Each business day HedgeCo.Net keeps you informed with the top hedge fund industry news, opinion and insight from around the globe. From the latest hedge fund launches, to the impact of regulation, competition, and investor activism - we track the topics and people that make a difference to you.
Now that some policymakers are shifting out of crisis mode, some of the competitive considerations that dominated regulatory discussions during the tenure of former U.S. Treasury Secretary Henry Paulson are re-emerging. Nowhere is this more apparent than in contrasting approaches to regulation of alternative investment fund managers–hedge funds and private equity firms–being considered by the E.U. and the United States.
Middle East Online – Can a Hedge-Fund Island Lose Its Shirt and Gain Its Soul?
In December, reports surfaced that Treasury Secretary Henry Paulson pushed his Wall Street bailout package by suggesting that, without it, civil unrest in the United States might grow so dangerous that martial law would have to be declared. Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF), warned of the same risk of riots, wherever the global economy was hurting. What really worried them wasn’t,
Reuters – U.S. Treasury debt prices jumped on Tuesday, pushing the benchmark note’s yield down to fresh five-decade lows, after the Federal Reserve slashed interest rates near zero and vowed to extend its quantitative easing measures.
In an unprecedented move, the Fed cut its target for overnight interest rates to a target of zero to 0.25 percent, the lowest on record.
"The decision is setting the Treasury market rallying because of a more dramatic move than the market expected," said Haag Sherman, co-founder and managing director of Salient Partners in Houston, Texas. "The Fed has been sending a message it will throw everything it has at deflation," and Tuesday’s aggressive rate cut and policy statement reinforced that message, he said.
The benchmark 10-year Treasury note’s price, which moves inversely to its yield, jumped 1-16/32, pushing its yield down to a five-decade low of 2.35 percent <US10YT=RR>, versus 2.52 percent late Tuesday.
"The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level," said the policy-setting Federal Open Market Committee in its accompanying statement.
Bloomberg – The U.S. Treasury and the Federal Deposit Insurance Corp. are considering a program that may offer about $500 billion in guarantees for troubled mortgages to stem record foreclosures, people familiar with the matter said.
The plan, which might put as many as 3 million homeowners into affordable loans, would require lenders to restructure mortgages based on a borrower’s ability to repay. Under one option, the industry would keep lower monthly payments for five years before raising interest rates, the people said.
FDIC Chairman Sheila Bair mentioned the program at an international deposit insurers conference in Arlington, Virginia, yesterday without offering details. “A framework is needed to modify loans on a scale large enough to have a major impact,” Bair said.
New York (HedgeCo.Net) – SEC Chairman Christopher Cox said he was all for a merger between the Commodity Futures Trading Commission and the Securities and Exchange Commission.
Hopping on board with U.S. Treasury Secretary Henry Paulson, this was the first time Cox has publically supported a merger that was first brought to the table years ago. The issue was brought up again in March, when Paulson laid out his regulatory reform blueprint which supported the merger of the two agencies.
The SEC and CFTC currently meet every quarter after signing a March memorandum in which they agreed to increase communication and cooperation. While the CFTC oversees the futures market and the SEC serves as an overall police for the markets, many feel the two would perform best under one roof seeing as how their functions tend to overlap.
“This would bring futures within the same general framework that currently governs economically similar securities,” Cox said during a Congressional hearing yesterday.
The House Oversight Committee hearing where Cox gave his public support for the merger was staged in hopes of holding Cox along with former Treasury Secretary John Snow and former Federal Reserve Chairman Alan Greenspan accountable for the lack of regulation that ultimately led to the credit crisis and the demise of several large financial institutions.
Cox, who has been notoriously lax on regulation ever since his appointment by Bush in 2005, reiterated that Congress must also act this year to finalize the regulation of credit default swaps, an act that both agencies have endorsed.
Met with a mix of agreement and disdain, questions remain as to whether the merger can actually take place. Rep. Henry Waxman of California wasn’t about to look to the future without reminding Cox of the mess he helped get us in. "The reality, Mr. Cox, is you weren’t doing that job of proposing these regulations beforehand. You either didn’t anticipate the problem or you agreed with the philosophy that we didn’t need regulation."
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
Gotham Gazette – The turbulent financial market events of recent days demonstrably signal the end of Wall Street as we know it. More uncertainty lies ahead, on Wall Street but also for the national economy. How is this affecting New York and what will it take to get the economy moving again?
Six months ago, a "disastrous foray into financial wizardry" by banks and lenders led us to the sight of the Federal Reserve giving J.P. Morgan Chase $28 billion to take over Bear Stearns. It was thought that this unprecedented action might calm the panic triggered by the sub-prime lending fiasco.
The bursting of the housing bubble destroyed billions of dollars of equity people held in their homes and started to jeopardize millions of mortgages across the country, prime as well as sub-prime. This mortgage meltdown led the U.S. Treasury Department earlier this month to take over the two quasi-public mortgage giants- Fannie Mae and Freddie Mac, which together hold nearly half of the $12 trillion in outstanding mortgage debt in the U.S.
Reuters UK – "Does anyone know what is happening with the markets?" former U.S. Treasury Secretary Lawrence Summers asked after stepping out of his car and into a hedge fund industry conference in Connecticut on Tuesday.
And he wasn’t the only one wondering.
As Summers, now a managing director at hedge fund DE Shaw, and hundreds of managers and investors scanned Blackberries for prices and dialled cell phones for updates, the words Morgan Stanley American International Group tripped off dozens of tongues and faces went pale.
Only one day after watching financial markets tumble as Lehman Brothers Holdings hurtled toward liquidation and Merrill Lynch stunned investors with a surprise sale to Bank of America Morgan Stanley’s share price tumbled but its CFO declared that things were getting out of hand.
AIG’s shares sank 48 percent after the market closed as the insurance group struggled to get the funding it needed to survive.
"I would describe the mood here as a little bit wary," said Raj Mohamad, who travelled to the two-day conference from Singapore where he helps U.S. hedge funds find Middle Eastern investors as Managing Director at Five Pillars Pte Ltd.
Los Angeles Times – Big Wall Street investment banks have designed and marketed schemes enabling non-U.S. taxpayers, including offshore hedge funds, to evade millions of dollars in taxes each year on U.S. stock dividends, Senate investigators have found.
Some banks have been crafting for more than 10 years transactions designed to enable their foreign clients to dodge U.S. taxes on dividends, while the Internal Revenue Service failed to act to prevent the abuse, two senators say.
A yearlong investigation by a Senate Homeland Security and Governmental Affairs subcommittee, whose results are to be made public Thursday, found that the evasion of dividend taxes adds up to billions of dollars in revenue lost to the U.S. Treasury over the past decade.
IRS Commissioner Douglas Shulman is scheduled to testify on the issue at a hearing Thursday by the investigative subcommittee. Executives of Lehman Brothers Holdings Inc., Morgan Stanley and Deutsche Bank, and from several hedge funds also are expected to appear as witnesses.
New York (HedgeCo.Net) – The recent controversial moves of Henry Paulson and the U.S. Treasury have Washington divided not only on the future of Fannie Mae and Freddie Mac, but on government’s new role in the U.S. mortgage market.
On Monday, Paulson and Federal Housing Finance Agency Director James Lockhart placed the two mortgage giants in a conservatorship, allowing the government to replace chief executives and eliminate their dividends, while giving them themselves the power to purchase up to $200 billion of stock in the companies. A new program has also been launched to purchase mortgage-backed securities from the two firms, starting with $5 billion worth this month. In accordance with the government assistance, Fannie and Freddie will have to eventually reduce their holdings of mortgages and mortgage backed securities.
This decision was months in the making, after downplaying problems and staving off rumors of a government bailout. Finally, Bush came out and called the situation an “unacceptable” risk for an economy that has been battered by the subprime fallout and the worst housing slump since the great depression.
"Allowing the companies to fail or further deteriorate would damage our home mortgage market, and could weaken other credit markets that are unrelated directly to housing," Bush said in his statement. "Americans should be confident that the actions taken today will strengthen our ability to weather the housing correction and are critical to returning the economy to stronger sustained growth."
The two companies guarantee about half of the nation’s $12 billion in outstanding mortgages. For months, amidst rumors of capital shortages, Fannie and Freddie denied any problems. It was only after Paulson hired Morgan Stanley to probe into the company’s finances did it come to light that the two firms were overstating their capital and did not have sufficient reserves. Concerns over their finances sent stock prices plummeting and mortgage rates soaring.
Overall, Fannie and Freddie suffered about $14 billion in losses, leaving the government with a tough decision to make.
Democratic Senator Charles Schumer agrees with the course chosen. “Paulson has threaded the needle just right by taking necessary action to stabilize U.S. financial markets while minimizing the liability for taxpayers,” he said. “This plan will be met with broad acceptance in Congress because it doesn’t prejudge the ultimate fate of Fannie Mae and Freddie Mac."
But while some current political figures may be on board, it is really going to fall on the next administration to determine the role of the government in matters such as this, and ultimately, the fate of the both Fannie and Freddie.
"The new Congress and the next administration must decide what role government in general, and these entities in particular, should play in the housing market,” Paulson said in Washington. “There is a consensus now that they cannot continue in their current form.”
However, the fear of alienating voters has forced both candidates to spew nothing more than political rhetoric while never fully disclosing their position on this issue. While Obama pushes for “some” invention and McCain expresses that there must be a surge of “confidence,” it is unclear what either of their stances are on the role of the government in matters such as this.
Lately there has been an increase in the government’s role in the financial markets. Six months ago, the Fed infamously funded the $30 billion in financing needed to rescue Bear Stearns and facilitate the purchase by JPMorgan. There are several permanent courses of action that may be taken with Fannie and Freddie, including a full blown nationalization that would cement the government’s role in the markets permanently. Whatever the course chosen, it will most likely fall on the watch of the next presidential candidate. It’s about time to put politcal jargon aside and pick a side.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
HedgeCo.Net is a premier hedge fund database and community for qualified and accredited investors only. Membership on www.hedgeco.net is FREE and EASY. We also offer FREE LISTINGS for Hedge Funds! Be sure to check out our sister sites. For more information, visit www.hedgeconetworks.com
New York (HedgeCo.Net) – While the U.S. Treasury has done all it can to stave off rumors of a government bailout of Fannie Mae and Freddie Mac , some say the inevitable rescue is bound to take place after attempts to raise capital for the two mortgage giants have proved futile.
Preferred shares of the two companies are trading as low as 19 cents on the dollar, fueled by assumptions that their dividends will be suspended. This belief was the reason behind Moody’s recent ratings downgrade of their preferred stock to Baa3, the lowest possible investment-grade. Meanwhile, shares of both companies have experienced month after month of sharp declines, with Freddie down 93 percent and Fannie down 89 percent since November.
Together, the two companies account for over $5 trillion of outstanding U.S. mortgages. As the number of foreclosures reached record heights thanks to defaults on mortgages by subprime borrowers, Freddie Fannie have taken a beating since last summer, writing down almost $15 billion and forcing some to believe they will not be able to weather this housing crisis without the help of Uncle Sam.
Both Freddie and Fannie make money by offering mortgage-backed security bonds to investors. By selling these bonds, they assume the risk involved in the repayment of these loans. In exchange, they get to keep a guarantee fee that investors pay upon purchasing the bonds. It is easy to see, then, how the two companies that were believed to be “too big to fail,” started to experience problems. As more and more borrowers were unable to pay their mortgages, the responsibility fell on Freddie and Fannie. As they tried to stay afloat in their sea of debt, values of their securities started to plummet.
Recent attempts to try and find investors have been unsuccessful. Hedge funds like the Carlyle Group and Blackstone both expressed interest, only to rescind until further action by Treasury Secretary Henry Paulson.
"I think it starts with the constant doom and gloom, which makes investors quick to react when there is any sign of trouble ahead, and rightfully so," explains Michael Facchini, Portfolio Manager for Chicago-based Regent Global Funds. "Right now, investors are only interested in the cream of the crop when it comes to the MBS markets."
Federal Reserve Chairman Ben Bernanke has spoken several times about increased regulation of the companies, thanks to the widespread belief that Freddie and Fannie are government-backed. While both were created by Congress in an effort to increase homeownership and profits through the sale of their mortgage backed securities, they are in no way guaranteed by government funds.
In July, the Treasury and Federal Reserve outlined a plan to save Fannie and Freddie in order to prevent any chance of a Bear Stearns-like debacle. Among the suggestions, Paulson’s plan allowed for the Treasury to purchase shares of the two companies, should it prove to be necessary. That time has come, with some estimating the government may have to purchase about $60 billion worth of preferred shares.
Shares of Fannie Mae closed on Monday at $5.19, up 4 percent, while Freddie Mac rose 17 percent to close at $3.29.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
HedgeCo.Net is a premier hedge fund database and community for qualified and accredited investors only. Membership on www.hedgeco.net is FREE and EASY. We also offer FREE LISTINGS for Hedge Funds! Be sure to check out our sister sites. For more information, visit www.hedgeconetworks.com
San Francisco Chronicle- The giant housing rescue plan President Bush signed Wednesday might help stanch the bleeding in the housing market, but experts on both sides of the political divide worry that it is, at best, only an emergency step.
In addition to $300 billion in government guarantees to aid homeowners threatened by foreclosure, the administration got extraordinary new powers to backstop mortgage giants Fannie Mae and Freddie Mac after their stocks plunged earlier this month. The legislation gives both companies an open line of credit at the U.S. Treasury and allows the government to buy the companies’ stock through 2009. In return, the companies get a tough new regulator.
But both firms remain weird hybrid entities whose profits are private but whose losses are public, a recipe for excessive risk-taking. The new law makes the government guarantee explicit, exposing taxpayers to losses that could dwarf the savings & loan bailouts of the 1980s that cost taxpayers $300 billion in today’s dollars.
Reuters UK- A near one year-old credit crunch still has plenty of venom and will sting global financial markets and the economy well into next year or even into 2010, a Reuters poll found.
On the eve of its one-year anniversary at the start of August the credit crisis is still spitting out victims and darkening the outlooks from global central banks.
Most of the 87 economists polled from across Europe, the U.S. and Canada said the worst was not over and most felt that the fallout would last for another six to 12 months at least.
The sudden rescue plan for U.S. mortgage finance agencies Freddie Mac and Fannie Mae arranged by the U.S. Treasury and the collapse of IndyMac bank last week has 34 economists forecasting the crisis will roll on for another year or even more.
