You have to hand it to this guy Dreier. He really managed to scam some sharp folks. Or perhaps we have a very over-inflated view of the collective sharpness of hedge funds with famous names and big AUMs.
Elliott’s losses tied to the fraud accounted for less than 1 percent of the money it oversees, according to a person familiar with the firm.
“Elliott has been deceived more than once over the years, and it is likely to happen again in the future,” the fund said in the letter.
Elliott Hedge Fund Bought Fictitious Securities From Dreier [Bloomberg]
Earlier: Would You Give $50 Million To This Man?
What follows is a photograph of Philip Toub, Fairfield Greenwich partner, son-in-law of Walter, and husband of Alix, at a Pimps and Hos party. Don’t know when it was taken (last night?) but that’s pretty much immaterial. PT is on the left.
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Performance for everyone’s favorite “he is a Tiger cub” “he isn’t a Tiger cub” through January 23rd:
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Our favorite Target-lover held his annual investor dinner last Thursday. For those of you who couldn’t attend, the presentation is after the jump. Later, we’ll simulate what it was like to eat pasta with Ackman, Lady and the Tramp-style, which he took the time to do with each and every guest, because unlike certain other managers, he works hard for the money.
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Her father and husband may have lost everything, but Marisa Noel Brown still up to get down. Guest of a Guest reports that the youngest Noel girl is hosting a soiree this Thursday at the Doubles Club in the Sherry-Netherland Hotel. Walter Noel, on the prowl for new investors, set to attend. RSVP today.
What will we miss most about the last few years? Well, the list is long, but high up on it is Bill Ackman’s skewing of MBIA. That trade was a brutally long campaign, and caught Ackman a lot of flak from MBIA’s PR efforts, but it paid off in the end. Apparently, he has unwound it, finally. Waiting on the last two dollars might have been bouncing the rubble. After a 78% drop in 2008, I’d think about unwinding too. Then again, while he’s been in MBIA with Pershing Square for some time, his short view on the stock dates back much longer: seven years or so.
Ackman first thought MBIA’s stock and bonds would fall in 2002 when he oversaw Gotham Partners, a New York-based investment firm. He wrote a 62-page report casting doubt on the AAA ratings at MBIA’s insurance unit, and last year seven bond insurers lost top rankings as losses on securities backed by subprime mortgages soared.
Sexy graphs after the jump.
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When we were informed last month that Citigroup was putting two of its corporate jets up for sale, the reaction was pretty much “What the fuck is this shit?” First off, as everyone here knows, private jets are an essential component of Citi’s business model. Second, the firm had already instituted its ban on color copies, so we were under the impression that things were back on track, making-money wise. Some calls were placed and Saudi Prince Alwalweed promised to make his superjumbo available, but it looks like we may not have to rely on the kindness of the Shareholder 4 Life. The Post reports that the Big C is soon to be the proud owner of a brand spanking new Dassault Falcon 7X. There are apparently just nine of these French-made toys in the U.S., which, for a mere $50 million, will transport Vikram Pandit and 11 of his closest pals in a style they deserve.
We all know what will pull us out of this nose dive: $1 trillion in direct stimulus. Huzzah! What is less well advertised is what sort of strings will be attached.
When Paulson announced to several of the large banks that they were going to get bailout money and like it, a few had the temerity to ask what the conditions were. Of course, anyone who made such a comment was just opening themselves up to accusations that the developing (but not described) restrictions on executive pay were the motive for the rejection. That silenced about everyone. The institutions took the money. Some more grudgingly than others.
Fast forward. Surprise! Now anyone with public money is bathing in the gelatinous “squish” of a million squirming appetites, forced to submit to a literal morass of legislative tentacle sex with hundreds of pet projects, social theory experiments and personal causes (from the left and the right), not to mention the utter chaos and unpredictability of having every idiot in the House pop off about what new rule you should be following this week. Predicting what is or will be expected of you (or what you may or may not be paid) is a nightmarish prospect.
The typically good Falkenblog examines the consequences of these sorts of situations against big stimulus plans:
To see the problems, note that for the past 15 years, every bank merger would have to by approved by regulators, who were keen on making sure these banks were making adequate recompense for red-lining and other policies. Thus, consider this press release from when Washington Mutual acquired Dime bank in 2001:
In connection with its merger with Dime, Washington Mutual recently established a ten-year, $375 billion community commitment which targets funding to low- and moderate-income borrowers, and minority borrowers, as well as direct investments and other forms of support in communities where the company operates, including the greater metropolitan New York area. One of the largest community commitments of its kind, the ten-year pledge will be implemented with the assistance and support of a variety of non-profit community partners.
Now, WaMu hade [sic] about $250B in assets at this time. Pledging $375B for low-income borrowers staggers the imagination. If the entire banking sector was making these pledges, how, possibly, could one actually meet this objective without creating a huge system of favors, with vested interests at every level (government, business, nonprofit, regulatory, academic)? More importantly, how could it not end in a huge number of bad loans? That it took so long to implode is the most amazing thing. When it finally blew up, those responsible for the mess would say, like “it was perverse that Freddie Mac and Fannie Mae, the two biggest providers of money for U.S. home loans, have been encouraged to put people into homes that they end up losing.” That was Richard Syron, who was head of the Boston Fed when it ‘proved’ that existing residential lending was discriminatory and too conservative back in 1992, and was rewarded as head of Fannie Mae, where he pocketed $38MM for running it into the ground.
Falkenblog goes on to wonder what perverse incentives $1 trillion in stimulus might leave our heirs with. Not a bad question considering we are well on the way back to lending requirements (all of them loose) for any TARP institution.
Will we never learn?
Big Government’s Big Effects [Falkenblog]
Typically when Congress can’t get the political backing to actually pass a bill to pay for something, they do the next best thing: get the political backing to guarantee something, or insure any losses. At the very least this reduces the cost of capital for the activity. Throw some tax benefits in and you go a long way to encouraging the behavior you are trying to stimulate. So potent can the effect be that you don’t even necessarily need a direct guarantee. (The “too big to fail” condition and the “implicit guarantee” of a Fannie Mae is a good example here).
Alea points us to a Financial Times piece this morning that hints at the use of that kind of backing. To wit:
Forcing institutions to raise capital, be it private or public, at panic-driven fire sale prices threatens enormous dilutions to already shell-shocked shareholders, further exacerbating uncertainty and fuelling the downward spiral. This is self-defeating.
The question then is whether it is feasible to run a (nearly) capital-less financial system until panic subsides. If it is, then a solution to the financial crisis is in sight since it would free up trillions of dollars of hard to raise funds, covering more than even the most extreme estimate of losses.
I believe it is feasible to run such a system for a while, because, essentially, distressed financial institutions need (regulatory) capital for two basic purposes: To act as a buffer for negative shocks, and to reduce their risk-shifting incentives by exposing them to their losses.
However these two functions can be replaced, respectively, by the provision of a comprehensive public insurance, and by strict (and intrusive) government supervision while this insurance is in place.
We call the plan “Back Up and Bully.”
The problem with this level of insurance is that while it preserves public capital (and prevents dilution) you can write a lot of insurance before anyone starts to notice that you are on the hook for, well, a lot of insurance. (See e.g., Fannie and Freddie).
Caballero is thin on details, particularly the part about how the day-to-day operations of a “capital-less” bank work. We wonder after these details. In the present situation a good share of the capital being raised is likely to actually cover losses. An interesting side effect of mark-to-myth accounting is that you might not trigger capital and margin calls based on those marks right away, but they could well be coming in short order. We tend to think that the Treasury knew a bit more than it was telling about the state of bank balance sheets early in the crisis. A capital-less solution might not be as practical as it looks here. Still, it’s fun to dream- and not every case is a lost cause for this solution.
A capital-less financial system [The Financial Times]
Investors don’t know it yet but apparently a decision was made internally last night to suspend redemptions at Union Bancaire Privée for 3/31/09, with the funds being “restructured.” Since *someone* went public with his pyramid scheme, requests for money to be returned have hit $7.5 billion.
Related: UBP’s Primer On Madoff
The title’s supposed to come with some sort of job security but at least one analyst has gone on record to say that Ken Lewis is finished. NAB Research banking analyst Nancy Bush told the Journal, “I think his job is in jeopardy. I think he is gone next week. He is rearranging the deck chairs before he gets thrown overboard.” And though throwing John Thain under the commode on legs was supposed to strengthen his position at the top, even best buddy Angelo Mozilo, former Countrywide CEO and current BAC men’s room bookie, is taking bets this morning regarding Lewis’s future with the firm. So.
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