Thursday, April 30, 2009

Just how sloppy is Paradigm Global?

Paradigm Global is a fund of hedge funds owned and controlled by Hunter Biden and James Biden.  Hunter and James are the Vice President’s son and brother respectively.

The SEC recently alleged a fraud by Ponta Negra – a small hedge fund run out of an office in Stamford Connecticut.  This blog first observed that Ponta Negra also maintained an office with Paradigm Global.

Moreover in SEC filings they gave their phone number as the Paradigm Global switch and they used the same marketer as Paradigm Global.

This was first exposed on this blog here.  Read this post first.

Now Paradigm have – through their lawyer – sought to defuse this issue.  Their lawyer summed up the story as follows (as reported in the Politico):

"They were subtenants," he said, adding that marketer Jeff Schneider "who did some marketing for paradigm over the last couple of years introduced us to Ponte Negra, and we had some available office space."

"That's 100% the extent of the relationship," he said.

"There's no smoke or fire as relates to this unfortunate Ponte Negra situation. There's nothing there at all," he said.

Jeff Schneider was a full time employee of Paradigm (according to their own marketing material) until relatively recently (January 2004 to February 2008 according to FINRA records).  To say that he did some marketing for Paradigm over the last few years is understating the extent of the relationship.

Anyway the excuse is that Ponta Negra is a subtenant – and in no way associated with Paradigm.

The excuse comes down to Paradigm being careless about their reputation rather than in any way involved in the alleged Ponta Negra fraud.

And I admit it – the only hard evidence I have is for Paradigm being unduly careless about their reputation.  

And in this light I thought I might have a look at just how careless by looking at Jeff Schneider’s FINRA record.  Jeff Schneider it seems has a history that might make him difficult to employ by anyone who does thorough due diligence and cares about their reputation.  

Remember this guy was a full time employee in a senior position at Paradigm. 

  • Whilst working for CIBC markets immediately before taking the position at Paradigm he allegedly temporarily transferred securities from a customer account to another member of the firm allowing the other member of the firm a bonus.  He is acused of but denies sharing in this bonus.  He settled this for a fine, a non-admission of guilt and a 90 day industry suspension.  
  • There were several allegations that at CIBC he recommended inappropriate investments and excessively traded client accounts.  Damages in most these cases was under half a million dollars and some cases were settled by CIBC for amounts up to one hundred thousand dollars.
  • There were also allegations of unauthorised trading of client accounts which were settled by CIBC for amounts in excess of $50 thousand.

Needless to say he was dismissed by CIBC.

  • At Paine Weber he was accused of failing to respond to client requests causing damages to clients of $18000.  Paine Weber settled for $10 thousand but Mr Schneider denies any liability.
  • He was permitted to resign from Merrill Lynch after allowing foreign clients to exercise (losing) trades and to not pay for their losses.  He argues that he was following Merrill Lynch procedures and that the clients just disappeared.

You can find the details here in his FINRA report.

Given this history are you surprised that Jeff Schneider is the marketing agent for Ponta Negra – an alleged scam?  

Or are you more surprised that a firm owned by the Vice President’s son and brother continued to employ Jeff Schneider as a marketing agent?

At best the Biden’s firm is sloppy.  Sloppy enough that it is highly surprising that the main stream media is not asking questions.


PS.  I am a life-long adherent of slightly left-of-centre politics.  I campaigned against John Howard in his own electorate and was (proudly) at Maxine McKew's election party when she pulled off the improbable win.

I would have donated to the Obama campaign except that - for a non-US citizen - that would be illegal.  My problem with Obama is that he is too centrist.

If the election were held again tomorrow and I could vote it would be for Obama/Biden.

There are some people aruging I am writing these posts because of some right wing political agenda.  They are just wrong.  

This issue just deserves exposure.  I did not set out to expose the Bidens.  I found Ponta Negra and followed where it led me.  I almost collapsed in surprise when I found the strong Biden link.  


AIG – a really neat run through

I do not do links unless they are really good.

This is really good.

The Aleph Blog has a simply wonderful piece on AIG – going through and asking in a clear way which (if any) AIG operations were sound.

It helps if you have some expertise in insurance – for instance it helps if you know instinctively that when insurance company A owns insurance company B it winds up with some double counting of capital and hence lower solvency than if the companies are independent and jointly owned by a holding company.

That said Mr Merkel has done what nobody in the press has done and really analysed AIG.  His bit on security lending is really useful.

The formatting however is awful so I suggest you read the PDF.  And put the blog on the RSS feed.


Finally when AIG went under I thought the life insurance companies were sound.  I later decided otherwise.  Mr Merkel explains why in very simple terms though I suspect the life companies are even worse than he makes out.

Happy reading - and don't buy any of the debt because there is no value left in my view.


A statement by Paradigm - and some questions

Message to readers: if you are new to the Paradigm/Biden/Ponta Negra connection read this post first.  

Marc LoPresti – the regular lawyer for Paradigm Global has apparently made a few statements regarding this blog’s suggestion that Ponta Negra (an allegedly fraudulent hedge fund) and Paradigm Global (a fund of funds controlled by the Biden family) were very close.  

I can’t find the statements, only a second hand reference to them at the Politico.  However to quote:

"They were subtenants," he said, adding that marketer Jeff Schneider "who did some marketing for paradigm over the last couple of years introduced us to Ponte Negra, and we had some available office space."

"That's 100% the extent of the relationship," he said.

"There's no smoke or fire as relates to this unfortunate Ponte Negra situation. There's nothing there at all," he said.

Let’s pick this apart.  

First I suggest you ring (212) 271-3388.  This is the phone number for Paradigm.  Do it after hours and you will get a choice on their automatic menu.  Ask for extension 213 on their automatic switch.  You get the following message:

You have reached Francesco Rusciano at the Ponta Negra Fund 1 LLC.  Please leave your message at the tone.

You get this message several days after Ponta Negra has been closed by a Federal Judge.

They were (at best) subtenants using the same phone system.

Secondly the LoPresti statement downplays the extent of the relationship between Jeff Schneider and Paradigm.  I have posted several old Paradigm marketing documents that place Schneider as the second most important marketing person at Paradigm (see here for an example).  

Moreover the senior marketing person at Paradigm (Alla Babikova) is given as running the New York office of Onyx (Schneider’s organisation).  She does this whilst still working in Paradigm’s office.  She is warranted as a full time employee of Paradigm in a few Paradigm marketing documents.  

I have some questions for the respected Marc LoPresti.  

  • Did Paradigm implement any procedure after your dealing with Alan Stanford to ensure that Paradigm's name would never again be used by scamsters?  If so have these procedures failed?  If not, why not?

  • Did Francesco Rusciano actually have an office at Paradigm as suggested by the message on the answer phone?  The SEC filings suggest that Ponta Negra was run by Mr Rusciano from his home in Stamford.  How often was Mr Rusciano in his tenancy?  Did he use the tenancy for marketing purposes – so as to trade off either Paradigm or the Biden’s name?
  • Could you please list the other subtenants of the 17th Floor of 650 Fifth Avenue? I can find other stuff there which looks suspect and I want you to assure us that it has nothing to do with Paradigm and is no way trading off your reputation.  Remember Alan Stanford traded off your reputation listing you as one of his investment strategies (and noting the joint branded fund).  
  • Could you please also answer the question as to how many staff you have?  The answer is six to ten in the SEC IARD filings – and 28 in some marketing documents.  Did you ever have 28 staff?  Were Schneider and Babikova full time staff as listed in your marketing documents?  If so when (if ever) did they cease to be full time staff?
  • Could you please also answer the allegation made in James Biden’s sworn statement that your returns were misrepresented?  By whom and to who were they misrepresented?  Did you approach legal authorities to report staff or agents of yours for misrepresenting your returns?  Or was James Biden’s statement perjury?

Thanks in advance.

Wednesday, April 29, 2009

The economics of Paradigm Global – alleged substance abuse and alleged ponzi schemes

Paradigm Global is a fund of funds owned and controlled by Hunter Biden and James Biden.  These two are Vice President Joe Biden’s son and brother respectively.

Oh yes, and it does involve substance abuse and ponzi schemes (both alleged).

Paradigm Global on its website still contains the assertion that they have never had a down year.  


The PARADIGM Group of Companies was founded in 1991. PARADIGM Global Advisors, LLC is the asset allocation and investment advisory arm of the Group. PARADIGM Global Advisors, LLC is an SEC-registered investment adviser, is registered with the Commodity Futures Trading Commission as a commodity pool operator and commodity trading advisor and is a member of the National Futures Association. 

PARADIGM's portfolios of hedge funds have not suffered a down year since the firm's inception in 1991 and have consistently outperformed stock and bond markets. Volatility has steadily declined over the years. We proudly attribute our performance to our investment philosophy and its application to managing a portfolio of funds.

At various stages Paradigm Global has claimed to have 1.8 billion in funds under management or advice.  That would make it a good business.

Paradigm Global has however been in some reputation trouble twice lately.  Firstly they co-branded a fund with Alan Stanford which (at best) suggests sloppy due diligence.   This was reported here in the WSJ.

Secondly they housed Ponta Negra – an allegedly fraudulent hedge fund that has just been charged by the SEC.  Not only did they allow Ponta Negra to use their offices but they allowed Ponta Negra to use their marketing machine.  This was first reported on this blog here.

Sloppy two times over calls for a little more due diligence on Paradigm Global.  

Firstly the business was not started by the Bidens – it was purchased by them.  It was started by Dr James Park.  When the Bidens purchased the business they believed it to have 1.5 billion of funds under management.  This little section from an affidavit signed by James Biden (the VP’s brother) is revealing.  The affidavit is here.

(a).  The Paradigm Hedge Funds had only between two and three hundred million dollars under management, which were leveraged to over five hundred million, not the more than $1.5 billion under management represented to us by Lotito and Fasciana.  

(b) The returns on the Paradigm Hedge Funds were not as represented to us by Lotito and Fasciana; and (with editing)

(d). The primary manager of the funds, Dr. James Park, had an apparent substance abuse problem and had been an absentee manager for several years...

Now please put this in perspective.  The Bidens – mostly through failure to do proper due diligence – seem to have wound up in control of a fund of hedge funds which they claim (in sworn affidavit) that 

Had less than a fifth the funds under management that they represented to their customers,
Had misrepresented their returns and 
Had a primary manager who had “an apparent substance abuse problem”.

Now if you were told a fund manager only had a fifth the funds that he represented to the world, had misrepresented his returns and had a primary manager with a substance abuse problem what you say it is?  

Whatever – it quacks.

Now this affidavit was signed 13 April 2007.  I presume it is the truth otherwise James Biden is guilty of perjury.

The affidavit is signed a few months after Hunter Biden resigned as the CEO of Paradigm Global – a position he took up in late 2006.

Now I am going to give you one more detail.  In 2006 Paradigm represented that they had 28 staff.  They represented that they had offices in multiple cities including a largish office in New York on Fifth Avenue.  I have uploaded a few of their marketing documents here and here and here.

Two hundred to three hundred million in funds under management would represent less than 5 million in revenue and probably less than 3 million after any third party costs.  Most funds of funds of that period took a percentage of the performance fees – and given the performance of the funds the revenue would have been less than 1% of net funds under management however Paradigm's fee structure was somewhat higher suggesting revenue about 5 million per annum.  

With 28 staff mostly in New York and (according to this marketing document) with representative offices in Los Angeles, Monte Carlo and Tokyo you can’t make this business work very well.

Of course you could make it work if all the staff members were paid well under $70 thousand dollars (which does not seem likely in finance in New York, Los Angeles, Tokyo and Monte Carlo).  You could also make it work if you subsidized it. 

None of this would allow the senior manager to fail to show at the office and indulge a drug habit (as sworn by James Biden).  

Now go back and look at this marketing document.  It contains a few staff members on the marketing side.  Alla Babikova is still given as an email contact on the Paradigm website.  She is also listed on this document as working for Onyx Capital.  Onyx was the marketer of the allegedly fraudulent Ponta Negra hedge fund.  Onyx – or at least staff that worked for Onyx – were also marketers of Stanford.  

Jeffrey Schneider is the contact on this document from the allegedly fraudulent Ponta Negra fund.  He was the founder of Onyx.

I see lots of possibilities: all of them reflect very poorly on the Bidens.

  • They were and remain controllers of a fund of funds which they allege misrepresented its returns and yet which they kept operational.
  • They were and remain controllers of a fund of funds which houses an alleged fraud in its offices (Ponta Negra).
  • They were and remain controllers of a fund of funds which employed a marketing organisation (Onyx) which was associated with distributing alleged frauds (Ponta Negra and Stanford).  
  • They were and remain controllers of a fund that claimed to have 28 staff many of whom are difficult to trace and where the revenue to fund those staff did not obviously exist.  This suggests that either the staff were not paid, did not exist or (more sinisterly) they were paid by stealing from the small amount of funds under management.  You could only steal the client money if the asset custody safeguards were not robust.  There is an audit statement on the SEC files qualified as to the robustness of these protections – however there is no evidence that the lack of robustness was exploited.

All of this was done from the 17th Floor of 650 Fifth Avenue New York.  There are a few other things housed on that floor and you need to walk past Paradigm’s desk to get to them.  

Whatever – it quacks and it is controlled by the Vice President’s family.

The first post I did not make on Ponta Negra and its link to the Bidens

Note - an error in this post has been corrected - see the end note...

Being a blogger you sometimes need to hold your horses.  Lawyers do threaten.  I wrote this post.  I circulated it to a few friends but on the promise that they would not further circulate it.  

I did not post it.

I suggest you read the FIRST POST ON THE BIDEN/Ponta Negra connection before you read this.  However you should enjoy this...

It was originally titled "The Scorpion Post".  You will see why.  Some of the links in the post do not work because - under legal threat - I deleted some posts and some documents.

You will also note that since I wrote this (hitherto unpublished) post the amount of information I have linking the Bidens to various ponzis/frauds has increased.

A Scorpion Post - Chasing down a Ponzi

If you are a Republican political obsessive please read this to the end. There is a really big sting in the tail… you might like it…

This blog would – on average – have readers considerably more financially sophisticated than the average person. Indeed looking at where my emails come from its not quite a roll call of Wall Street’s finest– but the crowd is well heeled and well connected.

The fund I put up yesterday is almost certainly a Ponzi. Indeed just reading the numbers as posted I was pretty sure it was a Ponzi – and in this post Madoff/Stanford world I would have thought that most of my readers would be trained to look at results which do not in any way resemble plausible and scream Ponzi.

I did not reveal the name of the Ponzi fund in yesterday’s post but I will today. It is called Ponta Negra Fund LLC and its manager is the Ponta Negra Group.

Surprisingly about a third the emails I got and a fair few of the comments did not even raise the possibility it was a fraud.

Fraud was the first thing that I thought of – and it was the first thing I thought of when I first heard of this fund in June last year. I thought Ponzi in a pre-Madoff world. I am really startled that all my readers did not think Ponzi in a post-Madoff world.

I have two fund marketing documents, one containing results to May last year – the other containing results to February this year. I have uploaded them to Scribd – and you can find them here and here. Download them if you really want to follow the scam.

I was fairly sure it was a Ponzi before I observed the other tell-tale signs – but - for the sake of completing the experiment I will reveal them to you.

Firstly both documents are formatted in a very strange way. If you cut and paste text you get words without spaces. So a cut and past will look like this:

Rather than just saying:

“As we had anticipated inter-day volatility…”

This format takes some doing. The spaces are formatted as pictures rather than text. The reason for doing this is that it makes the documents non-searchable and hence unable to be found using Google. I guess that indicates that they have something to hide.

Now take a look at the February document. The contact is "Jared Toren" whose phone number is 512 306 0300. The fund has an address of Level 17, 650 Fifth Avenue New York. The first problem is that the phone number for the sales contact – for a fund headquartered in New York City – is in Austin Texas. Very strange.

If you Google the phone number you get a link to Eagle Rock Capital LLC. Here is their website (click here). Because I expect the site to disappear I have taken a picture of it for posterity.

There is not much there. No contact address, nothing really except a place holder and phone number.

But Eagle Rock Capital has a history – as a personal lending company. This is an extract from the San Marcos Record – which describes the company as providing personal loans (click here). I have reproduced below:

In the earlier Ponta Negra document you find a different contact – a
Jeffry Schneider from Onyx Capital, LLC. Onyx Capital is a funny entity. It too has a website or two (click here for one).  [Editors note - this site has changed...]

The Onyx website is constructed almost entirely of pictures not text. Nothing is searchable by Google. On their home page they offend with stray apostrophes – but that would not be noticed because it is not text and so never went through a spelling checker. Here is the cover page:

And here is their contact page:

Note no physical address is given. That is very strange indeed.

Jared Toren and Jeffrey Schneider do appear together in – you guessed it – civil litigation. I have filed the complaint on Sribd (click here).

The allegation in that suit is that Jared Toren and Jeffrey Schneider worked at Hedgeco – an internet based marketer of hedge funds – and that they stole the client list. They either joined or established Onyx. [EDITORS NOTE - SEE END]

In other words Jared Toren and Jeffrey Schneider are alleged to have stolen a client list and are seemingly using that list to market a Ponzi scheme (Ponta Negra). They possibly also used it to market New World.

Ok – all of this would not have interested me. I have numerous times reported frauds like this to the SEC and even to the FBI – and I have yet to see any action. Mr Markowitz and Madoff is an experience that anyone who has dealt with the SEC has seen before.

I have simply given up

This is however a Scorpion Post. Here is the sting.

The address given in the second Ponta Negra marketing document is 17th Floor, 650 Fifth Avenue New York. I can’t find any reference to Ponta Negra there – but there is a fund-of-hedge-funds based there. It is Paradigm Global Advisors and they manage roughly 270 million dollars according to the Wall Street Journal and 500 million on some other estimates I have seen.

Now Paradigm is a name that will ring a few bells. The firm is owned by Hunter and James Biden. Hunter is Vice President Joe Biden’s son and James is the Vice President’s brother. (I told the Republican activists to read to the end…) You can see a picture of Hunter Biden with his dad at the Obama inauguration below.

Paradigm Global does not have an entirely pristine reputation. Here is a Wall Street Journal article about a fund that they co-branded with Stanford Financial (click here). I copied the picture from that WSJ article.

According to the WSJ article Paradigm claims that the Bidens never met or communicated with Mr Stanford. I believe them. They lent the name Paradigm to the Paradigm Stanford Capital Management Core Alternative Fund without ever having met the principals of Stanford. Such is the standard of due diligence on Wall Street.

I was worried at first that Ponta Negra might be a legitimate fund headquartered in another cubicle on the 17th Floor of 650 Fifth Avenue. It turns out that there are several funds also HQ'd there. Paradigm it seems does all the signage on the floor – but once you get past the couple of Paradigm people on the front desk you find several doors behind which reside several hedge funds – a hedge fund hotel if you want. Most of the offices were empty mid-morning – which was very surprising. These funds are largely marketed by Paradigm.

Still there could be a fund (Ponta Negra) independent of Paradigm on the 17th floor. There could be – they too would need to employ a Jeffrey Schneider as a marketing agent. To quote the Wall Street Journal story:

A Paradigm marketer, Jeffrey Schneider, confirmed accounts provided by others that he brought in the Stanford business. Stanford would bring clients to the fund and Paradigm would manage it, according to Mr. LoPresti. The fund is mentioned on the Web site of a Stanford entity called Stanford Trust Co. as one of its "investment management strategies."

Ok – by this point you should at least be open to the possibility that the Vice President’s son and brother employ someone who uses the good Biden name and a stolen client list to market Ponzi schemes.

There is no allegation here that the Bidens are involved. Just that their standard of due diligence is low. Very low.

Now the Biden’s hedge fund hotel contains an assortment of other colourful funds. One of them is a SIPC registered broker dealer who also manages client money. This broker dealer does not list their auditor anywhere on their website. However they report startlingly good funds management results for 2006 and 2007 though they have surprisingly failed to update their website to include 2008 results. Their website boasts that their trades will be completed with zero commissions and transaction charges allowing them to focus exclusively on the investments that best meet the needs of the clients without the concern of transaction charges and hidden revenue sharing…

Any resemblance to Bernie Madoff is purely coincidental.

EDITORS NOTE.  I originally referred to Capital Group Holdings as marketing a previous Ponzi.  It was HOLDING CAPITAL GROUP.  I sincerely apologise for the error and have deleted a section of this post.

Tuesday, April 28, 2009

Alleged fraudulent hedge fund associated with the Vice President’s family harasses blogger

I wrote a post about Ponta Negra – a hedge fund that I thought was more likely than not to be fraudulent.  I did not name Ponta Negra in the post but I put two of their marketing documents on the web and some people found them.  

I withdrew that post after threats from lawyers.  I also removed the documents from the web.

I have reposted the two marketing documents I have from Ponta Negra here and here and the first threat from the lawyer here.  

I have done this because Francesco Rusciano of Ponta Negra has formally had his assets frozen by a Federal Judge at the request of the SEC.  Also see here for the formal charges.  

Anyway I asked the lawyers for the things that I would need to do due diligence on Ponta Negra – that is the identity of the auditor, permission to talk to the auditor, identity of the prime broker and permission to talk to the prime broker.  

I was denied.  The lawyers argued that I was “just a blogger”.  Their denial letter is here.

The first marketing document however identified a supposed prime broker as Citigroup.  I wrote to citigroup several times – and spoke to senior people in their government relations area and told Citigroup the entire story.  I believe that Citigroup did not react appropriately to a fraud committed in their name.

Anyway I will save you the suspense.  All of this would not be the biggest story on my blog except that Ponta Negra is marketed out of the office of Paradigm Global – a fund of hedge funds owned and controlled by Hunter Biden and James Biden.  Hunter and James are the son and brother of Vice President Joe Biden respectively.

You can find this several ways.  

1. Ponta Negra gives its address in the second marketing document as 650 Fifth Avenue, 17th Floor.  This is the same address as Paradigm Global.  

2. The contact on the first marketing document for Ponta Negra is Jeffry Schneider.  This is the same Jeffry Schneider who is quoted in this Wall Street Journal article as being the marketer for Paradigm Global and effectively spins for the Bidens.

3. This SEC filing gives an address and phone number for Ponta Negra.  The address and phone number is a number through the switchboard of Paradigm Global and until recently it was a way of getting into contact with Ponta Negra.

At a minimum Paradigm Global – a fund of fund managers owned the Vice President’s family, housed an alleged fraudster.  The alleged fraudster used the same phone number as the Vice President’s family business, the same marketing machine and traded off the good name of the Vice President’s family business.

There are numerous posts about Ponta Negra, Paradigm and other assorted entities (Onyx Capital for one) that I have withheld posting on.  I will put them up as a series.  The ties between the Vice President’s family and some very questionable dealings are very strong.

The next step for the SEC has the surname Biden.  Are they up to it?

To be continued.


A last hurrah for the rational markets hypothesis - Biota Holdings redux

You know we should all give this game away – at least when it comes to short term trading.  Rationality doesn’t work and I am not a good gut instinct trader.

I have posted on Biota (see here and here) – a stock very unlike my usual stock market picks.  I purchased it after it had risen 60 percent on swine flu.  It is clearly a big beneficiary of the flu as it is entitled to a 7% royalty on sales of Relenza – one of only two drugs that is likely to be effective against swine flu and one of two drugs that governments stockpile to deal with events like this.

I figured that if you believed the movement in Glaxo’s share price on the swine flu outbreak then you should believe that Biota would triple in Tuesday’s trading.  I also suggested that that was not going to happen.  The stock was up pennies.  However I observed that the relative movements was proof – if any more was needed – that markets are (at least medium term) irrational.  

Now there is a reason I was willing to speculate in Biota – which is that it simply is not that expensive.  I mentioned that Biota’s cash holdings were about AUD60 million.  Well I understated it.  It was 60 million before recent cash inflows.  

It is receiving a fairly big royalty payment on sales of Relenza before the swine flu outbreak.  Here was Biota’s last press release.  The company is not promotional – and there has not been a single release since the swine flu outbreak (if anything the CEO has talked down the stock).  

For Immediate Release
Melbourne, Australia — 23 April 2009

Relenza Royalty for March 2009 quarter $32.3 million
Biota Holdings Limited (ASX:BTA) today announced that it had received notification from GlaxoSmithKline (GSK) that Relenza sales were $462 million and indicative royalties were $32.3 million, for the three months ended 31 March 2009.

Indicative royalties for the nine months to 31 March 2009 total $36.1 million.

Biota CEO Peter Cook attributed the performance to recent significant orders for pandemic stockpiling from the UK and Japanese Governments.

After that cash inflow the cash holdings of Biota are closer to 100 million.

Now does anyone seriously believe that Swine Flu won’t cause a substantial increase in pandemic ordering of Relenza?  

I have no idea how big that that inflow will be – but five times the most recent quarter is hardly implausible.  (Though I am more than happy to say that it was just a guess...)

In that case Biota would have cash backing almost equal to its market cap.  And it could be bigger.  You would guess on a small possibility of very big Relenza ordering and massive and repeated stockpiling of the drug.

More to the point – the emergence of reports of psychological and resistance problems with Tamiflu will probably shift the market towards Relenza.  And Biota has a second generation flu product which should be out before Relenza runs out of patent.

Of course the dear stock market can price up the 93% of Relenza revenue for Glaxo by 6 billion and ignore the 7% owned by Biota.  In fact I frankly expect them to do so.  Rational markets don’t exist – and don’t consider this to be a stock tip because the insane relative movements can exist quite a long time and I figure the rise in market cap for Glaxo is probably wrong too.  But if you ever wanted a clear rational markets counter-example then this is it.


PS.  To me the strongest reason for buying the stock is that Biota is by far the cheapest financial protection against a very nasty global pandemic.  That ultimately is why I purchased it.  Though I admit - if the stock is super-strong I will take some profits...

Can the stock market count?

The title is a rhetorical because I have been long enough in the market gain to know that the stock market does not come close to counting accurately.  The rational expectations hypothesis is just nonsense. 

That said I have a single highly topical example.  

I purchased Biota Holdings yesterday.  Biota is a one-product company – a biotech with a line in influenza drugs.  It is also a small cap company listed in Australia.

Biota invented Relenza – one of two drugs that are effective against swine flu – and one of two drugs stockpiled by governments in anticipation of an event like this influenza outbreak.

More precisely Biota is entitled to a royalty of 7 percent of Relenza sales.  Glaxo funded Biota’s development and much research and as a result Relenza is essentially a Glaxo drug.  (Incidentally Gilead is to Roche as Biota is to Glaxo.  Gilead developed Tamiflu.)

Glaxo’s stock price went up by 7.5 percent in a sharply down market on the news of swine flu.  It was quite specifically a swine flu reaction in that pretty well only the companies that would benefit from swine flu (Glaxo, Roche, Gilead etc) went up.  

7.5 percent on Glaxo’s huge market cap is a lot.  Indeed as Glaxo’s market cap at the end of the day was USD79.8 billion the rise in Glaxo’s market cap of about USD6 billion.

Now Biota is entitled to 7% of the sales of Relenza – without any expenses – just a pure royalty – so whilst it is entitled to 7% of the sales – at a minimum it should be entitled to say 8% of the economics.

Now if Glaxo’s market cap rose by USD6 billion then Biota’s market cap should rise by 8% of USD6 billion or USD480 million.  USD480 million is AUD676 million.  

I do not expect it to happen.  Biota’s market cap at close of business yesterday (and after a 80% rise) was AUD276 million.  

If the market could count then Biota would approximately triple today on the open.

I doubt it will happen because (a) the market can’t count and (b) fund managers would rather speculate a lot on Glaxo for small gains than a little on Biota for big gains because.  Well frankly nobody was ever sacked for buying Glaxo/IBM.  

The effect of swine flu is hard to calculate.  But the stock market effect of swine flu on Glaxo is highly visible and it should be reflected in Biota’s share price.  But even when things are easy to calculate (as this post demonstrates) the market does not price consistently.  At least one of the Biota/Glaxo stock price moves is demonstrably wrong.

When things are hard to calculate – eg losses in the financial system – is it any surprise that the market is entirely schizoid?


Post script... the extent to which the stock market can not count is indicated by the fact that Biota opened a penny down albeit still above my midday yesterday purchase.

Now I do not think the move in Glaxo was necessarily rational... but one of the Biota or Glaxo moves is clearly wrong.

Monday, April 27, 2009

Biota - a wild speculation

Biota is an Australian listed company.  It has a share in a drug that cures influenza and almost certainly works on swine flu.  The stock went about 60% today.

The drug (Relenza) is a true wonder except that it has several features that make it very difficult to market.

First – and foremost – it must be taken very early in an influenza infection.  Indeed it is most effective if taken at the first sniffle.

The problem is that influenza – which can be debilitating and is sometimes fatal – starts life with about the implied threat of a common cold.  There is absolutely no way you would be crawling to the doctor to get some Relenza when you have the slightest sniffle.

By the time the influenza has taken hold – and you are running fevers and have joint pain and feel near death then the drug is ineffective.

The second problem is that the drug is inhaled through a turbo-inhaler.  Taking it is somewhat more pleasant than having an injection – but certainly less palatable than a tablet.

The third problem is that there is a competitor drug (Tamiflu) which is taken orally and is a little more consumer palatable.  Against this there are some links to psychological problems (especially in Japan) with Tamiflu.  More importantly there are resistance problems with Tamiflu that appear absent with Relenza.  

The main market for Relenza is stockpiles by government health authorities who are holding it as protection against bird flu going super-contagious.  Some governments tend to prefer Relenza stockpiles because of the lesser resistance problems.  The German Government stockpiles Relenza because they believe it more effective than Tamiflu.  That said the market is dominated by Tamiflu.

Biota is a company that has been living on very little money – the moneys made almost entirely from selling to Government stockpiles.  Needless to say governments are reliable if parsimonious payers.

Still Biota has AUD60 million cash (and equivalents) on hand and a market cap of AUD250 million.  

If Swine flu is the real deal then Biota will be a huge stock.  And if not – then maybe the fear will encourage more government stockpiling.

I speculatively purchased Biota today.  It is unusual that I purchase anything after a rapid 60% rise… and I may do some dough.  But this looked to me to be a sensible speculation – and not a bad hedge against global catastrophe.  Now I guess I have to be prepared to do my dough.

Saturday, April 25, 2009

ANZAC Day edition

The original ANZACs were the Australian and New Zealand Army Corps.  They landed on 25 April 1915 at Galipoli in the Dardenelles for what was to become a protracted and punishing military defeat.

Australians (and New Zealanders) still commemorate Anzac Day as their national day of remembrance and with numerous dawn services, remembrance parades followed by war stories, stories about the (great) grandkids and drinking with your mates.  It’s a day that is both sombre and joyous, reverential and light-hearted.  We remember our dead in a peculiarly Australian fashion.  

Today I was privileged to go to the ceremony with Alice.  Alice looked after me as a child and I return the favour in her old age.

Alice served as a nurse in the Second World War.  Her first husband served in Palestine, Tobruk and possibly El Alamein – but paid with his life at the true battle for Australia – at Kokoda.  (The reason I am not sure he fought at El Alamein is timeline.  He may have been at El Alamein and he was certainly in Egypt but the main battle was fought at El Alamein in late 1942 and the Kokoda battles were already happening by then.)  

Alice’s family sacrifice did not end there – her second husband had what I suspect were continued psychological problems after New Guinea.  Alice’s son (Richard) served in Vietnam.  (It is possible however that Alice's second husband fought at El Alamein - and she confuses which battles they fought in.)  

I pushed Alice in her wheelchair at the Legacy War Widows Service in Sydney.  The ranks of World War II War Widows are getting thinner – and Alice may have been amongst the oldest.  She is the youngest (and one of only two surviving) of more than a dozen children.  Being the youngest of many her father was not young when she was born – and – possibly uniquely – she was wearing her father’s Boer War medals.  The medals proudly were issued under Queen Victoria and Edward VII and showed their heads – reminding us that Australia has always fought under the auspices of the British Crown.

The ceremony was short and moving – and whilst I was pushing a wheelchair I did not feel that I belonged in the march.  Other people had sacrificed much and I was a beneficiary not a victim.  Still many tears were shed.

It was about an hour till the main march went through.  Richard disappeared to march with his Vietnam buddies.  I was left chatting with a bunch of mostly spritely women in their 80s whose husbands had died when they were 18-20.  Most did not remarry though one did and the second husband died in the Korean War.

Their husbands mostly died in campaigns against the Japanese after fighting the Germans.  The woman who sat next to me told me her husband served on HMAS Australia and was killed by a kamikaze at the Battle of the Coral Sea.  I was surprised as I did not know that kamikazes had been used as early as the Battle of the Coral Sea (1942).  Moreover it did not gel with her age as she was 18 married and pregnant when the war ended (1945) so it was unlikely that he was killed in 1942.  But HMAS Australia was the victim of a kamikaze – possibly the first kamikaze and there were many dead.  The date of that attack (January 1945) matched the age of her child.  Not to quibble.  She bought up a very well adjusted child as a very young widow – and she never remarried.  It does talk however to how inaccurate memory is – even of very important things.  Her mixed up memory matched Alice's doubt about which husband (if any) fought at El Alamein.  

The march itself was charming, lighthearted, sad and poignant.  And most of those things all at once.

It was led by a group of horses in full nineteenth century military regalia.  After a decent interval came a man with a wheelie bin and a shovel who – to cheers from the crowd – cleaned up the horse dung.

Then came a riderless horse called Galant in lieu of any surviving veterans from the Boer War.  Another riderless horse represented the First World War which was dated 1914-1918.  Flags representing all Australian divisions that fought in that war were carried by serving military officers.

There was no horse and no other representation for Australia’s (minor) involvement in the Russian Civil War (1919).  Australia played a very small role in that war – and there were few Australian dead – but the parade did not honour them.  The Australians fought in British units – though – according to this minor history at the Australian War Memorial web site Australia did send naval ships for reconnaissance.  

After a decent interval came a formal precession led by Professor Marie Bashir.  Marie Bashir is the Governor of New South Wales – and hence the representative of Her Majesty the Queen of Australia.  Governor Bashir is I think 78 years old – but my spritely war-widow companions thought she looked young and fantastic.  

Then came a large number of divisions of Second World War veterans.  Some were carried in taxis, some in military vehicles, some in wheel chairs – but most marched.  A few dropped out of the march to flirt with the war widows which I found hilarious and the widows found flattering.  Many saluted as they went past us.

The women tended to look a little better than the men (which is not atypical amongst 85 year olds).  Most colourful were the women who served in field hospitals who were dressed to the nines and all wearing gleaming (and elegant) white gloves.  Interspersed were marching bands mostly provided by various high schools including my high school.  My old high school (Sydney High) is an academically selective school with a history of taking the upwardly mobile children of the latest generation of immigrants.  In the days that Jim Wolfenson went there it was full of Jews and other children of Eastern European refugees.  It now is the children of Indians and Middle Eastern Muslims as well as South East Asians.  The band filled me with hope for Australia – and the racial mix of the students in it differed dramatically from the all-white Second World War returned soldiers.  

The troops went past largely in order of the campaigns they fought.  Most of the campaigns I knew Australians were involved in – but there were groups that fought with Americans and other services (usually in specialised roles) that I did not know about.  One example were the Polar Bears – a naval group covering arctic supply lines.  

There were contingents from Korea, the Malaya Emergency and extensive Vietnam Veterans.  There were small groups from the first Gulf War, East Timor, Iraq and Afghanistan.  

Finally there were groups representing allies we fought with in various wars.  There were for instance a small group of Dutch soldiers who were assigned to Australian Divisions after Dunkirk.  There were Americans (mostly from Vietnam), Ghurkhas and other assorted South Asians.  The largest group were Vietnamese who fought for the South and later settled in Australia as refugees.

To me though one of the most moving parts of the whole parade happened by fluke.  We tried to find a bathroom for Alice – and a woman who worked for Legacy led us to a disabled toilet.  Legacy is a charity for families of war dead – and it was Legacy who had organised the War Widows special ceremony.  They have a group for the children of war dead – and – for the first time – she had organised them a place in the parade.  They were led by a military truck and in the back was their oldest member – a son of a soldier who died in the Great War – and their youngest member – a son of a soldier who died in Afghanistan.  I would not have understood the significance of that baby had I not met the organiser.  

And whilst I am sad for the child – if I judge it by the children of the war widows I sat with then the boy will turn out OK, and in sixty five years he will still be honouring his father’s sacrifice.


PS.  I have to repeat one of the comments.

My mother was raised in an orphanage in Brisbane run by Legacy. As far as I know, she doesn't go to A.N.Z.A.C. Day parades, but does go to the Dawn Service. The "Legacy Kids"/orphans have their own get-togethers. Every August for the past 26 years, the orphans have a re-union on the birthday of the woman who ran the orphanage. She was a Legacy employee who had lost her husband on the Kokoda Track. One of her brothers was a Rat of Tobrook (9th Division) and El Alemein veteran, who later lost an arm at Milne Bay in Papua New Guinea. Another of her brothers is buried in France, killed while flying for the RAF. After her husband died, she lost her only child. She later gave back by running the orphanage for Legacy. She touched hundreds of orphan's lives. They never forgot her. She was also my Godmother.

My Grandfather was killed in Sydney during WWII while serving in the Australian Army. My mother has never visited his grave - its just too painful, even after all these years. My father has an uncle buried in northern France, a casualty of WWI's Battle of the Somme. No one from our family has ever visited his grave to pay our respects. There are many families like ours in Australia with similar stories to tell. 

Lest We Forget.

PPS.  I have been a little perplexed by the stories told by the War Widows.  They are sometimes embellished, sometimes the stories are compressed.  I gather Alice's first husband fought with the 7th division.  He could not have fought at El Alamein as he would have been in New Guinea by that time.  Here is a history from the 7th's website.  Almost all of what Alice told me (and the medals she wore) are consistent with this history - though she mixes her two husband's campaigns up.  

The 7th Division left Australia in October 1940 for the Middle East.  Over the next two months, the 7th was concentrated in Palestine.  It was slotted for a move to Greece to help in the defence against Axis invasion, but instead moved into defensive positions in the Western Desert.  Parts of the Division under the command of Maj General Allen crossed into Syria and fought a hard won victory in the campaign against the Vichy French .  18th Brigade excelled itself as part of the defence of Tobruk.   With Japanese invasion of Australia imminent, the Division was recalled home.  Elements of the Division (2/3rd Machine Gun Battalion, 2/2 Pioneer Battalion, 2/2 CCS,2/6 Fld Pk Coy and 105 Gen Tpt Coy)were diverted to Java. They fought a defensive campaign against overwhelming Japanese odds and were only forced to surrender after an early capitulation by the Dutch forces there.  

The Division moved to New Guinea and established headquarters in Port Moresby.  The timely arrival of the Division in New Guinea helped to halt the Japanese advance..  21st Brigade fought a bitter campaign of attrition on the Kokoda Track,until replaced by 25th Brigade who slowly forced the Japanese northwards.  18th Brigade and other Australian units inflicted the first decisive defeat of the Japanese on land in World War 11 at Milne Bay and then at Buna and Sanananda in January 1943.   21st Brigade and the militia 39tth Battalion won a costly victory at Gona in December 1942.    George Vasey took over command of the Division in October 1942, until his death in a plane crash in 1945.  Major General Milford then took over command until the end of the war.    In 1943, the Division was airlifted from Port Moresby to Nadzab in the Markham Valley.  After an advance on Lae, the Markham and Ramu Valleys were soon swept clear of Japanese troops.  A bloody campaign in the mountains of the Finisterre Ranges followed. 

Thursday, April 23, 2009

Liquidity and banks – a primer

Several of the responses to the last post (about bank excess liquidity) seemed to confuse liquidity and solvency.  Indeed several confused “cash reserves” with “loan loss reserves” and the like.

Aaron Krowne – a fairly sophisticated guy and the proprietor of the Mortgage Implode-O-Meter for instance suggested that the 170 billion in cash is necessary to meet loan losses.

Let’s get this right.  A bank’s liquidity goes down when they lend money.  They lend their liquidity.

A bank’s liquidity does not go down when there are loan losses.  You do not need cash to deal with loan losses.  You need net worth to deal with loan losses.

A bank really needs liquidity to deal with people being unwilling to leave their funds either on deposit to a bank or on loan to a bank.  If a bank gets a run on deposits (even a small run) it needs liquidity and it needs it bad.  This is essentially unpredictable.  If it cannot roll its own funding it needs liquidity and it needs it bad however this is more predictable because there will be a known debt maturity schedule they need to meet.

Bank of America carries 170 billion in cash rather than the more normal 30-40 billion because it is scared of runs (both retail and wholesale).

The wholesale run is happening and has been happening ever since that fateful week in September when bank creditors realised that – on the say-so of Sheila Bair – they could lose their assets entirely.  [Washington Mutual as originally confiscated left the senior debt holders essentially nothing.]

Still fear – and fear alone – can run a big bank out of liquidity.  You do not need to be insolvent as a bank to become illiquid.  Pretty well the entire Norwegian banking system was illiquid and confiscated during the 1992 Norwegian banking crisis.  Capital was constrained but the government made a profit on the bank-bail-out suggesting (ex-poste) that the problem was a liquidity crisis and not a solvency crisis.  [Unfortunately nobody, government or private sector, knew for certain whether the issue was solvency or liquidity during 1992 though plenty of people expressed very strong opinions many of which were wrong.]

But get this – and remember it well.  In traditional banking cash held by the bank beyond simple transactional balances exists solely to deal with fear.  If there is no fear then banks have no liquidity problem.  And they will have no liquidity problem even if they are staggeringly insolvent.  Indeed many Japanese banks had no fear, staggering insolvency and operated for more than a decade.  Closer to home Conseco Finance was almost certainly insolvent a few years before it collapsed.

I got at least a dozen emails that thought that liquidity at Bank of America was to do with losses.  All of them misunderstood this simple and key point.  

Now investment bank liquidity is much more complicated.  The most controversial example is credit default swaps – especially margined credit default swaps.

Writing a credit default swap is in many respects very similar to making a loan.  The credit risk – the key risk – is almost identical.

But when you make loans cash walks out the door immediately.  You have to have cash to make loans.  If you have only limited cash then you cannot make unlimited loans and so you will tend to be selective about the loans you make (choosing better credits).  If you have to raise cash in order to finance lending then you need to go to market (issue bonds etc) and that imposes some discipline and costs on you.

When you write a credit default swap you just need someone to have faith that you are good for the exposure.

No cash walks out the door.  

Lending imposes the discipline of being required to have cash.  Writing CDS does not.

Felix Salmon (and others) have had long arguments about whether CDS caused or exacerbated the crisis.  In most this argument I agree with Felix, but the ability to write vast amounts of CDS without needing cash was important in some parts of the crisis.  Plain old lending has more discipline.  This was certainly a large part of the problem at AIG, MBIA and Ambac.  

But CDS have another property.  CDS (unlike loans) do not require cash when they are written.  But CDS (also unlike loans) cause a cash drain when they default.

A bank which writes CDS needs cash to deal with credit losses.  A bank which does traditional lending does not.

Unfortunately CDS cash requirements go up in a financial crisis.  That is when the cash gets called.  

And that is also precisely the time when banks have most fear surrounding them and hence most difficulty raising cash.  CDS give financial institutions a cash call at precisely the wrong time.  That is why – if anything – they exacerbated the crisis.  

Lines of credit written by banks (Citigroup and JP Morgan were huge writers) also require cash precisely in times of crisis.  Most the time you write the line of credit and there is no cash drain on the bank.  But when the customer is stressed the lines of credit will be drawn.  That also – by usual correlation – tends to be the time that bank liquidity is most difficult.

Still – and this is my reaction from picking apart Bank of America – most of the huge cash balance of bank of America is to deal with fear in the funding markets – and very little is required to deal with loan losses.

Capital – that is net assets – is what is required to deal with loan losses.  Cash on hand is frankly irrelevant for that.  Whether Bank of America has sufficient net assets to deal with their (large) loan losses is a matter of widespread disputes.  Many strong and differing opinions exist – and inevitably some of them will be wrong.

Wednesday, April 22, 2009

Mixed up policy responses and liquidity preference

I frequently get emails suggesting that governments should force banks to lend and that would solve the recession.  I tend to agree but it would be difficult – and the government actions to date have exacerbated the lack of lending.

As it is, there is little to no balance sheet growth at any major bank in America and aggregate bank lending is falling.  Excess cash at the Federal Reserve is building up fast.  The economy is still sour (and getting more so) and bank credit losses are continuing to rise.  

Meanwhile banks sit on cash.  

Bank of America (for recent and topical example) is carrying $173 billion in cash and cash equivalents – a number which immunises them against many but not all ills and is about $140 billion higher than normal.

This excess cash inhibits BofA profitability by maybe 5-7 billion per annum (pre-tax).  They don’t really want that profit drain – but – in a telling comment – they thought it was worth it to have that negative carry because the cost to running short of liquidity was too high.  

The excess cash across the entire banking system probably exceeds a trillion dollars.  If only it could be spent – then we would have the stimulus we need.  

Alas – that is what is meant by being at the zero constraint of monetary policy.  We have banks with a seemingly endless liquidity preference.  It is not that there is no demand for loans (though demand is much ameliorated).  Banks are rapidly tightening lending criteria too and indeed some banks are just not lending to new customers.

Now lending standards needed to tighten.  2006 was insane.  But early 2009 is also insane– and if it were a perfect world lending would have moderated much slower so as to displace maybe 200 thousand workers per month.  (The economy can usually generate new jobs that fast.)  Indeed the whole idea of stimulus is to slow the rate of job loss in the economy down to a level where normal functioning of the labour market can deal with it.

That is not where we are.  We have an extraordinarily rapid change in liquidity preference for banks, an extraordinary tightening of standards and an extraordinary recession.  

Now some people are into forcing the banks to lend.  Willem Buiter (who is often clever and sometimes wrong) suggests confiscating banks that will not lend.  Useless as tits on a bull he says.

That would be fine if he did not want to confiscate marginally insolvent banks too.  A bank that is stretched for capital or liquidity would usually preserve both by restricting lending.  You restrict lending so as not to be confiscated – except in Willem Buiter’s world where you lend to avoid being confiscated.  

Now I thought that the confiscation of Washington Mutual was perhaps the single most destructive government action of this cycle.  That was a minority view – and remains one.  Felix Salmon thinks I am alone – but a paper from the New York Fed makes it clear that the confiscation of WaMu very rapidly increased the liquidity preference of mainstream banks and hence spread the crisis from the Wall Street Banks to Main Street.  

The lesson of Washington Mutual – learned hard – was that you could have adequate capital but a minor run and be confiscated.  The only way to cope was to have massive excess liquidity.  

And so we are in an unusual liquidity trap.  In the Japanese liquidity trap the general populace had massive excess cash savings.  The liquidity preference was the preference of the legendary Mrs Watanabe who liked sitting – in cash – on three years of Mr Watanabe’s salary.  

In America the liquidity preference belongs to banks.  Mr and Mrs Middle America are not swimming in cash.  Indeed all the evidence suggests that they are over-indebted.  It’s the banks that are swimming in cash.  And it is the bank’s excess demand for liquidity that makes monetary policy ineffective.

Now Paul Krugman has argued that it doesn’t really matter why we are at the zero bound in monetary policy – but I think it does.  If we are at the zero bound because Mrs Watanabe wants to save to excess then we should target Mrs Watanabe.  If we are at the zero bound because Bank of America is scared of arbitrary government action (as evidenced in the confiscation of WaMu) then we should address Bank of America’s concern.

The first way to address Bank of America’s concern is for Sheila Bair to fall on her sword.  She should resign because – through confiscating Washington Mutual – she spread the crisis to Main Street.  But regular readers should know I have a very low opinion of her and will not be surprised by that comment.

But I have a second proposal.  It is floated for discussion only as it is obviously risky.  The idea is that the bank capital adequacy requirements be dropped a couple of percentage points – but only if their genuine third party loans fully owned on the balance sheet are growing by more than say five percent per annum.

Friday, April 17, 2009

Welcome to the 21st Century

An AIG business that did not lose (much) money

AIG has sold 21st Century to Zurich.  21st Century is not a bad personal lines insurance company.  I blogged about it here (arguing that the CEO of that unit deserved his bonus).  

Anyway 21st Century was always partly owned by AIG but they took it private in 2007 buying the 39 percent they did not own for 813 million.  That valued 21st Century at just shy of $2.1 billion.

They just sold it to Zurich for $1.9 billion.  Zurich also assumed unit debt.

Hell – they are down less than ten percent.  

It’s a record for AIG.  Much rejoicing was had by taxpayers everywhere.  $2 billion down – 178 billion to go.

Now it is time to watch Zurich.  21st Century – despite (or maybe because) of its AIG pedigree is a far better run institution than Zurich’s Farmers business.  If Zurich is halfway competent they will merge Farmers into the (much smaller) 21st Century and not the reverse.

However there is no sign they are going to do that.  Competence and insurance seldom go together.


Post script.  Zurich is saying that they purchased more than the old 21st century operation.  

This makes the pricing element of the post wrong.

The old 21st century operation was MUCH better than either Zurich or any prior AIG operation - so it should remain the bulk of the value.

The reserving of Zurich's personal lines business did not make any sense in the 1999 year and adjacent periods.  Nor did anyone esle.  

If you go back and look even Berkshire (GEICO) mis-estimated their profits in 1998 and 1999 and had huge true ups in 2000.  So did Progressive and Mercury General.  In both MCY and PGR the stocks got hammered into 2000.  So - from memory - did the old 21st century stock.

However the degree of mis-statement was MUCH MUCH higher at Farmers.  Farmers true results were 5 percentage points worse than 21st in those days.  Farmers caused big problems.  State farm was (operationally) worse than any but it had (much) more capital.

PPS.  Just to remind those without very long memories.  The old 21st century was a very fine auto insurer and an average household insurer.  (I do not believe that it is possible to create enough difference as a household insurer to be a fine business.  GEICO is a fine auto insurer and does not do household.  Ditto Progressive.)

The auto business once a fine competitor to Mercury (MCY) in California.  MCY however does not sell household insurance.

Both were from California.

With earthquakes.

What was then called 20th Century hurt themselves bad on the Northridge Quake.   From memory that is how AIG got its initial stake.  

On that initial stake AIG made good money.  Better money than on their own business.


Thursday, April 16, 2009

Bramdean did reply

My last post about Bramdean Asset Management observed that Bramdean had sent money to an un-named fund and received it back the same day.  This was done for "regulatory purposes".

I presume that there must be a legitimate reason for doing this - but to date I have not found one and nobody has identified one.  I still seek assistance.

Several people in comments have suggested nefarious regulatory purposes are possible - with the best example being a lawyer who transferred considerable trust funds to his own account for one hour (and returned them in full) so as to qualify for better credit at a casino.  
I presume that the fund in question is better than a Casino - but maybe private equity funds from 2007 are in fact glorified casinos and someone just needed to maintain credit.

Anyway I would love somebody to identify a respectable regulatory purpose as I have not been able to do so.

I did ask this question of Bramdean.  And (contrary to what I said in the last post) there has been a reply.
I repeat it here in full for your benefit.

Dear Mr Hempton

Thank you for your email and for your interest in Bramdean Alternatives Limited.

With regards to your query, private equity funds are structured and governed within the terms of their stated mandates.


Loretta Murphy
Head of Investor Relations and Communications
For and on behalf of Bramdean Asset Management LLP
35 Park Lane
London W1K 1RB
Tel:    +44 20 7052 9272
DDI:  +44 20 7590 2001
Fax:   +44 20 7052 9273

I am not picking on Bramdean here.  The unnamed fund probably sent the same request to almost all of their investors and the investors all sent money for a "regulatory purpose" and received it back later.  The activity is widespread and almost certainly legitmate.  

I just don't know what it is and a fairly direct email to Bramdean did not produce a helpful reply.  If they do reply I will let you know again.


PS.  One of my favourite bloggers - on seeing the Bramdean letter said "regulatory arbitrage is so 2006".  Maybe we are just caught in a timewarp.

Wednesday, April 15, 2009

Goldman’s Orphan Month

Goldman Sachs just put out pretty good results and did a big capital raising.

Here is a table for Goldman Sach’s revenue for the three months ended Feb 2008, Nov 2008 and March 2009 respectively.  The table comes from the 8K dated 13 April 09 – essentially the 8K in which they announced results to raise money.

(click for detail)

Now the observant amongst you will notice that these three month periods are not contiguous.  Indeed the three months to November 2008 and the three months to March 2009 conveniently forget the month of December 2008.

That is right.  Goldman Sachs changed its balance date – and there is a one month period not reported in the usual quarterlies.  An “orphan month”.

Now December 2008 was a pretty bad month.  Probably the worst on record.

Here – also from the same 8K is Goldman Sach’s revenue during the orphan month.

It is hardly linear.  Total revenue for the three months ended March 2009 was 9425 million.  For the one month it was 183 million.  Of course this revenue was offset by some very large charges rammed into the orphan month.  If you click on the attached table you will find that Fixed Income Commodities and Currency (FICC) revenue refers to Note 19.  Note 19 says blandly that it “includes the writedowns of approximately $1 billion related to non-investment-grade credit origination activities and approximately $625 million (excluding hedges) related to commercial mortgage loans and securities”

Ah – that explains it.

There is also another billion in losses labelled as "other corporate and real estate gains and losses".  That line doesn't even occur in the March accounts.

The costs are also non-linear – but not as non-linear as the revenue.  

The net loss applicable to common shareholders for the orphan month was just over a billion dollars.  The four month period was just profitable.

Am I surprised that Goldies had an “orphan month” and stuffed the bad news in it?  No.  If you were – then obviously you are new to investment banking.

But I am surprised at the credulity of the press.  Most stories about the quarterly result simply omitted the December month.  This story though at the WSJ Deal Blog was considerably better – noting that December was really ugly but not understanding why.

They even note that December is seemingly omitted from the official records – but doubt it is deliberate.

The Deal Blog is more observant than most.  

But perhaps they too are new to investment banking.  Note 19 explains about half of it.  The mysterious "other corporate and real estate gains and losses" explains most the rest.

Post script:  The excellent Floyd Norris (New York Times) also picked this up.   There are some journalists way better than average.  

Further postscript:  Krugman has also commented.

Wednesday, April 8, 2009

Farewell Greg Newton

I only spoke to Greg Newton (of the Naked Shorts blog) twice and my email box has about a dozen emails. 

He died suddenly recently.

I want to second Nihon Cassandra's fitting obit.


Post script:  I have rejected several anonymous comments along the lines that he was (a) crooked, (b) revolting, (c) better dead.

I have always seen him - even in the title of his blog - as poking fun at people who deserved fun poked at them.  He was a little more vicious at the people who were bent.

The people who are picking arguments with him I am happy to publish in the comments - so long as the posts are not anonymous and the arguments are detailed.

My view- the nasty(but not rationally argued) comments about a dead guy tend to show he was onto something good.


Monday, April 6, 2009

Bed and Breakfast capital at Bramdean Alternatives

I keep an eye on Bramdean Alternatives – the listed fund of hedge funds and private equity funds run by Nicola Horlick’s Bramdean Asset Management.

What really interests me is the capital calls on private equity – these being numbers large enough to potentially bankrupt Bramdean Alternatives.

So far the capital calls have been manageable – but detailed disclosure about how large they are and when they are due is not available.  Without that disclosure I am inclined to think the worst.

Anyway the February "factsheet" contains the following gem (emphasis added):

Four capital calls were received from underlying Funds in February, though one of these was purely for regulatory capital purposes and was refunded the same day. Revaluations were received from two managers of the Company's Private Equity and Specialty Funds and these have been incorporated into the February NAV calculations. Both revaluations were downwards revaluations, reflecting falls in the values of market comparables and adverse currency movements. As stated in previous communications, downward valuations are to be expected given the exceptional market environment and it is likely that the Company will receive further fair market valuation write-downs, including valuations as at 31 December 2008, from some of its managers. As at February, six of the 18 private equity and specialty managers have reported their December 2008 year-end valuations; these have been reflected in the NAV of BAL. One other manager's portfolio is revalued every month.

The first sentence just leaves me gobsmacked.  Bramdean sent a whole lot of money – a capital call – to a private equity fund (or other fund) – and they sent it back the same day – after presumably including it in their accounts.

This was done for "regulatory purposes" – but – for the life of me – I cannot think what the regulatory purpose might be – and why this might be legitimate.  

If it was to fool a regulator or a creditor into believing that the fund had adequate capital on balance date it looks and smells like it was designed to mislead or at least to circumvent some kind of regulatory test.

But it could be another reason – it is just that I can’t think of any real reason why a fund of funds would send its money to some underlying fund for just a few hours without a design on fooling someone.  I sent an email to Bramdean hoping that they might give me a legitimate reason but alas there was no reply.

And I am not picking on Nicola Horlick here.  If Bramdean sends the capital and it comes back on the same day the fund presumably sent this request to several funds-of-funds – and they all complied.  And they all didn’t think it unusual that their money might be needed for a few hours.

So to repeat the question.   Can anyone think of a legitimate purposes for this?



ps.  If you want to spot me a few million dollars for a few hours - then - I am interested.   I just can't think of any legitimate reason why you would want to do that either.

pps.  Someone with no intention to repay may be more interested still.  

That Legacy Word

Toxic assets are no more.  The Geithner Plan is officially a “legacy asset plan”.

Legacy assets sounds so much better than toxic assets.

By contrast Chevron (latest security analysts conference call) has as its first stated goal (in upstream business) to "grow profitably in core areas and build new legacy positions".

Bankers and oilmen leave a different legacy.

Friday, April 3, 2009

The seemingly criminal Sheila Bair*

I am not opposed to the Geithner Plan – but the execution is bordering on criminal.  This article in the FT runs as follows:

Bailed-out banks eye toxic asset buys
By Francesco Guerrera in New York and Krishna Guha in Washington 
Published: April 2 2009 23:20 | Last updated: April 2 2009 23:57

US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000bn (£680bn) plan to revive the financial system.

The plans proved controversial, with critics charging that the government’s public-private partnership - which provide generous loans to investors - are intended to help banks sell, rather than acquire, troubled securities and loans. 

Spencer Bachus, the top Republican on the House financial services committee, vowed after being told of the plans by the FT to introduce legislation to stop financial institutions ”gaming the system to reap taxpayer-subsidised windfalls”.

It is so blatantly obvious that the people that should not participate as buyers in the Geithner funds are the conflicted.  This was first pointed out by Steve Waldman – but I thought his dark thoughts were too dark.  However Clusterstock argues that Sheila Bair is seemingly oblivious to the corruption possibilities.

She isn't seemingly oblivious.  She is totally captured by JPM and Citi.

After all WaMu was gifted to JP Morgan in a reckless and irresponsible manner and she attempted to gift Wachovia to Citigroup.  It should not surprise me that Sheila Bair continues to act as if she is on the take.  That represents no change in behaviour.

Recommendation:  Indict Sheila Bair if she won't resign.  Indict her now.

*Note - I have always believed that Sheila Bair is either incompetent or corrupt.  She seems to be corrupt - but incomeptence in her case is probably a sound defence.  She should resign before she is (perhaps mistakenly) indicted for corruption.  

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