Pandit: Still Going in Circles

Posted on August 13, 2008 by Felix

Gary Weiss profiles Vikram Pandit in this month’s magazine, and his conclusion seems spot-on:

What Citigroup needs now is not a wannabe Sandy Weill but someone with the elusive qualities needed to revive the banking giant from its slump. Pandit’s current course doesn’t seem bold enough, nor does his vision seem clear enough, to put the lumbering colossus back on track.

My views on Pandit are known, and it seems they’re shared by Citi types, too:

Citi’s challenge is now more structural than operational, a management nightmare ill suited to a C.E.O. running his first-ever public company. “I don’t know who his godfather is,” says one former Citi banker. “He has the background to run a hedge fund, not a bank.”

And when Pandit meets reporters, they tend to emerge from the experience decidedly underwhelmed. Weiss is no exception:

He talks more about growing in the future than winding his way out of Citi’s past, reciting his strategy in well-rehearsed cadences, reflecting a Pandit-era culture that favors neologisms like globality and clientcentricity.

I’m reminded of a classic slide from what Weiss describes as "a widely hyped three-and-a-half-hour dog and pony show for analysts and investors on May 9". This comes from a presentation by Manuel Medina-Mora, jealous head of one of Citi’s most important fiefs, Latin America:

centric.jpg

As a symbol of everything that’s vapid and content-free about Pandit’s strategy, it can hardly be improved upon.

Posted in banking, leadership | 1 Comment

Quantitative Finance Soundbite of the Day

Posted on August 13, 2008 by Felix

Paul Wilmott on the problems facing the world of quantitative finance:

Banks and hedge funds employ mathematicians with no financial-market experience to build models that no one is testing scientifically for use in situations where they were not intended by traders who don’t understand them. And people are surprised by the losses!

That alone is reason enough to subscribe to Wilmott’s blog, although he doesn’t update it very often. The quote comes via Bryant Urstadt’s profile of Wilmott for Condé Nast Portfolio, which is well worth reading.

Posted in banking, hedge funds | Comments Off on Quantitative Finance Soundbite of the Day

SUV Inventories: Up, or Down?

Posted on August 13, 2008 by Felix

When the NYT decides to run a major article on demand for SUVs on the front page of its business section, would it be too much to ask for some actual numbers, rather than one far-from-clear ratio and a handful of anecdotes?

It’s hardly news, of course, that few people are very interested in buying SUVs right now. But Nick Bunkley’s article concentrates almost exclusively on the metric of "days supply", which is a ratio: the numerator is the number of such cars in stock, while the denominator is the number of such cars sold per day. If the pace of sales is falling, then the ratio will rise, no matter what’s happening to stocks.

So when Bunkley writes that "inventory of the Chevrolet C/K Suburban nearly doubled, to 116 days from 63 days," he’s not talking about inventory in its normal sense of number of autos, but rather in a much more technical sense of the rate of increase of a certain ratio. And nowhere in the article does he give a clear sense of what’s happening to real, absolute inventories.

We do get one indication of what’s happened to sales, halfway into the 1300-word piece: "sales of S.U.V.’s are down 32 percent so far this year," says Bunkley, "and were off 43 percent for July." Are those year-on-year figures? I assume so, Bunkley doesn’t say.

But here’s the thing: let’s say the Suburban is typical and its sales are off 43%. Then by my calculation, if any given lot of Suburbans held 63 days’ supply a year ago, a lot with the same number of cars would hold 110 days’ supply today. In other words, if sales are down by 43% and inventory has risen only to 116 days’ supply from 63, then absolute inventory is actually unchanged.

Or look at the Ford Explorer, which, Bunkley tells us, sold 5,404 units in July this year. He doesn’t tell us, but we can find out, that it sold 11,212 units in July last year. July has 31 days, so Ford sold 174 Explorers per day in July this year, down from 362 Explorers per day last year.

According to Bunkley’s chart, last year dealers had 64 days’ supply of Explorers on their lots: that’s 23,147 cars. This year, they have 111 days’ supply: that’s 19,350 cars. Which means, if my calculations are correct, that inventory of Explorers has actually fallen over the past year, by a non-negligible 16%.

That would make sense — elsewhere in the article Bunkley says that dealers are lopping $10,000 or more off the price of SUVs "so dealers have space to stock more of the fuel-efficient cars consumers are clamoring for". That’s consistent with absolute SUV inventories falling, not rising. But if that’s true, then let’s not talk about "bloated inventories". Instead, dealers are cutting their SUV inventories, to make space for smaller models. A smart move — and one you’d think might be worth reporting in an article such as this one.

Posted in statistics | Comments Off on SUV Inventories: Up, or Down?

The Short-Selling Ban: A Post-Mortem

Posted on August 13, 2008 by Felix

Floyd Norris gets out his calculator this morning and crunches some numbers on short-selling and stock performance during the now-expired period when the SEC banned naked shorting of 19 financial stocks.

As you might expect, there aren’t any obvious conclusions. The stocks rose over the period in question — but then again financial stocks which weren’t on the list rose more. Short interest in the SEC-named companies declined, even as it rose among their competitors — but then again "the range of the changes in short position was very wide among both groups".

My feeling is that the SEC’s action was more of an insurance policy than it was an attempt to drive stock prices up or short interest down. As it happens, there wasn’t any kind of attempted bank run during the period when naked shorting was banned — which is quite possibly exactly the result that the SEC wanted. There probably wouldn’t have been one anyway, of course, but the SEC might just have wanted to play things as safe as possible in an environment where there was a very real risk that shareholders in Fannie and Freddie could be wiped out.

Still, with any luck we won’t see the return of this rule any time soon. The misinterpretations alone should be reason enough not to start changing the architecture of the capital markets in the middle of a crisis. I hope that the SEC will take the data from this experiment, sit on it, crunch it umpteen different ways, and eventually come out with recommendations and a request for feedback. So long as there’s no indication the SEC is panicking, we’ll probably be OK.

Posted in regulation, stocks | 3 Comments

Carl Icahn: Hitting His Stride

Posted on August 13, 2008 by Felix

It famously took four months for Carl Icahn to even start blogging, after announcing the launch of the Icahn Report in February. So the fact that he now seems to be getting into his stride after only two months is probably heartening. His latest blog entry, an attack on a WSJ op-ed by UCLA law professor Lynn Stout, is nearly everything that blogging should be: heartfelt, pointed, opinionated, substantive.

I’m sure that pretty soon, thanks to the arrival of Dane Hamilton, Carl will start allowing himself hyperlinks and will manage to reply to these kind of articles within 24 hours rather than within two weeks. Eventually, he might even start replying to other bloggers, rather than just to articles in the WSJ. Although I’m not holding my breath on that one. Billionaires tend to be averse to consorting with the little people.

Posted in investing, Media | Comments Off on Carl Icahn: Hitting His Stride

Extra Credit, Tuesday Edition

Posted on August 12, 2008 by Felix

Reflections on Alt-A: A must-read from Tanta. "If subprime was supposed to be about taking a bad-credit borrower and working him back into a good-credit borrower, Alt-A was about taking a good-credit borrower and loading him up with enough debt to make him eventually subprime." See also: Lex gets it very, very wrong on Alt-A.

Less junk mail: the upside of the credit crunch

Le Pen sells party HQ to Chinese: "Mr Le Pen, 79, has campaigned to become president several times under the slogan ‘Keep France for the French’."

Posted in remainders | Comments Off on Extra Credit, Tuesday Edition

Falling Stocks: Cheap, or Cursed?

Posted on August 12, 2008 by Felix

John Hempton emails with an insight about Bill Miller:

Buying a stock when it falls precipitously is selling volatility.

This helps explain Miller’s outperformance over the course of the Great Moderation: by doubling down on his losers, he was selling volatility during a period when volatility kept on hitting all-time lows. On the other hand, by sticking to the same strategy in an environment of rising volatility, he’s doing nothing more than digging himself ever deeper into his self-inflicted hole.

Incidentally, that more justly famous value investor, Benjamin Graham, has had his name attached to three new exchange-traded notes issued by Deutsche Bank. One of them, the Benjamin Graham Small Cap Value ELEMENTS fund, is being listed on the NYSE under the ticker symbol BSC — a ticker symbol which is more or less synonymous with the dangers of doubling down when the stock you like falls substantially in value. (Just ask Joe Lewis.)

Which sets me to wondering: can ticker symbols be cursed, like locations for restaurants? Citigroup, when it was CCI, was a fantastic stock; once it took over C from the doomed Chrysler, its fortunes reversed. I guess the chaps at Deutsche Bank aren’t superstitious.

(HT: Newton)

Posted in stocks | Comments Off on Falling Stocks: Cheap, or Cursed?

The Risky World of Argentine Debt

Posted on August 12, 2008 by Felix

For all that commodity prices might be falling right now, they’re still very high — which is good news for Argentina and its current account. Since its disastrous default and devaluation in 2001, the Land of Silver has managed to accumulate a whopping $47 billion in foreign reserves, which means its ability to pay its debts, at least for the foreseeable future, is assured.

Its willingness to pay, on the other hand, is anything but. And so S&P has now downgraded Argentina to single-B, in line with where Moody’s already had the country.

Argentina’s debt service is due to rise substantially to $18.2 billion next year, and there’s no indication that the government of president Cristina Fernandez de Kirchner puts any particular priority on making those payments. After all, Argentina is still running a budget surplus, so it doesn’t need capital-markets access; in any case, because of the large stock of defaulted debt still outstanding, it isn’t able to raise money in New York or London in the first place. So realistically it’s going to get very little benefit from making those $18.2 billion in payments.

Kirchner’s fiddling with domestic inflation statistics doesn’t help either: by keeping them artificially and unrealistically low, she’s effectively defrauding anybody holding inflation-linked domestic bonds. If she’s willing to do that, it’s not such a great leap to doing something similar to investors holding dollar-denominated debt.

The most interesting part of the whole story, however, is that the Argentine government is doing the very sensible thing and taking advantage of the low price of Argentine debt to buy it back. With the benchmark 2033 bonds trading in the low 70s to yield more than 11.5%, Argentina is likely to save billions by buying back its bonds at these levels.

It’s a trick which is hardly new to Latin American sovereigns: threaten default, watch your bonds plunge in value, and then buy them back on the cheap. If you’re really sleazy, you buy credit protection on your debt first, and make profits as your credit default swaps soar in value. Then you write credit protection after the bonds have plunged, locking in enormous premiums for the next five years. And then you fail to default, ensuring that you don’t have to pay out on the protection that you wrote.

All of which means that if you’re an investor in Argentine debt, beware of being played. It’s a high-risk investment, and if you get it wrong you could lose a lot of money. But on the other hand, those double-digit yields from a rich country with a large trade and budget surplus sure do look attractive.

Posted in bonds and loans, emerging markets | Comments Off on The Risky World of Argentine Debt

When Bill Met Freddie

Posted on August 12, 2008 by Felix

On December 31, Freddie Mac shares were worth $34.07 apiece, and Bill Miller owned 15 million of them.

By March 31, Freddie Mac shares had fallen 25% to $25.32 each, and Bill Miller owned 50 million of them.

As of July 31, Freddie Mac shares had collapsed all the way to $8.17. And Bill Miller owned 80 million of them.

Anybody else getting the impression that Bill Miller is one of the world’s worst bear market fund managers?

Posted in investing | Comments Off on When Bill Met Freddie

Frank Quattrone, Whiner

Posted on August 12, 2008 by Felix

Frank Quattrone made his fortune by taking Silicon Valley startups public during the dot-com boom. Even at the time many awkward questions were asked: weren’t most of these companies too small and too young and too unprofitable for a full-scale IPO? But Quattrone didn’t let those things stop him.

How did Quattrone overcome these real and sensible worries of investors? Partly by being in the right place at the right time: technology stocks were soaring, investors in them were making millions of dollars, and everybody wanted in on hot IPOs which were pretty much guaranteed to be flippable at a huge profit on the day the stock went public. But Quattrone had another, fallback position, too: don’t worry, I can assure you that these are eminently respectable companies, just look at the analyst coverage that they have.

Today, Quattrone misses those days.

“I do think the industry should petition to remove the Spitzer initiatives because ultimately they hurt the competitiveness of our country by denying small companies the access to research analysts,” he said…

Mr. Quattrone posits that the lack of research has been one reason the initial public offering market for technology companies has had a tough time.

Well, yes. But what Quattrone isn’t mentioning here is that the IPO market for technology companies has always been tough — with the single exception of one bubblicious period in the late 1990s. For pretty much the entire history of capital markets, a technology company wanting to go public has had to be reasonably big and show substantial annual profits more than once. Quattrone’s baseline is far removed from there, and he would love it if he could get analyst support for the smaller, less profitable companies that he wants to take public. He can’t, however, and so he’s whining.

The job of stock analysts is not to increase the number of technology companies going public before they’ve really proven themselves. Quattrone still doesn’t grok that analysts are meant to work for investors, not investment bankers. And in the much more sensible tech-stock environment of the 2000s, the biggest investors simply aren’t interested in small companies with smaller profits and free floats which are smaller still. They don’t "move the needle", as they say.

Such IPOs are good for giving the founders of the company in question massive paper wealth, and they’re very good for giving the likes of Frank Quattrone very real wealth. From an investment perspective, however, there’s no good reason for the big sell-side research departments to put a large amount of human capital to work covering these small and marginal and speculative stocks.

Quattrone wants his free lunch back? Well, he’s not going to get it. No matter how much he kvetches to Andrew Ross Sorkin.

Posted in stocks, technology | Comments Off on Frank Quattrone, Whiner

Commuting Datapoint of the Day

Posted on August 12, 2008 by Felix

Matthew Garrahan reports on the housing bust in Merced, California:

Like Stockton and Modesto, Merced is within commuting distance of San Francisco and the Bay Area, which made it appealing to investors.

Some numbers from Google Maps:

Merced, CA to San Francisco, CA

131 mi – about 2 hours 11 mins (up to 3 hours 0 mins in traffic)

Merced, CA to San Jose, CA

129 mi – about 2 hours 7 mins

Merced, CA to Palo Alto, CA

130 mi – about 2 hours 12 mins

That 130 miles (one way) was ever considered "withing commuting distance" — let alone still considered that — boggles the mind. If you did the round trip five days a week, 50 weeks a year, that’s 65,000 miles right there. At 25 miles and $4 a gallon, that’s over $10,000 in gasoline costs alone, not to mention the opportunity costs of spending well over a thousand hours a year in traffic.

Incidentally, Merced real estate broker Robin Kane deserves some kind of mixed metaphor medal for this:

“It was a great ride for a lot of investors but eventually the music stopped and someone had to pay the piper,” says Mr Kane. “What was supposed to be a liquid asset becomes a ball and chain around your neck when you owe more than the market value of the property.”

If the investors were really putting money into Merced on the assumption that their renters would commute to San Francisco, they deserve to end up upside-down. It’s actually quite hard to think of a worse investment thesis.

Posted in cities, housing | Comments Off on Commuting Datapoint of the Day

Regulate All Lenders

Posted on August 12, 2008 by Felix

George Soros lays out his plan for fixing the US mortgage system in the FT today: essentially, it’s a Demark-style covered-bond system which imposes extremely rigorous regulation and homogenization on all mortgage lenders. Under his preferred system, says Soros, "loan-to-value ratios and underwriting standards are strictly enforced by a single, strong regulator".

This is quite un-American, and won’t happen, but that doesn’t mean it shouldn’t. A large part of the reason for the current housing mess was regulatory arbitrage: while banks and GSEs were regulated quite assiduously (although not assiduously enough), other lenders — anyone who didn’t take deposits, basically — had essentially no regulation at all.

Lenders are a crucial part of any financial system, and it’s high time that they were properly regulated — all of them. That includes not only subprime mortgage lenders but also payday lenders, credit-card companies, car loan shops, the lot. What’s more, the regulation should be at the federal, not state level, thereby preventing all these companies from simply officially setting up shop in Delaware and then operating nationwide with effective impunity.

The lack of regulation of lenders can only really be justified on the grounds of homo economicus: that individuals won’t take out loans which do them no good and lots of harm. But of course they do, every day, to the point at which credit-card companies nowadays make their biggest profits from accounts which go into arrears. Slapping enormous fees onto people who can’t afford to pay back their loans might be profitable, but it’s unhealthy from a systemic perspective, and it’s high time a regulator had the power and authority to crack down on such activity.

Posted in regulation | Comments Off on Regulate All Lenders

Why UBS’s Wealth Management Should Stand Alone

Posted on August 12, 2008 by Felix

When I saw yesterday that UBS private-banking clients were expected to have withdrawn SFr5 billion from their accounts last quarter, I said the number seemed low to me. Amazingly, I was right:

Rich clients at UBS’s wealth management units withdrew 17.3 billion francs more than they added in the quarter, triple the 5 billion-franc estimate of analysts. The division, which oversaw 1.84 trillion francs at the end of March, attracted an average of 37.9 billion francs in each quarter last year.

In an entirely sensible response, UBS is separating its wealth-management unit from its investment banking unit, giving it the freedom to sell one or the other entirely. Losing the private bank would leave the rump UBS with much more volatile earnings, but the value of a unit managing more than $1.6 trillion is mind-boggling. A bit like Neuberger Berman at Lehman Brothers, the buy-side is worth such an enormous percentage of the whole that at some point it becomes impossible for a fiduciary not to sell (or at the very least spin) it off.

If and when that happens, the private-banking clients will probably be happy to be rid of the investment-banking albatross: no one likes to wake up in the morning to see the home to his money has contrived to lose $38 billion on misadventures in mortgage-backed securities. Hardly gives one confidence that they know what they’re doing.

And the chances are, too, that if investment banking and wealth management were separate, the problems in the auction-rate securities market might not have happened either. ARSs were sold aggressively "into retail" (private-banking clients) largely because they were so lucrative for the investment-banking side of the business, which got nice fees for structuring them and holding the regular auctions.

So if UBS wants to stanch the outflow of client funds, today’s announcement is a very good first step.

Posted in banking, private banking | Comments Off on Why UBS’s Wealth Management Should Stand Alone

Extra Credit, Monday Edition

Posted on August 11, 2008 by Felix

Lessons Learned From A Dangerous Year: "For fixed-income investors, what matters most is not the return on your money, it’s the return of your money."

What Bill Gates really means by creative capitalism: An elegant piece from Martin Wolf.

Crisis Averted. What of the Next One? Add Robert Shiller to the people calling for "a better framework for dealing with systemic crises". Of course, no one opposes frameworks, they just never happen, no matter how many op-eds are written.

‘Naked’ short-selling rule set to expire

Bankruptcy Filings Jump in July, Highest Since 2005 Law

The Coase Theorem Rules at NYU Law

FSA Report on False HBOS Rumours (in full): "It was clearly the result of more sellers than buyers which made the HBOS price fall more than it would have if this hadn’t been the case."

FHFA From OFHEO Over GSE With HUD And FHFB

Coffey Turned Over Portfolio at His GLG Fund 2.8 Times a Day

How and Why Does Age at Kindergarten Entry Matter?

Posted in remainders | Comments Off on Extra Credit, Monday Edition

Eat Roo

Posted on August 11, 2008 by Felix

In case you wanted another reason to eat kangaroo rather than beef: they emit just 0.003 tonnes of greenhouse gases per animal per year, compared to 1.67 tonnes per cow per year. And they don’t just save in terms of methane emissions, either:

The costs of producing a

kilogram of kangaroo meat from a free-ranging, minimal-input production system are lower than those for cattle or

sheep. For example, there are no costs for fences or yards,

internal or external parasite control, shearing, crutching, purchasing new genetic material (e.g., stud rams and

bulls), branding, dehorning, or castrating.

Plus, it’s high in protein, low in fat, and low in cholesterol.

For Australia, with vast quantities of land supporting a very small number of people, a mass switch from beef and lamb to kangaroo makes all the sense in the world — especially with cattle and sheep accounting for 11% of the country’s total greenhouse-gas emissions. There might even be a healthy export industry there, although it’ll probably be a while before we see roo steaks in Safeway.

Posted in climate change, food | Comments Off on Eat Roo

Bear Stearns Conspiracy Watch: Bloomberg Piles On

Posted on August 11, 2008 by Felix

The latest journalist to start waxing conspiratorial about the collapse of Bear Stearns is Gary Matsumoto of Bloomberg. He’s looking at options trades which he reckons are very suspicious:

In a gambit with such low odds of success that traders question its legitimacy, someone wagered $1.7 million that Bear Stearns shares would suffer an unprecedented decline within days. Options specialists are convinced that the buyer, or buyers, made a concerted effort to drive the fifth-biggest U.S. securities firm out of business and, in the process, reap a profit of more than $270 million.

Wow, $1.7 million turned into $270 million? Nice trade! Except by the end of the article the cost of the trade has gone up substantially, while the pay-off hasn’t:

Options bets that looked irrational on Friday proved brilliant on Monday, when the shares traded between $3 and $5. By Wollney’s calculations, the traders who spent $35.8 million on the deep out-of-the-money puts reaped an estimated $274 million windfall from the plunge in Bear Stearns.

The thing which annoys me most about the article is that the people buying the puts are always described as speculators: there’s no indication that there could have been any legitimate purpose to enter into these trades.

Of course, there are lots of reasons to buy short-dated out-of-the-money puts. The best reason would be if you’d been selling a lot of short-dated out-of-the-money puts at higher strike prices, and you wanted to protect your downside. And, guess what, it turns out that volume in Bear Stearns put options at $40 and $50 strikes had indeed been rising sharply.

More generally, there was good reason to believe that if Bear could make it through the week and start being able to tap the Federal Reserve’s liquidity facility, then the worst was behind it and it would survive. In that case, a very sensible trade would be to go long Bear stock, and hedge with short-dated bankruptcy puts which would pay out in case Bear imploded over the course of the coming week.

But there’s no indication of any of this in Matsumoto’s feverish article. Instead, the piece is full of utterly baseless speculation that the people buying the puts were also spreading rumors which brought down the bank, and it’s based entirely on the speculation of options traders who lost a lot of money in the Bear collapse and have an understandable desire to pin the blame elsewhere. This is one-sided journalism, and Bloomberg, of all media outlets, really ought to behave more responsibly.

(HT: Ritholtz)

Posted in banking, derivatives | Comments Off on Bear Stearns Conspiracy Watch: Bloomberg Piles On

The Sad Anonymity of a Risk Professional

Posted on August 11, 2008 by Felix

The anonymous confessions of a risk manager in this week’s Economist are well worth reading:

The focus of our risk management was on the loan portfolio and classic market risk. Loans were illiquid and accounted for on an accrual basis in the “banking book” rather than on a mark-to-market basis in the “trading book”. Rigorous credit analysis to ensure minimum loan-loss provisions was important. Loan risks and classic market risks were generally well understood and regularly reviewed. Equities, government bonds and foreign exchange, and their derivatives, were well managed in the trading book and monitored on a daily basis.

The gap in our risk management only opened up gradually over the years with the growth of traded credit products such as CDO tranches and other asset-backed securities. These sat uncomfortably between market and credit risk. The market-risk department never really took ownership of them, believing them to be primarily credit-risk instruments, and the credit-risk department thought of them as market risk as they sat in the trading book.

I’m interested in the fact that the author of the article is anonymous. There’s nothing here which isn’t well known and accepted in the banking community, and it’s hardly news that any bank which has taken billions of dollars in write-downs had weaknesses in its risk management systems.

If the author of this article had been identified by name and institution, that would have been a sign that the bank in question is really learning its lessons. The fact that the author feels the need to be anonymous, however, signals the opposite: that the bank doesn’t want to admit to weaknesses in its risk management, even now.

For all the areas within banks which have been hit hard by the credit crunch, corporate communications has generally remained unscathed — despite that fact that they’re still instinctively playing defense rather than getting out there and showing the world how the bank has truly changed. When an article like this appears with a byline attached — that’s when we’ll know that the culture of the bank has really internalized the lessons of this crisis.

Posted in banking | Comments Off on The Sad Anonymity of a Risk Professional

Distressed Trades of the Day

Posted on August 11, 2008 by Felix

For the best part of a year now I’ve heard buy-siders talk about how there are great opportunities in the debt markets if you know what you’re doing. I’ve generally assumed that these people have lost money on most of those "great opportunities" so far, and that a lot of their rhetoric was just what any fund manager says when markets go down.

But distressed-debt hedge fund GSO, recently acquired by Blackstone, has actually exited a couple of its distressed positions already, with healthy profits:

In its largest deal, it bought debt in Alltel at the same hefty discount and will be paid off at 100 cents on the dollar, as the telecommuncations company’s owners – Goldman Sachs and TPG – sold it to Verizon two months later. Another big payday came when GSO bought debt of Tribune, a troubled newspaper company, Tribune at 66 cents on the dollar, watched it rise to 75 cents when Tribune sold Newsday, one of its crown jewels, and quickly sold out.

Very nice: I sure wouldn’t want to be owning Tribune debt right now. There’s a vague idea out there that distressed debt investing is essentially a buy-and-hold practice: you hope that the firm won’t go bankrupt and will repay you in full, but if it does go bankrupt then you litigate aggressively in bankruptcy court.

GSO, it seems, is also very good at distressed-debt trading: buying low and selling high before the debt starts falling again. That skill is likely to serve them very well in today’s volatile environment.

Posted in bonds and loans, hedge funds | Comments Off on Distressed Trades of the Day

Fortress Gets a New Principal

Posted on August 11, 2008 by Felix

Hedge funds can be extremely good at making their founders extremely wealthy. But that can be a problem, too: a star trader at a hedge fund knows that if he wants the real dynastic wealth, he’ll have to start up his own fund at some point. As a result, hedge funds rarely survive their founders — which is a problem for any hedge funds with public listings like Fortress.

It’s not surprising, then, that Fortress has lavished a $300 million share grant on its star trader, Adam Levinson. Such grants are only to be expected at publicly-listed hedge funds which need to exist in perpetuity, not only so long as their founders stick around.

On the other hand, such share grants are necessarily dilutive for existing shareholders: they’re essentially being asked to give up ownership now in return for the hope of owning part of a star fund long into the future. Still, they shouldn’t be shocked or upset in principle at this share grant: it’s exactly what publicly-listed hedge funds should be doing.

That said, this share grant could have been the best trade of Levinson’s career. The stock is being issued to him while the shares are trading at their all-time lows; what’s more, Levinson’s own magic touch seems to have deserted him this year, at least as it’s reflected in the performance of the global macro hedge fund he runs. From here on in, he gets to piggy-back in large part on his colleagues’ performance, rather than his own, and he gets to do so from an extremely attractive entry point.

Posted in hedge funds | Comments Off on Fortress Gets a New Principal

MBIA Turns Thuggish

Posted on August 11, 2008 by Felix

When it comes to the monolines, I’ve had quite a lot of sympathy for MBIA in general and for its CEO Jay Brown in particular. But if he carries on like this, that sympathy won’t last long:

MBIA Inc. said it may sue Bill Ackman, striking back against the hedge fund manager who waged a six-year campaign against the bond insurer and said this year that the company may be insolvent.

MBIA is "assessing all our options, including litigation" against Ackman’s Pershing Square Capital Management LP, Chief Executive Officer Jay Brown said on a conference call today.

Litigation is a very, very, very bad idea. The immediate upside is negligible: what could MBIA hope to achieve from bringing such a case? And the long-term upside isn’t much larger: while a handful of people might have second thoughts about publicizing their analysis of MBIA, investors more generally will simply assume that MBIA is trying to prevent them from reading negative analysis, and will mark down MBIA’s securities accordingly.

Ackman is tenacious, but he’s no criminal, and he doesn’t go around threatening the companies he’s shorting. Similarly, neither should they threaten him. Open, transparent debate is good; anything which serves to quash that debate is bad. The irony here is that Jay Brown is extremely good in such debates: he’s clear and easy to understand and quite convincing, most of the time. He should engage in them more often, rather than resort to thuggish tactics like this.

Posted in insurance | Comments Off on MBIA Turns Thuggish

Oil Datapoints of the Day

Posted on August 11, 2008 by Felix

Krishna Guha:

At today’s prices the value of oil in the ground exceeds the combined value of all the world’s equity and debt markets.

Oil-importing nations are paying oil-exporting nations roughly $1,500bn per annum for oil – about 2.5 per cent of global gross domestic product – by some measures the biggest income transfer in history.

The whole article is excellent, and required reading for anybody wanting to scare up opinion against sovereign wealth funds. Yes, the savings rates of oil exporters might start falling as their capacity for domestic investment rises. But there’s no doubt that their savings in absolute terms will rise impressively for the foreseeable future. If you think the SWFs are big now, just wait another decade: they’ll have major geopolitical importance then.

The last two waves of petrodollar investment both turned very sour in the end, and I can’t say that the medium-term outlook is any better. The magic of capital markets is that they’re meant to somehow take capital from investors and funnel it to where it can be put to best use in the real world. But with banks deleveraging and investors staying risk averse, it’s not easy to see that happening with any elegance in the future.

Over the next few years, oil will be converted into stocks and bonds at an astonishing pace. That trade has never worked out well in the past; what hope is there that it will work out well in the future?

Posted in commodities, economics | Comments Off on Oil Datapoints of the Day

UBS Private Banking Inflows Cease

Posted on August 11, 2008 by Felix

I’m utterly unsurprised at this; if anything, I’d’ve expected the scale of withdrawals to be much bigger.

UBS AG, the world’s biggest money manager for the wealthy, may report tomorrow that private-banking clients removed funds for the first time in almost eight years in the second quarter as losses at the securities unit mounted.

Clients probably withdrew a net 5 billion Swiss francs ($4.6 billion) in the period, according to the median estimate of 10 analysts surveyed by Bloomberg. UBS’s wealth management units, which oversee 1.84 trillion francs, attracted an average of 37.9 billion francs in each quarter last year.

Bloomberg’s Elena Logutenkova blames the withdrawals on "an erosion of confidence in UBS after it amassed 25.4 billion francs of net losses", "claims that it helped clients evade American taxes", and the fiasco in auction-rate securities.

But much more important is the fact that a UBS private banker, Bradley Birkenfeld, gave enormous amounts of confidential information to US authorities, and the fact that UBS is going to stop providing offshore private-banking services to Americans.

The problem with UBS, from a private-banking perspective, is now that it’s too big, and too global. So long as Swiss banks stayed in Switzerland, the Swiss government certainly wasn’t going to ask any questions about their clients. But UBS has a presence in dozens of important jurisdictions around the world, and its clients in those countries simply can’t assume any more that their assets and personal information are safely being kept away from prying eyes in Zurich.

From the point of view of a high net worth individual, placing your money with a big bank is a good thing: it’s safer there. But placing your money with an enormous bank doesn’t make it any safer, and might in fact make it a more obvious target. Expect the outflows from UBS to continue, especially as more information trickles out about the controls that UBS may or may not have had in place within its private banking unit.

Posted in banking, private banking | Comments Off on UBS Private Banking Inflows Cease

Manhattan Housing Wealth Datapoint of the Day

Posted on August 10, 2008 by Felix

Jonathan Miller takes a look at what’s happened to Manhattan apartment prices over the past three years — since, more or less, the national housing market peaked in 2005. On a year-over-year basis, it turns out, Manhattan co-ops have appreciated in value by $109,596 a year for the past three years, while Manhattan condos have gone up by $166,937 a year for the past three years.

Obviously, these numbers don’t translate easily to any particular ROI: that would depend greatly on your downpayment, your mortgage payments, your tax rate, etc etc. But even so, it’s a pretty safe assumption that the housing wealth of most Manhattan apartment owners has been rising at a six-figure-per-year pace even as the rest of the country has been suffering. For big apartments with four or more bedrooms, make that a seven-figure-per-year pace. This is clearly unsustainable, but when it will stop is anybody’s guess.

Posted in housing | Comments Off on Manhattan Housing Wealth Datapoint of the Day

Ben Stein Watch: August 10, 2008

Posted on August 10, 2008 by Felix

I hope you’re sitting down for this one: Ben Stein has written a perfectly good column this week. It’s about fiscal responsibility: he says that the US needs to raise taxes, not cut them, and that if we’re going to raise taxes, we should raise them on the rich and not the poor.

Well done, Ben, you’re quite right. I’m not even going to quibble with the way you said it: this is a message which should be communicated in as many ways as possible. But I can’t resist noting that even a stopped clock is right twice a day. Maybe this is a good point at which to quit while you’re ahead.

Posted in ben stein watch | Comments Off on Ben Stein Watch: August 10, 2008

Metablogging Sunday

Posted on August 9, 2008 by Felix

The war in South Ossetia is a great example of the power of blogging. On Friday, which was pretty much the day it started, Doug Muir posted a generally anti-Georgian explanation of the whole thing, while Svante Cornell posted a generally pro-Georgian explanation of the whole thing. For anybody trying to understand what on earth is going on and wanting to put the war in a big-picture context, these two fast blog entries are as good or better as anything the MSM has managed to come up with over the weekend. The combination of the two of them gives anybody the talking points they need to bluff their way through dinner parties for the next few weeks, I’m sure.

So are The Blogs beating the MSM in South Ossetia? No: the MSM is irreplaceable. The NYT isn’t even close to being out on front in this war, but just check out the byline on its story today:

Andrew E. Kramer reported from Gori and Tbilisi, Georgia, and Anne Barnard from Moscow. Reporting was contributed by Michael Schwirtz from Gori; Ellen Barry from Moscow; Matt Siegel from Vladikavkaz, Russia; Steven Lee Myers from Beijing; and Katrin Bennhold from Paris.

These are people who aren’t doing anything but reporting: they’re all dedicated to finding out the facts on the ground and communicating them as clearly and quickly as they can. For all that blogging is useful, such resources are invaluable.

Incidentally, it’s now been over a year and a half since I was fired by Roubini Global Economics. I wasn’t there very long; while I was there, I got my blog a relatively small but pretty high-end and influential readership. Eventually I popped up at Portfolio.com, and I’ve been very happy there indeed.

But when I left RGE and started talking to Portfolio, I was convinced that “name” blogs would nearly always outperform blogs like mine in terms of traffic and other econoblog rankings. People like Nouriel Roubini and Barry Ritholtz and Paul Krugman have credentials, and are much in demand as TV pundits. I, by contrast, am a lowly hack; I hate appearing on TV, and I’ve never taken an economics course or traded the stock market or worked in a bank or anything like that.

At a dinner party on Friday I was talking to a German blogger about the reasons why the blogosphere hasn’t really taken off in Germany: he said it was basically that Germans have no interest in reading or paying any attention to people without credentials, while the people with credentials have no interest in blogging. Both are actually perfectly sensible attitudes to take, and it would be interesting to examine the mechanisms by which those obstacles were overcome in the US.

In any case, I recently had occasion to revisit a couple of simple comparisons that I remembered from my RGE days. First there was a googlefight between myself and Nouriel Roubini: he used to utterly trounce me, but now I edge him. (It’s useful that both of us have names which aren’t shared by anybody else who’s got much of an online presence.) Then there’s the technorati rankings: I have an authority of 695 and a rank of 4,312 with 5,033 blog reactions, while Nouriel has an authority of 588 and a rank of 5,500 with 2,113 blog reactions.

Now I hasten to add that I couldn’t have done this on my own. Being part of an MSM website was very important for three reasons: firstly, it gave me a bit of that valuable credibility: people at places like the WSJ, it turns out, are much more comfortable linking to other MSM blogs than they are to small DIY sites like felixsalmon.com. Second, Conde Nast has put a lot of time and effort into building Portfolio.com’s traffic, and a bunch of that must have helped me, along the way. And most importantly of all, Conde was paying me the whole while, which allowed me to put all my efforts into the blog without having to go off and earn real money elsewhere.

Still, I feel that I’ve achieved something which, honestly, a year ago I would have thought impossible — especially given that Nouriel’s doomsaying has all pretty much come true over the course of that year, making him much less wacky and much more respectable and mainstream. Over at Aaron Schiff’s economics blogs ranking, I’m now in 13th place, above even Brad DeLong, which is crazy. (I think that’s because Brad has a lot of different URLs, which makes it hard for Technorati to track and aggregate him properly.) Nouriel is #24, which is too low, I’m not sure what’s going on there. Historically, I’ve compared myself to other MSM blogs: MarketBeat, Alphaville, Free Exchange. Now, I feel like I’m up there with the likes of DeLong and Thoma and VoxEU. And that feels great.

Posted in Not economics | 4 Comments