HEDGE FUND NEWS
@ Tue 17 July 2007 : GMT

FINTAG COMMENT

Yesterday I succumbed to a Thai explosion and have been up all night. This gave me time to ponder why I get emails from people doubting I am a hedgie. I could give a link to my FSA approved person details, post up my resume/cv or put up my monthly newsletter? But no, I am above all that. I am who I say I am, and I have enough troubles as it is; paranoia delusions are the last thing I need. What I do need though is a decent dollop of market wrenching news. Today is not one of those days.

Banks are stuck with debt nobody wants.

A dead shark finds a new hedge fund home.

We fire our fund managers and hire Waitresses instead.

Iceland comes from nowhere to be the best place in the world.

Oil is no longer a signal to sell.

Sar-Box is blamed for the woes of America.

Working in Operations is the new black.

Fintag joins facebook and has his identity stolen.

OTHER NEWS

HEDGE DOUGH NO GO FUND $$ DRY UP (nypost)

Harris Associates is building stake in UBS (financialnews-us)

Mortgage fees soar 600% in two years (thisismoney)

Fund Aims at Target, With a Philanthropic Twist (dealbook)

UK Wealth gap 'widest in 40 years' (bbc)

Samsung Is Said to Prepare for an Icahn Approach (dealbook)

New generation hedge funds are springing from older roots (ft)

Finance sector swells Obama poll funds (ft)

Thia PM orders watch on hedge funds (and ignores its corrupt ex-PM buying Man City?)

UNLOVED

Goldman, JPMorgan Stuck With Debt They Can't Sell to Investors (bloomberg)
Goldman Sachs Group Inc., JPMorgan Chase & Co. and the rest of Wall Street are stuck with at least $11 billion of loans and bonds they can't readily sell.

The banks have had to dig into their own pockets to finance parts of at least five leveraged buyouts over the past month because of the worst bear market in high-yield debt in more than two years, data compiled by Bloomberg show.

Bankers, who just a few months ago boasted that demand for high-yield assets was so great that they would have no problem raising debt for a $100 billion LBO, are now paying for their overconfidence. The cost of tying up their own capital may curb earnings and stem the flood of LBOs, which generated a record $8.4 billion in fees during the first half of 2007, according to Brad Hintz, the former chief financial officer at New York-based Lehman Brothers Holdings Inc.

``The private equity firms, being very tough negotiators, are unlikely to let the banks off the hook,'' said Martin Fridson, chief executive officer of high-yield research firm FridsonVision LLC in New York. ``They'll say that's your problem and that's why we're paying you: To take risk.''

As the market began to turn sour last month, Goldman Sachs, Citigroup Inc., Lehman and Wachovia Corp. had to buy $725 million of bonds that Goodlettsville, Tennessee-based Dollar General Corp. was selling to finance Kohlberg Kravis Roberts & Co. purchase of the company for $6.9 billion. All of the securities firms are based in New York, except Wachovia, which is located in Charlotte, North Carolina.

Bonds Tumble

Those bonds are probably worth 94 cents on the dollar, or $43.5 million less than when they were sold on June 28, according to Justin Monteith, an analyst at high-yield research firm KDP Investment Advisors in Montpelier, Vermont. KKR completed the acquisition of Dollar General on July 9.

Bear Stearns Cos. strategists estimate that about $290 billion of deals still need to get funded, including those of Greenwood Village, Colorado-based credit-card processor First Data Corp. and energy company TXU Corp. of Dallas.

The question is ``how much yield are the brokerage firms going to have to eat,'' said Hintz, who is now an analyst at Sanford C. Bernstein & Co. in New York. ``What they've committed to is not current trading rates in the market. If I have a problem it doesn't mean I can't place the problem, but it's going to cause a mark-to-market loss.''

Record Sales

Acquisitions by private equity firms such as New York's KKR and Blackstone Group LP helped push sales of high-yield bonds and loans worldwide up more than 70 percent during the first half of the year to a record $708 billion, according to data compiled by Bloomberg. High-yield, or junk, bonds are those rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's.

The investment banking fees generated by LBOs in the first half amounted to almost two-thirds of the $12.8 billion paid by LBO firms to Wall Street in 2006, data compiled by Freeman & Co. and Thomson Financial show. In the race to win deals, the five largest U.S. investment banks more than tripled their lending commitments to non-investment grade borrowers during the past year to $174 billion, according to their regulatory filings.

KKR co-founder Henry Kravis in May called it the ``golden era'' of buyouts at a conference in Halifax, Nova Scotia. The extra yield investors demanded to own junk bonds rather than Treasuries shrank to a record low of 2.41 percentage points in June from the peak of more than 10 percentage points in 2002, according to index data from New York-based Merrill Lynch & Co.

No Escape

For loans rated four or five levels below investment grade, the spread over the London interbank offered rate shrank to 2.12 percentage points in February from more than 4 percentage points in 2003. It has since widened to 2.72 percentage points.

Some bankers even speculated that $100 billion LBO was possible, a scenario that is now ``definitely'' off the table, said Stephen Antczak, high-yield strategist at UBS AG in Stamford, Connecticut. Wall Street's confidence in its ability to finance just about any deal led buyout firms to remove clauses in their purchase agreements that would allow them to back out if their banks couldn't come up with the financing.

Just three of the 40 biggest pending LBOs have an escape clause that lets the buyer back out if funding can't be arranged, said Mike Belin, U.S. head of equity derivatives strategy at Deutsche Bank AG in New York. A couple of years ago, a majority of deals included a financing contingency, Belin said, based on his research.

``If you were a credit officer or a risk manager who said `No' to virtually anything over the last few years you were wrong,'' Hintz said. ``So did they take it too far? Well, yeah. But that's part of any cycle. The issue is did they take it too far and is it going to hurt their earnings.''

Market Cracks

The market for high-yield bonds and junk-rated, or leveraged loans began to crack in June as concerns that LBOs were becoming too risky coincided with a slump in the market for subprime mortgages that caused the near-collapse of two Bear Stearns hedge funds.

Junk bonds lost 1.61 percent last month, the most since March 2005 when General Motors Corp. forecast its biggest quarterly loss since 1992 and the debt lost 2.73 percent, according to Merrill Lynch.

Investors refused to buy bonds to finance purchases of companies including Dollar General and ServiceMaster Co., forcing bankers to either buy the bonds themselves or extend a loan to make up for the securities that weren't sold.

In most deals, investment banks promise to provide loans to the buyer. They then seek other lenders to take pieces of the loans and find buyers for bonds. When buyers vanish, the banks must either buy the bonds themselves or provide a bridge loan to the borrower, tying up capital that would otherwise be used to finance more deals. The banks typically parcel out portions of bridge loans to reduce their risk.

Lending Commitments

Citigroup, the biggest U.S. bank, reported that its securities and banking division recorded an expense of $286 million in the first quarter to increase loan-loss reserves to account for higher commitments to leveraged transactions and an increase in the average length of loans.

Lehman reported on July 10 that its commitments for ``contingent acquisition facilities'' more than doubled in the quarter ended May 31 to $43.9 billion, exceeding its stock market capitalization of $39.1 billion. Lehman said its commitments contain ``flexible pricing features'' that allow it to charge more if market conditions deteriorate.

Goldman Sachs more than doubled its lending commitments to non-investment grade borrowers to $71.5 billion in the year ended May 31.

Citigroup spokeswoman Danielle Romero-Apsilos, Lehman spokeswoman Tasha Pelio and Goldman Sachs spokesman Michael Duvally, either declined to comment or didn't return phone calls.

ServiceMaster Bonds

JPMorgan failed to sell $1.15 billion of bonds for Memphis, Tennessee-based ServiceMaster on July 3. The banks provided ServiceMaster, the maker of TruGreen and Terminix lawn-care products, with a bridge loan to make up for the failed bond sale. ServiceMaster is being bought by private equity firm Clayton Dubilier & Rice Inc. for $4.7 billion.

KKR and New York-based Clayton Dubilier this month completed their $7.1 billion purchase of Columbia, Maryland- based US Foodservice, a unit of Dutch supermarket company Royal Ahold NV, even though junk bond investors refused to buy $1.55 billion of bonds and $3.37 billion of loans to finance the deal, according to estimates from New York-based Bear Stearns.

Deutsche Bank led the bond offering, which included $1 billion of ``toggle'' bonds that would have allowed US Foodservice to pay interest in either cash or additional debt. KKR and Clayton Dubilier relied on loans to complete the deal, according to S&P's Leveraged Commentary and Data unit.

`Beyond Our Risk'

``Many of these things are beyond our risk desires,'' said Bruce Monrad, who manages $1.5 billion of high-yield bonds at Northeast Investment Management Inc. in Boston.

JPMorgan spokesman Adam Castellani, Deutsche bank spokesman Scott Helfman and Morgan Stanley spokeswoman Jennifer Sala either declined to comment or didn't return calls. All the banks are based in New York, except Deutsche Bank, which is in Frankfurt.

Banks can always sell the debt if demand increases. Meanwhile, they may have to report a loss from the decline in value of their holdings, a process known as marking to market.

Banks could also lose money should they have to offer discounts on loans in order to syndicate the deals, said Tanya Azarchs, a banking industry analyst at New York-based S&P.

``I don't think it's going to cause banks to fail or even lead to downgrades,'' Azarchs said. ``But I do think there will be a little indigestion and lower earnings.''

The biggest concern is ``hung deals,'' where a lender is left holding a large loan to a single borrower, said Azarchs. ``Those traditionally in all the prior credit cycles have caused the greatest amount of grief for the large syndicating banks,'' Azarchs said.

`Burning Bed'

In 1989, First Boston Corp., now part of Credit Suisse, made a bridge loan for a buyout of Ohio Mattress Co., the predecessor to Sealy Corp. The junk bond market collapsed before First Boston could refinance the loan, and the securities firm ended up owning a big stake in the bedding manufacturer.

The deal became known as ``Burning Bed.''

``The thing about this business is memories are two seconds long,'' said James Schell, a private equity attorney in the New York office of Skadden, Arps, Slate, Meagher & Flom LLP.

Banks led by Citigroup committed to extend $37.2 billion in credit to fund the purchase of TXU by a group that included KKR, Fort Worth, Texas-based TPG Inc. and Goldman Sachs's private equity group. The financing will comprise $25.9 billion of term loans and $11.3 billion in an unsecured bridge loan.

First Data

Credit Suisse, based in Zurich, is leading banks in the U.S. that have agreed to provide KKR with $16 billion of loans for its $26.1 billion takeover of First Data. The plans include an $8 billion bond sale, which is scheduled for August or September, according to Bank of America Corp.

For firms such as KKR or Blackstone, both based in New York, the tighter credit environment may make their acquisitions less profitable and even change the way they go after future targets. Mark Semer, a spokesman for KKR, declined to comment.

``The underwriters are going to be forced to provide bridge loans and it's getting pretty ugly, but Wall Street deserves to get smacked around a little,'' said William Featherston, managing director in high-yield at J. Giordano Securities LLC in Stamford, Connecticut. ``It's been easy for so long.''

NEVER

Andreas Whittam Smith: Why I fear a financial crisis is in the offing (independent)

A financial storm is heading our way. Just a few hedge funds have capsized so far. If the winds do keep blowing, professional players and institutions in financial markets will take the main impact. But the rest of us would feel the effects.

As with all financial stories, greed and fear explain most of the action. In this case, however, it is also necessary to understand a technical device - financial gearing or leverage.

Most homeowners have seen this technique in action. You purchase a property for, say, £200,000. You put up £50,000 yourself and borrow the balance, £150,000. Then suppose prices rise by 10 per cent. Your home is now worth £220,000, your loan remains at £150,000 and your so-called equity in the property has risen from £50,000 to £70,000, an increase of 40 per cent.

Financial gearing, achieved by borrowing, is the mechanism which has turned a small percentage gain into a large one. It also works in the reverse direction and can turn a minor loss into a serious shortfall, or even wipe you out.

Nonetheless, financial gearing has seemed to be an answer to a difficulty. Benign as a lengthy period of low inflation and steady growth has been, it has also been marked by lower returns on financial assets. Interest rates have come right down. Shares don't yield much above 3 per cent. And these reduced returns are one reason why people at work have been required to pay more into their pension funds or see them closed to new entrants.

Seeking better returns, professional investors have responded by using financial gearing. As in the example above, they have sought to leverage 10 per cent gains into 40 per cent ones. And lenders have answered the same problem by engaging in more risky lending because higher rates can be charged.

The phrase "sub-prime" lending, often mentioned in financial stories these days, refers to this very activity, the provision of home loans to borrowers whose credit rating is poor. The one big collapse that we have seen so far, two hedge funds run by the prestigious American investment bankers, Bear Stearns, neatly combined both these attributes. The funds made highly leveraged investments in loans to sub-prime borrowers.

At this point in the story, we are on the boundary line between decisions driven by rational financial considerations and those where greed has clouded judgement. There is nothing inherently wrong, for instance, in lending to borrowers with poor credit risks, just so long as you can make an accurate appraisal of individual financial circumstances, have reliable statistics for the incidence of defaults by such borrowers and can price the risk fully in the interest rate.

Nevertheless there is an overlay to all this. The sheer size of the incentives and rewards that financial institutions give their best performers is now generating raw greed. Believe it or not, the customers aren't bothered when things are going well.

To show this, let me give you an example. Let us say that a £100m hedge fund increases the value of its assets by 25 per cent in one year to £125m. The investors in the fund - the customers - would be charged 2 per cent of the funds under management - £2m. And they would also be charged 20 per cent of the capital gain - 20 per cent of £25m equals £5m. Thus the fund has gained £25m and the investors have given £7m of this to the managers. Actually everybody is happy. Win win, as they say.

However greed is a form of disability. For with it comes a sort of blindness. This takes various forms. One is an invincible optimism. You can see this in the newspapers now. Whenever financial executives are asked about the current state of credit markets, they almost always say - "well yes, there have been one or two problems, but there is nothing systemic in this". Or, as a leading American banker said the other day: "when the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance". And he added: "We're still dancing."

The blindness takes other forms. Some players are loath to admit they are engaging in double leverage. They borrow funds to buy securities which are themselves highly geared. Or they rely on valuations that come from financial modelling. They think that a few keystrokes on a computer will tell them what something is worth rather than the acid test of a transaction between an actual seller and an actual buyer. Without greed the true extent of leverage would be measured. Without greed artificial valuations would be seen for what they are.

After greed comes fear. An idea of what this would mean was illustrated by some minor developments last week - though they were sufficient to make me suddenly sit down and write this article. A small Australian hedge fund said it would restrict investors' rights to withdraw their funds because it had been hit by "indiscriminate" re-pricing of "otherwise fundamentally sound collateral". It reported losses of 14 per cent in one of its funds in June. What "indiscriminate" means here is that actual flesh and blood buyers are putting a much lower price on the firm's assets than its computer model had suggested. And it is restricting withdrawal because it knows that their customers are unforgiving. One lapse and they want out. Fear replaces greed in a trice.

If greed is blind, fear is contagious. I know very well what I would do if refused an exit by one hedge fund in which I was invested. I say this as someone who has trustee responsibilities for substantial endowments and savings but which, as a matter of fact, have no hedge fund involvement. I would begin to pull out of other hedge funds where withdrawals were still unrestricted.

Another development that caught my eye concerned the specialised agencies that give a rating to various classes of debt, all the way from supremely safe government securities such as those issued by the US or UK, to what are rightly known as junk bonds. These agencies downgraded debt that is backed by mortgage loans. Just catching up with reality you might think, particularly in the US where house prices are falling. Except that pension funds and insurance funds are often forbidden to hold lowly rated debt. A down rating can mean that they are legally compelled to sell every security they own in the down-rated class.

I could go on to describe the horrible consequences of financial gearing working in reverse and of risky borrowers proving even less reliable than assumed. I could illustrate how financial fear spreads like the Black Death. I could emphasise the malign impact of rising interest rates on the junk bond world. But I won't do so because little has gone wrong so far. The financial storm I espy is still well out to sea. It could lose momentum or change direction. Or it could hit us full on.

WHIPPER SNAPPERS

Hussman's Who's Who (financialarmegeddon)
ohn P. Hussman, Ph.D., is president and principal shareholder of Hussman Econometrics Advisors, the investment advisory firm that manages the Hussman Funds. Every Monday, he offers up interesting and provocative insights on investing, economics, and markets in his Weekly Market Comment. In this week's edition, he details "A Who's Who of Awful Times to Invest":

December 1961 (followed by 28% market loss over 6 months)

January 1973 (followed by a 48% collapse over the following 20 months)

August 1987 (followed by a 34% plunge over the following 3 months)

July 1998 (followed abruptly by an 18% loss over the following 3 months)

July 1999 (followed by a 12% loss over the following 3 months)

December 1999 (followed by a 9% loss over the following 2 months)

March 2000 (followed by a 49% collapse in the S&P over the following 30 months)

The defining characteristics of these instances were:

1) price/peak-earnings multiple above 18

2) 4-year high in the S&P 500 index (on a weekly closing basis)

3) S&P 500 8% or more above its 52-week moving average (exponential)

4) rising Treasury and corporate bond yields

Depending on how we define the interest rate trends, we can include two additional

historical instances of these conditions: October 1963 and May 1996, both closely

followed by 7-10% corrections.

One more instance completes the list: July 2007.

COLD BEER

Key To Happiness (sky)
f you want to live the good life, then Iceland is the place to be, according to a survey - which suggests the UK is worth avoiding.

The European Happy Planet Index of 30 countries puts Britain in 21st place.

Compiled by the New Economics Foundation (NEF), the list judges the happiness of the population against the amount of green rescouces it consumes.

The index measures the carbon footprint of each country alongside life satisfaction and life expectancy to calculate how efficiently finite resources are converted into wellbeing.

The report, published in association with Friends Of The Earth, found:

:: Only transition economies and Portugal, Greece and Luxembourg ranked below the UK

:: Europe as a whole has become less efficient in translating fossil fuel into relatively long and happy lives. In fact, the index reveals that Europe is less carbon efficient now than it was in 1961.

:: People are just as likely to lead satisfied lives whether their levels of consumption are very low or high.

Nic Marks, the founder of NEF's Centre For Wellbeing, said: "Countries like Iceland, the highest scoring nation on our index, clearly show that happiness doesn't have to cost the earth

"Iceland's combination of strong social policies and extensive use of renewable energy demonstrate that living within our environmental means doesn't mean sacrificing human wellbeing. In fact, it could even make us happier."

Andrew Simms, NEF's policy director and head of the climate change programme, added: "What is the point if we burn vast quantities of fossil fuels to make, buy and consume ever more stuff, without noticeably benefiting our wellbeing?"

Simon Bullock, from Friends Of The Earth, said: "Our economy has been binge-drinking fossil fuels for decades.

"But not only has this been wrecking the environment we all depend on, it's not been making us any happier either."

THE BEATLES

Help us out, west asks Opec, with pound at 25-year high against dollar (guardian)
Warning that oil could hit $95 a barrel by end of year

UK inflation outlook may force sixth bank rate rise

Middle East members of the oil cartel Opec were last night under pressure for an immediate rise in production, after a warning from Goldman Sachs that prices could hit $95 a barrel this year.

With a bout of speculative activity yesterday driving Brent crude to within a few cents of the record $78.65 of last summer, Goldman said that shortages of supply were behind the steady rise. However, the price later dropped to $77.63 and a decline in petrol futures led New York analysts to question Goldman's forecast.

A further rise in oil prices would add to inflationary pressures in developed countries, with some UK analysts fearful that dearer energy increases the risk of at least one more quarter-point increase in base rates from the Bank of England.

Despite recent declines in North Sea output, Britain's status as an oil producer has been a contributory factor in the recent rapid rise in sterling against the dollar. The pound yesterday exploited nervousness about further fallout from the US sub-prime mortgage crisis to climb above $2.04 for the first time in more than a quarter of a century. Analysts in London were looking to today's inflation figures for June, and tomorrow's release of the minutes of the meeting this month at which the Bank raised borrowing costs to 5.75%, to assess the chances of what would be a sixth increase in bank rate since last August.

Jonathan Loynes and Paul Dales, at Capital Economics, said in a report yesterday that the recent climb in oil prices and dearer food had placed a question mark over the Bank's forecast that inflation would fall sharply. "The recent further increase in oil prices and the potential stickiness of food prices suggest that previous expectations of a sharp fall in UK consumer price inflation over the coming months may now be disappointed. This could add to the upside risks to interest rates."

Sterling has passed $2 in recent weeks amid expectations that interest rates in Britain have further to rise, whereas US short-term borrowing costs have peaked at 5.25%. The last time the pound was at its current levels against the US currency was in early 1981, when the Thatcher government was using high interest rates to tackle inflation and oil prices were high as a result of the Iran-Iraq war.

On the foreign exchanges yesterday, the dollar fell across the board, suffering particularly against currencies such as the pound and the New Zealand dollar where interest rates are high. Sterling peaked at $2.0405, but slipped back to $2.0367 in late afternoon trading. Investors are concerned that weakness in the US housing market could spread to the rest of the economy and force the Federal Reserve to cut interest rates. Ben Bernanke, the chairman of the Fed, is giving testimony to Congress tomorrow on the state of the economy, but is not expected to signal an early cut in rates.

Wall Street was last night awaiting a statement from the investment house Bear Stearns on the losses suffered by investors in two of its hedge funds exposed to the sub-prime market to assess the risks to the rest of the financial sector.

In the energy market, a wave of speculative activity pushed Brent crude to $78.40 before profit taking saw it fall back. Goldmans said Opec production was a million barrels a day down on last year while demand is strong. "We believe an increase in Saudi Arabian, Kuwaiti and United Arab Emirate production by the end of the summer is critical to avoid prices spiking above $90 a barrel this autumn," the investment bank said. "Our estimates show that keeping Opec production at current levels and assuming normal winter weather, total petroleum inventories would fall by over 150m barrels or 6.5% by the end of the year, which would push prices to $95 a barrel with a demand response."

Opec yesterday sought to calm increasingly frenzied global energy markets when it predicted world demand for oil would grow only modestly in 2008. It downplayed the need for extra production, citing greater energy efficiency, higher taxes and conservation.

SHUCKS

Hirst's Shark Moving to New Home in Met (nytimes)
As soon as Damien Hirst began replacing the rotting shark in that famous work “The Physical Impossibility of Death in the Mind of Someone Living,” the art world began speculating where its owner, the hedge-fund billionaire Steven A. Cohen, would show the piece.

Would it head to his Stamford, Conn., office where a shark floating in a tank of formaldehyde would be an appropriate mascot for a group of aggressive traders? Or would he lend or donate it to an institution like the Museum of Modern Art or the Metropolitan Museum, both of which have been courting him for years?

This week the Met confirmed that the shark will go on view in its modern and contemporary art galleries by Labor Day weekend. It will be there for two to three years.

“When Steve Cohen acquired it, I sent him an e-mail asking if we could show it,” said Gary Tinterow, the Met's curator in charge of 19th-century, modern and contemporary art.

Mr. Cohen bought the piece in 2004 for $8 million, which at the time was one of the highest prices paid for a contemporary work of art. He released a statement saying, “I am very excited that the piece will be displayed at the Met with other art-historical treasures.”

This won't be its first appearance since the new shark replaced the original one. After leaving Mr. Hirst's studio in Gloucestershire, England, this fall it went to Bregenz, Austria, where it was included in a show about object-based art.

For a museum like the Met, whose taste in contemporary art is known to be conservative, showing a work as provocative as the shark is an adventurous step. “It's big, it's important and it's amazingly powerful,” Mr. Tinterow said.

REFCO

Sarbanes-Oxley takes blame for America's corporate ills (financialnews-us)
The charge sheet against the act does not stand up

Larry Ribstein, a law professor at the University of Illinois, wears his hate for the Sarbanes-Oxley Act of 2002 on his sleeve. On his blog he sells a T-shirt featuring a clothes line clipped with two socks, one labeled Sarbanes, the other Oxley, with the caption “Hanging business out to dry.”

US-listed IPOs

Ribstein, co-author of The Sarbanes-Oxley Debacle, is not alone. Since the act was passed during a single frantic month in July 2002 at the height of the scandals at WorldCom, Enron and Tyco, the legislation has suffered the wrath of executives, directors, boards, auditors, bankers and lawyers, who all complain it was passed too quickly and that America might take decades to recover.

The prosecution case against Sarbanes-Oxley is extensive. Some argue it merely repeats older legislation: the US already had a thickly plated regulatory regime 70 years old in the Securities Exchange Act of 1934.

In addition there is the Foreign Corrupt Practices Act of 1977, which required companies to have internal controls over functions such as accounting. Other critics have gone further: they have argued that the act has eroded foreign competitiveness, that it imposes excessive costs, and leads to extra litigation.

President George Bush signed the act on July 30, 2002. And with the fifth anniversary just days away, it is as unpopular as ever. In December, New York Mayor Michael Bloomberg endorsed a report that predicted a loss of 60,000 jobs and $25bn (€18bn) in cashflow on Wall Street over five years unless Sarbanes-Oxley and other securities laws were revamped. Executive search firm Korn/Ferry found that 58% of US directors wanted to repeal the rules.

Yet supporters of the measures argue that blaming the act for all corporate America's ills is unfair. In many circles, Sarbanes-Oxley has become a convenient shorthand for everything that is wrong with the US's burdensome regulatory regime and even, in some cases, its controversial foreign policy.

Many issues have been laid at the act's door which, on closer inspection, have nothing to do with the text or spirit of it. The effect of Sarbanes-Oxley is getting lost in translation, according to Harvey Goldschmid, a Columbia Law School professor and former Securities and Exchange commissioner.

“When I took office the day after Sarbanes-Oxley was signed, the markets were in turmoil and the business community in disrepute. Five years later, the atmosphere has dramatically improved and Sarbanes-Oxley gets a good deal of credit for the change,” said Goldschmid.

A desire to legislate is a long tradition for the country. The act's critics said America's love for the precision of the written word was one of the reasons the act was passed. Whereas the UK gets by without a constitution, in America there is a love of codifying, classifying and sanctioning everything that moves.

Nowhere is that more true than in financial regulation, where the UK depends on principles and the US depends on multiple layers of oversight. It spends more than $425,000 on this for every $1bn of gross domestic product, according to Harvard Law professor Howell Jackson.

Much of the charge sheet against the Sarbanes-Oxley Act does not add up. Of all the allegations against it, it is the claim that the act has eroded America's competitiveness that has had the most resonance throughout the country's boardrooms. The act is blamed for the US becoming less competitive with foreign markets, especially when it comes to listings of initial public offerings.

But Hal Scott, a Harvard Law professor and director of the committee on capital markets regulation, backed by US Treasury Secretary Henry Paulson, said nothing in the act was prohibitive to foreign firms, and that the committee had been careful not to lay the blame on Sarbanes-Oxley for US competitiveness problems.

“The drive to the private market and the growth of foreign markets are not the fault of Sarbanes-Oxley,” said Scott. He cited two big problems with the US markets that affected competitiveness.

The first was litigation and the second was “the way the SEC goes about doing its business. It doesn't particularly care whether people want to come to the US or not. The SEC defines its mission simply as the cop on the beat. But in a competitive world, we need to compete and stay ahead.”

Ethiopis Tafara, director of international affairs at the SEC, recently said: “US markets have not become less competitive. They are facing more competition.”

The allegation that the act has led to a decline in the number and value of listings is difficult to sustain, because other countries sustained similar declines. It is true that after 2002 fewer US firms went public - but UK firms also shied away from listings.

Ken Lehn, a professor at University of Pittsburgh, found that about 87% of US IPOs since 1990 took place before Sarbanes-Oxley, and 75% of the dollar volume of US IPOs was raised before the legislation. But in the UK similarly, most IPOs took place before 2002: 68%, and 75% of UK listing proceeds were raised before the act.

Many of the changes in foreign listings appear to be either cyclical or political. Last year, almost all of the of the top-10 largest IPOs were privatizations of state-owned firms, especially in China. And the number of first-time American Depositary Receipts listed in the US was falling as long ago as 2000, two years before the act, when there were 53 ADRs listed worth $46.39bn. The next year, there were only eight, worth just over $7bn, according to data provider Dealogic.

And the pendulum is swinging back to the US: by last year, there were the same number of ADRs listed, 17, as there were in 1998. Similarly, last year there were 41 IPOs from non-US issuers in the US - the highest number since the pre-Sarbanes-Oxley days of 2001.

There is other evidence the act suffers mainly from a perception problem. A Korn/Ferry study this year found that 72% of directors in the Americas felt their boards had become more cautious because of Sarbanes-Oxley. However, 61% of the boards in the UK felt the Combined Code had the same effect. Yet 58% of the directors in the Americas thought the act should be repealed or overhauled, while only 28% of the directors in the UK felt the same about the code.

Lewis Ferguson, partner at law firm Gibson Dunn & Crutcher and former Public Company Accounting Oversight Board general counsel, said the requirements of the act were similar to those of many foreign regulators, including the UK's Financial Services Authority and the French, Canadian and German regimes. He said: “Most of that has been adopted since Sarbox. We were the first people to put in a system of periodic inspection.”

And the differences were decreasing every day. Tafara and SEC international affairs senior counsel Robert Peterson have drawn a blueprint for international regulatory co-operation, and the introduction of International Financial Reporting Standards will draw many international regulatory regimes closer together.

So arguments that Sarbanes-Oxley has substantially added to the US regulatory burden look difficult to stand up. But what about the charge that the act has imposed excessive cost on the industry?

Boston's AMR Research estimated Sarbanes-Oxley technology compliance costs about $6bn a year. Estimates of the individual costs for companies range from $1m to a more recent estimate of $5.1m by Korn/Ferry International. About one third of that would be technology-related.

Small companies would suffer that cost more than their large competitors. But more than 6,000 small companies, with a market capitalization of less than $75m, have been exempted from Sarbanes-Oxley for the past five years. They will not have to file a year-end internal control reports until next year, or an external auditor's report until early 2009.

German chemicals producer BASF puts its Sarbanes-Oxley costs at between $30m and $40m a year, as does General Electric. In 2004, former AIG chairman Maurice Greenberg estimated the company spent $300m a year fulfilling the requirements.

Yet studies suggest companies have earned back those costs, thanks to a rising stock price that can be directly attributed to complying with the act. Lehn's research found that because those US companies have avoided risky activities over recent years, that has produced an instant share price premium of almost 30% for all companies listed in the US.

Steve Wagner, head of Deloitte's corporate governance center, said the companies that faced the high cost of compliance were making up for slack before. “It does surprise me when costs are up in the stratosphere, and it indicates they had a high degree of deferred maintenance,” he said.

Accountancy firm PwC found in 2005 that more than 54% of 341 companies with more than $150m in revenues foresaw no more increases in their Sarbanes-Oxley-related spending, while 7% expected the costs to decrease over two years.

Lee Dittmar, leader of Deloitte's governance risk and compliance consulting practice and co-head of its Sarbanes-Oxley services group, said: “This first five years have been messy but, remember, we have been moving an entire financial ecosystem to a different plane than it was before.”

Dittmar and Wagner wrote: “Fear can be a powerful generator of upstanding conduct. But business runs on discovering and creating value. The procrastinators need to start viewing the Sarbanes-Oxley Act of 2002 as an ally in that effort.”

The act's supporters, including former WorldCom trustee Richard Breeden and Republican Congressman Michael Oxley, who sponsored the act and is now at Nasdaq, urge another perspective. “The implementation costs are one-ten-millionth of executive pay,” Breeden said.

Because Sarbanes-Oxley imposes big fines on corporate fraudsters, it is easy to blame it for the multibillion-dollar class-action settlements crowding the markets. But a closer reading reveals that nearly all of that litigation is based on other rules in the US regulatory system, particularly Rule 10b5 of the Securities Exchange Act 1934, which prohibits fraud and deceit in securities transactions.

In addition, class-action lawsuits have been falling, not rising. In the first half of this year, the number of class-action lawsuits filed fell 42% from the average six-monthly rate of 101 cases to 52 cases, according to Cornerstone Research. While the number of class-action settlements rose fivefold last year, that was largely due to 14 mega-settlements from 2002 and 2003, including the $6.6bn partial settlement of Enron.

Mary Jo White, a former US federal prosecutor who is now with law firm Debevoise & Plimpton, said no big shareholder lawsuits had been closely influenced by Sarbanes-Oxley. The US courts have come down against big shareholder lawsuits, most recently in the Supreme Court's rejection of an IPO antitrust lawsuit against Wall Street underwriters. And the Committee on Capital Markets Regulation has called for Rule 10b5 to be amended.

So the charge sheet against Sarbanes-Oxley, although long, is open to question. Nevertheless there are still attempts to revise the act, including an amendment of the controversial auditing standards and the Treasury Secretary's task force to revamp the US regulatory regime.

Paulson pledged to devote the next six months to creating a blueprint for modernizing the regulatory structure in the US. He said he would create two panels, one representing investors and the other managers of money and companies.

The SEC and Public Company Accounting Oversight Board have revamped Section 404 to allow outside auditors to take on the work of internal auditing staff. The committee, like the European Union's internal market commissioner Charlie McCreevy, has also asked for a cap on liabilities for auditors.

Corporate America has come to terms with the Sarbanes-Oxley Act, and even its greatest critics are beginning to admit that not all the country's evils should be laid at its door. The charge against the act has been that it has led to the decline, both in performance and morale, of corporate America. Guilt, but only by association, is becoming the apparent verdict.

The controversial clauses

Amid the complaints about cost, foreign competitiveness and potential legislation, only three main parts of the act have drawn fire: Sections 302, 404 and 906.

• Section 302 calls for chief executives and chief financial officers to sign off on financial statements and auditing controls.

• Section 906 imposes potential penalties of $5m (€3.7m) and 20 years imprisonment if the companies do not comply.

• Section 404, the most notorious,a mere 173 words long, only asks companies to submit full reports of internal controls every year. However, this has created havoc as companies struggle to interpret how far they have to go to comply. It has taken five years for the US Securities and Exchange Commission and Public Company Accounting Oversight Board to provide clearer expectations for auditors about how to comply with the section.

Timeline of events leading up to Act

1983 - Foundation of WorldCom

1985 - Creation of Enron

1986 - Kenneth Lay appointed Enron chairman and chief executive

1990 - Lay hires former management consultant Jeffrey Skilling to look after the company's energy trading operation.

1999 - US President Bill Clinton calls WorldCom chief Bernie Ebbers “the symbol of 21st-century America”

2000

- July: WorldCom's attempts to buy larger rival Sprint thwarted by regulators. Worries about WorldCom's mounting debt begin to emerge

- December: Enron rises to become US's seventh-largest company

2001

- October: First sign of trouble at Enron, which announces $638m third-quarter loss

- December: Enron files for bankruptcy

2002

- January: Business Week magazine lists Dennis Kozlowski, chief executive of conglomerate Tyco as one of the top 25 corporate managers

- March: Enron's auditor, Arthur Andersen, is indicted over the shredding of tons of Enron-related documents. Firm later collapses

- June: Accounting irregularities revealed at WorldCom. Tyco's Kozlowski resigns unexpectedly after he is investigated for tax evasion

- July: WorldCom files for bankruptcy

- July 30: Congress passes Sarbanes-Oxley Act

2005 - Ebbers jailed for 25 years. Kozlowski found guilty of theft from Tyco, sentenced to up to 25 years in jail

2006 - Lay and Skilling found guilty of conspiracy, wire fraud and other charges. Lay dies six weeks later

OPS

S&P: Hedge funds' operations as big a risk as their investments (financialweek)
Recent blowups at two Bear Stearns hedge funds because of bad bets on subprime mortgages may give investors pause. But as more institutional investors are allocating dollars toward alternative investments like hedge funds—according to financial market researcher the Tabb Group, by 2008 pension plans will compose 19% of hedge fund assets, up from 12% in 2005—they should be no less worried about operational risks than about exotic investments, a report out today by S&P finds.

“The data indicate that mundane, non-market risks—better known as operational risks—could pose just as large a threat to hedge fund investors as exotic investing strategies,” said Charles Davidson, a director in S&P's financial services ratings group, in the report.

Some of the top operational risks that hedge fund investors face, according to S&P, include concentration of strategy in just one or two hedge fund managers and inexperienced or untested staff. At some hedge funds, S&P found, big strategic decisions lie in the hands of one person or a small group of executives. Also problematic: As hedge funds have exploded in assets under management, they often haven't been able to hire experienced staff quickly enough.

Furthermore, found S&P, some hedge funds have outdated information technology infrastructure or a non-existent business continuity plan in the event of a blackout or catastrophic event.

When choosing a hedge fund, investors should look for those that have had a detailed third-party evaluation of their operational systems and control infrastructures, said S&P. “This can be a powerful tool for hedge funds to improve operations and for investors to understand how a particular fund stacks up operationally against other hedge funds with similar strategies,” said Mr. Davidson.

F*CEB**K

Caught on camera - and found on Facebook (times)
It has become as much a part of student life as hangovers and essay crises. But now Facebook, the social networking website, is being used as a disciplinary tool by university authorities.

Staff at Oxford University are searching the website, collecting photographs of students who they say have broken rules on post-examination celebrations, and handing down fines. The student union has branded the move a “disgraceful” intrusion into privacy and has e-mailed every common room advising how to prevent dons viewing the photographs.

Last week the university's disciplinary officers, the proctors, began e-mailing students whose profiles contained pictures of “trashings”, where students spray each other with champagne, flour or worse, to celebrate finishing their exams.

The move is the latest example of how information posted on social networking websites is used against users. Research suggests that one in five employers is vetting potential recruits on Facebook and similar websites.

Alex Hill, 21, a maths and philosophy student, received an e-mail stating that three of her photos provided evidence that she had engaged in “disorderly” conduct. “I don't know how the proctors got access to it,” the St Hugh's College student said. “I thought my privacy settings were such that only students could see my pictures.

“They cited three links to pictures on my Facebook profile where I've got shaving foam all over me. They must just do it randomly because it would take hours and hours to go through every profile. I'm outraged. It's truly bizarre that they're paying staff to sit and go through Facebook. It must be extremely time-consuming.”

For years the university has tried to rein in the celebrations. Spot-fines of up to £70 were introduced in 2004 for those who were caught, among other offences, “fluid-spraying or egg hurling”, after residents and police complained that the clean-up bill ran into thousands of pounds. However, as The Times reported in June 2004, the fines did nothing to prevent exuberance, and scarce staffing resources meant that only 14 students were caught.

Last year the university raised the idea of allowing students to sit finals in casual clothes, rather than sub fusc, a combination of white bow-tie and dark suit, in the hope that deflating the sense of occasion would prevent the trashings.

Now the proctors have taken their battle online. A spokesman for the university said: “Despite the advice given out before exams, there have been a lot more complaints made and there seems to have been a very high volume of incidents.

“The proctors wish to take the steps available to them to identify and discipline the culprits. Facebook forms part of the evidence that the proctors might use.”

The students are livid that their online world is being gatecrashed. Martin McCluskey, president of Oxford University Student Union, said: “While we do not condone unruly, violent or disorderly behaviour, we believe that the university's use of private photos from the Facebook site in disciplinary procedures is disgraceful.

“The proctors' actions are underhand and the fines being imposed are completely disproportionate. Taking action during the summer vacation also makes it even more difficult for people to attend hearings and have their case heard. Many people who have already completed their degrees will be faced with an ultimatum — pay up or we won't allow you to graduate.”

Those who even consider engaging in unruly behaviour have been warned off. One undergraduate was fined £40 before he had sat his exams; he had set up a Facebook event inviting people to come and trash him.

Losing face

— Photographs of Amy Polumbo, Miss New Jersey, posing with pumpkins held to her chest led to an alleged blackmail, and the national Miss America organisation reviewing whether she was fit to hold her crown. The pictures, from her Facebook profile, were splashed across American newspapers

— A survey of 600 British companies revealed that one in five had logged on to Facebook and other networking websites to vet potential employees. Jacqueline Thomson, from public relations firm Brands2Life, said that she had turned down one applicant after learning that he had used Facebook “to criticise previous employers and discuss company information”

— In Toronto, Canada, five students were banned from a school trip after disparaging remarks about teachers were found on Facebook

— Brad Karsh, a US career consultant, turned down a job applicant after reading on Facebook that his interests were “smokin' blunts with the homies” and “shooting caps into whitie”

— A university in Pennsylvania denied a 27-year-old woman a teaching degree on the grounds that she was promoting under-age drinking, after she posted a photo of herself on Facebook, titled “Drunken Pirate”

— Several students at DePauw University, Indiana, were disciplined after college authorities used Facebook to trace those responsible for vandalising a sculpture of a deer