Wednesday, April 02, 2008
Even I'm Not that Gullible
by Ken Houghton
It wasn't until I read the link at this post from Steve Gould of EoB that I realized that yesterday was more than the traditional birthday of our cat.*
So I'm gullible. But even I'm not as gullible enough to believe the claim of Lehmann's CEO today that he has evidence that hedge funds "conspired" to destroy Bear Stearns by short-selling.
It's not that I don't believe multiple hedge funds shorted the firm, or even that some of them spoke with each other. But the conversation was more likely,"Are you short BSC?" "Better believe it. You too?" "Of course." than some clandestine activity.
Let's be clear: when your firm is leveraged over 30x itself, when most of your revenues come from an area that hasn't generated enough volume to support your structure in over a year (even after two major rounds of layoffs), and when your swap spreads blow out by a factor of 15 or 20 in the course of a few weeks, short sellers (who have to risk a lot more capital than derivatives traders) are the least of your concerns. Or just the icing on the cake.
Mark Gilbert mostly gets it right here:
And, to be clear, when you have done Jack about it in the month leading up to the day before Ben Bernanke decides he needs to help you because no one else will, two dollars a share is for the other shareholders; getting punched out in the gym (note the correction at 7:53a.m. on 3/28) is Getting Off Easy.
But the seeds of Alan Schwartz's destruction-by-inaction were, as Gilbert notes, planted in 1998:
Only the Stevens Levitt and Dubner might be surprised by that reaction. The rest of us noticed that, when rumors of an illiquid Lehmann started spreading, the first thing that happened was that Goldman Sachs trotted out a Senior Executive to confirm that they view Lehmann as (something like) "a strong, viable competitor."
When rumors started about Bear, there was about three days of silence, followed by the negotiations of March 14-16 to avoid Chapter 11 on the 17th.
That may be a case of revenge being a dish best served cold. Maybe the calls were made and no one was willing to do what Goldman did for Lehmann.
But all of the other evidence is that upper management just didn't realise that its job isn't to manage departments so much as to manage public perception by making certain that anything that might worry investors—say, the market for your CDS swap spreads going well past junk levels—is handled quickly and publicly.
That's why they pay the CEO—and the Board of Directors—the big bucks and bigger stock options. In early March, several "leaders" of BSC proved they were overpriced.
*No picture, in keeping with this plea.
Metro reported yesterday that CBS's Les Moonves was so impressed by Britney Spears's appearance on How I Met Your Mother that they decided to make her the centerpiece of a show—a remake of the Mary Tyler Moore Show.
It wasn't until I read the link at this post from Steve Gould of EoB that I realized that yesterday was more than the traditional birthday of our cat.*
So I'm gullible. But even I'm not as gullible enough to believe the claim of Lehmann's CEO today that he has evidence that hedge funds "conspired" to destroy Bear Stearns by short-selling.
It's not that I don't believe multiple hedge funds shorted the firm, or even that some of them spoke with each other. But the conversation was more likely,"Are you short BSC?" "Better believe it. You too?" "Of course." than some clandestine activity.
Let's be clear: when your firm is leveraged over 30x itself, when most of your revenues come from an area that hasn't generated enough volume to support your structure in over a year (even after two major rounds of layoffs), and when your swap spreads blow out by a factor of 15 or 20 in the course of a few weeks, short sellers (who have to risk a lot more capital than derivatives traders) are the least of your concerns. Or just the icing on the cake.
Mark Gilbert mostly gets it right here:
U.S. and U.K. regulators are wasting their time threatening traders who profit from speculation about the deteriorating health of the financial community. The gossips aren't to blame for the demise of Bear Stearns Cos., and they won't be at fault when the next firm goes bang, either.
Brokers, futures traders, collateral managers and compliance officers are ranking their counterparties from strongest to weakest, and choosing to stop doing business with whichever company comes bottom. If the same name gets crossed out on every list, it spells game over for the loser -- deserved or not.
And, to be clear, when you have done Jack about it in the month leading up to the day before Ben Bernanke decides he needs to help you because no one else will, two dollars a share is for the other shareholders; getting punched out in the gym (note the correction at 7:53a.m. on 3/28) is Getting Off Easy.
But the seeds of Alan Schwartz's destruction-by-inaction were, as Gilbert notes, planted in 1998:
In his 2001 book When Genius Failed, Roger Lowenstein details the Fed's crucial 1998 meeting to convince Wall Street that it should shoulder the financial burden of keeping Long-Term Capital Management LP afloat or risk financial meltdown.
James Cayne, the CEO of Bear Stearns, told his peers—including Philip Purcell of Morgan Stanley and Herbert Allison of Merrill Lynch—that his company wouldn't join the 14 securities firms paying for the rescue.
"In unison, the CEOs demanded an explanation," Lowenstein writes. "This only made Cayne more resolute. Bear had enough exposure as a clearing agent, Cayne said. He wouldn't say more. Suddenly these paragons of individual enterprise seethed with communitarian fervor. Purcell of Morgan Stanley turned beet red. He fumed, 'It's not acceptable that a major Wall Street firm isn't participating!' It was as if Bear were breaking a silent code; it would pay a price in the future, Allison vowed."
Only the Stevens Levitt and Dubner might be surprised by that reaction. The rest of us noticed that, when rumors of an illiquid Lehmann started spreading, the first thing that happened was that Goldman Sachs trotted out a Senior Executive to confirm that they view Lehmann as (something like) "a strong, viable competitor."
When rumors started about Bear, there was about three days of silence, followed by the negotiations of March 14-16 to avoid Chapter 11 on the 17th.
That may be a case of revenge being a dish best served cold. Maybe the calls were made and no one was willing to do what Goldman did for Lehmann.
But all of the other evidence is that upper management just didn't realise that its job isn't to manage departments so much as to manage public perception by making certain that anything that might worry investors—say, the market for your CDS swap spreads going well past junk levels—is handled quickly and publicly.
That's why they pay the CEO—and the Board of Directors—the big bucks and bigger stock options. In early March, several "leaders" of BSC proved they were overpriced.
*No picture, in keeping with this plea.
Labels: hedge funds, High Finance, leverage, liquidity, The Old Firm
Friday, March 14, 2008
It Really IS time to move my 401(k)
by Ken Houghton
And that's the good news.
Now, let us translate:
People have noticed that our CDS spreads are higher than Argentine debt ca. 2001.
To do this, we enlisted Margaret Seltzer, who came highly recommended by James Frey.
Nobody believed me on CNBC yesterday; my e-mail has been filled with "The truth will set you free."
We threw ourselves on the mercy of the Fed and JPMC, which may do for us what BofA's support has done for Countrywide.*
In the desperate hope that, since Jimmy's gone, the people who remember that we kept all the LTCM collateral for ourselves will be nicer to us than he was to them.
*Insert your own Eliot Spitzer/Jessica Cutler joke here
Via Felix, a short, sharp shock:
With the support of the Federal Reserve Bank of New York, JPMorgan said in a statement that it had “agreed to provide secured funding to Bear Stearns, as necessary, for an initial period of up to 28 days.”
For the next month, JPMorgan will work with Bear Stearns to reach a solution for its financing crisis. Options could include organizing permanent financing or, according to people briefed on the discussions, buying the bank for a discounted price.
“JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company,” JPMorgan said in its statement.
And that's the good news.
Now, let us translate:
In a statement issued on Friday, [Bear’s chief executive, Alan Schwartz] said: “Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity.
People have noticed that our CDS spreads are higher than Argentine debt ca. 2001.
We have tried to confront and dispel these rumors and parse fact from fiction.
To do this, we enlisted Margaret Seltzer, who came highly recommended by James Frey.
Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated.
Nobody believed me on CNBC yesterday; my e-mail has been filled with "The truth will set you free."
We took this important step
We threw ourselves on the mercy of the Fed and JPMC, which may do for us what BofA's support has done for Countrywide.*
to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations.”
In the desperate hope that, since Jimmy's gone, the people who remember that we kept all the LTCM collateral for ourselves will be nicer to us than he was to them.
*Insert your own Eliot Spitzer/Jessica Cutler joke here
Labels: credit, High Finance, liquidity, The Old Firm
Friday, August 17, 2007
Red Means Stop - Or, in this case, Cut the Engines!
by Ken Houghton
It is now common knowledge that the Federal Reserve accepts three types of security for its Open Market Repurchase (and Reverse Repurchase) agreements: Treasuries, Agencies, and Mortgage-Backed Securities.
Generally, the security of choice is a Treasury. This week, though, Treasuries have been a very small portion. (Last Friday, all of the securities accepted for Repo were MBS.)
Above is the blend for the past three weeks of Treasuries, Agencies, and MBSes tendered by the market and accepted by the Fed. The red area at the top of each line (if it exists) is the MBS segment.
Rather speaks for itself, don't you think?
It is now common knowledge that the Federal Reserve accepts three types of security for its Open Market Repurchase (and Reverse Repurchase) agreements: Treasuries, Agencies, and Mortgage-Backed Securities.
Generally, the security of choice is a Treasury. This week, though, Treasuries have been a very small portion. (Last Friday, all of the securities accepted for Repo were MBS.)
Above is the blend for the past three weeks of Treasuries, Agencies, and MBSes tendered by the market and accepted by the Fed. The red area at the top of each line (if it exists) is the MBS segment.
Rather speaks for itself, don't you think?
Labels: High Finance, liquidity, mortgage
A 33-year WAM is not sufficient to call it a "Money Market Fund"
by Ken Houghton
How Sentinel used to market it is another question.
The good news is that money market funds remain money market funds. The bad news follows in the next post.
Much fooforah yesterday about Sentinel's 33-year Weighted-Average Maturity "Money Market Fund." The record begins to straighten out:
Stocks fell after CNBC referred to Sentinel Management Group Inc.'s fund for commodity traders as a "money market mutual fund." In fact, the troubled fund is not a money market mutual fund and the distinction is very important.
Sentinel's fund is set up for pros, and was paying about 7 percent in interest to compensate commodities traders for the risks they were taking in it.
How Sentinel used to market it is another question.
How is Sentinel different from a money market mutual fund?
Most importantly, clients have immediate access to their cash, regardless of market conditions. (A mutual fund is allowed to postpone redemptions up to five business days in unstable market conditions.)
Second, through Sentinel, clients know exactly what they own. Sentinel sends daily emails (or faxes, if preferred) to each client reporting the total amount invested, the interest earned, and supporting securities. In contrast, mutual funds are typically sent statements on a monthly basis at most, and report assets owned by the fund only quarterly or semiannually, often two to three months following the reporting date.
If Sentinel is not a mutual fund manager, what is Sentinel's role?
Sentinel acts as an agent for its clients. Clients sign an Investment Management Agreement appointing Sentinel as a discretionary investment advisor to supervise and direct the investment of assets in the account on behalf of the client in accordance with the risk parameters agreed upon.
How frequently can I deposit or withdraw cash?
Sentinel clients can withdraw 100% of their cash daily. Sentinel accepts deposits of any amount daily. A cutoff time of 4:00PM (eastern time) applies for notification of intent to redeem or make deposits same day.
What if I don't need daily liquidity?
Clients who do not need daily liquidity for the entire amount of their investment can authorize Sentinel to invest for longer periods. This gives Sentinel the flexibility to seek slightly higher yields when the short-term yield curve is more steeply sloped.
The good news is that money market funds remain money market funds. The bad news follows in the next post.
Labels: High Finance, liquidity
