Capital Markets

What to do about energy speculators?

Jim Kim — Thu, 21 Aug 2008 12:33:35 -0400

Can any one country really regulate the capital markets? The issue has cropped up in the wake of the Wall Street Journal's report (later reported on by the Washington Post) about Vitol, the big Swiss energy conglomerate that is a massive player in the energy markets. The CFTC has been looking into the market's ups and downs and now says that financial firms account for 81 percent of all Nymex oil contracts. What's more, just four big firms hold fully one-third of all Nymex oil contracts. This is playing to some pretty intense political passions right now. We still can't conclude that the big dealers (on behalf of hedge funds and others) were responsible for the run up in actual gas prices this summer. But let's say legislators want to change the rules, and limit speculation. Such trading could easily go overseas. The ICE runs a London platform. And, the Post reports, the CFTC has stated it will not oppose trading in U.S. oil contracts overseas in Dubai. Goldman Sachs and Vitol are among those starting this new commodities platform.

For more:
- here's the Washington Post's article

Related Article:
Oil speculators morphing into convenient targets

Debt specialists in the spotlight

Jim Kim — Mon, 11 Aug 2008 09:43:33 -0400

The Financial Times suggests that the purchase by the Blackstone Group of debt boutique GSO Capital Partners last year speaks volumes about the credit universe that private equity firms must navigate. When debt was cheap, they were big borrowers. Now private equity firms want to profit by being on the other side. GSO has raised eyebrows with its recent purchase of $13 billion in leveraged loans. The hope, of course, is that super senior stuff will rebound and eventually rack up huge gains. This is going on across the street, and valuations for leveraged loans have improved. In all this, the FT sees the long shadow of Michael Milken and Drexel Burnham Lambert. The really gutsy play will be in other forms of debt, such as CDOs. We'll see more debt shops loading up on cheap assets, for better, or worse.

For more:
- here's the Financial Times article

Related Article:
Blackstone buys GSO Capital

More hedge funds to tap capital markets?

Jim Kim — Mon, 28 Jul 2008 14:47:12 -0400

The KKR move to become a publicly traded company throws the spotlight, once again, on alternative investment companies and the public markets. We may see more private equity companies try to somehow follow suit. The case for more hedge funds tapping the markets seems even more compelling. Financial News Online notes a recent Celent study that found more hedge fund firms seeking permanent capital to get through the fallout from the ongoing credit crunch. The fact is that prime brokers haven't exactly turned the leverage spigots back on, and it's unclear if they ever will. So more might follow Citadel, which became the first hedge fund firm to issue bonds in 2006. Others will seek to follow the likes of Man and Fortress and become public companies. While the benefits of a public offering are obvious, it's unclear whether investors will readily snap up such issues. At some point, hopefully sentiment will change.

For more:
- here's the Financial News Online article

Related Article:
KKR to go public after all

Pain spreads to East Hampton

Jim Kim — Sun, 27 Jul 2008 14:00:14 -0400

So how bad is the downturn on Wall Street? Bad enough to spread to East Hampton, a favorite play area for the made-it Wall Street set. Tax revenues in the town are down 42 percent from last year. The East Hampton Star also reports the town faces a budget deficit of up to $12 million, which has forced it to turn to the capital markets for some bridging funds. Residents include the likes of Carl Icahn and Ron Baron, who paid $103 million for an oceanfront estate last year. It seems like residents could collectively come up with a solution, if they stopped to think about it. The town apparently is considering ending roadside leaf collection, notes the New York Times. I'm not sure that will get their attention. For now, residents have larger bailout issues on their mind, involving the federal government.

For more:
- here's the New York Times article

Bond downgrades may hit record

Jim Kim — Wed, 11 Jun 2008 21:40:00 -0400

According to Standard & Poor's, potential bond downgrades hit a record 738 in May. That's more than 100 higher than a year ago. Meanwhile, S&P says potential upgrades are at their lowest level since September 2004. Article

Financed by UBS, BlackRock purchases UBS portfolio

Fri, 23 May 2008 06:59:55 -0400

Private equity firms and hedge funds are making some massive bets on distressed debts. The terms have been pretty good of late, though the leveraged loan market has rallied. The latest news, as noted by the Financial Times, is that UBS has closed on a deal to sell a portfolio of primarily Alt-A and subprime loans to a new fund managed by BlackRock. It sold securities with a nominal value of $22 billion for just $15 billion. But the real twist, the article notes, is that UBS provided the majority of financing for BlackRock via a collateralized term loan of approximately $11.25 billion. So as long as the securities don't absolutely crater, this looks to be a win-win.

For more:
- here's the article
- here's a AP article

Where have all the shorts gone?

Wed, 21 May 2008 06:59:54 -0400

When Douglas Kass, in an interview with Barron's, calls short sellers "an endangered species, like the dodo bird," you have to draw a distinction. He's talking about short sellers who do nothing else. The number of short-only funds indeed has dwindled since the heyday of the Feshbach Brothers and others, but now it seems there are more shorts than ever. It's just that most of the shorting is coming from long-short type funds. Indeed, 130/30 funds are all the rage. It makes sense to do both. As for Kass' new partners, he's faring well, proving himself to be anything but a dodo. His Seabreeze Partners short fund has generated a 16.5 percent gain vs. a 5.6 percent loss for the S&P 500, according to Barron's.

For more:
- here's the Barron's article via MarketWatch

NYSE's SPAC move: Misguided?

Tue, 20 May 2008 06:59:56 -0400

We've spoken a lot about the rise of special purpose acquisition companies, or SPACs. They were all the rage over the past few years, as more top investment banks got involved with them. They were fees to be had, of course. But the deal environment has worsened obviously, and that is making it hard for some SPACs to invest their newly raised funds. Share prices have been under pressure, and there is speculation that some SPACs may have to return funds. So it is interesting to read, in Traders Magazine, that the NYSE's marketing has paid off: A SPAC will move to the Big Board from the Amex. That would mark a first. Some might say the NYSE's marketing efforts are too late, but perhaps the time to make a push is when things are at a trough.

For more:
- here's the Traders Magazine article

Sad tale of a Merrill Lynch securitization

Fri, 16 May 2008 06:59:56 -0400

The New York Times offers an arresting story about an emblematic Merrill Lynch securitization in 2006. The securitized securities were so-called piggyback loans--that is, second mortgages usually for about 20 percent of the value of a home. Borrowers used piggybacks to get away with putting no money down. Did you hear me? NO MONEY DOWN. Just like the commercials scream. Almost all had loans for the remaining 80 percent. The originator was the infamous, now defunct Ownit Mortgage Solutions, in California. The Times notes that the piggyback loan borrowers were quick to default, which rippled through the CDOs that invested in the securities, which hit the investors, including mutual funds, that bought the CDOs. Moody's eventually got around to downgrading the securities from Aaa to Baa2. What a time it was. Merrill Lynch, of course, wasn't alone in packaging and selling such stuff.

For more:
- here's the New York Times article

Moody's makes a few changes, keeps letters

Thu, 15 May 2008 06:59:54 -0400

Moody's surveyed its customers recently, and they apparently were in favor of keeping the ratings agency's time-honored letter ratings, AAA and so forth. To many critics, these letter ratings mean little these days, but that is more rhetoric than reality. Still, the agency has some PR issues to contend with. And it is trying to make some hay with some ratings tweaks that the Financial Times has just written about. Moody's launched two new indices that would indicate how fast a security might lose a top rating if the economy changed. This is an obvious hoped-for corrective to the masses of AAA rated CDOs that suddenly ended up on the skids, resulting in mass downgrades.

For more:
- here's the Financial Times article