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
Basis Capital in creditor crisis talks (ft) Basis Capital, one of Australia's biggest hedge fund managers, is in crisis talks with creditors after banks seized and began to sell some of its investments linked to hard-hit US subprime mortgages.
Creditors said Basis missed margin calls - demands for additional loan collateral - on Monday for its Basis Yield Fund, and has appointed accountants Grant Thornton as restructuring advisors.
The problems at the $1bn manager follow heavy losses in two highly-leveraged Bear Stearns funds investing in bonds linked to US subprime and the closure of at least two other hedge funds following a similar strategy.
Basis told investors last week that the Yield Fund fell 13.93 per cent in June, and said it was likely to stop withdrawals to prevent forced sales of assets.
It reassured them in a letter that its funds were “highly diversified” and its investments remained “fundamentally sound”, while suffering “indiscriminate mark-to-market pricing by dealers”.
But the plummeting value of the subprime market - where it invested in the equity portions of collateralised debt obligations - together with the fallout in other credit markets– prompted margin calls from creditors it could not meet.
Basis's other fund, the Pac-Rim Opportunity Fund, is thought to have met margin calls, partly because it was less exposed to US subprime.
Neither fund had leverage anywhere close to the Bear Stearns funds, something that one creditor said gave it a chance of surviving.
“But when it starts to slip it is very difficult to arrest the slide,” he added.
The Yield Fund is understood to have missed margin calls on repurchase agreements [repos], a form of secured lending, prompting several big investment banks to seize the collateral and put it up for sale.
JP Morgan and Citigroup have circulated lists of assets they would like to sell, investors said, while Morgan Stanley seized assets to cover its exposure. Other creditors include Goldman Sachs, Bear Stearns and Deutsche Bank, according to people familiar with the situation.
Lehman Brothers and Merrill Lynch are prime brokers to the funds. All declined to comment or did not return calls. Grant Thornton also declined to comment, and Basis did not return calls.
Basis removed information about its funds from its web site this week, along with glowing reviews by rating agencies which had helped it sell to private investors in Australia.
Other hedge funds investing in structured credit are likely to have similar issues as values are marked down savagely by brokers, hedge fund investors and creditors said. “Any of these people that have a single investment strategy in volatile leveraged credit products and are funding it in the repo markets is going to have a tough time,” said one Basis creditor.
Basis, founded by Steven Howell and Stuart Fowler, was the seventh-largest hedge fund in Australia at the start of the year, according to AsiaHedge, the magazine.
Fintag says What can you say? Let us hope they can ride the storm.
BRING OUT THE LAWYERS
Bruised Bear hedge fund investors mull legal action (reuters) Some aggrieved investors are turning to lawyers to pursue possible legal claims stemming from losses at two Bear Stearns Cos. hedge funds that were virtually wiped out from large, illiquid bets on risky mortgages.
One lawyer who handles cases against financial firms said on Wednesday that he had been retained by two investors in the funds -- a family office and a fund of funds he would not identify -- to explore potential lawsuits.
"They are shocked and angered by the losses," said lawyer Ross Intelisano, of Rich & Intelisano in New York. "They were under the impression that at least for that fund (that they were invested in) that the losses were much milder."
Bear Stearns said in a letter to clients on Tuesday that there was "effectively no value" left for investors in its High-Grade Structured Credit Strategies Enhanced Leverage Fund and "very little value" remaining in the High-Grade Structured Credit Strategies Fund. A copy of the letter was obtained by Reuters.
CNBC reported on Wednesday that Bear Stearns had hired several outside law firms as it braces for investor litigation. It said the Wall Street firm had hired WilmerHale to represent it before the U.S. Securities and Exchange Commission and shareholders, another to represent the board of directors and audit committee and another to represent the funds themselves.
Bear Stearns did not respond to requests for comment on potential litigation or its legal strategy.
Intelisano, who said he still needed to review the funds' offering documents before deciding to bring any legal action, said his clients had both invested in the High-Grade Structured Credit Strategies Fund. The family office -- a private entity that oversees investments for a wealthy family -- had about $1 million invested, while the fund of funds had more than $10 million in the fund, he said.
The Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage fund reported $638 million of investor capital and gross long positions of $11.15 billion in the first quarter.
The Bear Stearns High-Grade Structured Credit Strategies fund had $925 million of investor capital and gross long positions of $9.682 billion through March 31.
Bear Stearns was forced last month to bail out that fund with $1.6 billion, reduced from $3.2 billion initially, to prevent a fire sale of those assets.
Currently, about $1.4 billion remains outstanding on this credit line, Bear said in the letter.
Legal experts say the losses in the Bear funds are so large that it's almost certain litigation will result.
But they say plaintiffs could have a tough time proving their case. Because the funds were aimed at sophisticated investors such as institutions and wealthy clients, it could be hard to argue that the risks were not properly defined.
Another lawyer who specializes in securities lawsuits, Jacob Zamansky of Zamansky & Associates, said on Wednesday that he too had been contacted by several investors in the funds -- primarily wealthy individuals. He said he was investigating potential claims, including allegations that Bear Stearns vastly understated the total subprime exposure of the funds.
A major issue is where potential claims would be brought. If the hedge funds themselves are sued, that likely would happen in federal court, Intelisano said.
But if Bear Stearns itself is the defendant, cases could end up in arbitration, he said.
"Where to file and against what entities I think is a huge question," he said. "It may be one of the reasons no one has done anything yet."
Philippe Bonnefoy, chairman of hedge fund advisory group Cedard Partners, said that lawsuits are likely against defendants such as the funds' administrators who were responsible for independent accounting, the prime brokers that helped finance the funds' trades and the fund managers.
He said that the funds long had had steady returns and Bear had a good track record. They were attractive to institutional investors as well as funds of funds that took stakes in various hedge funds, making the losses all the more staggering.
"There is no reason for investors to believe they are at 100 one month and then be told they are at zero the next," he said.
Fintag says There is a case I am sure. I too would be shocked and angered if I had seen my investment wiped out so suddenly. We will watch with interest.
SMALL FRY
Bad News Bear? It's All Relative (nytimes) For a company that just had two big hedge funds evaporate, Bear Stearns seemed to be faring relatively well on Wednesday. Its shares were down 1.1 percent in late-morning trading Wednesday, far less than the after-hours decline of 3.6 percent they registered Tuesday night. That is when reports started emerging that two Bear Stearns-run hedge funds, worth an estimated $1.5 billion at the end of 2006, has lost nearly all their value because of mortgage-related bets gone bad.
Why wasn't the share reaction bigger?
Perhaps investors were taking the glass-half-full view expressed by Felix Salmon on the Portfolio.com blog. Mr. Salmon noted that, considering how leveraged these hedge funds were — they funded their positions with multibillion-dollar loans from major Wall Street banks — it is a wonder that the funds didn't end up deeply, deeply in the red when the smoke cleared.
He wrote:
As it is, investors in the funds will have lost their money. But the banks which lent money to the funds will get it all back, and neither Barclays nor anybody else is going to have to suffer hundreds of millions of dollars in loan losses.
Of course, someone was feeling the pain Wednesday — it just might not have been Bear Stearns. That was the idea behind a post on Greg Newton's Naked Shorts blog. Mr. Newton provided this four-word summary of Bear's latest letter to its hedge-fund investors: “You're screwed. We're not.”
Mr. Salmon said Bear's final tally is much better than Wall Street had expected, but others would disagree. “How did you go from reporting very high returns to suddenly now saying the collateral is worth nothing?” Janet Tavakoli, president of Tavakoli Structured Finance, asked The New York Times in an article published Wednesday.
The damage to Bear Stearns from Tuesday's disclosure may be as much with the firm's reputation as with its earnings or stock price. Along those lines, the firm closed its letter to the funds' investors this way:
“Our highest priority is to continue to earn your trust and confidence each and every day, consistent with the firm's proud history of achievement. As always, please contact us if we can be of service.”
Fintag says The New York Times hates me. It often takes a lead from some comments I have made but never acknowledges my existence. That is my problem not yours but I am quite a sensitive soul.
The Bear debacle has raised many questions and is causing fall out in the industry of subprime asset trading hence the closing down of a number of hedge funds subsequently. The role of independent pricing comes to the fore (why don't NAV's get published which state the pricing policy, what percentage of the positions were listed, the average spread, percentage that are unlisted and where only manager marks were available to price? That would help investors out from a risk/reward perspective.)
While Schneeweis was referring to the relative advantages of managed accounts at the time, the same general theme has now made its way into the debate on hedge fund replication. Alpha Male shared a cold one with one of the luminaries of hedge fund academia a couple of months ago (a Hall of Fame member) when said guru expressed concern over the so-called “distributional replication” approach to hedge fund cloning. In his opinion, Kat's reliance on monthly data to pump out daily trading instructions was a source of potentially considerable error.
Now another group of academics, backed by one of the world's largest hedge fund investors, has attempted to address this concern. Nicolas Papageorgiou, Bruno Remillard, and Alexandre Hocquard of Montreal's HEC Business School have just released the first version of a paper that aims to improve on the Kat-Palaro method (available here at AllAboutAlpha.com). Papageorgiou tells AllAboutAlpha.com that Canada's Desjardins Global Asset Management has been quietly managing a “beta” fund since late 2006 and will be adopting this approach for an official launch in September. So expect to see Desjardins and Papageorgiou on red carpets around the hedge fund conference circuit this Fall (including this one featuring a panel of both Papageorgiou and Kat for - with apologies to Seinfeld's Mr. Peterman - ”a good old fashioned Kat fight“).
According to Papageorgiou:
“The efficiency measure as presented by Kat and Palaro (2005) is...subject to several shortcomings and inconsistencies. The most significant of these relates to the way that the daily trading strategies are derived from the distribution of monthly returns. The properties of the estimated monthly distributions and copula functions proposed by the authors are not infinitely divisible and therefore the true properties of the daily returns are not known. As a result, the replicating strategy will not be precise.”
He goes on to argue that a more “precise” model decreases the so-called “time to convergence” required before the replication's statistical properties match those being targeted. Furthermore, he says that the precision of the replication strategy must be known before any conclusions can be drawn about the replicatability of various hedge fund indices:
“[Kat and Palaro's] analysis can...be misleading if we do not also examine the precision of the replication strategy. Before dismissing the hedge fund indices as poor-performers, we need to properly evaluate whether the properties of the replication strategies and hedge fund indices are truly the same. A proper examination of both the cost and the precision of the replication strategy is fundamental before any strong conclusion can be drawn about the model's ability to replicate hedge fund indices.”
Papageorgiou asks a question similar to the one posed by Northwater in a recent paper, namely: does the choice of reserve asset (the asset or assets being dynamically traded) impact the precision of the outcome? In particular, he concludes that while the choice of reserve asset might affect the mean return of the replication, it does not affect the precision (a.k.a. “success“) of the replication model. In fact, Papageorgiou doesn't mince words as he wonders why previous studies have neglected this finer point:
“Contrary to the conclusions put forth by recent studies at EDHEC and Northwater (2007), the choice of reserve asset does not impact the model's ability to replicate the statistical properties of the indices. The choice of reserve asset only impacts the initial cost of investing in the replicating portfolio (and hence only impacts the return of the replicating strategy). This is not to say that the return generated by the model is not important, however it is not a measure of the model's success. One must dissociate the technical issues of the replicating methodology (i.e. how to best model the returns and solve for the optimal trading strategy) from the choice of the reserve asset. Our contribution is to provide a robust framework for the replication methodology, and address the technical shortcomings of the much publicized research of Kat and Palaro. It is a little surprising that the two aforementioned reports, who have clearly spent considerable time studying the Kat and Palaro (2005) approach, do not address the technical shortcomings of the proposed approach, and focus instead on non-model related issues.”
While he acknowledges that the mean return of a distributional replication depends on the mean return of its inputs (”Garbage in, garbage out”), he finds that the bar is actually set pretty low when it comes to beating hedge fund indices with distributional replications:
“As is the case with any investment strategy, the returns depend on the choice of assets. The results in this paper indicate, however, that it is not necessary to select the best performing assets over the sample period in order to replicate and outperform the hedge fund indices. In fact, we show that by using run-of-the-mill exposures in our reserve asset we can nonetheless outperform the majority of hedge fund indices. We purposely selected two reserve assets that have exposures to different yet common market premia over the sample period, and we find that both reserve assets outperform a large percentage of the indices. We also find that the EDHEC indices, which are subject to less significant biases, are more easily to replicate than the HFRI indices.”
This paper is quite technical even though Papageorgiou tells us he stuck most of the technical issues in the appendix in order to make it more accessible. But for any non-rocket-scientists out there, the introduction and conclusion make all the salient points.
While the paper does indeed propose specific improvements to the Kat-Palaro method, some might describe these as incremental, rather than dramatic. For his part, Harry Kat tells AllAboutAlpha.com that he sees the proposed changes to his procedure as “fairly trivial”.
Regardless, what's probably more noteworthy is the simple fact that the distributional replication camp will soon be welcoming a second competitor. To date, Kat's “Fund Creator” has been the only game in town (although it provides trading instructions and does not actually manage assets itself). Ironically, the entry of Desjardins into this space will likely be a good thing for Fund Creator since it goes a long way toward legitimizing a method that has so far been met with considerable skepticism from many corners.
Fintag says Why bother? You either buy a real Rolex or a fake. You can pretend to have the real thing but you know that deep down it will break down after 6 months.
The main flaw with replication is the data that is used is biased towards bull years, selective, inconsistent and unreliable. Just like the workings of a fake Rolex.
Tell the world you have found a cheap way into Hedge Funds and people will be impressed - until it breaks down.
BULL SH*T
Economic clouds take shine off shares (guardian) A possible £12bn bid and an actual £11bn takeover would normally get the market going but yesterday traders were more concerned about the increasingly gloomy economic picture.
In the UK, it seems the chances of the Bank of England raising interest rates to 6% are growing by the day. After Tuesday's worse than expected inflation figures came news from the Bank that a majority of six-to-three voted for dearer borrowing at its July meeting. So the pound surged again, up past $2.05 at one point.
Across the pond, the sub-prime mortgage chaos refuses to go away, with Bear Stearns telling investors its two hedge funds which invested in subprime loans had very little value. Investors are worried about the problems becoming contagious, and wondering which other funds and financial institutions might find themselves holding worthless assets. So, with Asian markets falling overnight and Wall Street off to a poor start, the FTSE 100 ended down 92 points at 6567.1. By the time London closed, the Dow Jones was around 100 points lower, as Federal Reserve chairman Ben Bernanke warned in a testimony to Congress that mortgage problems were likely to get worse.
On to the bids. Supermarket group J Sainsbury jumped 5p to 590.5p on news that a Qatari investment fund, which owns 25% of the company, was in preliminary talks about a possible cash offer. A figure of more than 600p a share is being bandied about, valuing Sainsbury at around £12bn. Dealers suggested that entrepreneur Robert Tchenguiz, who is believed to speak for around 10% of Sainsbury, could sell out to the Qatari fund and turn his attention either to rival supermarket Morrison, down 0.5p to 315.75p, or pubs group Mitchells & Butler, up 16p to 892p. Morrison has a trading update due tomorrow, while M&B is already in talks with Tchenguiz about a property deal.
blah blah
Fintag says I had an email from a Facebook "friend" asking me why the markets are still bullish. Here are my reasons:
- USD dollar is so cheap that you get more stock for your bucks than before and long term non-USD investors are having a field day in the US markets picking up blue chips for the price of penny shares - debt denial; cheap credit; naive lenders; despite rising rates and the Fed failing to raise rates to keep its currency afloat most analysts and investors have seen how many companies have successfully put in hedges to protect against interest rate risk; - hedge funds have been building up large short positions, especially on US indices but they need longs to cover the risk and so have inadvertently kept the markets buoyant - the European and Asia markets just follow the US markets, despite having different fundamentals and being considerably smaller - remember the US is the largest market and 4 times bigger than the next - Japan and so give the impression the global economy is fine - bonus preservation is forcing market makers to mark upwards - many stocks are fairly priced - massive increase in share buy-backs (e.g. Wal-Mart, J&J) - subprime is over hyped - inverted yield curve theory has been proven to be just that
I am not very good at this. The markets are irrational and even more so than ever before. Reversion to mean will occur soon. Sell, sell, sell, short, short, short ...
UBS plans more leveraged lending in drive to reach top of US league table (financialnews-us) UBS's investment banking business has made a lot of money in the US. Quite how much became clear when the Swiss bank announced its first-quarter revenues from its advisory and underwriting business had increased 30% to Sfr865m (€522m), driven in large part by the growth of the US business.
However, UBS bankers last week said they were dissatisfied with the bank's position in the US, adding that they wanted it to become a top-five mergers and acquisitions advisor within the next three years, and would be looking to increase leveraged lending to lead bigger deals.
Predicting future league table positions has been a precarious business for UBS. When Jeff McDermott joined UBS's European investment banking division in 2004, he said he wanted the bank to top the region's M&A league table by the end of 2006.
The bank had to settle for a ranking of sixth in European M&A at the end of last year, and despite winning several large mandates this year, is ranked third, according to data provider Dealogic.
UBS insists this time things will be different, and a source close to the bank said all the people and structures needed to achieve its ambitions in the US were in place. A market source said: “There is nothing new here.
"This is about focusing on breaking into the Fortune 500 companies and building long-term corporate relationships.”
UBS has had success breaking into the US financial institutions advisory market and is the top-ranked bank in the market. In Asia and Europe, it has moved from being an outsider in M&A advisory to a top-five ranked bank in the past three years, but in the US it has ranked no higher than seventh since 2000.
The improvement of its M&A ranking in Europe and Asia has largely been achieved without it becoming a big lender and debt underwriter.
In Asia, the bank is not among the top 10 houses for debt or loan capital markets, in Europe it is 13th in DCM and eighth in loans, but in the US the link between M&A ranking and a bank's debt business is stronger.
A market source said: “In the US you have to have a strong position in leveraged finance to be big in M&A in the current market conditions.”
UBS said it is not about to open its check book to win a position on any large M&A deal and wants to use its balance sheet more selectively.
The Swiss bank also pointed out that despite the explosion in financial sponsor-related M&A deals, it has tended to advise the corporate side, rather than private equity firms.
This is shown in terms of its revenue ranking for fees paid by financial sponsors, with UBS ranking seventh in Dealogic's half-year league table, with just over 50% of the revenues of top-placed JP Morgan.
Fintag says Whereas many other lenders are pulling back, our favourite bank (not) decides to fill in the void and offer even more cheap debt. What do I know? I just borrow the stuff at the cheapest rates. Where it comes from, I do not care.
DYING DOLLAR
Fed keeps rates steady at 5.25% (bbc) The US Federal Reserve has left its main interest rate unchanged at 5.25%, saying it had concerns that inflation may fail to "moderate".
It was the eighth time in a row that the Fed had left interest rates unchanged, and many analysts said rates may now stay where they are this year.
The Fed is not alone in worrying about inflation, and central banks worldwide have been lifting borrowing costs.
In the UK, the Bank of England has raised rates four times since August.
The Fed's rate-setting committee, which includes chairman Ben Bernanke, voted unanimously to leave borrowing costs where they were.
"Unchanged means the Fed remains hawkish in their outlook for inflation," said Andrew Busch of BMO Capital Markets.
'Sustained moderation'
There had been some speculation that a weakening housing market and slowing economic growth could prompt the Fed to cut interest rates.
A report on Thursday showed that the US economy, the world's biggest, grew by 0.7% in the first three months of 2007, the slowest pace in four years and down from 2.5% in the last quarter of 2006.
At the same time, there are growing signs that the higher rates are causing more borrowers to default on their mortgages.
However, most analysts are expecting economic growth to pick up later this year, and the Fed said that the economy "seems likely to continue to expand at a moderate pace over coming quarters".
That, coupled with an oil price that has climbed above $70 a barrel in London and New York, was enough to fan fears that inflation would remain difficult to bring down.
The Fed warned that a "sustained moderation in inflation pressures has yet to be convincingly demonstrated".
Fintag says This shows the man's inexperience. No wonder the USD has turned into monopoly money - he needs to ramp up rates by at least 100 basis points to keep the dollar afloat. This is new territory for the US as it has always assumed the dollar was the currency of choice. No more. Even the Russian mafia prefers Euros as do many oil producing states.
The US hasn't quite understood that a falling currency leads to higher imports and given its trade deficit will feed into higher consumer prices, wage inflation and overall inflation.
If he keeps going the way he does, the US is going to get itself into a terrible mess. If it involves lots of volatility, a bear market and panic then I will be "lovin' it".
Hedgies perform best when the dark clouds are out.
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