Monday, October 27, 2008

Citadel holds conference call to calm bondholders

Last Friday, hedge fund giant Citadel held a conference call with bondholders to quench rumors about its losses, standing with counterparties and need to liquidate holdings. More than 1000 people tried to dial into the call. Breaking Views outlines the substance of the call while noting that it is very difficult for a financial institution to deal with rumors. At a time when former Lehman executives are under investigation for misleading investors, the market simply does not know how to interpret what banks and others are saying. As a result, it is a Catch-22 to say anything at all. The New York Times offers a play-by-play of the call.

Tuesday, October 21, 2008

Self-inflicted wounds hurt hedge fund industry

Dealbook by the New York Times reports that Andrew Lahde is closing his funds and returning money to investors. The article reprints Lahde's "farewell" letter to investors. Unfortunately, the letter is more of a "screw you" than a farewell and wanders into head-scratching territory including a defense of growing hemp and recommendations on what George Soros should do with his free time.

Lahde writes, "I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy ofthe education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America."

That's all the industry needs: proof that egotistical managers are pulling fast ones on naive investors.

Hopefully, people (and the media) will recognize that Lahde operated his own LA-based fund for less than two years and his opinion should be taken with a grain of salt.

A story on Bloomberg gives a little more information about Andrew Lahde.

Tuesday, October 14, 2008

Paulson comment foreshadows storm for hedge fund industry

According to an email sent to a colleague, former Lehman Brothers CEO Richard Fuld said Treasury Secretary Henry Paulson wants to "kill the bad HFnds + heavily regulate the rest." Fuld was in a very public battle with short sellers, but this sentiment held by Paulson (if accurate) should send shivers down the spine of the hedge fund industry.

With the ban on short selling, it is clear that Treasury and other regulators have view collateral limits on trading options of hedge funds simply as collateral damage the battle against the financial crisis.

More regulation seems inevitable and, the industry is not well-positioned to do much about it. For too long hedge funds have tried to fly under the radar, but it was naive to think that a $2 trillion industry would not attract outside scrutiny or regulatory interference. The industry resisted even the slightest infringement on independence, like registration. It turned a blind eye to high-profile cases of fraud and deception. It did not view challenges involving risk management, valuation, market practices and governance as risks to the entire industry.

Most important, the largest, most institutionalized funds did not band together (as was done in Europe) to create a unified front against unnecessary regulation and to serve as the voice of the industry in an increasingly shrill political and media environment.

It is ironic that Henry Paulson would want to kill the bad hedge funds and heavily regulate the rest. Isn't Goldman Sachs, after all, a giant hedge fund? However, the statement shows just how vulnerable the hedge fund industry is.

Friday, October 10, 2008

Reputation, regulation and hedge funds' consternation

The UK-based Hedge Funds Standards Board recently announced that its increased membership now represents half of the hedge funds assets in Europe. HFSB chairman Antonio Borges said in an interview with Reuters that he fears regulators could be swayed into enacting harful legislation in the wake of the credit crisis. "The reputation of the industry will drive public opinion and therefore politicians in directions which might be harmful for all of us, not just hedge funds," he said.

Hedge funds in the U.S. can almost certainly count on new regulations. Even Republican nominees McCain and Palin are calling for more oversight of financial markets. If the industry could not effectively head off the ban on short selling (Borges calls such a ban "bad for the whole market"), how can it hope to avoid more and even more onerous restrictions, now that the crisis has deepened?

Wednesday, October 8, 2008

Who is spooking whom?

Tina Brown's new news Web site The Daily Beast asks the question: is the media spooking the market? The article offers examples ranging from Jim Cramer to the outdated story on United Airlines that each are correlated "panic" among investors. Is the media to blame? I don't think so.

Rather, the media and investors are themselves spooked by bank CEOs, the President, Bernake and Paulson, none of whom effectively have explained the roots, extent and, most important, remedy for the financial crisis. In this vacuum bad news sounds worse than it is and pessimism is unchecked. But don't blame the media.

It is this same lack of leadership and demonstrable solutions that leads to ineffective half-measures like the ban on short selling. It is questionable whether the ban fulfilled its intention, given the freefall we've seen in the markets this week. However, the real solutions were not forthcoming and regulators had plenty of political cover for sticking it to the hedge fund industry. (The industry's anemic efforts to head off the short selling ban is best discussed in a separate entry.)

For the record, as early as 2005, reporters at The Wall Street Journal were asking my clients about the state of the mortgage market, risks of subprime lending, and risk management practices in mortgage lending. The media was right, it was everyone else who had their heads in the sand.

Wednesday, October 1, 2008

CEOs, lies and tickertape

A colunn by Andrew Ross Sorkin in the New York Times examines whether financial CEOs can tell the truth about the state of their companies. He notes that Wachovia CEO Robert Steel told CNBC just two weeks ago that the bank had "a great future as an independent company." Wachovia's banking business was sold to Citigroup on Monday. Was Steel lying? Was Lehman CEO Richard Fuld lying about the prospects of that, now defunct, bank? Maybe yes, maybe no.

Clearly, financial CEOs are trying to reassure investors, who these days don't need much to head for the door. Being negative, realistic or telling the "truth" could result in the proverbial run on the bank. Truthfully.

At the same time, maybe, just maybe conditions facing banks are moving so quickly that CEOs truly don't know what the future of their institutions holds. The Wall Street Journal reports that Wachovia executives and directors bought $30 million of Wachovia stock this year. They, surely, didn't foresee selling the bank for $1 per share. Steel himself bought $16 million of stock when he was appointed CEO. Similarly, insiders at AIG and WaMu also bought shares in their companies and, presumably, lost big.

See a related Hedge Lines entry on this topic.