Monday, June 25, 2007

Bear Stearns v. the SEC

Business Week has learned the SEC has opened an inquiry into the recent restatement of certain hedge fund valuations. En has long contended that despite the requirement of mark to market the fancy pants in the financial world have been marking to model. Their model. This could happen to nicer people. This could also happen to worse people. That it is happening at all is at least progress.
As BusinessWeek first reported, Bear Stearns told investors May 15 that the Enhanced Leveraged fund—which raised $642 million last summer—had lost 6.5% in April. But three weeks after that estimate, the investment firm shocked investors on June 7, telling them that the fund's actual April loss was 18.97%, or 23% for the year.

How many other housing contained surprises are there?

[Yes, a repeat image. Deliberate.]


BJ said...

first, murst, foremost but not moist!

The Real Wagga™ said...

First Hedge Fund of America!

The Real Wagga™ said...

King of the dead heats!

Actually, I did relate, somewhat, to the topic - BJ gets DQd.

BJ said...

@Rob Dawg

You may want to clarify this.. it does not read well.

En has long contended that despite the requirement of mark to market the fancy pants in the financial world have been marking to model. Their model.

walt526 said...

And just like Enron, the SEC shows that its quite adept at closing the barnyard door AFTER the animals have left.

Actually, it's just an inquiry, so I guess that it's more accurate to say that they'll be TALKING about closing the barnyard door.

I had a Joe Kennedy moment at a New Year's party last winter. One of my wife's friend-of-a-friend was talking about how he had just started a hedge fund to "arbi-whatever" between the Euro and the USD. Guy looked like a modern day Jeff Spicoli too. I knew then and there that our country was headed for some dark times.

Lou Minatti said...

Let them eat cake.

Caseys Sex Life said...

Thought this post of Sweet Cashback's was worth repeating:


Since that article Google has made it much easier to report paid links:

Report paid links

Sharky said...

Y'all must be getting the idea that what's wrong with our financial markets is a shortage of buckshot, right?

The fact that senior Enron execs pulled what they did on their Houstonian thralls...Texans!...and weren't simply taken out and lynched from a lamppost is a sad commentary on the pussificiation of this country.

If the Bear, Stearns LIES, as reported, turn out to be accurate, then the chumps who held when they should have sold should go round up some Bear, Stearns Fund Managers and PR people, some electrical ty-wraps, and head to Manhattan for some "Trader and PR Flack Sidewalk Impact Drop-Tests".

You must remember that Richard Ramirez, the Nightstalker, was NOT "captured" by the police...he was RESCUED by them.

It should be manifestly evident that Law Enforcement is actively complicit in these financial mega-crimes...the Bad Guys don't fear the Fuzz...they ARE the Fuzz.

So it's time, once again, to make them fear their victims.

What else you gonna do when you're too old to work and too young to die, and your "Golden Years" will consist of penury?

Blast a little slickster's legs off at the knees, and then get three hots and a cot and medical care courtesy of the Department of Corrections.

BelowTheCrowd said...

Mark to market is required for liquid, marketable securities.

For securities in which there is no liquid market (which includes most CDOs and other custom derivatives), either cost or a model is always used. Once again there is no market price to mark these things to, which is part of the reason Buffett considers these custom, leveraged derivatives to be "financial weapons of mass destruction."

The models are supposed to be provided by independent agencies, mostly S&P and Fitch. In fact, the agencies have significant conflicts of interest, as explained here:

Bear Stearns Fund Reveals Tip of the CDO Iceberg

And elaborated on here:

Three Words: Mark to Market

And more here:

Black Swan Lake

Jeff Cooper sums it up nicely in the last piece. Attribute it all to easy money generated by the fanatical government belief in its ability to control everything with no negative impact. Yeah Right.


Sharky said...

Does anyone know which accounting firm was auditing the books for these Bear, Stearns turkeys?

IMO, THAT was the real story of the Enron debacle...Arthur Andersen Associates was right in there with 'em...a vested interest in having the investors and employees eat the big shit biscuit.

You wanna buy a color teevee from the trunk of some guy's car, then go and make sure that it really IS a teevee in that box.

Don't trust some guy who's gonna get a cut of the profit from helpin' sell you two concrete blocks duct-taped together.

BelowTheCrowd said...

What makes you think they were audited? Hedge funds are private investment partnerships. There is no legal requirement for auditing. The partners are supposed to be smart enough and saavy enough to insist on whatever is needed to protect themselves.

In fact, reputable ones do have auditors, paid for from the limited partner's funds and often answerable to the limited partners or some board of limited partners, not the the GP. As much as I often dislike Cramer, he ran his own fund that way and has gone on the record saying that anybody who doesn't shouldn't be getting dollars.

The reality is not that clean. The LPs know that the "system" will bail them out rather than risk contagion, so they have stopped caring. See "Black Swan Lake," linked above.

Of course, the problem is that "the system" can't bail these things out if multiple ones hit all at once. Bear Stearns just used almost half their shareholder's equity on this particular disaster. Three or four of them at once, or one really big one (ala LTCM) won't be sustainable.


Sharky said...


"What makes you think they were audited?"

Apparently, common sense and utter ignorance.

"There is no legal requirement for auditing."

Far fuckin' out. The investors are supposed to take their "say-so" that they're solvent?

And these things are actually marketed publicly?

So, what's to stop 'em from building a good rep by actually selling trunk tee-vees, and then turning around and busting the joint out by slamming some concrete-blocks?

Wasn't one of the points of your Swan Lake post a critique that past performance is not necessarily a valid predictor of the future?

True, you were talking about credit scores, but doesn't the same truth apply here?

socrates said...

The SEC is a joke, just like the DOJ and every other government law enforcement and banking authority. Why bother? The grifters own the gubbermint. You, Rob Dawg, will pay for the bailout. Cheers.

BelowTheCrowd said...


Hedge Funds are NOT marketed to the general public, despite what Casey says about his ability to get into them.

The requirements are (theoretically) strict enough to exclude people with limited funds, though inflation has sort of made the $1m net worth requirement sort of ridiculous. Current proposal, which may already have passed, is to move the limit up to $2.5m LIQUID net worth.

In practice, most hedge funds are looking for seven figure investments or better. The bigger ones set their minimums much higher and work mostly with other financial institutions to market their funds by word of mouth to qualified individuals and institutions.

Any kind of public marketing is definitely a no-no. Most hedge fund companies don't even have websites, or have private sites for use by their partners only. This is typical:

Unfortunately the theory and the reality diverge. So long as hedge funds were set up in a manner that the worst they could do was lose all their investors' money, it was no problem. These days they are levered as much as 10:1 to buy assets that are, themselves, highly leveraged derivatives. This means you end up with entities whose failures can threaten everybody. It's sort of like storing ammo in your basement. If it's just a few boxes of .45s, then you're not likely to hurt anybody but yourself and even that event is unlikely. But when you expand the notion to include 16" battleship shells, your neighbors start having a legitimate interest.

Hedge funds have definitely gotten to the battleship shell stage. Or maybe nuclear weapons.


BelowTheCrowd said...

And it's worth noting that the reason for all the above dangerous behavior is the same easy money policy I've mentioned several times today.

Until the mid 90s or so, hedge funds were pretty much limited to the same kinds of margin rules as anybody else. This limited how much destruction they could create. Sure, they could be long, short, and use options, futures and lots of other things that some investors can't get approval for, but ultimately margin rules kept their investments at levels that limited the damage to the investors and maybe the fund's prime broker.

But easy money has made it possible for these funds to get huge lines of credit backed by limited assets. These loans are not coming from the brokerage firms, so they're not considered margin.

They are Casey-like almost-no-money-down loans used to buy stocks, bonds and various leveraged derivatives.


Sharky said...


"In practice, most hedge funds are looking for seven figure investments or better. The bigger ones set their minimums much higher and work mostly with other financial institutions to market their funds by word of mouth to qualified individuals and institutions"

Like Pension Funds?

Y'know, call me untutored, but the last time I was approached to go in on some fund, I asked the guy if he and his firm could guarantee that I'd double my money in 10 years with NO risk to my principal.

The guy looked at me like I had grown a penis outta the middle of my forehead:

"C'mon! No one can guarantee that!"

says he.

"US Savings Bonds, series EE...and have a nice day."

says I.

For all this intricate leveraged and byzantine "left-handed blackjack dealer" derivatives...(you know that the parlance makes it sound like something Rube Goldberg dreamed up), what's the typical payout for these wiz-bangs?

The risk to principal is plainly evident...(at least in theory).

"Until the mid 90s or so, hedge funds were pretty much limited to the same kinds of margin rules as anybody else."

Yeah...never a good idea to buy into a game where it's not "table stakes".

Thanks for the primer, bud. I'm sure you'd charge me like sin to educate me thusly in meatspace, I'm mindful of that, and I do appreciate it.

BelowTheCrowd said...

Virtually everything I know is available for free. Took a while, but it's all out there. Check the list of linked blogs/sites on my own blog.

If I could get paid for teaching this, I would. Unfortunately the big money is either in running such a fund (which I'm not really qualified to do) or in running scam seminars like Casey's gurus. Teaching the "real world" to non-pros, while emphasizing that there's no quick-rich scheme that involves no work and low risk is simply not something you can make money off these days. So I blog about topics of interest, hope that here and there people note some of the stuff I post (like this gem) and make the bulk of my money elsewhere.

I have a slightly better understanding than many in that early in my career I built ops and trading systems for one of the bigger trading firms of the time. But I'm decidedly a non-pro.

As to your other comment. Yeah, pension funds are the kind of "institutional" investor that can buy into hedge funds. In fact they are the prefered investors of the bigger funds because they are much like the big mutual funds in their "hands off" attitudes towards the stuff they own. Individuals can get pesky, want accountability, etc. The more layers of "intermediation" out there, the less and less accountability there is. Which is why I own individual stocks directly.

That's another of the huge changes that happened in the hedge fund world in the 90s, after I left the scene. To qualify as the kind of "members only" partnership that is excluded from regulation, funds used to have to limit themselves to under 100 partners, take money only from principals, and meet the "no advertising" and "Reg D" minimums stated earlier. The 99 partner limit went away, as did any legal and most professional objections to taking pension and other institutional money. So a business that was started as a way for rich people to get together and pool money they could afford to lose is now incredibly influential and can seriously impact everybody.

A friend who left the hedge fund world described the environment today as being "10,000 fund managers standing in a circle shooting each other." Hedge funds, private equity funds, real estate funds, even a lot of mutual funds (there are more funds out there than there are stocks!) all are liquidity-fueled bubbles that will pop.

The catalyst for this popping is in "Black Swan" territory.


H Simpson said...

Ahh, some good information here. Thanks to all. Shows the haterz are more than just spite.

I can see Casey is small time player. $50K cash back? Dude, read that article about NRW Development LLC. Those boys took Ocean Bank for $3Mil cashback!
At your best thief rate, you have to buy 60 sweet properities concurrently to match these folks. Heck, you are going to get cramps trying to sign all those disclosures saying you are not lying about income or living in those 60 houses.

1 more thing. The last 2 days, every time I check my yahoo account, I get a Rich Dad invite for Boston on July 9th.

"Learn to be Rich(tm)" it says. Must be true cause they trademarked the phase.

Sorry to say, the water heater crapped out on the yacht this weekend, so I will need to miss it. Being clean W-2 looser beats being rich and dirty (not to be confused with dirty rich) in my book.


FlyingMonkeyWarrior said...

Surprises Out There?
How about welfare for the Rich Corporations and a high rise getto?

GDC Properties LLC, GDC Properties LLC, Hawthorne, N.Y., May 23, 2007

Towers planned in downtown Orlando will set aside some subsidized units.

Jack Snyder | Sentinel Staff Writer
May 24, 2007

Using state, county and city financial incentives, developer GDC Properties plans to launch a long-planned apartment project in downtown Orlando with 60 percent of the 484 units targeting low-income and certain essential service workers.

No construction date has been set for the twin-tower project known as Verde, at the intersection of North Orange Avenue and East Marks Street, but the company indicated it could be under way by late summer or early fall. Preliminary site work, such as soil testing, has begun.

The company has owned the property since early 2004 and has considered several development plans, including a condo tower.

GDC, based in Hawthorne, N.Y., said it has been awarded a $5 million grant from the Florida Housing Finance Corp. to target a percentage of the apartments for the city's essential service workers, such as police officers, nurses, teachers and firefighters.

The company also said $115 million for the project will be generated by tax-exempt bonds issued by the Orange County Housing Finance Authority.

Additionally, the city is expected to provide a tax-increment rebate -- where property taxes are rebated to the company over a set time period -- for the project. The City Council is to vote on that aspect of the project June 4.

In return for the incentives, GDC would reserve 20 percent of the one- and two-bedroom apartments for renters earning less than 50 percent of the area's median household income. The Orange County Workforce Housing Task Force recently said the area's median household income is about $52,000.

Another 40 percent of the apartments would be set aside for those earning no more than 150 percent of the area's median household income.

The balance of the apartments would be rented at market rates.

The subsidized apartments would be located on the first 29 floors of each of the 36-story towers.

"The city is working hard to provide housing solutions and grow the downtown area, and Verde supports these goals while bringing diverse living to downtown," said Thomas Chatmon, executive director of the Downtown Development Board.

Orlando Mayor Buddy Dyer called the project "a big step forward as we address the needs of our growing community and create a variety of housing options in our city's urban core."

The city has been involved in previous programs to promote affordable downtown housing, such as the CityView at Hughes Square project. In that development, 49 percent of the 266 rental units are reserved for lower-income tenants.

Verde will feature the two towers with 13,500 square feet of ground-floor retail and restaurant space. An attached garage will provide parking.

Jack Snyder can be reached at or 407-420-5094.

(Ex) Train Wreck Watcher said...

The "threat" from the SEC investigation isn't that something will get done (it probably won't), but that the figures will be made public. The most damaging figures, in this case, are the estimated values of the CDOs--estimates which will be put up alongside hard numbers when they're compared to what the securities actually went for when Merrill Lynch sold them in fire sales last week.

Merrill Lynch has, somewhat surprisingly, been the catalyst for many of these developments (including the subprime meltdown, where they were the most demanding and least compromising on redemptions for bad loans from the subprime lenders.) I can't blame them at all, however; first creditor in line gets his money back, the last ones in line end up fighting over the used office furniture in bankruptcy court. Ruthless? Welcome to capitalism.

Anonymous said...

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Anonymous said...

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