On Tuesday, May 11, HedgeCo Networks hosted its successful Manager Showcase  gala event in downtown Chicago.  Held at the Hyatt Regency Hotel, the capital introduction event drew a capacity crowd of institutional investors, fund-of-funds, family offices, and high net worth investors.

Robert Stein, accomplished author and Managing Partner of Chicago-based Astor Financial, LLC, provided a well-received keynote dissertation on the current state of the economy.  Stein, who began his career as an analyst for the Federal Reserve under the chairmanship of Paul Volker, has penned such titles as The Bull Inside the Bear: Finding New Investment Opportunities in Today’s Fast-Changing Financial Markets and Inside Greenspan’s Briefcase: Investment Strategies for Profiling from Key Reports & Data.

In addition, five emerging-sized hedge fund managers, including Steve Hall of Lattice Capital Management, Lonny Bernath of Headline Capital Management, Kevin Lennil from Exagroup, Bruce Bernstein from Rockmore Capital Management, and Kurt Hovan from Hovan Capital Management gave brief presentations to the audience before dispersing into separate roundtables for the Q&A portion of the event.

Spending an allotted 15 minutes at each of five investor tables, presenting managers answered individual questions pertaining to each fund strategy, all while sharing their unique insights relating to the current market environment.  Afterward, attendees and presenters, alike, celebrated a spirited networking hour, enjoying an open bar and complementary hors d’oeuvres into the early evening hours.

Tags: Astor Financial, economy, emerging-sized hedge fund manager, Federal Reserve, hedge fund, HedgeCo, HedgeCo Networks, investor, Paul Volker

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Move over, George Soros.  Same with you, John Paulson.  The worldwide hedge fund community may be readying itself to anoint its newest superstar, a relatively unassuming fund manager from Short Hills, New Jersey.  According to an article written by Gregory Zuckerman and published in the Wall Street Journal, fund manager David Tepper of Appaloosa Management has reaped billions of dollars for himself and his firm over the past year by purchasing debt and shares in struggling banks.

Tepper, a former junk bond trader at Goldman Sachs, left the firm in 1993 to start Appaloosa.  Since then, he has posted annual returns in excess of 30% per year, largely by placing highly-concentrated bets with out-of-favor companies and themes.  In the late 1990′s, his firm profited by purchasing Korean stocks and Russian debt, cashing in when those markets rebounded.  Similarly, a sizable investment in resource-related firms paid off when the commodities markets exploded in 2008.  In contrast, some of his notable losses include a failed investment in auto parts maker, Delphi, which cost him $200 million in 2006, and last year’s poorly-timed investment in large cap stocks, which ultimately cost him $1 billion as the stock market tumbled.

The seed for Tepper’s most recent victory was planted last February, when the Treasury Department announced the launch of the Financial Stability Plan, a project by which the government would inject much-needed capital into banks by purchasing shares of preferred stock.  At the time, most investors feared that the nation’s major banks would be nationalized, despite reassurances from government officials.  In response, Tepper instructed his traders to scoop up preferred shares of Bank of America Corp. and Citigroup Inc., even as their share prices cratered well below $5.00.

Despite analysts’ warnings, Tepper held strong in his belief that the US government would honor its commitment to save the ailing banks.  That conviction has been rewarded handsomely this year, as shares of Bank of America and Citigroup have rebounded and now trade at $15.03 and $3.40.  Despite liquidating a portion of his shares, and thus locking in sizable gains, Appaloosa still maintains a considerable stake in each bank.

Tepper’s bold investment has yielded his firm over $7 billion in profits this year, not to mention a cool $2.5 billion for himself.  Nonetheless, it appears unlikely that this sudden success will go to Tepper’s head.   Around the office, Tepper displays an affinity for sneakers and jeans, and he still lives in the same home he bought in 1990.

In recent months, Tepper has moved on to commercial real estate, buying debt backed by struggling properties, particularly in New York.  He reasons that as several large-scale real estate properties go belly-up, he will profit as they restructure their debts.

In a sense, this latest investment mirrors his 2009 investment in the banks, as  Tepper is buying “when others are fearful,” as Warren Buffet would say.  Whether this strategy repeats the success of 2009 remains to be seen.  Regardless of the outcome, Tepper’s year should warrant his mention amongst the industry’s elite.

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Juggling the recent debt crisis in Dubai, reports of a growing asset bubble, the latest unemployment data, and last Thursday’s turkey leftovers can present a formidable task for even the most seasoned of investors.  During times like these, why not sit back, loosen up the belt, and digest an admittedly ‘lite’ version of market commentary?  Jeffrey Saut, Chief Investment Strategist and Managing Director of Equity Research at Raymond James & Associates, as well as Bill Gross, Managing Director at the Pacific Investment Management Company (PIMCO), recently weighed in, releasing their own market thoughts.

Saut’s November 30th commentary is titled, “Don’t Worry About the Dollar!” Citing a previous occurrence during the 1970′s, he believes that stock market investors’ worries about inflation are largely overblown.  Most notably, he predicts that any continued weakness in the US Dollar will be more-than-offset by rising stock prices.  As he explains,

Nevertheless, the dollar’s weakness has clearly been very positive for our “stuff stocks” (precious/base-metals, agriculture, energy, cement, timber, etc.), as well as stocks in general, and we have been bullish. Most recently, we have suggested, “that with credit spreads below their pre-Lehman bankruptcy levels there should be no reason why the equity markets can’t ‘fill up’ the downside vacuum created in the charts by said bankruptcy… That gives the S&P 500 an upside target of 1200 – 1250”…

Saut goes on to support his bullish theory with a myriad of facts.  In particular, he points to recent decreasing jobless claims, dramatic increases in labor productivity, rising corporate profits, and lowering inventories as potential catalysts for an economic rebound.  More specifically, after initially cutting back on labor, he expects that businesses will soon look to reinvest profits, hire new workers, and replenish those declining inventories.  Such a move could reinvigorate consumer demand and jump-start our ailing economy.

Furthermore, he views last week’s Dubai debt crisis as a symptom of the previous real estate bubble, and not a sign of another pending systemic crisis.  Finally, as he has suggested over the previous few months, he is near-term bullish large cap stocks.

Meanwhile, in Bill Gross’s November commentary, titled, “Anything but .01%,” he points out the depressingly anemic returns generated by most of today’s money market accounts.  Indeed, although maintaining low interest rates may be in the economy’s best interests, they are also forcing investors to flee supposedly “riskless” investments in order to chase more attractive returns.  This has sparked a considerable rise in asset prices.

Nonetheless, Gross does not foresee the Fed raising rates any time soon.  As we have seen, the private sector has shown little traction this year, with government spending largely assuming the role of oiling the gears of this economy.  Until GDP picks up considerably, unemployment shows signs of reversing, and private sector demand replaces the need for government stimulus, rates are likely to remain low.  As Gross notes,

The Fed is trying to reflate the U.S. economy.  The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks.  Once your cash has recapitalized and revitalized corporate America and homeowners, well, then the Fed will start to be concerned about inflation-not until.

Looking forward, Gross has a few ideas for skittish investors to consider.  First, long term investors must ready themselves for a “New Normal” economy to take effect.  In essence, they should expect that as companies continue to deleverage, corporate growth slows, and the government’s role in the economy expands, corporate profits will take a hit.  As a result, dividend and interest payments are also likely to suffer; end result, investors may need to lower their expectations when it comes to returns.

According to Gross, part of the reason why Warren Buffett recently invested in the railroads was to simply put his money to work, rather than let it languish in a low-yielding account (I covered this subject in more depth  in my previous blog).  Like Buffett, Gross believes investors would be wise to follow suit.  In this “New Normal” economy, he suggests targeting low-growth, high-yielding companies like utilities.  Although utilities may not excite investors from a return standpoint, they do offer reliable cash flow (dividends), and normally grow in line with the broader economy.

Tags: Bill Gross, debt crisis, Dubai, economy, equity markets, GDP, Inflation, inventories, Jeffrey Saut, jobless, labor productivity, New Normal, PIMCO, precious metals, Raymond James, real estate bubble, U.S. Dollar, utilities, Warren Buffett

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Berkshire Hathaway’s recent acquisition of rail operator Burlington Northern Santa Fe Corp has generated a tremendous amount of dialogue within the investment community.  For one, the deal involves Warren Buffet, Berkshire’s iconic CEO and legendary value investor.  The 79 year-old sage, whose succession plan remains one of the most tightly bound secrets in the industry, invited the rail operator to join the ranks of such names as GEICO, Dairy Queen, Fruit of the Loom, and Brown Shoe Company which currently shine atop Berkshire Hathaway’s Omaha, Nebraska-based mantle.

In addition to Buffett’s obvious name recognition, the deal stands out due to its sheer enormity.  Berkshire Hathaway agreed to fork over all of $26 billion to acquire the 77% stake in BNSF it doesn’t already own.
That would value Berkshire’s total ownership stake at $34 billlion (not to mention the $10 billion in
BNSF debt payments the conglomerate now assumes).

In return, Berkshire gains control of the nation’s second largest freight railroad network.  In fact, BNSF is also the country’s most prolific mover of intermodal freight traffic, a practice characterized by moving freight between ship, truck, and rail within the same container.  Not only does this insure that a container’s contents remain considerably secure, but it also presents a much more cost-effective means of moving freight across multiple modes of transportation.

In the end, the deal’s cost was by no means cheap.  Buffett & Co. agreed to pay $100 per share for the operator, more than a 30% premium over the firm’s share price on Monday, November 3, when the deal was first announced.  With shares trading at 18.2X estimated 2010 earnings, the deal does not constitute the typical Buffet- esque value play.  In fact, the mere notion of ponying up a premium for any company is considered a rarity at Berkshire Hathaway, a firm who owes much of its previous success to purchasing companies at bargain-basement prices.  Buffett has even willingly admitted as much, commenting on the deal, “You don’t get bargains on things like that. It’s not cheap.”

Although the investment appears puzzling from a valuation standpoint, a number of issues stand out as potential motivations for the deal.  First, there is the concern over the future of the US dollar.  As many are now concluding, the dollar’s recent descent presents a legitimate, growing concern to investors and businesses,
alike.  In part, the Federal Reserve’s insistence upon keeping interest rates low is forcing investors to flee low-yielding bank deposits and short term investments, dumping dollars and chasing investment returns which are more likely to keep pace with inflation.  One way to hedge against the dollar’s demise is to invest in real assets, whether that be precious metals, commodities, real estate, or other businesses.  With that said, what better a place to make a long-term investment than in  one of America’s largest rail operators?  BNSF holds billions of dollars’ worth of real estate, offering the potential for long term value stability.  Meanwhile, by paying out roughly a billion dollars per year in dividends, it also provides Berkshire with a steady cash flow, joining the ranks of other cash flow-rich businesses such as insurers, newspapers, and utilities which have funded Berkshire Hathaway’s prolific growth throughout the years.

Despite the relatively quick execution of the deal, Berkshire Hathaway’s decision did not arise without precedent.  In recent years, Buffett’s firm had shown a propensity for rail operators, accumulating positions in Union Pacific and Norfolk Southern.  When BNSF CEO Matt Rose recently expressed a willingness to negotiate with Buffett, Berkshire pounced at the opportunity and made an offer.  However, even after completing the combined cash/stock purchase, Berkshire still holds roughly $20 billion in cash.  Buffett had plenty of motivation to put his cash to work. Hence, when the opportunity arose, he tossed his chips into the ring.

Stretching beyond concerns about the dollar,  the dealmaker for this transaction is, without a doubt, coal.  Coal, that dirty, filthy fossil fuel has increasingly become the target of global warming advocates and legislators.  However, by accounting for nearly one half of all of the electric generation in the US today, its presence is solidly entrenched in this country’s energy future.  Fortunate for Berkshire Hathaway, one half of all the tonnage BNSF’s trains have transported thus far this year is-you guessed it-coal.  In all, the total yearly tonnage of coal BNSF moves is enough to power one in every ten US homes.

According to the Energy Information Administration, a statistics office within the US Government, the US’s current recoverable coal reserves should meet a growing US demand for another 150 years.  Given coal’s cheapness, abundance, and relative efficiency, it presents an extremely cost effective and convenient form of energy.  Furthermore, with the largest recoverable reserves of any country buried in our own back yard, it presents a viable energy option, provided the US begins to ween itself off of its foreign oil dependency.

From a strategic standpoint, BNSF is well-positioned to benefit from our continued use of coal.  Its tracks spread across 28 states and 2 provinces, mainly west of the Mississippi River, at a combined length of 32,000 miles.  Its  network of rail lines is heavily concentrated in the upper Great Plains, particularly in the region of the Powder River Basin, an area of southeast Montana and northeast Wyoming which supplies roughly 40% of the nation’s coal. Of note, the region is rich in sub-butiminous coal, a cleaner-burning alternative to Appalachian coal.  This coal is known for being low in sulfur dioxide, a common contributor to acid rain.  Lastly, BNSF’s extensive lines throughout the Great Plains, Midwest, and Pacific Northwest will allow it to serve MidAmerican Energy, an energy producer also owned by Berkshire Hathaway which happens to operate several coal-fired power plants of its own.

Currently, BNSF transports the majority of its coal to population centers of the Great Plains, including Denver, Kansas City, Chicago, St. Louis, and Dallas.  However, with its wide reach, it could also feasibly provide significant amounts of coal to population centers in the Upper Northwest, Southern California, and South Texas as well.  The nation’s hunger for electricity is expected to increase 25% by 2030.  Factoring in our continued reluctance to build more nuclear power plants, the cost barriers to implementing green energy initiatives, and the highly variable cost of oil, our reliance on coal is likely to intensify for the foreseeable future.

In addition to this, coal exporters are also poised to benefit from the developing world’s mounting appetite for electricity, especially China and India.  China, which burns more coal than the US, Europe, and Japan combined, is scheduled to build 500 additional coal-fired powerplants over the next decade.  After first becoming a net importer of coal in 2007, the country’s appetite for coal will undoubtedly force it to increase its reliance on imports.  Given BNSF’s plentiful access to Pacific ports, it sits in a prime position to benefit should coal producers look to direct their coal shipments across the Pacific.

Mr. Buffett has never shied away from admitting his bullishness with regards to the US’s long term prospects.  In fact, following the deal’s announcement, Buffett told CNBC, “America’s best years lie ahead, there’s no question about that.”  If one assumes that Mr. Buffett’s remarks are correct, this deal should put Berkshire Hathaway in an enviable position to ride that wave of prosperity over the next 50-100 years.  BNSF gives Berkshire a brawny, strapping infrastructural presence, transporting carload-after carload of goods and resources cross-country.  The relative cost-effectiveness of rail transport (it takes only one gallon of diesel fuel to move one ton of goods 470 miles) gives it an obvious edge over the automobile.   In fact, should gas prices rise considerably, demand for rail freight will undoubtedly increase.

Berkshire Hathaway prefers to identify companies which hold a competitive advantage within their industries.  BNSF’s competitive advantage lies in its strong infrastructure base, some 32,000 miles of tracks.  Furthermore, its geographic footprint-primarily located between the population centers of the Great Plains and the West Coast-ensures that it holds a distinct advantage for moving not only processed goods and products, but more importantly, coal.  As US, and for that matter, global demand for goods and resources accelerates over the coming decades, Berkshire Hathaway and its shareholders could be rewarded handsomely.

Tags: Berkshire Hathaway, bnsf, brown shoe company, Burlington Northern, Burlington Northern Santa Fe, CEO, China, coal, dairy queen, debt payments, Federal Reserve, foreign oil dependency, fruit of the loom, geico, great plains, india, intermodal freight traffic, midamerican energy, U.S. Dollar, union pacific, Warren Buffett

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Due to an overwhelming response, the HedgeCo staff is running out of available seats for the Fall 2009 Capital Introduction Round Tables.

On November 10^th, Doug Kass and others will be discussing the strategies they utilize within their hedge funds. Investors will have the chance to sit and speak with managers in small groups and really discover the investment philosophies held by these professional money managers. The event will take place at the US Trust Building in Midtown Manhattan on 47^th Street. Doors will open at for check-in at 4:00, and the opening speech by Doug Kass will start at 4:30.

Space is running out, but if you would like to attend and you are an accredited investor, please click here to register.

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In today’s competitive hedge fund marketplace, startup managers seek out every advantage they can to ensure their fund’s future success.  On Thursday, October 29, a panel of accomplished industry veterans will convene in a free webinar to discuss the intricacies of launching a hedge fund in today’s constantly changing environment.  The webinar, which is hosted by Eze Castle Integration, is titled Launching a Hedge Fund: Critical Considerations for Managers.

Launching your fund can be an extremely taxing process.  This trio of panelists will share their knowledge and insights on a variety of topical issues central to starting a hedge fund.  The panel will include:

• Aaron Steinberg, Vice President of Pershing Prime Services, who will discuss operational infrastructure, selecting service providers and building a sustainable infrastructure to make your firm attractive to institutional investors.

• Evan Rapoport, Co-Founder of HedgeCo Networks, who will review how to most effectively raise capital including marketability, fund administration and regulations and registration.

• Vinod Paul, Managing Director at Eze Castle Integration, who will explore how to best implement and design a highly secure and efficient office infrastructure, including telecommunications, data protection, co-location and disaster recovery planning.

The event, which is expected to last one hour, is scheduled to begin at 1:30 P.M. ET.  Interested parties are encouraged to sign up here.

Tags: Evan Rapoport, Eze Castle Integration, free webinar, fund administration, hedge fund, HedgeCo Networks, launching a hedge fund, Pershing Prime Services, raise capital, startup manager, Steinberg, Vinod Paul, webinar

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If you ask ten different hedge fund professionals to explain the difference between third party marketing and capital introduction, you are bound to get ten different answers.  Though often confused, each practice serves a vital role in attracting capital to the industry.  Recently in his Hedge Fund Capital Introduction Blog, Evan Rapoport, Co-founder of HedgeCo Networks, spent some time dissecting the two practices.

Capital introduction, according to Rapoport, is typically done by prime brokers.  The largest prime brokers, such as Goldman Sachs & Co., Morgan Stanley, and Merrill Lynch all have teams assembled within their ‘prime services’ divisions that help clients of the firm to find investors suitable for their funds.

In order to properly utilize the services of a prime broker, you need to meet a few parameters:

First, your fund must be doing enough business with the prime brokerage firm to be able for the firm to afford their employees time, and risk. That’s right risk. Most hedge fund managers do not understand what it means to have a series 7 and therefore have never had to worry about a client suing them for a poor recommendation. This is exactly the risk these licensed individuals and firms take on when making introductions to your fund. If your fund fails, they are at risk of client complaints and lawsuits, and if you commit fraud…..whoa boy! They can say goodbye to their career, or at least thousands of dollars defending themselves as to how they had no knowledge that this low life manager decided to run off with their clients money. Anyway, point is, if you are not trading or borrowing, don’t expect too many investor introductions from your prime broker.

Second, your fund needs to perform. It is hard to make investor introductions for a fund that is down thirty percent. Stellar performance obviously makes it easier to make investor introductions.

Next, your fund infrastructure must be solid whereas no one can question the integrity of the information coming out of your firm. This includes having an independent fund administrator, industry recognized auditor, larger firm prime broker and custodian, and knowledgeable legal team. With these providers in place the capital introduction team can feel more confident their investor referrals will have access to the proper information when needed regarding your fund.

In contrast, Third party marketers are individuals, licensed by FINRA, that raise capital on behalf of multiple hedge fund products.  Typically, they work for a fee that amounts to about 20% of the hedge fund’s fees.  In essence, they receive a portion of all management and performance fees throughout the relationship with the investor client.  Similar to capital introduction, third party marketers set up all investor meetings, conference calls, and road shows.  However, unlike the cap intro business, where the representative is responsible for making the introduction, third party marketers assume a much more active role.  Not only do they pique the investor’s initial interest, but they also follow up with potential investors after manager meetings and conference calls, update the prospective client with monthly performance, and do everything they can to facilitate the investment (provided, of course, that it makes sense for the client).

Just like with capital introduction, there are a few requirements for a fund to work with a third party marketer:

One is length of track record. As a result of taking on the risk of marketing your fund to investors, third party marketers typically like to work with funds that have several years worth of track record. I would say the typical minimum to be considered for most third party marketing platforms is around eighteen months worth of track record that is actual to the fund (no pro-forma!) with the standard being thirty-six months.

Assets under management are also important. The smaller the fund the harder it is for the third party marketer to raise assets. Again typical minimums to be considered for most third party marketing platforms are about fifty million USD and average about one-hundred million USD plus.

Hedge fund strategy is the next item of importance. There are specific times that certain strategies are simply out of favor. If your strategy is out of flavor currently, don’t expect many third party marketers to come to your rescue. However, if your strategy is this year’s Miss Universe, then you may not need to go looking for third party marketers, they will come finding you.

Fund manager pedigrees are another factor third party marketers look at before representing a new fund. If the manager was a plumber and now has decided to start a hedge fund because he doubled his money at Ameritrade, chances are, third party marketers will pass. However if the fund manager was formerly at one of the larger hedge funds, and has a portable track record and strategy, this certainly will help to move him to the top of the marketers list.

Fund infrastructure is equally important to third party marketers. The reasons are the same as mentioned for capital introduction, but maybe even more so being that third party marketers are paid a fee by the fund and therefore are perceived to have more responsibility for their recommendations as opposed to capital introducers that simply make a referral. Having top tier providers makes due diligence much easier for these firms and their clients.

Lastly, and probably most important again, is positive fund performance. It simply is harder to sell a hedge fund with poor performance as opposed to one that has performed. As a third party marketer, we usually have access to multiple products and being that my pay is often tied to their performance….well, nuff said. I do always keep in mind however what is right for individual clients portfolios. and also do realize sometimes the best time to invest in hedge funds is when they have had a short term losing period, especially if this type of strategy has paid off in the past. If I don’t include that last disclaimer I will get tons of hate mail from poorly performing managers.

Bear in mind, using a third party marketer does not make sense for all hedge funds.  For some funds, they may be small and growing in size and cannot afford to pay hefty fees.  Meanwhile, others may already employ their own marketing teams internally.  This approach, while more expensive in the short term, actually tends to be more cost effective over the long run.

In summary, there are a number of effective means of raising capital for your fund.  A few key points to consider when deciding between using capital introduction or third party marketing include:

-Hedge Fund Track Record
-Hedge Fund Monthly Trading Volume
-Current Firm/Fund Assets Under Management
-Hedge Fund Age
-Hedge Fund Capacity
-Current Marketing Budget

Decide what is most important to your fund, and take action accordingly.  Then, watch (and hope) the capital introduction or third party marketing teams work for you!

If you are looking for help with capital introduction, prime brokerage, or third party marketing for your fund feel free to email me for consideration at evan@hedgecosecurities.com.

Evan Rapoport is a registered principal and offers securities through HedgeCo Securities LLC. Member FINRA, NFA, SIPC.

Tags: administrator, auditor, Capital Introduction, custodian, FINRA, fraud, fund administrator, fund infrastructure, Goldman Sachs, Hedge Fund Capital Introduction Blog, HedgeCo, Merrill Lynch, Morgan Stanley, Not Categorized, prime brokers, prime services, series 7, third party marketing

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In last Saturday’s edition of the New York Times, Joe Nocera wrote an interesting piece outlining some of the major obstacles currently facing the House Financial Services Committee.  The agency, which considers measures ranging from the banking industry to economic issues to insurance, is responsible for drafting a new financial reform package on behalf of the Obama Administration.  At the heart of such a proposal lies the creation of a new Consumer Financial Protection Agency (CFPA), one which would regulate mortgages, credit cards, debit cards, installment loans and other financial products issued by financial institutions.

On the surface, such an agency would serve as a boon for US consumers.  For example, the agency could potentially reign in on some of the banking industry’s most questionable practices, such charging consumers egregiously high overdraft fees when they overspend on their debit cards.  In the past, banks were more apt to simply reject purchases by consumers who overspent with their debit cards.  Now, banks reap billions of dollars annually off such charges.  Other proposed regulations range from forcing brokers to spend more time explaining mortgage products to consumers to curtailing unannounced hikes in credit card fees.

Why is such legislation justified?  Well, after the near-collapse of our financial system in the past year, it has grown abundantly clear that the financial services industry must change its practices.  After all, we, the taxpayers opened our wallets for the Troubled Asset Relief Program to the tune of $700 billion.  A message must be sent, loud and clear, that the risky, irresponsible practices of the past are not to be repeated.  Part of the government’s role as chief rescuer is to hold these institutions accountable for their actions by 1). collecting on their TARP loans to the banks, while 2.) instituting new regulations preventing  the risk of moral hazard.  However, these two responsibilities are not one and the same…

As an example, take Citigroup and Bank of America.  Citigroup received $50 billion in TARP funds last year, in addition to receiving $306 billion in US Government guarantees on troubled assets.  Likewise, Bank of America received $45 billion in TARP funds, to go along with $118 billion in troubled asset guarantees.  The two, amongst the largest consumer banks in the world, are hugely indebted to the US Government.  Yet to the surprise of few, neither has repaid a cent of TARP money to date.

If the new House Financial Services Committee places more stringent controls on the banks, such as limiting overdraft fees, these banks could miss out on billions of dollars in revenues.  Placing caps or limits on credit card interest rate hikes could have the same effect.  This lost revenue, while protecting consumers (mainly, the minority with the weakest credit histories), would effectively hurt the US taxpayer, and further dampen the chances that the US Government fully collects on its loans to the banks.

Coupled with this, many of the more traditional revenue streams for these banks earlier in the decade have since dried up.  For example, with the housing industry’s continued struggles, banks cannot rely upon the heavy fees previously generated through the bundling and selling of mortgage-backed investment products.  Likewise, after being caught with over-levered balance sheets over the past few years, banks have considerably cut back lending to businesses and consumers.  Instead, many are shoring up their balance sheets to meet appropriate reserve levels.

So, what does this proposed legislation ultimately mean for the big banks, consumers, and taxpayers?  For the banks, such rules will force them to abandon formerly profitable practices and seek out new revenue streams.  This could be accomplished through several means.  First, they could sell company assets, as Citi did by selling Phibro, its profitable energy trading (albeit, controversial) business, just last weekend.  However, the selling of assets is not a sustainable activity over the long run.  Rather, the banks are much more likely to cut costs (lay off workers, close branches) or hike up consumer fees in other areas (think higher ATM fees and account charge hikes).

For consumers, the new CFPA will look out for their interests, serving as a watchdog for banking practices it finds unscrupulous, irresponsible, or even predatory.  That’s great, especially for the 10% of consumers with the poorest credit histories-those largely responsible for paying hightened fees for services like debit card overdrafts.  However, in forcing the banks to abandon practices it finds unacceptable, the agency indirectly forces these banks to seek revenues in other areas.  For example, by protecting the consumer who overdraws on her debit card account each month, the agency’s actions could simply force the banks to raise standard fees on all customer ATM withdrawals.  In other words, in return for protecting the interests of a minority of consumers, legislation could simply force banks to raise fees for ALL customers.

Lastly, we have the taxpayer.  Ultimately, you benefit when the banks repay their TARP funds.  As such, you need the banks to continue to increase revenues, grow, and flourish.  However, from the taxpayer’s point of view, the CFPA could inhibit this from occurring.  By placing more controls on the industry and limiting its ability to generate the necessary income, the agency could serve as an obstacle to these banks’ attempts at recovery.

When it was launched last October, the Troubled Asset Relief Program was widely lauded as a means of preventing additional bank failures.  Thus far, few can argue that the program has positively affected the financial landscape and reassured investors.  However, while it appears necessary for agencies such as the CFPA to prevent future abuses by ramping up regulations, those same regulations will undoubtedly inhibit some banks’ abilities to repay TARP funds.

For the Obama team, encouraging a more traditional, “bread and butter” model for the big banks is necessary to appease the needs of an industry, consumers, and his taxpaying constituents alike.   Yet, as you can see, introducing new regulations is a sensitive issue which can produce a variety of consequences to multiple parties.  Perhaps above all else, he must promote a sustainable industry model which ensures the banks’ ability to repay TARP funds without resorting to the same sort of wreckless behavior which brought about this crisis in the first place.  After all, as novelist George Santanaya once wrote, “Those who cannot learn from history are doomed to repeat it.”

Tags: Add new tag, Bank of America, banks, brokers, citigroup, Consumer Financial Protection Agency, debit cards, financial products, George Santanaya, House Financial Services Committee, industry, New York Times, obama, overdraft fees, Phibro, regulations, TARP, taxpayer, Troubled Asset Relief Program, US Government

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Hedge fund investors, hurry up and circle November 10, 2009 on your calendars!  Late that Tuesday afternoon, HedgeCo will be holding one of its largest capital introduction conferences to date, in roundtable discussion format.  Held at the famed US Trust Building in midtown Manhattan, the event will allow investors the opportunity to meet with a select group of hedge fund managers within a truly intimate setting.

Doug Kass, columnist for theStreet.com, a regular on CNBC’s Squawk Box, and President of Seabreeze Partners Management will serve as the night’s keynote speaker.  Kass, a self-professed “Anti Cramer,” has garnered accolades in recent years for correctly forecasting the financial meltdown.

Fund managers representing many different strategies of the alternative investment world will be on hand to discuss the key differentiators in their funds.  Managers will spend time sitting at each investor table, personally discussing their strategies and answering questions from attendees.  This should make for a dynamic event, spotlighting several of the industry’s leading thinkers in the same room for one night.

Space for the event is limited, so investors are encouraged to sign up for the event ASAP.  If you are interested in attending the event, please click here to be redirected to the event page.  The event, which is scheduled to begin at 4:30 PM, is intended for accredited investors only.

Tags: Anti Cramer, Capital Introduction, CNBC, Doug Kass, hedge fund, hedge fund investor, HedgeCo.Net, Roubini Global Economics, roundtable discussion, Seabreeze Partners Management, Squawk Box

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A letter dated December 22, 2008 and sent from Fairfield Sentry Limited to its investors recently surfaced here.  The fund, part of Fairfield Greenwich Group, had invested in excess of $7 billion in Bernard Madoff Securities, making it Madoff’s largest feeder fund investor.  In wake of the surrounding facts which have surfaced in the case, we have received a rough rewrite of that letter to investors which includes several suggested revisions.  It is provided below…

FAIRFIELD SENTRY LIMITED
Romasco Place, Wickhams Cay 1
Road Town, Tortola
British Virgin Islands, VG 1110
December 22, 2008

Dear Shareholder,

Suspension *Edit: Elimination of the Calculation of Net Asset Value
Reference is made to the extraordinary events of last week regarding Bernard L. Madoff Investments Securities LLC (“Madoff”). As you are most likely aware, on December 11, 2008 Bernard Madoff was arrested and charged with securities fraud for operating in essence a giant Ponzi scheme. It has been alleged that Madoff’s fraud involved a loss in both cash and securities of possibly US$50 billion.

As you will have read in the press, Fairfield Sentry Limited (the “Company”) was significantly exposed to *Edit: blindly dumped all of your money into Madoff.  At this point in time the value of the Company’s investment in Madoff is not certain *Edit: basically a pipe dream. There may be residual assets *Edit: presumably, proceeds from the sale of Ruth Madoff’s jewelry collection in Madoff to be distributed or, alternatively, there may be no assets *Edit: you’ve been totally had.

With the view to acting in the best interests of the Company and all of its shareholders and creditors *Edit: To save what little dignity we have left, the Board of Directors *Edit: Glorified “Yes” Men of the Company (the “Board” ) has suspended the calculation *Edit: fabrication of net asset value with a corresponding suspension of redemptions and subscriptions pursuant to Article 11(4) of the Articles of the Association of the Company, due to the fact that the Board determined that  (i) that circumstances exist as a result of which in their opinion it is not reasonably practicable for the Company to dispose of investments or that any such disposal would be materially prejudicial to shareholders, (ii) that a breakdown has occurred in the means normally employed in ascertaining the value of investments of the Company, (iii) that the value of the investments of the Company cannot reasonably or fairly be ascertained and (iv) that the Company is unable to repatriate funds required for the purpose of making payments due on redemption of shares *Edit: okay, we get it, blah, blah, blah, maybe ignorance does not equal bliss. As such, pursuant to the powers contained in the Articles of Association of the Company , the Board has suspended the determination of the net asset value. As a result of such suspension, all subscriptions into and redemptions from the Company have been suspended *Edit: good luck paying this month’s electric bill! With respect to redemption requests received for the November 30, 2008 dealing date, the payment of these proceeds of redemption have been similarly suspended pursuant to the powers contained in the Articles of Association of the Company *Edit: some document we just found out we have!

The Company has retained counsel in the British Virgin Islands *Edit: Retreat and the United States to represent its interests. These counsel will advise as to what action should be taken to ensure the Company’s interests in the remaining assets of Madoff are represented, to ensure an orderly running *Edit: potential winding down of the affairs of the Company and to ensure that all shareholders and creditors are treated equitably and fairly *Edit: you are all equally screwed. In this regard and as advised by counsel, we are not able to respond to requests for information *Edit: death threats, complaints, legal action by individual shareholders at this time. Rather, information will be provided to all shareholders to ensure that no one shareholder is at an advantage. We note that the manager to the Company, Fairfield Greenwich (Bermuda) Limited, has waived all fees until further notice *Edit: we emerge from hiding. We *Edit: CNBC will endeavour to keep you advised of developments with respect to the Company.

Yours faithfully *Edit: shamefully,

The Board of Directors

Tags: Bernard Madoff Securities, board of directors, British Virgin Islands, CNBC, Fairfield Greenwich Group, Fairfield Sentry, fund, Investors, madoff, Net Asset Value, Ponzi, Ruth Madoff, United States

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