Saturday, November 1, 2008
Short Sellers and Hedge Funds
"'Financial engineering is no longer viable,' said Henry Kravis at a private-equity conference in Dubai last week. 'Going forward, we need to be thoughtful and even conservative.' ... Kravis acknowledged an open secret of the buyout business: In the go-go years these firms made a chunk of their profits though quick flips and manueuvers such as 'dividend recapitalizations'--taking big cash payments out of the companies they owned by paying themselves a fat dividend", Peter Lattman at the WSJ, 20 October 2008.
"Instead of blaming hedge funds for their prediction that the Lehman share price would fall, Mr. Fuld should have acted on the short sellers' clear warning, months ago, that he was atop a powder keg of mortgage-related securities that would soon explode. Lehman is bankrupt and Mr. Fuld is a former CEO. ... A UBS research note ... [said] 'Anyone who seriously thinks that the cause of this crisis arises from the actions of evil and manipulative speculators lacks the insight and knowledge to be allowed anywhere near the regulation of financial markets.' ... But in complex markets, short sellers are akin to investigative journalists, looking for the scoop of finding an overvalued company or industry. Also like journalists, short sellers aren't always popular with corporate management or regulators. ... Many hedge funds are suing Lehman for their assets--including allegations of fraudulent conveyance for transferrring funds to the London affiliate--and meanwhile billions of investment dollars are out of the system when they're needed most. ... Hedge funds and their short sellers deserve thanks for delivering information to markets. But alas, it's human nature instead to blame the messengers of bad news, especially when the news turns out to be true", my emphasis, Gordon Crovitz at the WSJ, 20 October 2008.
May Kravis be right and financial engineering end. Much of private-equity firms profits came from abuse of the bankruptcy code and banks which lent to them underpricing bank loans made to effect the acquisitions.
I agree with Crovitz, Chris Cox should not be permitted to regulate anything.