ugly secret of this market."
Copyright The Financial Times Limited 2007
Fintag says Large spreads. Few buyers. Hard to value assets. Take it or leave it.
I have been very harsh on B*** S***** recently and I think they need time to sort out their own problems. One of my funds uses them as a Prime Broker and they are very good too. My gripe is arrogance and incompetence and [Editor:Stop it]
PIRATES FEEL SORRY FOR THEMSELVES
Tough times ahead for private equity, says Moulton (guardian) Private equity firms will increasingly struggle to make huge gains from selling companies back to the stock market, a senior figure in the British industry warned yesterday, signalling an end to the exuberance that has characterised deals in recent years. Jon Moulton said the failure to secure a high price for fashion retailer New Look was a "straw in the wind" and predicted tougher times ahead.
Mr Moulton is head of private equity firm Alchemy Partners, and came to prominence when he failed to take over carmaker Rover. He was speaking at the latest Treasury select committee on private equity; it is investigating concerns that the industry has grown quickly by using a mixture of cheap debt, clever tax planning, and anti-labour practices.
His comments coincided with an interview by Alistair Darling in which the new chancellor used to reject any immediate change to the tax breaks enjoyed by private equity. He told this morning's Financial Times: "I think we should be very, very wary indeed of a knee jerk reaction to a day's headlines into making a tax change that could have unintended consequences and undesirable consequences."
Unions have attacked the private equity industry, and the tax issue featured in the Labour deputy leadership contest. But Mr Darling cited the US's Sarbanes-Oxley rules on corporate governance as an example of rushed legislation. "They're now looking at how they can get out of it. There's no doubt it's damaged the US market." He said any UK changes would "be at the proper time in the context of the Budget or pre-Budget report."
At the select committee Mr Moulton likened the private equity industry to the struggling US sub-prime mortgage market, which he said showed what could happen when banks refused to underwrite asset sales with unsustainably high prices. His warning will fuel concerns that highly leveraged buyout funds are at risk of collapse should there be further sharp rises in interest rates or shocks to the finance system. He said: "[A collapse] could be very close. It could be a year or two forward. It's very hard to call. It is near future."
The sub-prime mortgage market has forced several banks to issue profit warnings after large losses, and last week triggered the collapse of two hedge funds. "The sub-prime mortgage market in the US ... is a very interesting prototype for us," Mr Moulton said. "It's financed in the same way that the leveraged loan market is structured here ... You can take a view that we will have the same sort of problems at some point arising out of an over-enthusiastic market."
Also appearing before the committee were David Blitzer, managing director of Blackstone; Donald Mackenzie, head of CVC Capital Partners; and the Duke Street Capital boss Peter Taylor. Mr Blitzer said he believed the credit market remained buoyant and his firm would continue to raise funds. Private equity firms have increasingly turned away from selling firms back to the stock market in favour of trade sales to other private equity buyers.
When Merrill Lynch was appointed in March to handle the sale of New Look, owned by Apax and Permira, it started the auction at £2bn but was soon forced to drop to £1.8bn. On Monday night, however, the final two bidders - BC Partners and a consortium of TPG and Warburg Pincus - pulled out. BC Partners offered £1.7bn and its rivals bid even less.
The witnesses:
Donald McKenzie, CVC
Co-founded and manages CVC Capital Partners which is battling Imperial Tobacco to take over the latter's Franco-Spanish rival Altadis.
David Blitzer, Blackstone
Senior managing director of the New York-based company that Blitzer joined in 1991 after he graduated from the Wharton School of the University of Pennsylvania.
Jon Moulton, Alchemy Partners
One of the more vocal operators in the private equity sphere, Jon Moulton has conceded that he does not carry "a huge burden of tax" and argues that firms will move offshore or to lower-tax havens if the tax rates in the private equity sector are increased.
Peter Taylor, Duke Street Capital
Taylor recently admitted that the current level of tax paid on carried interest could be raised to 15-20%.He joined the business in 1996 from Vardon (now known as Cannons Group) where he was finance director.
David Walker
Former Bank of England director, now chair of the private equity working group, Walker was appointed in March to formulate a code of conduct for the industry and improve disclosure levels. Walker was also formerly a managing director of Morgan Stanley and chairman of Morgan Stanley International Inc. He attended Queens' College, Cambridge graduating with a Double First in Economics.
Fintag says Sickening. A bunch of Pirates enjoy massive tax breaks and are now crying because they may have to pay more than their office cleaners. The real reason they are moaning is because people like me have been battering them since my first news letter in Sept 2006 and they have been found out.
It is all too late of course. They have raped enough companies and paid enough fat dividends to themselves for the damage to have been done. The companies are in pain and the pirates have had their fun. No wonder the likes of KKR are IPOing - the old routes of rape and pillage and closing up (tax, debt, political opposition) so why not rape and pillage a few unsuspecting moms and pops who buy the stock because it sounds like KKK instead?
KKR Files For IPO of $1.25 Billion (washingtonpost) Kohlberg Kravis Roberts, one of the kings of the buyout world, filed for a $1.25 billion initial public offering yesterday, following the precedent set two weeks ago by its long-standing rival, Blackstone Group.
Minutes after KKR's IPO filing, Blackstone said it was acquiring Hilton Hotels, one of the most recognized brand names in American business. The deal is among the biggest buyouts in history, with Blackstone paying $18.5 billion in cash, or $47.50 a share, and assuming $7.5 billion in debt.
KKR's announcement established that Blackstone's IPO was not a singular event and suggested that the top buyout firms in the country, including Carlyle Group of the District, TPG Capital of Fort Worth and Madison Dearborn Partners of Chicago, could become public companies in the near future.
"I think it's a way to leverage the current bull market in private equity into creating enduring franchises," said Mark D. Ein, a Washington venture capitalist who worked at Carlyle Group. "Anyone who thought the Blackstone offering would have been a one-off situation, or that the political issues around it would have discouraged others from going public, can see now that it looks like an irreversible trend."
KKR and Blackstone are the most aggressive and biggest dealmakers in a private-equity world that has grown tenfold in three years. These buyout shops completed deals worth a half trillion dollars last year and are on track to nearly double that total this year.
KKR is going public despite proposals in Congress that would dramatically increase taxes paid by private-equity firms. The firm said it expects its shares to begin trading under the symbol "KKR" sometime in the fall or winter. In the past few months, KKR has accounted for five of the eight largest buyouts in the United States and, as of March 31, had about $53.4 billion under management.
In its IPO filing, KKR said it decided to go public so it could continue its rapid growth. But true to the secretive nature of private equity, KKR said it would not provide any earnings guidance and warned that shareholders would have almost no control over management decisions.
Unlike Blackstone, whose partners sold stock worth more than $1 billion in its offering, KKR said its owners would not sell shares in the IPO.
With its record-setting $31.4 billion acquisition of RJR Nabisco in 1988, KKR held the record for the biggest leveraged buyout in history for more than a decade. The size of that takeover was so extraordinary at the time that it became the subject of a best-selling book, "Barbarians at the Gate," which detailed the corporate egos and excesses surrounding the deal. Now multibillion-dollar buyouts barely raise eyebrows on Wall Street.
Blackstone is one of the few firms to rival KKR's hegemony in the private-equity world. In January, Blackstone set a new record for a single transaction by buying Equity Office Properties Trust for $39 billion. A few weeks later, KKR took back the crown by buying TXU, the largest power company in Texas, for $45 billion.
Henry Kravis, one of the founders of KKR, and Stephen Schwarzman, chief executive of Blackstone, are more than just business rivals and two of the wealthiest men in the world. Both are A-list names on the New York social and philanthropic scene, giving away millions of dollars and turning up regularly in the society pages.
By taking Hilton private, Blackstone is acquiring one of the most valuable brands in American business. The hospitality company dates to 1919, when Conrad Hilton bought his first hotel in Cisco, Tex. The company has grown to more than 2,800 hotels around the world, including flagships like the Waldorf-Astoria in New York, the New York Hilton and the Cavalieri Hilton in Rome. Blackstone already owns more than 100,000 hotel rooms in the United States and Europe, including La Quinta Inns and Suites.
"This will make Blackstone the absolute powerhouse in the hotel industry with the strongest representation and brands across every segment of the lodging industry," said Frederic V. Malek, chairman of Thayer Capital Partners and former president of Marriott Hotels and Resorts. "Hilton is a fabulous franchise, has outstanding management and will undoubtedly be a crown jewel in the Blackstone galaxy."
Blackstone began trading under the symbol "BX" on June 22 at $31 a share in what was one of the biggest and most highly anticipated IPOs of the past five years. After shooting up to about $38 a share during its first day of trading, the stock has since fallen below its IPO price, closing yesterday at $29.72 per share, up 45 cents.
In the days leading up to the IPO, lawmakers proposed a slew of tax bills aimed at Blackstone and other big private-equity firms. These companies organize themselves as partnerships and pay taxes at the capital gains rate of 15 percent.
Bipartisan legislation proposed in Senate last month would force private-equity firms that sell shares to the public to pay at the 35 percent corporate tax rate.
Fintag says Despite seeing Blackstone perform poorly at its IPO, it hasn't stopped KKR (as we predicted a while ago) to list too.
The party is over. How can a very private institution with very opaque ways of doing things suddenly open up its books and records and come clean?
KKR's IPO will be a flop. Mark my words.
JUST ONE MORE
Hey, how come that hedge fund got a bailout and I didn't? (msnbc) Bear Stearns has always been the pesky, streetwise, kid brother in the Wall Street family—smaller, younger (it was founded in 1923), and less polished. Bear lacks Goldman Sachs' tradition of public-minded financiers, the brand name of Merrill Lynch, the proud WASP lineage of Morgan Stanley, or the overwhelming size of Citigroup and Chase. Bear Stearns' market capitalization is a measly $21 billion, less than one-tenth that of Citigroup. CEO Jimmy Cayne isn't a Harvard MBA; he's a former scrap-iron salesman who didn't complete his studies at Purdue. Bear Stearns confirmed its outsider status in 1998 by refusing to participate in the Wall Street-orchestrated bailout of faltering hedge fund Long Term Capital Management.
But now Bear Stearns has finally joined the club. Last month, facing a crisis at two large hedge funds run by its asset management unit, Bear Stearns agreed to bail out one of the funds (and its many creditors) by providing a $1.6 billion line of credit. The move, intended to spare Bear Stearns embarrassment and protect the reputation of its asset management business, also had a take-one-for-the-team result. It insulated fellow Wall Street firms from losses and prevented widespread damage to similar hedge funds.
The details of the Bear Stearns rescue may fascinate only those who devour the Money & Investing section of the Wall Street Journal. But because it reinforces the notion that the big boys get pampered when their investments go bad, the bailout should resonate.
The two Bear Stearns hedge funds ran into trouble by borrowing heavily to invest in CDOs (collateralized debt obligations), investment vehicles that hold bits and pieces of subprime mortgages. (Wall Street's Jungle-esque food-processing machinery chops and dices mortgages like clams, into strips, bellies, and other parts, and peddles them to investors with different appetites for risk.) This year, the value of many of the assets in CDOs has fallen as delinquency rates on subprime mortgages have risen to record levels. According to the Mortgage Bankers Association, in the first quarter of 2007, 5.1 percent of subprime loans were in foreclosure and a whopping 15.75 percent were delinquent.
The falling prices of the securities backed by such loans spelled trouble for the Bear Stearns hedge funds, and for gigantic Wall Street firms like Merrill Lynch, which had extended billions of dollars in credit to them. Falling returns could push investors to ask for their money back, which could force the funds to liquidate. To protect themselves, lenders could effectively foreclose on the fund—grab the assets posted as collateral and sell them. In June, Merrill Lynch seized some $850 million in assets from the Bear Stearns funds. Not surprisingly, Merrill had a hard time getting a good price for them. After all, these were distressed assets in a distressed market. Had other firms followed Merrill's lead and dumped billions of dollars of securities onto the market, it would have thrown the whole subprime mortgage-backed securities market into chaos. By selling them at fire-sale prices, the firms would have forced all the other hedge funds run by their colleagues, friends, and customers, which held similar assets, to mark down the value of their subprime CDO assets.
By stepping in, Bear Stearns averted a swift collapse for the subprime CDO market. But it seemed out of step with Wall Street's prevailing sink-or-swim ethos. Last year, the $9 billion hedge fund Amaranth, caught out by a trader's reckless natural gas trade, was allowed to sink like the Titanic. We are constantly told that hedge funds, private equity firms, and the giant Wall Street firms that back them are dynamic creatures whose intolerance for poor performance leads them to seek and destroy economic inefficiency. Failures, even large-scale failures like Amaranth, are a necessary and natural part of the system. But in the case of the Bear Stearns funds, Wall Street firms seemed positively European in their aversion to creative destruction. They clamored to be bailed out from their reckless extension of credit to a subprime hedge fund. Bear Stearns obliged.
And yet the financial services firms that made many of these soured loans in the first place are not nearly so kind to their down-market customers. Many of the unfortunate homeowners losing their houses to foreclosure are, directly or indirectly, customers of firms like Merrill Lynch and Morgan Stanley, both of which recently acquired subprime lending companies. Foreclosing on subprime borrowers has the same ruinous impact on homeowners as it has on subprime hedge-fund managers. When foreclosures are concentrated in a particular area, it hurts the whole neighborhood. In a fantastic Wall Street Journal article (subscription required) about the impact of subprime lending on a single block in a lower-middle-class section of Detroit, a real estate broker noted that banks would have a tough time selling homes on which they had just foreclosed. "Nobody's going to want to buy into a neighborhood with 20 percent foreclosures," he said. "You end up with no neighborhood."
Note the similarities—and the differences—between the neighborhoods in which subprime borrowers live and the financial neighborhood in which subprime lenders operate. Wall Street executives didn't foreclose on the Bear Stearns hedge fund, which borrowed imprudently, because (1) the fund had a rich parent to bail it out, and (2) doing so would have imposed financial hardships on themselves, on their friends, customers, and neighbors. The residents of neighborhoods targeted by subprime lenders typically receive no such consideration. When you owe the bank $10,000, it's your problem. When you owe the bank $10 billion, it's the bank's problem.
Wall Street these days seems to be willfully obtuse when it comes to the appearance of its business practices, whether it's the differential attitudes toward foreclosure, obscene pay packages for CEOs, or the special tax break for private-equity managers. (See under: Schwarzman, Steve.) The rapid expansion of subprime lending has tethered the fortunes of higher-income Wall Street to the fortunes of lower-income Main Street. As Main Street has foundered, financial companies have generally responded by severing the lines and leaving struggling borrowers to their fate. They might be well-advised to throw some life preservers.
Blackstone buys Hilton for $26bn (bbc) US private equity group Blackstone is buying the global Hilton Hotels chain for $26bn (£13bn) in an all-cash deal.
Under the deal, Blackstone is paying $47.50 for each Hilton Hotels Corporation share, a 32% premium over their closing price on Tuesday.
Blackstone said the deal had been approved by Hilton's board, and was due to be completed by the end of 2007.
The surprise announcement comes two weeks after Blackstone raised $4.13bn through floating a 13.2% stake.
Private equity firms are investment companies that raise money from private sources rather than by using the stock market.
They typically buy up businesses they believe can fare better, with a view to improving their performances and eventually, selling them on for a profit.
Numerous hotel brands
Blackstone said it intends to grow the Hilton business.
The private equity firm already has a number of hotel investments, including La Quinta Inns and Luxury Resorts and Hotels.
US-based Hilton's other brands include Conrad Hotels, and the Waldorf-Astoria Collection.
Blackstone's co-founders, Stephen Schwarzman, 60, and Peter Peterson, 81, earned more than $2.4bn between them from last month's share sale.
The global network of Hilton hotels were reunited as one company in 2006 after a 42-year split.
The reunion happened after Hilton Hotels Corporation (HHC) paid $3.3bn to buy the 400 international Hilton hotels owned by UK-based Hilton Group.
The division took place in 1964, when HHC sold off all its overseas hotels to concentrate on the US market.
Fintag says Extraordinary.
You will never see me stepping foot into a Hilton again.
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