30SEP08:
31DEC08 INDICES:
FTSE100:3550
DOW30:7550
# HEDGE FUNDS:4425 30JUN08: Oil to be USD200 by 30OCT08 USA Inflation to be 7.5% by 30OCT08
...oops 23APR08:
Next Rights Issue:
HBOS...yes
All & Lec ...
...1 Nil. 17APR08: Oil to be USD127 by 30SEP08
...16MAY08 losing my touch 27FEB08:
2 Banks go bust by 30JUN08
BS down, Lehman (a bit late I know) 20NOV07: Northern Crock to be sold for 15p
Nationalized 01NOV07: Oil to be USD103 EOM
...peaked too soon 08OCT07:
SEC to fine Goldman for pricing issues
...still waiting 15JUN07: ML to buy-out BS
JPM got there first 06JUN07: The Big Crash: 17OCT07
...well it's here
Gold high, Oil high, Dying USD, Clinton leading the opinion polls, US house foreclosures worse than thought, Northern Crock is still borrowing, UK House prices falling fast, Tech Rally has stopped, JP Morgan latest bank to fire, Commercial Real Estate is the new subprime.
Finally. The world is gradually coming to the realization that hedge funds are not the only financial institutions with an occasionally heavy thumb on the illiquid securities valuation scales.
Such pricing problems have become common in some of Wall Street's biggest markets. The burgeoning universe of complex securities based on mortgages and other assets has turned the once-simple task of getting a price quote into a confounding undertaking.
Today, “way less than half” of all securities trade on exchanges with readily available price information, according to Goldman Sachs Group Inc. analyst Daniel Harris. More and more securities are priced by dealers who don't publish quotes.
As a result, money managers can no longer gauge with certainty the value of some assets in mutual funds, hedge funds and other investment vehicles—a process known as marking to market. An official at the Securities and Exchange Commission said recently that some bond mutual funds might be using outdated or unrealistic prices to value their portfolios.
Fintag says: Tell me about it.
Here is a dilemma faced by all illiquid asset owners.
Illiquids in this sense are assets I cannot get a spread price off Bloomberg and trade immediately at that price.
I bought a painting yesterday by Alison Pullen. This is an illiquid asset. The dealer was paid GBP1500. Does that mean my painting is still worth and can be resold at GBP1500?
No. The dealer paid the artist GBP700 and took the rest. The transaction costs were therefore very high and if I put this on ebay or sell it to another dealer I would try and add these costs to the price. Where markets are efficient and the buyers know the true cost they would probably refuse my offer price and bid less.
So what value should this fixed asset be recorded at in my accounts? Its book cost of GBP1500 or its immediate ebay value of GBP1000? Or maybe its longer term director's valuation (a common practice at Enron) of GBP10000?
As this painting is being held for the long run, it could be argued it should be at book and revalued quarterly. In fact I would like to sell this painting in 10 years time and because the Queen has a number of Pullens believe the asset is worth GBP10000. I would like to accrue for this GBP8500 unrealised profit now. A mate of mine has told me in an email it will be worth GBP20000 in 10 years time so I am in fact being prudent.
Now let us pretend this painting is an Asset Backed Security? Or a new building in the West End of London? Or an interest in a Private Equity LP?
All financial institutions face pricing issues and have to guess what the unrealised profit or loss is before an asset is actually sold.
The general repricing of credit risk can be gauged by developments in the corporate bond and credit derivatives markets, where spreads have widened markedly across the whole rating spectrum.The general character of the repricing of credit risk notwithstanding, the financial tensions have affected financial institutions more than non-financial corporations.
Corporate bond spreads for most of 2005 and 2006 were in a tightening trend, albeit with some small interruptions in the spring of both years. The extremely low levels reached by credit spreads at the lower end of the rating spectrum in particular were one manifestation of the general environment of unusually low pricing and perceptions of both financial and economic risks. However, between the end of June and 2 October 2007 bond spreads for BBB-rated non financial corporations increased by around 40 basis points to stand at 100 basis points. For the same rating class, spreads for financial corporations increased by almost 90 basis points over the same period to stand at a level of 195 basis points.
The under performance of the financial sector reflects the changes in market participants' perceptions of the credit risk faced by financial institutions (including banks). This reflects the fact that financial institutions have the greatest exposure to those market segments which are at the epicentre of the turmoil, namely asset-backed securities and structured finance in general. These have suffered the most from declines in asset values and the drying up of market liquidity and activity. Market perceptions of the earnings and credit outlook for financial corporations have therefore deteriorated in the face of these difficulties.
RAB Capital's assets under management as at 30 September 2007 have been totaled at $7.12bn. This is up 6% compared to the $6.74bn under management at 30 June 2007, up 36% compared to the $5.24bn under management at 31 December 2006 and up 75% compared to the $4.03bn under management at 30 September 2006.
Included at 30 September 2007 are an estimated $209m in assets under management transferred to RAB on 28 September 2007, prior to completion of the acquisition of the business of Pi Investment Management on 2 October 2007.
Fintag says: Nice one. Despite the media's attempts at wanting the Hedge Fund world to crumble, we just get stronger and stronger - a bit like the c.diff bug in Kent hospitals.
Mounting evidence suggests bubble conditions may be emerging in US commercial real estate valuations, CreditSights warns in a new report on the sector.
The recent boom in non-residential construction has almost entirely made up for the slump in residential investment, in turn significantly increasing the economy's dependence on the commercial real estate sector, CreditSights says in Bubblenomics - Hunting for the Next Subprime in Commercial Real Estate. An even bigger problem may be overinflated commercial real estate prices, the report says.
The commercial real estate sector does not appear to be as bubbly as it was in the mid-1980s, but a slowdown in non-residential investment at a time when residential investment is already in the dumps could have serious consequences.
Fintag says: Seems unlikely. Not sure how this works in the USA, but most new UK commercial real estate buildings are pre let and although they will remain empty someone will be paying for the head lease. The trouble starts when the head lease is no longer being paid for and they cannot sub lease the space. 1991 anyone?
The scale of the task ahead for Royal Bank of Scotland when it takes control of ABN Amro was underlined yesterday when RBS announced that its engineer-in-chief, Mark Fisher, would head the Dutch lender.
Mr Fisher is "the Integrator" - the nuts-and-bolts man who puts into practice the plans of Sir Fred Goodwin, RBS's chief executive.
RBS and its consortium partners, Santander of Spain and Belgium's Fortis, have entrusted him with the job of untangling ABN Amro so they can each take their spoils. He will replace Rijkman Groenink as ABN Amro's chairman, though in effect he will be chief executive of the business.
The affable Yorkshireman is best known for running the integration of NatWest after RBS bought its rival in 2000. RBS spotted Mr Fisher at NatWest and put him in charge of what was then the biggest ever banking integration. He joined NatWest in 1981 as a graduate trainee and rose to be the retail chief operating officer before the takeover.
Investors had doubted RBS's ability to pull off such a massive takeover, but the bank beat all its revenue and cost targets for NatWest.
Now Mr Fisher has to do it all over again, and his new challenge is unprecedented. Not only is the ¿70bn (£49bn) ABN deal the biggest banking takeover ever, but the consortium plans to split the Dutch bank three ways. RBS will get wholesale banking and Asia, Fortis takes the Netherlands retail and wealth management, and Santander will get Latin America and Italy.
Simon Maughan, an analyst at Blue Oak Capital, said: "ABN needs someone who is completely au fait with back-office systems, front-office systems and how a big bank works. It's all about integration and for that reason Mark Fisher is probably the best person."
Fintag says: A very tough job. But this is how it will go - for all duplicate jobs (approx 30%) and the firings will be in London and Scotland. Why? Because the Netherlands employment laws are so tight, they have jobs for life. You cannot fire a Dutchy.
Tax changes will hurt British business and create a risk for the wider economy, the Confederation of British Industry (CBI) has warned. In a letter to the chancellor, CBI boss Richard Lambert said that scrapping taper relief on capital gains tax will make business owners worse off. The measures were announced earlier this week in the pre-Budget report. The letter was also signed by bosses of 12 firms and the CBI's small and medium sized businesses' enterprise council.
The government's plans mean that all capital gains will be subject to a flat 18% charge. This replaces a more complex system in which the rate could vary between 10% and 40% depending on the type of asset and the length of time it had been held.
Fintag says: On the hoof tax policy never works. In the Chancellor's scramble to beat the Tories pre election policies, he has inadvertently raided pensions, given buy-to-letters a massive tax break and hit hard entrepreneurs - and he was trying to go after the Private Equity who are laughing all the way to their carry interest.
The former hedge fund manager who this week pleaded guilty to attempted kidnapping for seeking to have his ex-mistress abducted and raped is saying sorry.
In an interview with the Stamford Advoacte after his plea, Albert Hsu apologized to his victim. “I am very sorry for the pain I caused her and her family.”
While accepting responsibility for his actions—”What I did was wrong,” he said. “I never denied what I did.”—he said the media had “oversensationalized” the case. He also said he has a severe form of bipolar disorder that was underdiagnosed three years ago.
Fintag says: I suffer from bipolar identity and am not sorry for anything I do.
he principals of Sentinel Management Group Inc., the bankrupt Chicago-area cash management firm, were accused by its court-appointed bankruptcy trustee of ``a pattern of criminal conduct'' that defrauded investors.
Trustee Frederick J. Grede, formerly chief executive officer of the Hong Kong Futures Exchange, today sued Sentinel President Eric Bloom and two other executives, seeking to recover $350 million. The 10 other defendants named in the complaint filed in U.S. Bankruptcy Court in Chicago include trusts in the names of Bloom's parents.
Bloom and the other individual defendants, ``operating through a pattern of criminal conduct, committed a long-term, massive fraud against Sentinel and its customers,'' Grede said in the complaint.
Sentinel, based in Northbrook, Illinois, filed for Chapter 11 bankruptcy protection on Aug. 17, four days after freezing its clients' funds, citing credit market instability. On Sept. 24, Grede told creditors the firm had $861.5 million in assets and $1.15 billion in debt.
Bloom's attorney, Edward McDonald, a partner in the Washington-based law firm Dechert, didn't immediately respond to voice-mail and e-mail requests for comment.
Commingled Funds
Three days after filing for bankruptcy court protection, Sentinel was sued by the U.S. Securities and Exchange Commission. The commission said Sentinel improperly commingled client funds with one another and with its own assets. The SEC also accused Sentinel of using client assets as collateral for $312 million in loans it obtained from the Bank of New York Mellon Corp.
The housing market could be in a much worse state than recently thought as figures today showed house prices falling at their fastest rate for two years.
The influential Royal Institution of Chartered Surveyors' (Rics) report showed a shock increase in September in the number of its members reporting a drop in house prices.
Overall, 14.6% more surveyors reported a drop in house prices than those who said there had been a rise, a steep increase from the 3.3% more reporting a fall in August.
Rics said the fall seen during September was the fastest decline since September 2005, when 19.4% more surveyors reported seeing a drop in the cost of property than those who saw a rise.
Fintag says: Not really a surprise. The UK's subprime hasn't started yet - but it has. Fixed rate mortgages have reached their term this fall and refinancing is going on coupled with no buyers. And yet the BBC still has TV programmes on how to become a property millionaire.
I wonder who will sue the BBC first? It is outrageous. I cannot sell my high performing, low risk hedge funds to Joe Public and a bunch of hacks can sell the real estate dream with no disclaimers or [Editor: Enough. Go and take your pills]
finfacts says US Home Foreclosure filings up 99% from September 2006; Top home builder says 68% of its prospective buyers cancelled orders in the company's fiscal fourth quarter
Oh, and the man who bailed out Northern Crock turns out to have a Mortgage at the same said bank says the scotsman
SRM Global, a hedge fund run by a former UBS trader, Jon Wood, has built a 4 percent stake in the ailing British mortgage lender Northern Rock.
The news sent Northern Rock's shares up more than 40 percent Wednesday, before closing 66.7 pence, or 32 percent, at 273.5 pence. The stock has dropped almost 60 percent since Sept. 13, the day before the bank issued a profit warning and announced it had requested emergency funding from the Bank of England.
The British government on Wednesday extended a guarantee on customer deposits until financial markets become less volatile. The central bank also widened the range of assets that Northern Rock can use to secure its credit line.
Some reports have suggested the move by Mr. Wood was intended to protect the firm from a low-ball takeover.
“There is value there,” Philip Price, chief operating officer at SRM Advisers, told Bloomberg News. “The company should be allowed to survive.”
Fintag says: I know I mentioned this yesterday, but these long covers are nothing to worry about. What is worrying is that the Hedge Funds know that Northern Crock is a nationalised bank and the UK Government is underwriting the stock. Long / Short you cannot lose.
JP Morgan is planning to shed jobs across its investment bank, making it the third universal bank to slash staff this year as the credit squeeze continues to take its toll.
The bank's asset-backed securities and collateralized-debt obligations units will bear the brunt of the cuts, according to sources cited by Reuters. The cuts come during a year in which JP Morgan has boosted staff levels in other units such as its financial investment group and commodities trading. In June, the bank said it was planning to add 40 people to its commodities trading division as part of an expansion of its energy group.
Mike Mayo, Deutsche Bank analyst, estimates that JPMorgan will have about $2bn in leverage loan writedowns before fees and hedges in the run-up to its third quarter profits to be announcement next week.
JP Morgan is among several banks facing the possibility of layoffs in the wake of poor performance particularly in mortgage-backed securities, leveraged finance and fixed income markets in connection with the credit crunch.
Fintag says: The last in the queue and more token gesture dead wood layoffs. The real nasty ones will come in Q1 2008. As we know, all banks have a 10% clear out every year to make way for the next load of graduates. I wonder how many grad programs will be scaled back next year?
Citigroup Top Trader Maheras Exits Amid Losses, Pandit Promoted
Citigroup Inc., the biggest U.S. bank, said its trading chief will leave after almost $6 billion of losses and bad-debt costs, and named former Morgan Stanley executive Vikram Pandit to oversee trading, investment banking and alternative investments.
Thomas Maheras and a top fixed-income executive, Randy Barker, are leaving the New York-based firm, Chief Executive Officer Charles Prince said yesterday in a telephone interview. Pandit, 50, joined the bank as head of alternative investments earlier this year when it bought his hedge fund for $800 million.
Maheras, 44, and Barker 48, are the first casualties at Citigroup following its disclosure last week that profits fell 60 percent in the third quarter because of losses tied to the collapse of the subprime mortgage market. Merrill Lynch & Co., Bear Stearns Cos., and UBS AG have already announced high-level firings after being forced to book losses as a result of three months of credit turmoil.
Fintag says: Shittigroup - never one to let us down.
When David Harding set up Winton Capital a decade ago in London, the hedge fund entrepreneur started out bigger than a two men and a dog operation. But only just. To be precise, it was a 10 men and a dog business, although the dog - a cocker-spaniel called Cosmo - added little to the management of its $10m starting funds.
As the hedge fund celebrated its 10th anniversary this month, Mr Harding was overseeing an organisation employing almost 150 people running $10bn (£4.9bn), which had just sold a 10 per cent stake to a Goldman Sachs fund.
The dog, though, remained unchanged. Mr Harding still walks to the office every day with Cosmo.
In many ways Winton fits the hedge fund mould perfectly. It has returned an average 19 per cent a year for a decade, and 12 per cent this year, by using computer models to trade futures, like many other hedge funds specialising in managed futures. It is intensely secretive about those models. And its funds are open only to the very rich or institutional investors.
Companies could be given powers to force hedge funds to declare secret stakes held through derivatives if proposals being considered by the FSA are approved. The regulator is considering extending “section 212? powers that companies can use to force investors to reveal their shareholdings to cover derivatives as well, according to people who have seen drafts of the document. Options are expected to include aligning the rules for disclosure of shareholdings above 3 per cent to include CFDs or other derivatives, or forcing banks to reveal big CFDs they sell.
Fintag says: Right. As usual we will find ways around this - we and the IB's always do.
Glad to see you are back on form, Finbar. I write for the Wall Street Journal (Europe) and you are a must read for all my colleagues. I'll send you an email with the details for a new column we are looking to launch.
12 Oct 07 - 09:58 gmt
anonymous said ...
Could you please remove the embedded video, it really messes up your page for firefox
12 Oct 07 - 12:24 gmt
Finbar said ...
I use Firefox 2.0 and windows media player 9 and 11 and works fine. Whats yours?
12 Oct 07 - 14:53 gmt
anonymous said ...
Anon - you can use the Adblock add-on for Firefox to get rid of the embedded video elements (if you want to). Adblock doesn't seem to affect the wit/humor. I haven't found a way to fix that yet.
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Finally. The world is gradually coming to the realization that hedge funds are not the only financial institutions with an occasionally heavy thumb on the illiquid securities valuation scales.
Such pricing problems have become common in some of Wall Street's biggest markets. The burgeoning universe of complex securities based on mortgages and other assets has turned the once-simple task of getting a price quote into a confounding undertaking.
Today, “way less than half” of all securities trade on exchanges with readily available price information, according to Goldman Sachs Group Inc. analyst Daniel Harris. More and more securities are priced by dealers who don't publish quotes.
As a result, money managers can no longer gauge with certainty the value of some assets in mutual funds, hedge funds and other investment vehicles—a process known as marking to market. An official at the Securities and Exchange Commission said recently that some bond mutual funds might be using outdated or unrealistic prices to value their portfolios.