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Hedge fund hearings in Washington
For those of you scoring at home, that’s George Soros on the far left, and to his left (your right), Renaissance’s James Simons, Paulson & Co.’s John Paulson, Harbinger’s Philip Falcone and Chicago’s own Citadel CEO Ken Griffin.
Sometimes cartoonists just nail it. Here’s today’s Non Sequitur:
The sense of relief among the ranks at Morgan Stanley was palpable at the bank’s autumn cocktail party held amid the elegance of London’s Wallace Collection on Tuesday evening. John Mack lieutenant co-chairman Walid Chammah welcomed guests with an understandable message of relief: “What a difference a week makes!” Later Mr. Chammah told me that the prime brokerage business had “changed overnight” but that the bank’s continuing conscientious service to hedge funds had helped it retain the vast majority of its clients. As we’ve discussed in several recent stories, Mr. Chammah confirmed that there is an unprecedented battle for market share in the prime services space. From his perspective, Morgan Stanley and Goldman remain in the top slots with J.P. Morgan Chase (after acquiring Bear Stearns) in third, but with Credit Suisse, Citigroup and Deutsche Bank all gaining share with new client wins. Marty Byman, Morgan Stanley’s co-head of prime services, told me that a few days of things “returning to relatively normal” had steadied the nerves of many hedge fund manager clients. We paused to drink to that before he cautioned that a lot of deleveraging is still happening and that the impact of this on investor returns would continue to reverberate across the hedge fund industry.
At a time when hedge funds are in the public spotlight more than ever before, Nat Rothschild, heir to the illustrious banking family fortune and early partner in the $13 billion New York-based hedge fund Atticus Capital has gotten involved in a high profile spat with leading Conservative MP and Britain’s opposition finance spokesman George Osborne. In a letter published in The Times of London, Mr. Rothschild accuses Mr. Osborne of meeting Russian oligarch Oleg Deripaska to “solicit” a large campaign donation even though contributions from foreigners are illegal under British law. Amid a “welter of claim and counterclaim”, the business of activist investing goes on with Atticus succeeding earlier this week in its long term campaign to oust Deutsche Boerse chairman Kurt Viermetz.
Just as bankers from Morgan Stanley and other firms have confirmed the rising competition in prime services, so arrives a new entrant to the market in the shape of Conifer, a fund administrator and services provider to hedge funds with a 20-year track record. The firm is targeting smallish $50 million to $250 million funds looking to add a prime broker. With financial backing from J.P. Morgan, Conifer’s move will be of interest to a lot of entrepreneurial hedge funds that may be looking for a more customized service than many of the big prime brokers find it cost effective to provide.
Meanwhile, more data shows how tough the environment is for hedge funds.
The EurekaHedge Hedge Fund Index racked up its worst month ever in September, dropping 4.7%. On a regional basis, North America and Japan outperformed while Europe and Emerging Markets underperformed with losses of nearly 7%. It makes me curious to see what the indexes will show for October.
Best. Disclosure. Ever.
Cliff Asness’ contribution to Joe Nocera’s blog that goes along with the disclosure … er, along with which the disclosure goes … whatever … is a must-read. As always, so are the comments below.
From an opinion piece in Thursday’s Financial Times:
“Indeed, any lender would have been encouraged by his words in April 2005: ‘Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending.’ Well, he was right about the rapid growth in subprime lending.”
One theory holds that nobody could have foreseen the credit troubles we’ve been dealing with for the past year, not even that great seer Alan Greenspan. Except that some people did, including some people not even in the finance industry. Here’s author and urban critic James Howard Kunstler writing on May 23, 2005:
“The wealth accumulated in the US in the second half of the last century is actually shrinking now, since our industrial base is withering away, and whatever investment we are capable of making has been increasingly directed into the “hard assets” of houses. The catch is that the “investment” in houses is almost all credit — mortgages, promises to pay most of the money later. The catch of the catch is that the cost of obtaining credit (interest rates) remains supernaturally low and the standards for creditworthiness have ceased to exist. The catch of the catch of the catch is that a lot of the mortgages are adjustable, meaning the cost of borrowing doesn’t necessarily stay supernaturally low. It can float with rising interest rates. Finance professionals know that these conditions are perverse and perilous.”
News Headline: “McCain Says would fire SEC chairman”
I think that’s what’s known as a warning shot. Although at this point it’s even money on which way Cox will vote this November. I mean, would you want to stick around and run the SEC?
This morning NPR aired several stories on the turmoil in financial markets, one of which was a report on how the worst may not be over yet. In it, Michael Mussa, senior fellow at the Peterson Institute for International Economics in Washington, D.C., said what’s happening in the markets is “disproportionate” to the apparent underlying economic weakness. “So there’s something dysfunctional about the way in which financial markets, particularly in the United States but also elsewhere, have been behaving.”
“Something dysfunctional” … otherwise known as “panic.”
Sorry, Lehman Brothers. No soup for you!
But AIG … well hello there. Come on in! Your table is ready.
News headline: “Fannie’s capital better than market perceptions: Lehman”
“Fannie Mae’s capital and reserves positions are better than market expectations, and the biggest U.S. mortgage finance company may not need any more externally raised capital, according to an analyst at Lehman Brothers.”
I believe it. If anyone would know about making that argument it would be Lehman, right?
Read the full Reuters story here.
The hits just keep on coming for the Federal Deposit Insurance Corp. On Tuesday we learned that the list of troubled banks the FDIC is keeping an eye on grew from 90 in the first quarter to 117 as of June 30. The FDIC also disclosed yesterday that the failure of IndyMac Bank, once predicted to cost between $4 billion and $8 billion, will now more than likely cost nearly $9 billion.
Perhaps in response to the gloom emanating out of the regulator’s Washington offices, it made Chairman Sheila Bair available to the Wall Street Journal and the New York Times for interviews. Whatever else was said during her time with the Journal, the news that made page A11 of the paper this morning was less than confidence-inspiring. Because of the wave of bank failures, the FDIC’s deposit insurance fund balance has fallen to $45.2 billion, just more than 1% of all insured deposits. According to the Journal, this is low by historical standards.
In response, Ms. Bair said the FDIC may borrow money from the U.S. Treasury to cover “short-term cash pressures caused by reimbursing depositors immediately after the failure of a bank.” The FDIC insures bank deposits up to $100,000. Both the Journal and the Times also reported that the FDIC is considering raising the fee it charges banks for insurance by 14%, or 14 cents for every $100 of deposits.
Journal reporters Damian Paletta and Jessica Holzer pointed out in their story that the last time the FDIC tapped the Treasury was at the end of the savings and loan crisis in the early 1990s. What might be termed the “nuclear option,” accessing a $30 billion line of credit the FDIC has with the Treasury, isn’t necessary now, and Ms. Bair told the Journal she didn’t expect it would be going forward.
If only I had a dollar for every time a government official said he or she “didn’t expect that” some drastic thing would happen or some last resort option would be necessary.
As if to reinforce the precarious state of the banking system, a page one story in today’s Journal details a new potential woe for banks: the reality that some $787 billion in floating-rate notes that banks have used over the past two years to stay afloat, will come due before the end of 2009. About $95 billion worth of those notes will mature in September, according to the Journal. The banks say they have enough money to redeem the notes, but again, if I had a dollar for every time over the past year a bank official has downplayed potential problems, I could pay off my house.
Every day’s a party. . . .
