Category: Articles

Earth, Kindle, Standing for the President, Road to Serfdom

– Population changes

– Why it can’t save newspapers (hat tip reader Chris)

– This is soooo weak…

– Crib notes illustrated

Disclosure (“none” means no position):

I’ll let this speak for itself as I agree with it 100%. Folks, we have contract law for a reason, it gives the markets a guide and allows for orderly transactions. First Congress attempted nullify it in the AIG (AIG) bonus issue and now the White House is trying with Chrysler bondholders. When both failed, they have resorted to stirring public outrage against those with whom they disagree. In both cases that public outrage has resulted in death threats against the vilified parties.

This is a dangerous game…

Unafraid In Greenwich Connecticut
Clifford S. Asness
Managing and Founding Principal
AQR Capital Management, LLC

The President has just harshly castigated hedge fund managers for being unwilling to take his administration’s bid for their Chrysler bonds. He called them “speculators” who were “refusing to sacrifice like everyone else” and who wanted “to hold out for the prospect of an unjustified taxpayer-funded bailout.”

The responses of hedge fund managers have been, appropriately, outrage, but generally have been anonymous for fear of going on the record against a powerful President (an exception, though still in the form of a “group letter,” was the superb note from “The Committee of Chrysler Non-TARP Lenders,” some of the points of which I echo here, and a relatively few firms, like Oppenheimer, that have publicly defended themselves). Furthermore, one by one the managers and banks are said to be caving to the President’s wishes out of justifiable fear.

I run an approximately twenty billion dollar money management firm that offers hedge funds as well as public mutual funds and unhedged traditional investments. My company is not involved in the Chrysler situation, but I am still aghast at the President’s comments (of course, these are my own views, not those of my company). Furthermore, for some reason I was not born with the common sense to keep it to myself, though my title should more accurately be called “Not Afraid Enough” as I am indeed fearful writing this… It’s really a bad idea to speak out.

Angering the President is a mistake, and my views will annoy half my clients. I hope my clients will understand that I’m entitled to my voice and to speak it loudly, just as they are in this great country. I hope they will also like that I do not think I have the right to intentionally “sacrifice” their money without their permission.

Here’s a shock. When hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back. However, they know, or should know, they take the risk of not being paid back. But if such a bad event happens, it usually does not result in a complete loss. A firm in bankruptcy still has assets. It’s not always a pretty process. Bankruptcy court is about figuring out how to most fairly divvy up the remaining assets based on who is owed what and whose contracts come first.

The process already has built-in partial protections for employees and pensions, and can set lenders’ contracts aside in order to help the company survive, all of which are the rules of the game lenders know before they lend. But, without this recovery process nobody would lend to risky borrowers. Essentially, lenders accept less than shareholders (means bonds return less than stocks) in good times only because they get more than shareholders in bad times.

The above is how it works in America, or how it’s supposed to work. The President and his team sought to avoid having Chrysler go through this process, proposing their own plan for re-organizing the company and partially paying off Chrysler’s creditors. Some bond holders thought this plan unfair. Specifically, they thought it unfairly favored the United Auto Workers, and unfairly paid bondholders less than they would get in bankruptcy court. So, they said no to the plan and decided, as is their right, to take their chances in the bankruptcy process. But, as his quotes above show, the President thought they were being unpatriotic or worse.

Let’s be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients’ money to share in the “sacrifice”, they are stealing. Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not.

The managers have a fiduciary obligation to look after their clients’ money as best they can, not to support the President, nor to oppose him, nor otherwise advance their personal political views. That’s how the system works. If you hired an investment professional and he could preserve more of your money in a financial disaster, but instead he decided to spend it on the UAW so you could “share in the sacrifice”, you would not be happy.

Let’s quickly review a few side issues.

The President’s attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. Why is he not calling on his party to “sacrifice” some campaign contributions, and votes, for the greater good? Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power.

Let’s also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won’t work because of this irresponsible hectoring.

Last but not least, the President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying.

The TARP recipients had no choice but to go along. The hedge funds were singled out only because they are unpopular, not because they behaved any differently from any other ethical manager of other people’s money. The President’s comments here are backwards and libelous. Yet, somehow I don’t think the hedge funds will be following ACORN’s lead and trucking in a bunch of paid professional protesters soon. Hedge funds really need a community organizer.

This is America. We have a free enterprise system that has worked spectacularly for us for two hundred plus years. When it fails it fixes itself. Most importantly, it is not an owned lackey of the oval office to be scolded for disobedience by the President.

I am ready for my “personalized” tax rate now.

Disclosure (“none” means no position):

This is awful. I get the whole “paint a rosy picture to restore confidence” thing and to avoid panic, but this is just wrong. Every potential “hope” for a recovery is conditioned with a factual reason that may not come to pass. If the good signs are based on hope the the downside risk fact, why are we supposed to be so optimistic? I get optimism, I am an eternal optimist but when it comes to this stuff you cannot ignore reality…

Here is the section to play close attention to:

We continue to expect economic activity to bottom out, then to turn up later this year. Key elements of this forecast are our assessments that the housing market is beginning to stabilize and that the sharp inventory liquidation that has been in progress will slow over the next few quarters. Final demand should also be supported by fiscal and monetary stimulus. An important caveat is that our forecast assumes continuing gradual repair of the financial system; a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall. I will provide a brief update on financial markets in a moment.

Now, if we know 10 of 19 banks failed the stress test, CRE loans are about to cause another desecration of earnings and huge losses and all banks have admitted that consumers loans are expected to “significantly worsen” over the coming months, then, how do we NOT think the financial system is anything but far from repair?

Full text of remarks:
Ben Bernanke 4/5/2009

Disclosure (“none” means no position):

The market, after the gut wrenching sell-off earlier is now officially positive for the year. Things are rosy and we can embrace the new bull market, right? Not so fast.

Let’s not forget we are still over 40% off from the market highs of 2008, the national deficit and debt has officially exploded past even the worst assumptions of a year ago, unemployment is racing to 10%, housing has been decimated, 2 million more homes are estimated to be foreclosed on this year, the government is the largest investor in US financial institutions & has decided to arbitrarily re-write bankruptcy law and despite all this, we cannot get oil (USO) to go below $50 a barrel which means any growth or geo-political event causes a massive surge in prices (exhale).

But, you say, we are positive for the year. Problem, see, we have done this before. Look at the following data from the 1929-1934 market (hat tip reader Mike for emailing it).

There were plenty of times during that market it rallied for prolonged periods but one thing remained the same, the underlying fundamentals of the economy were lousy, just like they are today. The FDR government underwent a massive spending plan designed to “boost growth”, just like today (it did not work, just like today). Market will rise on the hope “things will be better soon” as folks want to be in on the bottom. As it rises others come rushing not wanting to be late for the party and the market bursts higher.

Then, things do not get better and a market that looked cheap just a few months ago based on the hope people had now looks grossly overvalued based on today’s reality. Then comes the slow selloff as reality sinks in. If you look at the time frames in the above chart you see the trend. Violent rallies up followed by slow painful selloffs.

Remember, this market decline started in October 2007 after it peaked. It gained speed in September 2008 and then again in February 2009. The recent near 30% rally has taken less than a month.

We cannot sustain the rally and turn the corner until the economy does, period. “Green shoots” are meaningless….meaningless. All government officials, despite trying to talk up the economy as best they can, admit we are not even at the worst of this yet. All agree unemployment will significantly worsen and the commercial real estate issue are only now beginning to make themselves obvious. Rumors are 10 out 19 banks failed the ill-devised “stress tests” and when results are actually released (any day?) it will only serve to diminish confidence further. The banks, who by these tests seem to be on already shaky ground are all saying they expect consumer credit to “significantly worsen”.

At the end of the day we need the economy to stabilize before we grow. We have not even begun to do that yet. If that is true, how can we take the 30% rally serious? Ought we not take it with a grain of salt?

I am…

Disclosure (“none” means no position):

Barney Frank, Poverty, Housing, Rally

– “No housing bubble”

– This is what “poor” is. It isn’t not being able to afford a 3000 sq. ft. house

– Can’t sell ’em? Wreck ’em.

– More doubts

Disclosure (“none” means no position):

This filing is a must read…it is only 11 pages, please read it.

All politics aside, this is serious stuff and the case has a huge effect going forward. IF, the government is allowed to redistribute the capital structure in a Chapter 11 proceeding as it sees fit, then the “contract” debtholders hold in purchasing seniority is no longer valid. If that is true, then the lending costs and availability of credit for all but the strongest institutions are both in for stunning negative changes. If “senior” debt instruments can now be treated equally with equity and subordinate debt, then why hold senior at an lower interest rate?

To now make up for this lowered safety, either the interest rate must now go up dramatically OR the debt will simply not be purchased. Both are very adverse for those issuing debt.

Do I care about Chrysler? NO. What I do care about is laws we have in place being respected and enforced. Would you buy senior debt in a troubled company knowing there is a case in which it’s place in the equity structure could be erased? There currently is debt in troubled companies I am looking at BUT now am not sure of the rules. If I do not know what the rules are, why would I even look at it?

This case has ramifications far beyond this group of lenders. For this reason, it bear very close watching.

From Page 8

The sale of assets by the Debtors to New Chrysler is not a sale that was
negotiated by independent parties at arm’s length. Rather, it is a sale that was orchestrated entirely by the Treasury and foisted upon the Debtors without regard to corporate formalities, the fiduciary duties of the Debtors’ officers and directors or the other important checks and balances typically found in good faith sales. Indeed, well before the filing, the Debtors had ceased to function as an independent company and had become an instrumentality of the government.

President Obama, in his public statements, made it clear that the Debtors would be required to pursue the sale transaction with Fiat and ordered the Debtors to cease all efforts to pursue any other transaction. Both actions are clearly inconsistent with the requirements of a good faith sale. And, the government exerted extreme pressure to coerce all of the Debtors’ constituencies into accepting a deal which is being done largely for the benefit of unsecured creditors at the expense of senior creditors. Under the circumstances, the sale transaction does not pass muster under section 363(n), let alone section 363(m), and New Chrysler simply cannot establish that it is a good faith purchaser in connection with the proposed sale.

FULL FILING:
Chrysler Non-TARP Lender File Objection

Disclosure (“none” means no position):

Aaron Elstien has an interesting piece on Wilbur Ross in Crain’s NY.

Reprinted with permission:

‘King of Bankruptcy’ moves into toxic mortgages. Hope that proves wiser than his auto-biz bets

By Aaron Elstein
Wilbur Ross, who famously pocketed hundreds of millions turning around bankrupt steel mills, is moving to dramatically different turf. Last week, the “King of Bankruptcy” unveiled plans to invest up to $1 billion in distressed mortgages.

It’s worth a shot. After all, little else of what Wall Street’s top vulture has feasted on since his steel coup has turned out very well. The auto-parts company Mr. Ross created nearly four years ago has seen its revenue sink and its prospects darkened by Chrysler’s bankruptcy filing last week. His coal-mining outfit has suffered three consecutive years of losses and now faces a cash crunch. He acquired a stake in a bond insurer last spring, and has seen its stock price fall 60% since.

“I have a heck of a lot of respect for the guy,” says Nicholas Colas, chief market strategist at brokerage firm BNY ConvergEx. “But there’s no doubt he’s got a bunch of businesses in really tough shape now.”

It’s a humbling moment for Mr. Ross, a turnaround specialist for more than 30 years. He sealed his Midas-like reputation when he invested $325 million in bankrupt steelmaker LTV in 2002 and created International Steel Group. Thanks to booming demand—and Bush administration tariffs on imported steel—he took the company public a year later and then sold it the following year for $4.5 billion, reportedly reaping a quarter-billion dollars for himself.

He further boosted his fortune, recently estimated by Forbes at $1.8 billion, when he sold his boutique investment firm WL Ross & Co. in 2006—a market top, in hindsight—for $375 million.

Life since the steel deal, however, illustrates the danger in the game the 71-year-old Mr. Ross plays: the risk of buying into troubled businesses too early. Mr. Ross, who declined to comment for this article, is hardly the only bottom-feeder to run into difficulties. Highly regarded investment firms Warburg Pincus and Davis Advisors, for example, suffered last year from ill-timed bets in MBIA and Merrill Lynch, respectively.

“Everybody I’m aware of took big losses in “08,” says Robert Miller, chief executive of restructuring advisory firm Miller Mathis & Co.

Game gets harder

Yet Mr. Ross may also be struggling because the game he’s played best—buying bankrupt companies at rock-bottom prices—is getting harder. Fewer businesses are restructuring under bankruptcy-court protection, but instead are heading straight to liquidation, a result of the dismal economy and reluctance on the part of cash-strapped banks to lend. Mr. Ross must look farther afield than before for distressed investments.

Perhaps that explains the industrialist’s move into distressed mortgages. It also helps that his latest move—if the government lets him make it—looks like a can’t-lose proposition. Under the terms of the Obama administration’s public-private investment program, which Mr. Ross is seeking to join, the government, alongside private money managers, will buy toxic assets from banks and minimize investors’ losses.

A windfall would be most welcome as Mr. Ross grapples with the enormous challenges faced by International Automotive Components Group, a car-parts maker he cobbled together beginning in 2005 by acquiring pieces of bankrupt manufacturer Collins & Aikman and other concerns. Oops: IAC’s revenue sank $800 million last year, to $4.5 billion, and the company is looking at an even bleaker 2009, with U.S. auto production free-falling 50% in the first quarter.

Chrysler contracts torn up?

Now comes Chrysler’s bankruptcy. IAC, which makes instrument panels and flooring for the Town & Country minivan, could see its contracts with the automaker torn up in court. An IAC spokesman says it’s premature to assess how Chrysler’s bankruptcy could affect the supplier, adding that the federal government’s $5 billion Auto Supplier Support Program should ensure that IAC gets paid what it’s owed. He declined to say whether IAC is profitable.

Mr. Ross’ International Coal Group (ICO) is also struggling. It was created when he acquired a mining outfit out of bankruptcy for $290 million in 2004 and was taken public a year later in a $231 million offering. The West Virginia-based company has posted losses for three consecutive years, for a total $180 million worth of red ink.

Its stock, which debuted at $11 a share, now fetches about $2.50 amid declining demand for the coal used to make steel in cars and growing questions from credit raters over the company’s ability to maintain sufficient cash.

Mr. Ross’ buy-low instincts betrayed him last spring, as well, when he invested $250 million in bond insurer Assured Guaranty (AGO). Unlike in his previous deals, Assured Guaranty wasn’t in bankruptcy proceedings, and Mr. Ross paid $23.47 a share—market price at the time—for his 13% stake. The insurance stock has since declined to about $10 a share. Last September, the company said Mr. Ross would increase his stake to 18%, but he hasn’t done so yet because, a spokeswoman says, Assured Guaranty is in the process of acquiring a rival.

Rolling snake eyes so many times has taken a toll on Mr. Ross’ investors, which include major pension funds like the California Public Employees’ Retirement System. His $4 billion WLR Recovery Fund IV, which closed to new investors in January 2008, posted a decline of 17% through last Sept. 30, according to CalPERS data.

In contrast, his funds raised in 1997 and 2002 generated returns of 35% and 82%, respectively. If CalPERS fears Mr. Ross is losing his touch, it isn’t saying so—at least, not publicly.

“Performance tends to be negative for younger funds since it takes a few years for them to ramp up,” a CalPERS spokesman says. “We of course communicate with them privately if we have concerns.”

While his auto plays are in trouble, I think Wilbur is going to hit a home run with his mortgage buys. The thing about these valueplays is that they take time to run their course. With these we’ll have to take a look back a few years from now in order to make an accurate assessment. My money is on Wilbur (figuratively, not literally)

Disclosure (“none” means no position):

Dodd, “Green shoots”, Caffeine, Bolling

– Trails “3 guys nobody knows” and a bag of socks in his re-election bid

– Nope

– The withdrawal is real

– What the car team drives

Disclosure (“none” means no position):

William D. Cohan, author and former Wall Street veteran, speaking to Blaise Zerega, President and CEO of FORA.tv, about his book House of Cards: A Tale of Hubris and Wretched Excess on Wall Street.

Cohan demonstrates why the seemingly invincible Wall Street money machine came crashing down. He chronicles the swashbuckling corporate culture of Bear Stearns, the strangely crucial role competitive bridge played in the company’s fortunes, the brutal internecine battles for power, and the deadly combination of greed and inattention that helps to explain why the company’s leaders ignored the danger lurking in Bear’s huge positions in mortgage-backed securities.

Disclosure (“none” means no position):