A few good bond traders Wednesday, September 24, 2008

The Big Picture has published an excellent email doing the rounds on Bloomberg email. Think Jack Nicholson on the witness stand in A Few Good Men replaced by a Head of Fixed Income at an Investment Bank.

Son, we live in a world that has bonds and those bonds need to be bought by men with balance sheets. Who's gonna do it? You? You, Lieutenant Fuld?

I have a greater responsibility than you can possibly fathom. You weep for Bear Sterns and curse the short sellers; you have that luxury. You have the luxury of not knowing what I know: that Lehman's death, while tragic, probably saved firms and that my existence, while grotesque and incomprehensible to you, saves markets.

You don't want the truth because deep down in places you don't talk about at parties you want me buying bonds, you need me buying bonds. We use words like TSLF, PDLF, Super SIV. We use them as the backbone of a life trying to defend something. You use them as a punchline.

I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very freedom I provide and then questions the manner in which I provide it. I would rather you just said "thank you," and went on your way. Otherwise, I suggest that you pick a sub-prime option arm bond and pay par.

Either way, I don't give a damn what you think you are entitled to.
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posted by John Wilson @ 11:25 PM Permanent Link ,

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Sale of Financial Stock, Everything Must Go [?] Wednesday, September 17, 2008

The New York Times has a stark interactive graphic here showing the dramatic falls in market capitalisation of 29 US financial firms over the last 12 months up to Sept 12th 2008, prior to the weekend meltdown. On 9 October 2007, the firms had a collective value of $1.86 trillion - no longer.

Amidst the huge falls group, several firms stand-out for their resilience and marked contrast.
Other names included Lehman, Freddie Mac, Fannie Mae, Merrill Lynch, AIG who sadly have somewhat different results.

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Why having only one prime broker is a bad idea Tuesday, September 16, 2008

When conducting business continuity planning you aim to identify all single / critical points of failure and implement measures to eliminate them to the extent this is possible.

In which case, why did 33 hedge funds in Europe give Lehman a sole prime broking mandate with the result that their assets are now frozen and their prime brokerage contacts are unavailable to assist in almost all cases?

Recent examples at Bear Stearns and MF Global should have provided enough of a wake-up call to every hedge fund about the dangers of concentrating all your business in one place. Whilst those assets should be segregated and hence ring-fenced from those of Lehman, inability to access them in turbulent markets renders the funds hapless.

Setting aside the other benefits of operating with 2 or more prime brokers which is the obvious answer to the identified risk e.g. you remain closely attuned to price/service differences between firms, there are usually higher direct [fees paid] and indirect [netting opportunities foregone] costs to bear from distributing business. Yet one has to wonder if the managers in question were incompetent or plain stupid, since the consequences of a risk event occurring dramatically outweigh versus the costs of cover.

According to the FT, another 67 firms that were prime broking clients of Lehman are also affected by its' demise, but they had in place alternate prime broking arrangements, so are able to access some of their fund assets and continue to trade.
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The Weekend that Bear Stearns won't forget Tuesday, March 18, 2008

The Wall Street Journal has an excellent chronology of events leading up to the Bear Stearns takeover here. The piece highlights the pivotal role played by the US Treasury Secretary, Hank Paulson, in the affair. It's hard to think of anyone better qualified to hold that role and to orchestrate such matters given his former role as CEO of Goldman Sachs. His incredibly insight into Wall Street and the respect he commands amongst his former peers made him a natural leader in this crisis, something not automatically granted to a Treasury Secretary.

There is some discussion in a number of financial blogs and online papers regarding the opportunity for Bear Stearns shareholders not to vote for the deal, but there is universal acknowledgement that no alternates appear to exist plus JP Morgan now has an option on 20% of the stock which could frustrate other buyers. Moreover, it is more politically more palatable for a US bank to be the buyer than, say, a sovereign wealth fund or its' nominee.

There is also much comment regarding the pain to be borne by Bear Stearns staff - not only do they face losing their jobs at a time when hiring elsewhere has effectively dried up, but many will have been historically rewarded with stock and/or options in the bank, whose value has collapsed.

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Ooops, perhaps Bear Stearns wasn't worthless Monday, March 17, 2008

Alea points out that the market value of JP Morgan has gone up by $11bn since buying Bear Stearns - almost the previous book value of Bear Stearns. Certainly more than the $236m it paid.

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Confidence virus widens on Wall Street

With the Bear Stearns deal done at a 93 per cent discount to Friday’s closing price, you can only surmise that Bear Stearns management felt it had no alternate course of action available to it. Whilst the Fed engineered/forced the deal, one either has to conclude that JP Morgan were terrified in taking the deal on unless it was so cheap as to cover as yet undiscovered horrors, or they were being incredibly opportunistic and decided to play hard ball as the only buyer at the table.

Leaving aside the impact this has on perceptions of JP Morgan's own ability to absorb Bear Stearns [confidence virus - does this move make them stronger or weaker?], it will also exacerbate concerns about the balance sheets of other banks. If Bear Stearns had so little of value on its balance sheet, surely similar banks must be facing the same challenges?

Lehman Brothers announces first-quarter results this week, after warning 5% of its' workforce were to be laid off and arranging a three-year unsecured credit line of $2bn from 40 banks last Friday.

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The Bear Stearns investors nursing a hangover

With the announcement that JP Morgan is picking up Bear Stearns in a fire sale for a trivial $236m, aided by $30bn of funding from the Fed, several investors will be nursing some big losses given the $2 dollar share exchange this equates to. Bear Stearns shares had been trading on Friday at $30 dollars after sharp falls during the week, meaning the deal was at a 93 per cent discount to Friday’s closing price and had traded at $169 in Jan 07.

One is Joe Lewis, the British billionaire who, along with Daniel Levy, controls Tottenham Hotspur football club. He invested $860m for a 7 per cent stake in Bear Stearns in September 07. At the time he was reportedly worth $2.5bn.

A second is CITIC Securities. Last October, they and Bear Stearns announced a strategic alliance in a cross-shareholding deal involving investments of at least one billion dollars and plans to forge a banking joint venture in Asia. The deal was being re-negotiated in February following 50% falls in the share price of Bear Stearns. Citic’s stake was expected to be increased to 9.9 per cent of Bear Stearns. The US investment bank’s stake in Citic was expected to eventually be lifted to as much as 7.5 per cent, according to a report from China’s official Xinhua news agency at the time.

I'm still checking whether they are still a shareholder, but at the end of June 07, Putnam Investment Management was listed as Bear's largest institutional holder, with 6pc of Bear's shares.

Without the JP Morgan deal, Bear Stearns was a dead man walking and so shareholders will struggle to argue they could have done better than they have, despite the awful losses they have suffered.

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The True Story behind Merrill's result and the markets explained Monday, October 29, 2007

This excellent analysis (yet to be shown on Bloomberg for some reason) is mandatory viewing for anyone trying to understand the fundamentals behind the turbulence in the credit markets over the Summer.

It unpicks the "apparent" mystery of SIVs in the sub-prime market for the layman who may be worried by the impact of the financial meltdown on their pension and analyses the rationale for government intervention in the market liquidity crisis.



Some of the insights were apparently shared with the Merrill's Board over the weekend, which was the firm that had called in the collateral on the Bear Stearn's Hedge Funds in July, precipitating their collapse.

Job done John.

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Credit squeeze the air from the markets Friday, August 10, 2007

The markets have been on a a bumpy downward ride in the last few days with London losing 2.7% today alone, a fate shared by most major markets. The news reels have been full of stories of hedge funds being hard hit by the turmoil.

Financial Times today:

BNP Paribas, one of Europe’s biggest banks, blamed a “complete evaporation of liquidity in certain market segments of the US securitisation market” for the temporary decision to stop redemptions from [three of its hedge funds]...

Collapse of demand for some forms of securitised debt made their assets impossible to value, the bank said.

Freezing the funds, which invest in asset-backed securities, was the best way to “protect the interests and ensure the equal treatment of our investors”.

Before making a comment on the markets, let me pause on the really scary thing - hedge funds investors only have liquidity when they don't need it. The moment they want out i.e. redeem their fund holdings, they find the only exit route barred. Why? Because, their only option is to sell back to the manager and when the markets are in free fall, hedge fund managers don't want to add to their problems by being forced to sell assets to fund redemption. So the investor is left to dangle - had they held the underlying investment directly at least they might have been able to liquidate at some price.

That managers are not obliged to keep the fund open for redemptions is plain wrong, when those same managers generally preclude investors from being able to trade their interests with others in a secondary market.

As for the markets, the last few days have created some interesting buying opportunities but it has also put a brake on a number of the forces that have been supporting a bull market eg the ability of private equity firms to borrow to fund their acquisition.

One firm that has been caught in the headlines was Merrill Lynch who liquidated the collateral the held as prime broker to the Bear Stearns hedge funds. By coincidence I was out in London with Lawrence Tosi, Merrill's COO a few days after they intervened and we chatted about where this was headed but neither of us saw the pace of the falls we've seen.

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