Mutual Funds Experts
Archive for December, 2008
12 21st, 2008
I thought this was both creative and correct. Credit Suisse has decided to pay bonuses in a unique currency — toxic assets such as mortgage-backed securities. This Bloomberg piece spells out the arrangement [emphasis added]:
Credit Suisse to use illiquid assets to pay bonuses (Bloomberg, December 18, 2008, Christine Harper)
Credit Suisse Group AG’s investment bank has found a new way to reduce the risk of losses from about $5 billion of its most illiquid loans and bonds: using them to pay employees’ year-end bonuses.
The bank will use leveraged loans and commercial mortgage- backed debt, some of the securities blamed for generating the worst financial crisis since the Great Depression, to fund executive compensation packages, people familiar with the matter said. The new policy applies only to managing directors and directors, the two most senior ranks at the Zurich-based company, according to a memo sent to employees today.
“While the solution we have come up with may not be ideal for everyone, we believe it strikes the appropriate balance among the interests of our employees, shareholders and regulators and helps position us well for 2009,” Chief Executive Officer Brady Dougan and Paul Calello, CEO of the investment bank, said in the memo.
The securities will be placed into a so-called Partner Asset Facility, and affected employees at the bank, Switzerland’s second biggest, will be given stakes in the facility as part of their pay. Bonuses will take the first hit should the securities decline further in value.
“It’s monstrously clever,” said Dirk Hoffman-Becking, an analyst at Sanford C. Bernstein Ltd. in London who has a “market perform” rating on Credit Suisse stock. “From a shareholders’ perspective it’s great because you’ve got rid of some of the assets and regulators will be pleased because you’ve organized a risk transfer.”
…Credit Suisse is the first to use the debt to pay employees. Outside investors may also be permitted to invest in the facility, according to the people familiar with the matter, who declined to be identified because the plan hasn’t been made public. The bank will boost the potential for returns by providing leverage to the facility, and will be paid back first, according to the people.
…Assets in the facility will remain on Credit Suisse’s balance sheet and will be held in the company’s fund management division, the people familiar with the plan said. The new structure will mean that any mark-to-market losses or gains on the assets will be offset by identical gains, or losses, on the bank’s liability to employees…
Pretty clever. As I understand this, the bank gets rid of toxic assets from its balance sheet when they go into this Partner Asset Facility (PASS). PASS contributions offset cash the bank would otherwise have to pay to executives and, no doubt, the execs will view future investment decisions with a bit more sobriety.
I hope this idea catches on.
12 21st, 2008
12 21st, 2008
Hedge funds are having a very difficult year and, as a result, a number are closing or likely to close. This Bloomberg piece [emphasis added] gives a bit of background on tough times in hedge fund land:
Third of Hedge Funds Face ‘Wipeout’ After Slump (Bloomberg, December 15, 2008, Tom Cahill)
Almost a third of hedge funds will shut or merge after the $1.5 trillion industry posted its worst ever performance this year, according to IGS Group, which advises hedge funds on raising money.
“The failure rate is going to go up, the closure rate is going up, and the merger rate is going up,” IGS Chief Executive Officer John Godden said in an interview in London. “It’s going to be a 30 percent wipe out.”
The number of hedge funds more than tripled in the last decade to a record 10,233 at the end of June, according to Chicago-based Hedge Fund Research Inc. That number will likely tumble after funds dropped 18 percent in the year through November, the worst year since HFR started its Fund Weighted Composite Index in 1990.
…Hedge funds typically charge a 2 percent management fee and keep 20 percent of profits, while funds-of-hedge-funds typically charge 1 percent and 10 percent of profits. Profits are usually based on high-water marks that could take years to reach again.
…Funds of hedge funds, in particular, are likely to combine, Godden added. There are roughly three funds-of-funds for every single hedge fund, up from one to seven in 2001, according HFR…
As hedge funds close and investors withdraw their money, the hedge fund itself has to sell a proportionate amount of holdings. To the extent, the hedge fund was leveraged, it might have to sell several times the amount of assets being withdrawn.
This pattern of withdrawals from hedge funds probably accounts for a fairly significant chunk of the selling in stocks and bonds that we have seen over the past few months (see Hedge Fund Withdrawals Roil Markets and Bonds Markets Pricing In Armageddon).
12 21st, 2008
Given the big drop in energy prices, it is not surprising that the cost of living fell in November. However, the size of the decrease in the Consumer Price Index (CPI) was a bit startling as this release from the Bureau of Labor Statistics indicates [emphasis added]:
Consumer Price Index — November 2008 (Bureau of Labor Statistics, December 16, 2008)
On a seasonally adjusted basis, the CPI-U [CPI for all urban residents] decreased 1.7 percent in November, the second consecutive record decrease. For the 12 month period ending in November the CPI was up 1.1 percent, compared to 5.6 percent for the twelve months ending July of this year. Falling energy prices, particularly gasoline, drove the decline in the overall index…
…Excluding food and energy, the CPI was virtually unchanged in November and is up 2.0 percent since November 2007. Continuing declines in the indexes for new and used motor vehicles, lodging away from home, airline fares and some technology-related commodities offset small increases in a variety of other service and commodity items…
In a year of many surprises — mostly unwelcome surprises — this is a mixed blessing. I’m happy that inflation is falling. However, the underlying cause is not that we have our financial house in order. In fact, it’s quite the opposite. The circumstances are that the economy is suffering and falling prices are symptom of the economic malaise. It does show how quickly things can turn around though. As of July, 2008, year-over-year inflation was up 5.6%. Fast forward to November, 2008 and year-over-year inflation is up only 1.1%. Wow.
See also Inflation versus Deflation.
For much more on inflation, I recommend our series:
Part One: Does the Government Understate Inflation?
Part Two: Does the Government Understate Inflation? — Bill Gross Says Yes
Part Three: Does the Government Understate Inflation? — Don Boudroux & Russell Roberts Say No
12 21st, 2008
The title of this post is from an old joke line about Fords. “You know what Ford stands for,” asked a mechanic I knew many years ago. “Fix or repair daily,” he replied. Then, he went on with a cackle. Actually, it’s, “Found on road dead.” There was another version he had that’s not fit for a family publication.
Of course, he was a Chevy guy. In fact, he owned around 40 of them. In all fairness, I have a buddy who has always owned Fords and he loves to badmouth competitive offerings from Chevy, Dodge and Toyota. Despite all the tasteless jokes, Ford may have the last laugh when it comes to competing with General Motors. This column from automotive columnist Jerry Flint explains [emphasis added]:
Ford’s Focus (Forbes, December 16, 2008, Jerry Flint)
Ford Motor is suffering from guilt by association. The automaker has $15 billion or so in the bank and billions more in credit lines, is not looking for a year-end bailout and still gets splashed with mud. Every day I hear the TV news people, the stars like CNBC’s Maria Bartiromo, lump General Motors, Ford and Chrysler together as facing bankruptcy. In Ford’s case, this is just not true.
Alan Mulally, the chief executive Ford imported from Boeing
… has moved smartly since he gave up his wings. He mortgaged assets (for $24 billion) and signed up credit lines two years ago before all the current turbulence.
Ford is actually in pretty good shape it seems. Why? Well, the CEO apparently was concerned about cash flow so he mortgaged the company’s assets (reputedly including the blue Ford logo) for a big chunk of cash. He also sold off a number of car lines to streamline the company. Now, those moves seem to be coming in handly.
He also sold Jaguar, Land Rover, Aston Martin, some of Ford’s Mazda
… stake and has put Volvo on the block. You can disagree or agree, maybe some of these operations could still have turned into winning assets, but Mulally decided Ford did not need the problems right now.Unlike GM, Ford has no surplus car lines, which means it avoids both heavy spending to keep too big a lineup up-to-date and endless lectures from Wall Street know-it-alls who say to get rid of them. Excluding Volvo, which Ford hopes to sell, and Mazda Motor, in which it has only a minority stake, Ford has only two dealership channels in this country: Ford and Lincoln/Mercury.
...Long run, Ford has the ability to grow. For the past two months the Dearborn, Mich., manufacturer has held its own in share against the prior year, while the others slipped. The company even picked up share in November, to 16.4% of the industry sales versus 15.4% a year before. This is a good sign. If GM downsizes, Ford could end up bigger than GM in just a few years.
See also GM & Toyota: A Tale of Two Car Companies.