HEDGE FUND NEWS
@ Tue 20 November 2007 : GMT

The rescue of the embattled Northern Rock could cost the taxpayer millions of pounds, thrusting the Chancellor, Alistair Darling, into the spotlight once more over his handling of the banking crisis.

As 21 per cent was wiped off the bank's share values, Mr Darling came under sustained fire in the Commons yesterday when he faced Opposition accusations of "incompetence and weak leadership" in the management of the UK's first run on a bank for nearly 150 years.

George Osborne, the Shadow Chancellor, said Mr Darling's job was "on the line" as the Chancellor made a statement to the Commons. Brushing aside the criticism, Mr Darling said the Government would have a veto over any rescue plans for the mortgage lender which sought emergency funding from the Bank of England in September. Treasury officials said that "nationalisation" of Northern Rock had not been ruled out, but signalled a buy-out was the preferred option.

Vowing to protect the interests of both taxpayers and savers, a defensive Mr Darling refused to admit how much of taxpayers' money was at risk, although he did deny reports that it could be as much as £500m,

"The sum concern is nothing like that," he said. "It is a very small amount of money."

Senior Treasury officials, however, did not deny the sum at risk could run into hundreds of millions of pounds. The money is owed to the taxpayer for interest at penalty rates on the £24bn loan provided by the Bank of England to prop up Northern Rock because of its exposure to sub-prime loans in the US.

The bank's share value plummeted after the Newcastle-based lender revealed it had received bids from would-be suitors including Richard Branson's Virgin group which were "materially below" the value of the company.

The golden child of the banking world has turned on the prodigal son. Goldman Sachs - which will not, repeat not, be making significant write-downs - has had it with the cult of the disappearing dollars elsewhere on Wall Street.

The bank's analysts have slapped a sell order on Citigroup, downgraded their estimates, and lowered their target price to $33. US futures fell on the back of the note. Citi were down 2.6 per cent at $33.11 a share in premarket trading.

Citi's down 40 per cent this year, and 28 per cent over the past three months, but the team at Goldman believe that the rudderless banking behemoth has further to fall.

We see four factors driving underperformance: (1) additional write-offs on its remaining $43 billion of CDO exposure, (2) pressure on the firm to shore up Tier-1 capital ratios which may need to come from an equity infusion, asset sales, or a reduction in the dividend, (3) deteriorating consumer credit trends and higher corresponding provisions and charge-offs, and (4) no clear leadership at the firm.
557.jpgCiti has already said that it will face $8 to $11bn of write-offs on its CDO porfolio in the fourth quarter. Goldman think that will come it at the top end of the range, with a further $4bn to come in the first quarter of next year.

With $84bn in SIVs and $73bn of ABCP facilities providing ample material for additional nasties to emerge, Goldman estimates that the bank could fall nearly $4bn short on its pledge to meet 7.5 per cent Tier-1 capital ratio by the end of the second quarter next year. Citi has indicated that it will not take assets from the SIVs it manages onto its balance sheet, notes Goldman, but the bank has already provided $10bn in emergency funding to the vehicles.
A Tier-1 shortfall would leave Citi facing some rather unpalatable options to boost its ratio from their estimate of 7.2 per cent to the desired level, including cutting its dividend, issuing equity and asset sales. Which of those is preferred will very much depend on who ends up in Chuck Prince's recently vacated hotseat.

The bad news for Citi isn't contained to its CDO and SIV exposure, argues Goldman's William Tanona. With the US consumer under pressure and housing metrics proving increasingly dire, the bank faces pressure across its businesses. And with an absence of leadership and the impetus on getting the firm's risk management under control, Tanona adds that Citi may be unable to move on new opportunities and put its meaty balance sheet to good use as openings appear.

That, suggests Goldman, may prove debilitating into late 2008 or even 2009.

UK securities regulator The Financial Services Authority (FSA) has fined Toronto Dominion Bank's London operation $1m over the activities of a fixed income trader who managed to hide his trading losses (which finally hit $8m) for a two year period.

Simon Brignall, who left the firm in March last year, apparently told the bank's management about his shenanigans when he resigned. He admitted to mispricing some of his positions and entering a number of ficticious trades into his book in order to cover up trading losses. Brignall, who is said to have been suffering from issues in his personal life when he started to hide his losses, didn't personally gain from his misdeeds. He has been banned from the City for life.

Toronto Dominion copped it to the tune of $1m it as it clearly had flawed risk controls. The FSA acknowledged, however, that the bank notified it of the problems as soon as they came to light. A spokesperson for the bank said that 'we took this matter very seriously and cooperated fully with the regulator. We have since changed our proceduares and controls and are committed to reviewing them on an ongoing basis'.

As everyone in finance knows, size matters.

This seems to be the logic behind Raph F. Rosenberg, a former Goldman Sachs trader, deciding to wind down his $300 million fund, called R6, and join Eric Mindich, another Goldman alumnus, at Eton Park, a $10 billion hedge fund. (Read letters from Mr. Rosenberg and Eton Park announcing the news after the jump.)

Leaving aside the fact that it seems like Goldman people are everywhere — in Treasury and running half of Wall Street and in charge of lots of big hedge funds, which give a ton of business to Goldman — the Rosenberg tale is one that is likely to repeat itself as it is harder for smaller funds to gain traction in increasingly global markets.

Mr. Rosenberg set out in 2006 to raise a big fund. He raised about $300 million, which is not very big in a world now run by $30 and $40 billion funds. From November 2006, R6 returned about 5 percent, a return that was not likely to inspire massive new fund flows (the average return for hedge funds through October is 13 percent, though they have lost some of those gains in November).

So Mr. Rosenberg opted to join the heftier $10 billion Eton Park. He takes with him the $20 million of his own money that he had invested in R6 and has offered his investors the ability to invest with Eton Park (or just get their own money back).

“Given current market conditions, I believe the most compelling investment opportunities now and going forward will be available to firms with significant capital and a global reach,” Mr. Rosenberg said in a letter to R6 investors.

The value of commercial real estate, which nearly doubled in the past seven years, is now starting to decline due to the credit crunch, according to a report set to be released today by Moody's Investors Service.

The report found that the value of commercial property declined 1.2% in September from the previous month. Particularly hard hit were apartments in the West and office property in most states other than California.

The report is an early sign that the commercial-property sector is being dragged down by the growing reluctance of lenders to extend credit for anything related to real estate, ...

Private equity firms will face tougher standards demanding "more openness", a review is expected to say.

The proposed code of conduct is set to require more disclosure from UK private equity firms about the terms of their investments, according to reports.

The sector has been accused of secrecy and of asset-stripping troubled firms.

The review, commissioned by British Private Equity and Venture Capital Association (BVCA), is being led by Morgan Stanley's ex-boss David Walker.

Job cuts

On Monday, the BVCA launched a body to oversee whether firms would adhere to the set of proposals, to be headed by Sir Mike Rake, chairman of BT.

Earlier in the summer, members of the industry faced tough questioning from the Treasury Select Committee, when it looked into whether private equity firms needed stricter regulation and whether they should pay more tax.

The latest code of conduct is not expected to include proposals regarding taxes.

While unions have long criticised the industry, for cutting jobs and seeing only short term financial gain, some say the latest plans do not go far enough.

"It is madness to even contemplate allowing private equity firms to volunteer what they will tell to public rather forcing them to adhere to the same disclosure requirements of other public companies enjoying the privileges of limited liability, said Paul Kenny, general secretary of the GMB union.

Certain cases have been highlighted by unions - such as the acquisition by Permira of AA - for harming employees by reducing the workforce.

But proponents for the industry say it contributes significantly to the UK economy and stricter rules will put UK private equity firms at a disadvantage compared to US firms.

Funds from overseas have been eagerly acquiring stakes in United States-based private equity firms and hedge funds, with mixed results so far. The Chinese government's $3 billion investment in the Blackstone Group has been a money loser. On Monday, Dubai's big bet on Och-Ziff Capital Management offered another cautionary tale.

As of midday Monday, shares of Och-Ziff, the hedge-fund firm founded by former Goldman Sachs trader Daniel Och, had fallen 20 percent from last week's initial public offering price of $32 per share.

That translated into a loss, at least on paper, of about $244 million for Dubai International Capital, the firm controlled by Dubai's ruling family that bought nearly 10 percent in Och-Ziff as part of its I.P.O.

Monday's decline seemed at least partly related to a negative article over the weekend in Barron's, which argued that Och-Ziff was overvalued compared with other money management firms. Among other things, Barron's called the Och-Ziff offering “an embarrassment for the underwriters, led by Goldman Sachs and Lehman Brothers,” and said Och-Ziff was risky because it relied heavily on revenue from hedge-fund incentive fees.

The private equity giant Carlyle Group is facing challenges with its first hedge fund, Carlyle-Blue Wave Management Partners, a $700 million fund built as part of a diversification strategy, according to Reuters.

Blue Wave, based in New York, is facing investor redemptions after credit trades went awry and the multi-strategy fund failed to achieve a goal of raising $1 billion or more from investors, the news service said. The investors are reportedly demanding their money back, even though the firm is less than a year old and held by one of the world's most prominent buyout firms, with about $75 billion under management.