We figured it was worth 80, we Bid for 60, got hit, marked it at 80 for a year, took our 2 and 20, and now there's no bids... except at 30-40...
we can't sell there..
Six months ago, this man was running his business out of a three-bedroom residential house in Florida. Now his company is among the fastest-growing broker-dealers in the country. John Devaney, founder of United Capital Markets, reveals the secret of his success to Saskia Scholtes
Straight from the horse's (or should we say burro's?) mouth :
United Capital Markets (UCM) operates by exploiting market inefficiencies. The benefit of trading the subordinated tranches of these high-yield structured finance products is that their secondary markets are among the most inefficient. As Devaney puts it, The secondary markets for some of these bonds have an incredible disconnect between the current trading levels and the fundamental credit quality of the collateral pools backing the securities.
I have found John to be very aggressive in his ability to find interesting trading ideas. Devaney is an analyst, salesman and trader in one, which is a much more efficient use of my time. He conducts detailed and in-depth credit work on unusual structures and its important for us that he is willing to commit his own capital to illiquid securities.
an analyst, salesman and trader in one- enough said!
Setser highlights a guy (some financial blogger) who thinks its good for China & good for Wall Street if China used some of their excess liquidity to buy up bad CDOs & support hedgies...
I'm not clear on why anyone puts their money in funds where not only do you pay ridiculous fees when things go well, but you're guaranteed not to be able to get your money out if things go badly.
As Devaney puts it, The secondary markets for some of these bonds have an incredible disconnect between the current trading levels and the fundamental credit quality of the collateral pools backing the securities.
Didn't Seb have a posting earlier today from somebody with a similar pitch? Hmmmmm....
I couldnt believe that the upside was unlimited and that you could only lose 100% of your money! I was so drawn to the principals of leverage that I had to get involved, he says.
The way I see it, the more of these stories get out into the press, the more difficult it is to paper over the mess. One would think that even for a rather wealthy type who can afford to lose a couple hundred thousand in a hedge fund, the appeal of being able to tell such a costly story might not be that great. Hence, here and there, redemptions are on the rise. Now is an astute hedge fund investor is seeing all this play out, I would think he or she might want to get at the head of the redemption line. All I'm wondering is, "when" the run on these hedge funds begins, not "if" it begins. This is just the proverbial trickle that starts before a damn bursts. Eventually, it will all be mark to market, because so much of it will have been shown to be a ruse.
I wonder if they are suspending their fees at the same time?
Hey Lord, come on now... they gotta eat you know. Inflation affects everyone, not just the poor.
Well maybe the '20' part of the fees zero out but not the '2' - they still hold balances (especially if their clients CAN'T REDEEM THEM)...
But what if its 20% times a MINUS gain, then what? Do the clients receive NEGATIVE commissions? Ouch, if I was a hedgie I'd shutdown pretty fast then too.
One would think that even for a rather wealthy type who can afford to lose a couple hundred thousand in a hedge fund, the appeal of being able to tell such a costly story might not be that great.
A couple hundred thousand? Per month per fund maybe. The folks they are writing about got way more skin in this game than that - believe me.
But in principle 'ya'... they won't be bragging about their fund's performance this summer when they meet up with their pals on out on the island.
Called_bluff wisely made the analogy: only in Le Bananna replublio
Preach it, brother ... I remember my wife's relatives from Ecuador telling me about the gov't freezing everyone's bank accounts back in 2000 during a near-default. Some UC bag-holders must feel like they are living in some third-world dump ...
Coincidentally, I wonder if the recent drop in treasury yields might have anything to do with this? Could folks be heading for the exits from anything with the acronyms "CDO" or "MBS" in them, looking for a nice safe 5% in US treasuries?
If so it's more bad news for our friend Mr. Housing bubble.
Some UC bag-holders must feel like they are living in some third-world dump...
Ya it must suck to be them. Have to sell the waterfront home at the Hamptons & buy inland a block or two. Such hardships. Almost as bad as living in a tin roof shack in Latin America...
How humorous... Devaney's clients thought they were investing in a hedge fund (with monthly redemption/liquidity options I'm guessing) only to discover that they were really invested in a private equity fund (with no redemption options).
The problem with many of today's "hedge funds" is that they are private equity funds in disguise and, consequently, have a classic asset-liability mismatch. Their assets aren't as liquid as they believe and their liabilities (that is, the ability of the investors to redeem their capital) are shorter-lived than they believe. When you're a "hedge fund" and you find out that your assets have a much longer duration than you thought while your liabilities have a much shorter duration than you thought... well, you're in deep sh*t.
Felix Salmon is outdoing himself trying to figure out what derivatives he's talking about or even if they are derivatives -- Subprime Mess Its Not Derivatives Fault - Market Movers - Portfolio.com -- or even if he knows what he's talking about; I have to admit it's kind of fun watching him try.
What happened to the "global Liquiditty train" ?
Apologies to Jethro Tull:
(Sung to the tune of "locomotive breath")
In the shuffling madness
of locomotive breath
runs some hedge-fund investor
headlong to his death
He feels the piston scraping
steam breaking on his brow
old Greenspan stole the handle and
the train it won't stop going
no it couldn't slow down
He saw the Bear get bailed out
Containment seemed to have won
But then kool-aid wore off
And there was no more fun
He's crawling down the corridor
on his hands and knees
old Greenspan stole the handle and
the train it won't stop going no
it couldn't slow dow
If you had even a dime in any of these funds, wouldn't you be running, no, make that sprinting to get your money out? Would you even waste a single second at this point.
And if you heard "no redemption" over the phone, wouldn't you think a face to face meeting might be appropriate? I'm pretty certain a pencil-necked geek like Devaney wouldn't be much of a roadblock if you had your hands firmly around his neck.
At first read, the Devaney story really made me laugh out loud! Thanks oy vey.
Thinking about it further, I'm not so sure this isn't the start of something that will make millions of people cry. The problem I'm thinking about is the hedge fund equivalent of a "run on the bank." (This was a scary enough problem in the 1930's that the US Government took the then highly unusual step of creating the FDIC to restart confidence in the banking system.) The underlying issue in the early '30s was to encourage capital formation when everyone was afraid to hold their savings in a bank.
Well, when the people with the largest piles of capital start pulling back from the marketplace because of the terrible losses they take, we could see something worse than just a housing led douwnturn. I'm not saying we'll have a great depression, but I am wondering about the follow-on effects of a strong contraction in the willingness (or ability) to invest.
I am hoping that it is "Le Bananna replublio" and not "Late Rome".
Not sure of the use of the female vis male in the above. Maybe it is French- the hated French? Sounds almost Fran-Espanol?
Keep the jokes coming. I love this blog.
I don't know why S&P, Moody's, and Fitch are taking such heat for mis-labeling the toxic drudge as AAA.
The most efficient portfolio is the one with the lowest standard deviation over time for any given level of return.
Since the price of these securities is made up, it only goes up and thus, has a volatility (standard deviation) of zero.
Since the hedge fund is making up the price for the security, anyway, they may as well increase the price at a constant rate over time, giving the return a positive correlation of one with standard deviation of zero. Thus, the fund can collect their 2 % and 20 % on the increase in asset price.
Clearly, these instruments deserve to be rated AAA+. The return is a multiple of the risk free security with the same zero risk.
Nobody ever believed in that efficient market crap anyway.
I'm not saying we'll have a great depression, but I am wondering about the follow-on effects of a strong contraction in the willingness (or ability) to invest.
Pat, have you no faith? Ben is going to come to the rescue in helicopters like the attack scene from 'Apocalypse Now'... but instead of laying down fire on a VC controlled village they'll be hurling greenbacks at average citizens, Wagner blaring loudly all across America.
Everything will be fine. Its already in the script.
Okay, so maybe there won't REALLY be helicopters & Wagner - that's just poetic license. Maybe just some big gov't program to keep the wheels greased... re-inject liquidity...
OK, that gives me a thought on aaa+ ratings...
New symobolgy, especially for derivative's
think Olympics "higher,faster,stronger"
Five intertwined rings
0 0 0 0 0
put the aaa's inside the shared space of the rings
sh** , i need graphics for this
whaddya get???
As long as the links are held , the ratings' apply, once links are broken , ratings fall away....
Liquidity is how we got in this mess...
more won't help...
epf. where did Bear get 3 billion?
at what rate?
the bare min int expense is north of 150mm a year, on that note. and Bear principals only (supposedly) ponied up 32mm.
That's not a loss... that's just a credit challenge..
In ANY normal environment "no redumption" would mean a run on the bank.
"No redumption" should be followed with armed guards at the bank doors and the goverment either announcing a bail-out or let the invetors loose all their money.
Bailout does not have to be immidiate. It can be a goverment take over of assets and a promise to pay investors 85% of their money in 3, 105% in 6 years or 120% in 12 years.
I have seen such things (not the armed guards) take place in a country with hugh inflation - without the goverment promise the whole economic system would have collapsed.
Yeah, I know BB will just turn the spigot wide open -- but it didn't seem to work too well in the recent case of Japan. (I think 15 years is a pretty long wait for robust growth to return.)
Psychology could be a critical factor as well as liquidity. You've mentioned in the past that your parents talked of the 1930's. Like you , I heard first-hand stories too. A few were humorous (my dad never lost his sense of humor) but many of the stories were about fear, desperation and a crushing sense of helplessness. The psychology of lost confidence is something hard to fix once it starts.
As I said before, I'm not predicting any "great depression" here, but I am wondering about the next events after a "run-on-the-hedge-fund" scenario.
Liquidity is how we got in this mess... more won't help...
Depends on how depressed it gets after a hypothetical crash. Then it becomes a choice of evils... prolonged depression without liquidity or some 're-flotation' at the risk of causing inflation.
I'd choose the inflation risk over prolonged deflation risk myself assuming the administration in charge at the time didn't go completely Wiemar in the process.
Regardless - the Fed will NOT willingly allow deflation to set in. They will fight it like mad, pump liquidity like crazy to keep that from happening... whether we approve or not. That much is 'fact' - straight from BB's own 'helicopter speech'.
Yeah, I know BB will just turn the spigot wide open -- but it didn't seem to work too well in the recent case of Japan.
Japan had all kinds of 'disincentives' to spend & few incentives... likewise they had huge incentives to save. We are exactly the opposite (incentives to spend & disincentives to save). I do not believe for one minute that the Fed will have difficulty priming the pump here... this isn't Japan.
My concern & expectation is the opposite - that we'll have inflation rather than deflation... even after a bubble pop (import inflation from a weaker dollar if nothing else). My deflation pitch, in my estimation, is purely hypothetical.
Yal - I can't imagine gov't directly bailing out the hedgies & their clients, they aren't 'banks'... but then there are a lot of things I can't imagine, some of them happen.
What I can see is the gov't bailing out REAL banks (depositories) that have made loans to the hedgies... but the bailout goes directly to the bank not the hedgie... the hedgie assets go POOF in the process.
In other words sacrifice the individuals & their investments but preserve 'the system'. That is pretty close to what happened the last time we had something like this - the S&L crisis.
I don't think it will be identical to the S&L crisis but similar. I think a lot of those folks with money trapped in frozen hedge funds are massively screwed. They are just now learning that.
"After last week shaky sessions that closed the second quarter I was wondering how the new quarter will start. It started badly.
How come you may ask? The Dow Jones was up 126 points! So what? All indexes (except Nasdaq) are trading within trend-lines and I see nothing special. However, the credit markets behaved poorly, hinting at more cockroaches coming. Let review what happened:
ABX.HE CDS index - panic. The index of mortgage bond protection crashed today to record low levels. Especially important is a bad crash in investment-grade ABX-HE-AA 07-1
CMBX.NA index - panic. The commercial real estate protection is crashing, especially important is a crash in CMBX-NA-AA 3
LCDX index - crashing. The sell-off is not so bad as in real estate indexes, but the protection behind LBO deals is getting costly
High yield bonds - drifting down by another 7bp, or 70bp above May spread
Dollar is falling, Yen rising
The name for what is happening is credit crunch. Expect no good"
More liquidity means more PE playa's buying out worthless asset's "monetizing" the system
Since we never get to see the 'book' at TPG, KKR, Blkpbble, etc... we never will now how if the co's are netting money...
the liquidity also is'nt being passed down 'trickle like' to the day laborer-hourly worker-....
more liquidity will only help poor performing loans perform for a while longer...
My liquidity pet-peeve of the week-
Allison trans sold to PE for 5billion...
where was Kirk Kerkorian on this asset sale when he was a 5%+ holder??? when GM was trading at 19-20, with a mkt cap of around 11 billion, a sale like that would have been huge.
Called_Bluff - I hear ya. Right now the LAST thing we need is more liquidity.
But if the bottom really falls out & we experience real systemic deflation (not just sector deflation or disinflation... but real across the board economy wide deflation)... Then I'd hope they would inject some liquidity to get it going again. Otherwise it will be a long painful bounce along the bottom.
None of us have ever seen real deflation (unless we are in our late 80s or older). We don't want to either.
That's my point.
BTW - I know folks at Allison. In addition I have other friends working in firms owned by PEs right now. Those Allison folks are in for a good time (not).
"The official un-employment rate in the U.S. has been re-jigged so as to be meaningless. As John Williams of Shadow Government Statistics reports,
The popularly followed unemployment rate was 5.5% in July 2004, seasonally adjusted. That is known as U-3, one of six unemployment rates published by the BLS. The broadest U-6 measure was 9.5%, including discouraged and marginally attached workers.
Up until the Clinton administration, a discouraged worker was one who was willing, able and ready to work but had given up looking because there were no jobs to be had. The Clinton administration dismissed to the non-reporting netherworld about five million discouraged workers who had been so categorized for more than a year. As of July 2004, the less-than-a-year discouraged workers total 504,000. Adding in the netherworld takes the unemployment rate up to about 12.5%.
The inflation indexes [CPI and PPI] have also been reworked so as to exclude ANYTHING that actually rises in price. Again deferring to John Williams of Shadow Government Statistics,
Inflation, as reported by the Consumer Price Index (CPI) is understated by roughly 7% per year. This is due to recent redefinitions of the series as well as to flawed methodologies, particularly adjustments to price measures for quality changes. The concentration of this installment on the quality of government economic reports will be first on CPI series redefinition and the damages done to those dependent on accurate cost-of-living estimates, and on pending further redefinition and economic damage.
Dont we need (and expect) deflation in real estate and perhaps commodities as the bubbles deflate. As people return to saving wont this also be deflationary as the velocity of money slows and are these deflationary tendencies necessarily bad?
as per bloomberg:
"the horizon offshore ABS fund was up 40% last year."
lets see. if this was the reported performance at 2 and 20 the gross returns should have been around 50%. if the bonds were trading at say 250 over the finance rate that only means 20x leverage. i suspect in a day or so we will find out about the unhappy folks that own the collateral for this puppy.
i can't imagine we are not going to have an 'event' in the next week. there is just too much wobble in the pile and too many foxes will be huffing and puffing at the rather large straw house with the succulent piggies inside.
Dryfly"Okay, so maybe there won't REALLY be helicopters & Wagner - that's just poetic license. Maybe just some big gov't program to keep the wheels greased... re-inject liquidity..."
Imagine waking up tomorrow morning and finding your 5 million in a hedge fund account is frozen and you can't redeem it. Moreover , as the months roll by , you slowly come to realize it's gone forever.... that feeling is going to hit a lot of investors worldwide.
Apparently this credit crunch is only temporary....
"Dr Suki Mann, a credit expert at Société Générale, said: "The credit markets are feeling the full thrust of gale-force winds. It's yuk, yuk, yuk. The market is in no mood to try to pick the bottom here. Any signs of systemic risk will lead to an over-reaction."
However, Dr Mann said: "We remain steadfast that this is a temporary repricing of risk: global conditions remain as benign as ever."
Waggle finger in air-circles while croaking hojotoho?
I fear the financial market part of this thing has developed in areas of the economy so unregulated that there aren't many policy tools to use if one did want to ride to the rescue ...
These excerpts from Edith Wharton's "Age of Innocence" seem so strangely appropriate. The year is 1873, and Beaufort is the arrogant, rich, 'arriviste' banker whose fortune is ruined by a run on his bank:
"WALL STREET, the next day, had more reassuring reports of Beauforts situation. They were not definite, but they were hopeful. It was generally understood that he could call on powerful influences in case of emergency, and that he had done so with success; and that evening, when Mrs. Beaufort appeared at the Opera wearing her old smile and a new emerald necklace, society drew a breath of relief."
But...
"Beaufort, after all, had not managed to tide over; but by setting afloat the rumour that he had done so he had reassured his depositors, and heavy payments had poured into the bank till the previous evening, when disturbing reports again began to predominate."
Is the $$ going down because foreigners are baling out of hedge funds ???
Dollar is a function of interest rates here and everywhere else. As some FCBs are still rising the rates and our T-bonds rates are dropping, the carry trade goes somewhere else.
Somewhat off-topic, but since it relates to credit quality and mortgages, it's worth pointing out the following:
The American Bankers Association produces a quarterly report on delinquency trends for several types of loan products. They include credit cards, direct auto loans (loans made through banks) and indirect auto loans (loans obtained through car dealers), and home equity loans and lines of credit. The latest figures for Q1 2007 were just released. They showed:
The composite delinquency rate (for all eight types of closed-end consumer loans) rose to 2.42% from 2.23% in Q4 2006 and 1.94% in Q1 2006. That's the worst reading in almost six years -- since Q2 2001 (2.51%).
The delinquency rate on home equity loans popped up to 2.15% from 1.92% in Q4 2006 and 1.94% a year earlier. That's the highest rate since Q3 2005 (2.33%).
The DQ rate on home equity lines of credit rose to 0.60% from 0.57% in Q4 2006 and 0.55% in Q1 2006. That's the highest since Q2 2003 (0.63%).
Direct auto loan delinquencies ticked lower, as did credit card delinquencies. But indirect auto loans showed deterioration, with the DQ rate there rising to 2.73% from 2.57% in Q4 2006 and 2.04% in Q1 2006. That's the worst performance for that category since Q2 1997 (2.74%).
These figures confirm what we already know from federal delinquency figures, the FDIC's Quarterly Banking Profile, and the Mortgage Bankers Association's numbers -- credit quality is worsening. The housing slump is a key factor:
1) It has a direct impact on home equity loan performance. Slumping home values leave more second mortgage borrowers "upside down" -- owing more on their mortgages than their homes are worth. Meanwhile, falling home sales lead to more seasoning of home equity loans. In other words, more borrowers are forced to stay put, rather than sell and pay off their home equity loans. That increases the length of time those loans are outstanding, and that tends to drive the delinquency rate higher.
2) The housing slump also an indirect impact on the performance of other loans. A major use of home equity loans over the past several years has been consumer debt refinancing. Borrowers have rolled credit card and auto loan balances into their home equity lines of credit and home equity loans in order to reduce their interest rates and monthly payments. As home prices slump, fewer borrowers can take advantage of that payment-reducing maneuver. So consumer loan delinquencies are likely to rise, especially if the employment situation worsens.
I think it's quite easy. Last year people used credit cards to keep up with mortgage payments. This year prevailing idea is that you don't need to pay the mortgage at all and live free, while keeping your credit cards current.
In some states foreclosure takes as long as 1 year. Why bother with mortgage?
Amy asked: "I'm sorry to ask such a stupid question, but can a fund just NOT give you back your money because they choose not to??..."
Not a stupid question, Amy, there's a lot of confusion about this.
Hedge funds are not like mutual funds. It's common for a hedge fund to have rules restricting redemptions until the end of a quarter or a year (or longer). There's a legitimate reason for it, to prevent a sound long-term trading/investing strategy from being derailed by short-term investor panic.
However, hedge-fund investors aren't totally unprotected. Another common rule is that if the assets of the fund drop below a certain level the fund must either be closed and the money returned to the investors or those investors must be "re-solicited", which is essentially giving them the choice as to whether to stay with the fund or cash-out.
Although it is enjoyable to watch big players in hedge funds and IBs lose some cash, we in the market all know "Helicopter" Ben waits in the wings with a Greenspan Put should the trouble infect the financial system. So the pary goes on.
What happened to the "global Liquiditty train" ?
Hey, that Devaney guy was profiled in an article not but a few months ago...
150 ft yacht
G-V
big Bay house....
We figured it was worth 80, we Bid for 60, got hit, marked it at 80 for a year, took our 2 and 20, and now there's no bids... except at 30-40...
we can't sell there..
bahahhahahha
only in Le Bananna replublio
Roach motel
Six months ago, this man was running his business out of a three-bedroom residential house in Florida. Now his company is among the fastest-growing broker-dealers in the country. John Devaney, founder of United Capital Markets, reveals the secret of his success to Saskia Scholtes
US Credit - Devaney
Straight from the horse's (or should we say burro's?) mouth :
United Capital Markets (UCM) operates by exploiting market inefficiencies. The benefit of trading the subordinated tranches of these high-yield structured finance products is that their secondary markets are among the most inefficient. As Devaney puts it, The secondary markets for some of these bonds have an incredible disconnect between the current trading levels and the fundamental credit quality of the collateral pools backing the securities.
I have found John to be very aggressive in his ability to find interesting trading ideas. Devaney is an analyst, salesman and trader in one, which is a much more efficient use of my time. He conducts detailed and in-depth credit work on unusual structures and its important for us that he is willing to commit his own capital to illiquid securities.
an analyst, salesman and trader in one- enough said!
Translation : charlatan.
What happened to the "global Liquiditty train" ?
Evaporating maybe?
Here's a link that will make you laugh...
Felix Salmon, matchmaker...
Setser highlights a guy (some financial blogger) who thinks its good for China & good for Wall Street if China used some of their excess liquidity to buy up bad CDOs & support hedgies...
His argument can be read here... Why Margin Calls Need Not Destroy the CDO Market.
Enjoy.
Not Responsible For Ruined Keyboards
I'm not clear on why anyone puts their money in funds where not only do you pay ridiculous fees when things go well, but you're guaranteed not to be able to get your money out if things go badly.
As Devaney puts it, The secondary markets for some of these bonds have an incredible disconnect between the current trading levels and the fundamental credit quality of the collateral pools backing the securities.
Didn't Seb have a posting earlier today from somebody with a similar pitch? Hmmmmm....
I couldnt believe that the upside was unlimited and that you could only lose 100% of your money! I was so drawn to the principals of leverage that I had to get involved, he says.
I wonder if they are suspending their fees at the same time?
Excuse me... HERE is where Felix Salmon makes the 'Will China Prevent The CDO Meltdown' pitch... Gotta keep my links straight. Sheesh.
The way I see it, the more of these stories get out into the press, the more difficult it is to paper over the mess. One would think that even for a rather wealthy type who can afford to lose a couple hundred thousand in a hedge fund, the appeal of being able to tell such a costly story might not be that great. Hence, here and there, redemptions are on the rise. Now is an astute hedge fund investor is seeing all this play out, I would think he or she might want to get at the head of the redemption line. All I'm wondering is, "when" the run on these hedge funds begins, not "if" it begins. This is just the proverbial trickle that starts before a damn bursts. Eventually, it will all be mark to market, because so much of it will have been shown to be a ruse.
I wonder if they are suspending their fees at the same time?
Hey Lord, come on now... they gotta eat you know. Inflation affects everyone, not just the poor.
Well maybe the '20' part of the fees zero out but not the '2' - they still hold balances (especially if their clients CAN'T REDEEM THEM)...
But what if its 20% times a MINUS gain, then what? Do the clients receive NEGATIVE commissions? Ouch, if I was a hedgie I'd shutdown pretty fast then too.
One would think that even for a rather wealthy type who can afford to lose a couple hundred thousand in a hedge fund, the appeal of being able to tell such a costly story might not be that great.
A couple hundred thousand? Per month per fund maybe. The folks they are writing about got way more skin in this game than that - believe me.
But in principle 'ya'... they won't be bragging about their fund's performance this summer when they meet up with their pals on out on the island.
Called_bluff wisely made the analogy: only in Le Bananna replublio
Preach it, brother ... I remember my wife's relatives from Ecuador telling me about the gov't freezing everyone's bank accounts back in 2000 during a near-default. Some UC bag-holders must feel like they are living in some third-world dump ...
Coincidentally, I wonder if the recent drop in treasury yields might have anything to do with this? Could folks be heading for the exits from anything with the acronyms "CDO" or "MBS" in them, looking for a nice safe 5% in US treasuries?
If so it's more bad news for our friend Mr. Housing bubble.
Devaney gets his advice via the wyle e.coyote's investment service:
Acme Research Institute
123 Main Street
Podunk, NM 12543
boat charter company for corporate getaways
this guy is always ahead of the curve...
that's the biz i want to be in---
one way getaway's , to countries without extradition treaties...
Some UC bag-holders must feel like they are living in some third-world dump...
Ya it must suck to be them. Have to sell the waterfront home at the Hamptons & buy inland a block or two. Such hardships. Almost as bad as living in a tin roof shack in Latin America...
[/sarcasm]
Are there more margin calls ?
LEH -2.15% while BSC +2.26%
How humorous... Devaney's clients thought they were investing in a hedge fund (with monthly redemption/liquidity options I'm guessing) only to discover that they were really invested in a private equity fund (with no redemption options).
The problem with many of today's "hedge funds" is that they are private equity funds in disguise and, consequently, have a classic asset-liability mismatch. Their assets aren't as liquid as they believe and their liabilities (that is, the ability of the investors to redeem their capital) are shorter-lived than they believe. When you're a "hedge fund" and you find out that your assets have a much longer duration than you thought while your liabilities have a much shorter duration than you thought... well, you're in deep sh*t.
Felix Salmon is outdoing himself trying to figure out what derivatives he's talking about or even if they are derivatives -- Subprime Mess Its Not Derivatives Fault - Market Movers - Portfolio.com -- or even if he knows what he's talking about; I have to admit it's kind of fun watching him try.
What happened to the "global Liquiditty train" ?
Apologies to Jethro Tull:
(Sung to the tune of "locomotive breath")
In the shuffling madness
of locomotive breath
runs some hedge-fund investor
headlong to his death
He feels the piston scraping
steam breaking on his brow
old Greenspan stole the handle and
the train it won't stop going
no it couldn't slow down
He saw the Bear get bailed out
Containment seemed to have won
But then kool-aid wore off
And there was no more fun
He's crawling down the corridor
on his hands and knees
old Greenspan stole the handle and
the train it won't stop going no
it couldn't slow dow
If you had even a dime in any of these funds, wouldn't you be running, no, make that sprinting to get your money out? Would you even waste a single second at this point.
And if you heard "no redemption" over the phone, wouldn't you think a face to face meeting might be appropriate? I'm pretty certain a pencil-necked geek like Devaney wouldn't be much of a roadblock if you had your hands firmly around his neck.
I'm pretty certain a pencil-necked geek like Devaney wouldn't be much of a roadblock if you had your hands firmly around his neck.
Pretty much right but I think they grab lower than the neck.
At first read, the Devaney story really made me laugh out loud! Thanks oy vey.
Thinking about it further, I'm not so sure this isn't the start of something that will make millions of people cry. The problem I'm thinking about is the hedge fund equivalent of a "run on the bank." (This was a scary enough problem in the 1930's that the US Government took the then highly unusual step of creating the FDIC to restart confidence in the banking system.) The underlying issue in the early '30s was to encourage capital formation when everyone was afraid to hold their savings in a bank.
Well, when the people with the largest piles of capital start pulling back from the marketplace because of the terrible losses they take, we could see something worse than just a housing led douwnturn. I'm not saying we'll have a great depression, but I am wondering about the follow-on effects of a strong contraction in the willingness (or ability) to invest.
I am hoping that it is "Le Bananna replublio" and not "Late Rome".
Not sure of the use of the female vis male in the above. Maybe it is French- the hated French? Sounds almost Fran-Espanol?
Keep the jokes coming. I love this blog.
I don't know why S&P, Moody's, and Fitch are taking such heat for mis-labeling the toxic drudge as AAA.
The most efficient portfolio is the one with the lowest standard deviation over time for any given level of return.
Since the price of these securities is made up, it only goes up and thus, has a volatility (standard deviation) of zero.
Since the hedge fund is making up the price for the security, anyway, they may as well increase the price at a constant rate over time, giving the return a positive correlation of one with standard deviation of zero. Thus, the fund can collect their 2 % and 20 % on the increase in asset price.
Clearly, these instruments deserve to be rated AAA+. The return is a multiple of the risk free security with the same zero risk.
Nobody ever believed in that efficient market crap anyway.
I'm not saying we'll have a great depression, but I am wondering about the follow-on effects of a strong contraction in the willingness (or ability) to invest.
Pat, have you no faith? Ben is going to come to the rescue in helicopters like the attack scene from 'Apocalypse Now'... but instead of laying down fire on a VC controlled village they'll be hurling greenbacks at average citizens, Wagner blaring loudly all across America.
Everything will be fine. Its already in the script.
Okay, so maybe there won't REALLY be helicopters & Wagner - that's just poetic license. Maybe just some big gov't program to keep the wheels greased... re-inject liquidity...
Hedge Fund
Emergency
Liquidation
Program
OK, that gives me a thought on aaa+ ratings...
New symobolgy, especially for derivative's
think Olympics "higher,faster,stronger"
Five intertwined rings
0 0 0 0 0
put the aaa's inside the shared space of the rings
sh** , i need graphics for this
whaddya get???
As long as the links are held , the ratings' apply, once links are broken , ratings fall away....
Liquidity is how we got in this mess...
more won't help...
epf. where did Bear get 3 billion?
at what rate?
the bare min int expense is north of 150mm a year, on that note. and Bear principals only (supposedly) ponied up 32mm.
That's not a loss... that's just a credit challenge..
In ANY normal environment "no redumption" would mean a run on the bank.
"No redumption" should be followed with armed guards at the bank doors and the goverment either announcing a bail-out or let the invetors loose all their money.
Bailout does not have to be immidiate. It can be a goverment take over of assets and a promise to pay investors 85% of their money in 3, 105% in 6 years or 120% in 12 years.
I have seen such things (not the armed guards) take place in a country with hugh inflation - without the goverment promise the whole economic system would have collapsed.
dryfly,
Yeah, I know BB will just turn the spigot wide open -- but it didn't seem to work too well in the recent case of Japan. (I think 15 years is a pretty long wait for robust growth to return.)
Psychology could be a critical factor as well as liquidity. You've mentioned in the past that your parents talked of the 1930's. Like you , I heard first-hand stories too. A few were humorous (my dad never lost his sense of humor) but many of the stories were about fear, desperation and a crushing sense of helplessness. The psychology of lost confidence is something hard to fix once it starts.
As I said before, I'm not predicting any "great depression" here, but I am wondering about the next events after a "run-on-the-hedge-fund" scenario.
Liquidity is how we got in this mess... more won't help...
Depends on how depressed it gets after a hypothetical crash. Then it becomes a choice of evils... prolonged depression without liquidity or some 're-flotation' at the risk of causing inflation.
I'd choose the inflation risk over prolonged deflation risk myself assuming the administration in charge at the time didn't go completely Wiemar in the process.
Regardless - the Fed will NOT willingly allow deflation to set in. They will fight it like mad, pump liquidity like crazy to keep that from happening... whether we approve or not. That much is 'fact' - straight from BB's own 'helicopter speech'.
Yeah, I know BB will just turn the spigot wide open -- but it didn't seem to work too well in the recent case of Japan.
Japan had all kinds of 'disincentives' to spend & few incentives... likewise they had huge incentives to save. We are exactly the opposite (incentives to spend & disincentives to save). I do not believe for one minute that the Fed will have difficulty priming the pump here... this isn't Japan.
My concern & expectation is the opposite - that we'll have inflation rather than deflation... even after a bubble pop (import inflation from a weaker dollar if nothing else). My deflation pitch, in my estimation, is purely hypothetical.
Yal - I can't imagine gov't directly bailing out the hedgies & their clients, they aren't 'banks'... but then there are a lot of things I can't imagine, some of them happen.
What I can see is the gov't bailing out REAL banks (depositories) that have made loans to the hedgies... but the bailout goes directly to the bank not the hedgie... the hedgie assets go POOF in the process.
In other words sacrifice the individuals & their investments but preserve 'the system'. That is pretty close to what happened the last time we had something like this - the S&L crisis.
I don't think it will be identical to the S&L crisis but similar. I think a lot of those folks with money trapped in frozen hedge funds are massively screwed. They are just now learning that.
First trading day of the quarter was bad « The Theroxylandr in Flame
"After last week shaky sessions that closed the second quarter I was wondering how the new quarter will start. It started badly.
How come you may ask? The Dow Jones was up 126 points! So what? All indexes (except Nasdaq) are trading within trend-lines and I see nothing special. However, the credit markets behaved poorly, hinting at more cockroaches coming. Let review what happened:
The name for what is happening is credit crunch. Expect no good"
More liquidity means more PE playa's buying out worthless asset's "monetizing" the system
Since we never get to see the 'book' at TPG, KKR, Blkpbble, etc... we never will now how if the co's are netting money...
the liquidity also is'nt being passed down 'trickle like' to the day laborer-hourly worker-....
more liquidity will only help poor performing loans perform for a while longer...
My liquidity pet-peeve of the week-
Allison trans sold to PE for 5billion...
where was Kirk Kerkorian on this asset sale when he was a 5%+ holder??? when GM was trading at 19-20, with a mkt cap of around 11 billion, a sale like that would have been huge.
Called_Bluff - I hear ya. Right now the LAST thing we need is more liquidity.
But if the bottom really falls out & we experience real systemic deflation (not just sector deflation or disinflation... but real across the board economy wide deflation)... Then I'd hope they would inject some liquidity to get it going again. Otherwise it will be a long painful bounce along the bottom.
None of us have ever seen real deflation (unless we are in our late 80s or older). We don't want to either.
That's my point.
BTW - I know folks at Allison. In addition I have other friends working in firms owned by PEs right now. Those Allison folks are in for a good time (not).
Market Observation - Tim W. Wood 12.04.2009
"The official un-employment rate in the U.S. has been re-jigged so as to be meaningless. As John Williams of Shadow Government Statistics reports,
The popularly followed unemployment rate was 5.5% in July 2004, seasonally adjusted. That is known as U-3, one of six unemployment rates published by the BLS. The broadest U-6 measure was 9.5%, including discouraged and marginally attached workers.
Up until the Clinton administration, a discouraged worker was one who was willing, able and ready to work but had given up looking because there were no jobs to be had. The Clinton administration dismissed to the non-reporting netherworld about five million discouraged workers who had been so categorized for more than a year. As of July 2004, the less-than-a-year discouraged workers total 504,000. Adding in the netherworld takes the unemployment rate up to about 12.5%.
The inflation indexes [CPI and PPI] have also been reworked so as to exclude ANYTHING that actually rises in price. Again deferring to John Williams of Shadow Government Statistics,
Inflation, as reported by the Consumer Price Index (CPI) is understated by roughly 7% per year. This is due to recent redefinitions of the series as well as to flawed methodologies, particularly adjustments to price measures for quality changes. The concentration of this installment on the quality of government economic reports will be first on CPI series redefinition and the damages done to those dependent on accurate cost-of-living estimates, and on pending further redefinition and economic damage.
Oh, my God. A boy wonder, who's a plunger to boot. It's definitely time to bail out.
Okay, so maybe there won't REALLY be helicopters & Wagner
Air/Sea Rescue & the Dies Irae from Verdi's Requiem?
Dont we need (and expect) deflation in real estate and perhaps commodities as the bubbles deflate. As people return to saving wont this also be deflationary as the velocity of money slows and are these deflationary tendencies necessarily bad?
as per bloomberg:
"the horizon offshore ABS fund was up 40% last year."
lets see. if this was the reported performance at 2 and 20 the gross returns should have been around 50%. if the bonds were trading at say 250 over the finance rate that only means 20x leverage. i suspect in a day or so we will find out about the unhappy folks that own the collateral for this puppy.
i can't imagine we are not going to have an 'event' in the next week. there is just too much wobble in the pile and too many foxes will be huffing and puffing at the rather large straw house with the succulent piggies inside.
"The HORROR,The Horror"
Dryfly"Okay, so maybe there won't REALLY be helicopters & Wagner - that's just poetic license. Maybe just some big gov't program to keep the wheels greased... re-inject liquidity..."
something like Iran?
Sounds like Devaney may have to move back in with his mother.
Imagine waking up tomorrow morning and finding your 5 million in a hedge fund account is frozen and you can't redeem it. Moreover , as the months roll by , you slowly come to realize it's gone forever.... that feeling is going to hit a lot of investors worldwide.
Why did they have to "freeze redumptions" ?
After all herdge funds usually do double digit return every year with minimal risk - after all they are hedged at both direction - right ?
why would someone want to redeem units in such funds ?
Most of these are held by insurance companies and foreign accounts," said one banker, requesting anonymity...
and all I can think is
isn't 9% ROI enough?
Apparently this credit crunch is only temporary....
"Dr Suki Mann, a credit expert at Société Générale, said: "The credit markets are feeling the full thrust of gale-force winds. It's yuk, yuk, yuk. The market is in no mood to try to pick the bottom here. Any signs of systemic risk will lead to an over-reaction."
However, Dr Mann said: "We remain steadfast that this is a temporary repricing of risk: global conditions remain as benign as ever."
Credit crunch bites deep into Boots banks' fees - Telegraph
generation debt:
Yahoo! Personal Finance: Calculators,Money Advice,Guides,& More
aren't this debt making everything more costly ?
Waggle finger in air-circles while croaking hojotoho?
I fear the financial market part of this thing has developed in areas of the economy so unregulated that there aren't many policy tools to use if one did want to ride to the rescue ...
[who'll be the first?]
These excerpts from Edith Wharton's "Age of Innocence" seem so strangely appropriate. The year is 1873, and Beaufort is the arrogant, rich, 'arriviste' banker whose fortune is ruined by a run on his bank:
"WALL STREET, the next day, had more reassuring reports of Beauforts situation. They were not definite, but they were hopeful. It was generally understood that he could call on powerful influences in case of emergency, and that he had done so with success; and that evening, when Mrs. Beaufort appeared at the Opera wearing her old smile and a new emerald necklace, society drew a breath of relief."
But...
"Beaufort, after all, had not managed to tide over; but by setting afloat the rumour that he had done so he had reassured his depositors, and heavy payments had poured into the bank till the previous evening, when disturbing reports again began to predominate."
US Credit - Devaney
how things may change.
All major investment banks have from 20 to 50 billion of treasury bonds on account, just to cover credit events.
The T-bond selloff we had 3-4 weeks ago was just that - sell to get money for margin protection.
It was in my June 9th post:
Involuntary inventory accumulation? « The Theroxylandr in Flame
And I was recommending - buy, buy, buy T-bonds! I was right, uh?
Dollar is a function of interest rates here and everywhere else. As some FCBs are still rising the rates and our T-bonds rates are dropping, the carry trade goes somewhere else.
Somewhat off-topic, but since it relates to credit quality and mortgages, it's worth pointing out the following:
The American Bankers Association produces a quarterly report on delinquency trends for several types of loan products. They include credit cards, direct auto loans (loans made through banks) and indirect auto loans (loans obtained through car dealers), and home equity loans and lines of credit. The latest figures for Q1 2007 were just released. They showed:
These figures confirm what we already know from federal delinquency figures, the FDIC's Quarterly Banking Profile, and the Mortgage Bankers Association's numbers -- credit quality is worsening. The housing slump is a key factor:
1) It has a direct impact on home equity loan performance. Slumping home values leave more second mortgage borrowers "upside down" -- owing more on their mortgages than their homes are worth. Meanwhile, falling home sales lead to more seasoning of home equity loans. In other words, more borrowers are forced to stay put, rather than sell and pay off their home equity loans. That increases the length of time those loans are outstanding, and that tends to drive the delinquency rate higher.
2) The housing slump also an indirect impact on the performance of other loans. A major use of home equity loans over the past several years has been consumer debt refinancing. Borrowers have rolled credit card and auto loan balances into their home equity lines of credit and home equity loans in order to reduce their interest rates and monthly payments. As home prices slump, fewer borrowers can take advantage of that payment-reducing maneuver. So consumer loan delinquencies are likely to rise, especially if the employment situation worsens.
Here's the news release from ABA, FYI:
Page Not Found
Hedge funds ? - this is old news.
Now "housing is in recovery": - Bloomberg.com
ServiceMaster $1.15 billion debt issue postponed-sources:
RLPC-ServiceMaster $1.15 bln debt issue postponed-sources
| Reuters
nothing to see here after all....
Dear CR
I am sure you have seen this press release from the American Bankers Assn.
Page Not Found
Best regards,
Why credit card delinquencies are falling?
I think it's quite easy. Last year people used credit cards to keep up with mortgage payments. This year prevailing idea is that you don't need to pay the mortgage at all and live free, while keeping your credit cards current.
In some states foreclosure takes as long as 1 year. Why bother with mortgage?
theroxylandr: Thanks for your posts.
I'm sorry to ask such a stupid question, but can a fund just NOT give you back your money because they choose not to??
If this is true, shoud everybody in a risky bond or bond derivative fund get their money the heck out before this happens to them??
Amy asked: "I'm sorry to ask such a stupid question, but can a fund just NOT give you back your money because they choose not to??..."
Not a stupid question, Amy, there's a lot of confusion about this.
Hedge funds are not like mutual funds. It's common for a hedge fund to have rules restricting redemptions until the end of a quarter or a year (or longer). There's a legitimate reason for it, to prevent a sound long-term trading/investing strategy from being derailed by short-term investor panic.
However, hedge-fund investors aren't totally unprotected. Another common rule is that if the assets of the fund drop below a certain level the fund must either be closed and the money returned to the investors or those investors must be "re-solicited", which is essentially giving them the choice as to whether to stay with the fund or cash-out.
Sebastian
Although it is enjoyable to watch big players in hedge funds and IBs lose some cash, we in the market all know "Helicopter" Ben waits in the wings with a Greenspan Put should the trouble infect the financial system. So the pary goes on.
Thanks, Sebastian.
But a mutual fund can't unilaterally halt redemptions like this, is what I'm inferring from your comment?
Thanks,
looks like the fund is going to be down 20% for the month of June....