Category Archives: Hedge funds

Roger Ehrenberg’s Prescription for Robbing a Bank (the TBTF Variety)

One of the continued frustrations of the post-crisis period is the lack of discussion of looting, which as described in a seminal paper by George Akerlof and Paul Romer, is when executives find it more profitable to gamble on bankruptcy, as in lever up their companies, pull out too much in cash (usually with the help of overly flattering accounting) and leave failed businesses in their wake. Akerlof and Romer noted that businesses with explicit or implicit guarantees were particularly well suited to this sort of extractive behavior, and they argued the savings and loan crisis was a prototypical example. In ECONNED, we argued that the producers and management of major capital markets players were engaged in a looting 2.0 in the runup to the crisis.

Roger Ehrenberg, who had a long career in derivatives and now runs an early stage venture firm. He describes how easy it is to, as he puts it, “rob a bank” or loot. His formula:

The Imagination Trade, or the Tinkerbell Market 2.0

I’ve refrained from discussing the stock market for quite some time, in part because this is not an investment website and in part because I find the netherworld of credit more interesting. But a big reason of late is that the stock market has become so utterly unhinged from fundamentals that anyone opining on it, other than momentum trades and technicians with particularly good crystal balls, is likely to look silly.

We seem to be in a toxic replay of what I called the Tinkerbell market in 2007 and 2008: if the officialdom can get enough people to applaud, the economy will live. They weren’t too successful back then, but the crisis has appeared to have upped the game of the Powers That Be in talking up the price of financial instruments. And having the Fed at ready to provide boatloads of liquidity should anything go awry appears to have put much of the world in “don’t fight the Fed” mode.

Market action is looking a tad manic, yet the dot-com mania proved that unwarranted optimism can persist far longer than cooler heads deem possible. Hedge fund leverage, for instance, is allegedly back to pre-crisis highs.

Is Incoming New York Attorney General Schneiderman Going to Be Too Soft on Bank Abuses?

An article in the Wall Street Journal says that the incoming New York state attorney general, Eric Schneiderman, is going to be nicer to Wall Street than his predecessors Eliot Spitzer and Andrew Cuomo. Given that Cuomo decided to take financial firm chicanery seriously only fairly late in his term of office, the Wall Street Journal assessment does not bode well for the prospect of tough enforcement.

The reason this matters is that the New York state AG has a particularly effective weapon, the Martin Act. One of the continuing frustrations I have as a writer and a citizen is the use of the word “fraud”. Activities that by any common-sense standard are fraudulent probably don’t meet the legal standard for fraud. In very crude terms, one of the hurdles that needs to be overcome is intent. If a perp can argue that he thought what he did was not improper (his attorneys or accountant blessed it, it never occurred to him it was an abuse, etc.) or he can claim it was a mistake, he can get off scot free. The very fact that Joe Cassano, the head of AIG’s Financial Products Group, has not been prosecuted serves as an illustration of difficulties involved.

NJ Public Pension Slugfest Reporting Omits 15 Years of Governors Stealing From Workers

If you live in the world according to the mainstream media, the row between state executives and unions is all about (by implication) greedy unions trying to preserve their perquisites when budget “realities” demand that they suffer. Consider this excerpt from a recent article New York Times article about the fight in New Jersey:

Across the nation, a rising irritation with public employee unions is palpable, as a wounded economy has blown gaping holes in state, city and town budgets, and revealed that some public pension funds dangle perilously close to bankruptcy.

And how exactly did the crisis “reveal” that some pension funds were close seriously under water? A more accurate rendition would be that, at least in New Jersey, the state has been raiding the pension kitty for over 15 years.

Republican Members of FCIC to Promote Crisis Urban Legends, Shift Blame From Banks

Lordie, the Big Lie is with us in force.

The New York Times reports that the Republican members of the Financial Crisis Inquiry Commission are going to pre-empt the report (due in mid-January) and issue their own 13 page screed later today focusing blame for the crisis on…Fannie and Freddie, and no doubt the CRA too.

Let’s look at a few inconvenient facts.

Did Goldman and Other Dealers Squeeze Mortgage CDS Shorts So They Could Sell Toxic CDOs?

By Tom Adams, an attorney and former monoline executive, and Yves Smith

As reported in the Financial Times, Senator Carl Levin of the Senate permanent investigations released damaging e-mails in which Goldman traders discuss “killing” some mortgage-related CDS shorts in May 2007. Levin understood the implications, that damaging the shorts would allow Goldman to buy CDS even more cheaply, but did not tease out the logical conclusion. This move was a likely a major step that allowed Goldman (and fellow dealers not under investigation who likely pursued parallel strategies) to package its remaining mortgage dreck into CDOs, which were launched as the reported squeeze evidently took place, and unload as much toxic inventory as possible before the wheels came hopelessly off the subprime bandwagon….

Mirabile Dictu: The Treasury Flexes Some Muscle on the Volcker Rule?

As readers know, this blog has LOOONG been a critic of the Treasury Department’s stance towards big dealer banks, both in the Paulson era and from the very get-go of Geithner’s tenure. So on those all-too-rare occasions when Treasury seems willing to meddle in a real way with the “heads we win, tails you lose” arrangement the financial services industry has managed to devise with broader society, it’s important to applaud those efforts.

Admittedly, it is premature to declare victory, but the fact that Treasury is even taking a serious stance on the so-called Volcker rule is a surprise.

Ireland About to Give Another Sop to the Banks, a Bad Assets Fire Sale?

Reader Swedish Lex, who was involved in the famed and generally well regarded Swedish banking industry cleanup of the early 1990s, read an innocuous-sounding Financial Times story the same way I did. Not only are the banks who lent recklessly to Ireland’s overheated property sector being shielded from most of the consequences of their stupidity […]

SEC Probes Sus Relationships of Expert Network Kingpin Gerson Lehrman

Readers may recall that I’ve been a long-standing critic of Gerson Lehrman, a “research” firm that signs up so-called experts to provide information to clients, typically hedge funds. The problem with the Gerson model is the experts are often full time employees, and hence are effectively re-selling information they learned on their employer’s nickel. I’ve […]

Mirabile Dictu: SEC Finally Going After Business of Selling Inside Information

Yours truly has complained off and on over the years about “consulting” and “research” firms whose entire business model revolves around the procurement and sale of inside information. These companies solicit consultants, who in the vast majority of cases are employees of major corporations, to provide insight into what is going on at their employer’s […]

Field of Schemes: David Einhorn’s latest short

Einhorn is the famous Lehman short of 2008; he got a lot of flak from Clueless Charlie Gasparino for that. I seem to remember our own Lehman bear, Yves, getting snarled at by Charlie G somewhere along the line, too. But of course, Einhorn, via his vehicle Greenlight Capital, had it right; as did Yves […]

Satyajit Das: Pleasant & Unpleasant “Truths”

Yves here. If nothing else, be sure to read the section on the Money Honey book. By Satyajit Das, a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2010, FT-Prentice Hall). Michael Hirsh (2010) Capital Offense: How Washington’s Wise Men Turned America’s […]

John Paulson Throwing Weight Around in DC Against Foreclosure Fraud Inquiries

I got a very interesting report from a contact who is reasonably well plugged in with some of the government authorities that are taking a hard look at the foreclosure crisis. Readers have no doubt heard of hedge fund manager John Paulson, whose famed subprime short bet is reportedly the most profitable single trade in […]

Why Backstopping Repo is a Bad Idea

The normally sound Gillian Tett of the Financial Times endorses an idea that is both dangerous and unnecessary, namely, government backstopping of the system of short-term collateralized lending called repo, for “sale with agreement to repurchase.” The problem with her analysis is that her proposal treats symptoms rather than the underlying ailment. It would amount […]

Inside Job: A Movie Wall Street is Sure to Hate

Tom Adams and I saw an advance screening of the Charles Ferguson film Inside Job, a documentary on the financial crisis, due for theatrical release in New York on October 8. Given how well each of us knows the subject matter, we’re not easily swayed, but I can speak for both of us in giving […]