June 24, 2008
Governor Strickland's Gamble
The Governor of Ohio, Strickland, is a nice fellow. He has decided to gamble with taxpayer's money. Pushing through a 1.6 billion dollar bond issue, he will use the money to "attract more business to Ohio." Of course, if he is successful, the higher state tax revenues from the investment will pay off the bonds; if he fails, taxpayers will lose big (the difference between the interest and principal on the bonds and whatever tax revenue is produced). In other words, taxpayers in Ohio are leveraged on the investments from the bonds. How will he do? Investment in infrastructure (roads, schools, sewers, water, energy lines) makes sense as long as it is not allocated politically (by city-state). Investment in selected business does not. Government does not predict well and is hopelessly idealistic (let's invest in windmills). The irony of the packages is that it pays for what the legislature otherwise does that discourages business (laws on labor, businesses greatest expense, discourage business). We threaten to pass a law mandating sick days for healthy workers and wonder why we need to offer business tax rebates to locate here. In other words, we pass law costing business funds and then pass a bond issue to pay they for suffering the cost. It is madness. Why have the new Japanese auto factories all located elsewhere, some just across the state border? Our laws on labor regulations are a major reason.
Attack on Oil Speculators
I love to start the day with a chuckle. The news reports of the hearing Monday before the House Energy and Commerce Subcommittee on Oversight and Investigations are a hoot. Dingell (D-Mich) and others want to attack "speculators" in the oil futures market as the cause of high gas prices. Desperate divert blame from themselves in Congress (which has retarded oil production in the United States and subsidized a boondoggle in ethanol among other mistakes), they have chosen to make a target out of speculators. But the inevitable happened. The testimony devolved into a hilarious debate over who were speculators and who were not -- members of Congress could not identify the target. All agreed that speculators did not include those who wanted to take delivery of the underlying commodity, oil. But what about hedgers who did not use oil but worry about oil prices (an exporter or importer who hedges in oil futures so as to dampened price effects of transportation costs, borne by others but that effect the price of his product)? They seem harmless. Do we include those who short as well as those who are long? Short sellers bring oil prices down. Do we include those traders that hold "neutral positions", swaps traders, an even mix of long and short positions. Do we include "market makers" who post bids on both sides? Who are the bad one? I guess I am. I hold UNG, an EFT in natural gas. I do not want to take delivery of the gas; I do use some gas in our stove, however. Am I to blame for the price rise in natural gas? So sorry. The holding has not fully offset my loses in GM, however. Who did I get to blame for that? We need hearings.
SEC Gets it Right??
The SEC has proposed rules that reduce long standing requirements that certain investments have specified ratings from rating agencies. The requirements give rating agencies a government backed monopoly (oligopoly perhaps). The governments response has been to complain about the rating agencies practices. Now it is slowly moving to reduce the requirements as well and minimize the government sponsored monopoly. Good. Hope the proposed rules survive.
Huntsman Sues Appollo
A few days ago I noted that Appollo has filed for declaratory judgment in Delaware to get "permission" to abort its buyout of Huntsman. Huntsman has now sued Appollo in Texas attempting to force Appollo to close. We again have a dual of two courts. Who will blink? When will buyout agreements start putting choice of law clauses into their deals to stop this?
June 23, 2008
Cox and the SEC
Washington is humming with the buzz that Chairman Cox of the SEC was left out of the Bear Stearns buyout planning. Now comes news that a "formal agreement" between the Fed and the SEC will, in essence, cede some of the SEC's enforcement power over investment banks to the Fed. What is clear about all this is the need for new regulatory legislation crafted by Congress. Paulson has proposed a package but it has no chance given we are in an election year in which the Republican administrators will be thrown out and the Democrats moved in.
Bear Stearns Hedge Fund Managers Indicted
Former Bear Stearns hedge fund managers, Ralph Cioffi and Matthew Tannin, were arrested and indicted on wire and securities fraud charges on Thursday following a federal criminal probe into the collapse of two funds they managed. The failure of the two funds, the High Grade Structured Credit Strategies Master Fund and the Enhanced Master Fund, helped spark the credit crisis by stoking fears about investments in the subprime mortgage market.
The indictment states that the fund managers allegedly lied about the funds' prospects despite concerns over liquidity and overly-optimistic market forecasts. The indictment also indicates that at least one of the two managers removed a portion of his own funds from one of the investment vehicles he oversaw, and did not inform investors of the redemption.
Of considerable interest is that hedge funds in our largest investment banks performed so badly compared to independent hedge funds. One could speculate that hierarchical oversight in the banks was inferior to investor oversight that is stronger in the independent funds.