Operational Due Diligence

Borrowed from the Financial TImes:

Hedge fund chiefs blame the system for crisis

The hearing before the House oversight committee was the latest in a series of hearings to examine the causes of the financial collapse. Earlier examinations of AIG and Lehman Brothers, the failed insurer and investment bank included harsh questioning of executives who failed to oversee the coming financial tsunami even as they raked in millions of dollars in compensation.

Henry Waxman, the California congressman who chairs the House oversight committee, which is hosting a series of meetings to examine the causes of the financial collapse, said hedge funds’ rapid growth and high leverage were factors that had caused other companies to blow up. Mr Waxman stopped short of blaming the funds - or their trading practices - for contributing directly to the crisis. But he signalled concern over “special tax breaks” that allow managers to treat the vast majority of their earnings as capital gains, meaning some portions are taxed at a rate as low as 15 per cent.

“That’s a lower tax rate than many schoolteachers, firefighters or even plumbers pay,” Mr Waxman said.

Justifying his own pay package, Philip Falcone, co-founder of Harbinger Capital, pointed to his modest upbringing in Minnesota, where, he said, his father never earned more than $14,000 a year.

“It is important for the committee and the public to know that not everyone who runs a hedge fund was born on 5th Avenue - that is the beauty of America,” he said. He added: “This is not a case where management takes huge bonuses or stock options while the company is failing.”

John Paulson, of Paulson & Co, whose bearish views on the mortgage bubble made him the most highly paid fund manager last year, according to some calculations, said his pay reflected returns to investors.

Congressman Tom Davis of Virginia said that it was time to consider “greater standardisation, registration, disclosure and regulatory limitations” for the industry.

Kenneth Griffin, the founder and chief executive of Citadel, did not believe greater regulation was required, and said the greatest failures had occurred in regulated institutions. “We have not seen hedge funds as a focal point of carnage,” he added.

10/11/2008 No Discipline For SEC Officials In Pequot Probe
From FINalternatives

FINalternatives reports: Three high-ranking Securities and Exchange Commission officials will not be disciplined for lapses in the agency’s investigation of insider trading at Pequot Capital Management.

The SEC’s chief administrative law judge, Brenda Murray, declined to order punishment for Linda Thomsen, director of enforcement, and two others in the case of Gary Aguirre, a former SEC lawyer who claimed he was fired for seeking to question John Mack, the one-time Pequot chairman who now leads Morgan Stanley. In a report issued last month, H. David Kotz, the SEC’s inspector general, blasted the SEC’s probe of Pequot, saying he found evidence that “raised serious questions about the impartiality and fairness” of the investigation, and that the agency had allowed “inappropriate reasons to factor into its decision to terminate” Aguirre in 2005.

Just a heads up, I’ve been reading a lot of articles in Google News lately on hedge funds and have noticed many familiar manager names popping up. There are a lot of new articles coming out saying that a manager is either a.) not doing well b.) doing well or c.) commenting on the market turmoil.

I’m guessing that people in the fund of funds industry (our clients) are also reading the media too and are more likely to know if you omitted a recent media article in a report. To combat this, I’ve started doing a Google News search on top of the standard Google search. This seems to check for the most recently published articles.

With the influx of updates, they are probably looking for just this kind of information.

http://www.nytimes.com/2008/09/29/business/29hedge.html?_r=1&partner=rssuserland&emc=rss&pagewanted=all&oref=slogin

Hedge Funds Are Bracing for Investors to Cash Out
By LOUISE STORY
Published: September 28, 2008

http://www.huffingtonpost.com/2008/09/23/hedge-fund-performances-l_n_128729.html

CNBC’s Vicky Ward talks about leaked hedge fund performances, year-to-date. A lot funds have had a pretty rough year of it so far. Follow the link to see the video that shows which funds have lost up to 36% this year.

VIDEO CAN BE VIEWED AT: http://www.cnbc.com/id/15840232?video=865256587

I had a report recently where we went to confirm employment. When searching for company contact information, I realized that my subject had worked at two of the same companies at the same time as a fraudster. The fraudster had worked at one company, then went on to found his own firm in the 1980s. In the early 1980s, he was indicted. At the time he was out of the country and never came back.

There was no connection to my subject, other than they worked at the same seemingly small company, and then my subject went on to work at the company that the fraudster had started. He also appears to have worked at this company during the time that the fraudster committed the crimes that the US Govt accused him of.

I had a hard time deciding how to report that information. Ultimately I decided that the best thing to do was to provide details on the criminal activity and simply report that my subject had worked at the same companies during the same time as the fraudster.

Anxious wait for hedge funds
By James Mackintosh in London

Published: September 23 2008 03:14 | Last updated: September 23 2008 03:14

Hedge funds with billions of dollars at Lehman Brothers’ prime brokerage in London face a wait of months to get back assets – and many may end up as general creditors of the failed bank.

PwC, administrator of Lehman’s European arm, said on Monday that clients who held assets at the bank, including individuals and companies as well as hedge funds, would have to wait for assets to be identified and checked before they could be returned.

EDITOR’S CHOICE
In depth: Hedge funds - Jun-17Funds look to circumvent shorting ban - Sep-23Manro aims to cash in on internet poker - Sep-19Hedge fund market’s growth in doubt - Sep-17Ospraie’s flagship fund to be shut down - Sep-03Ospraie letter to shareholders - Sep-03The move is bad news for hedge funds caught up in the collapse of the bank, some of whom may have to suspend redemptions if they cannot retrieve their assets.

Hedge funds that borrowed against their assets might find they end up in the queue with other creditors if their agreement with the bank allowed Lehman to lend the assets on.

“We’re absolutely furious about what’s going on,” said Amber Capital, a $3.2bn New York hedge fund that has several hundred million dollars of assets in a client account at Lehman in London. “The situation is compounded by the fact that we had taken explicit action at Lehman against this specific event.”

According to investors in the sector, relatively few hedge funds had large exposures to Lehman, although a long list have reported that about 1 per cent of their assets are at risk.

“Really the exposure to Lehman was minimal,” said Simon Hopkins, chief executive of fund of hedge funds Fortune Asset Management. “The problems had been pretty well flagged and people had been moving their assets out.”

GLG Partners, which said last week it had shifted the majority of assets out of Lehman the week before it failed and expected to receive the remainder “shortly”, will now have to wait longer before it can gain access.

Amber and other funds objected to the sale of part of the US bank to Barclays, amid a demand by PwC for the return of $8bn transferred from London to its New York parent the Friday before its collapse.

Other hedge funds also objected, unsuccessfully, to the sale, including Harbinger Capital, a fund that said it was owed at least $250m by a US subsidiary of Lehman. On Monday, Bay Harbour, a hedge fund specialising in distressed debt that was a Lehman prime brokerage client, filed an appeal against the approval of the sale to Barclays.

http://www.reuters.com/article/reutersEdge/idUSTRE48N08420080924

Hedge funds shy from Bush’s Wall St. bailout
Oil rises $2 on U.S. supply concerns, OPEC
Market points up after Buffett’s Goldman investment
More Business & Investing News… By Kevin Drawbaugh and Richard Cowan

WASHINGTON (Reuters) - Hedge funds are unlikely to be among financial institutions clamoring to unload their bad debts under a proposed $700 billion Wall Street bailout plan, the chief of the funds’ lobbying group said on Tuesday.

“I think it’s unlikely that they would include us and I think it’s unlikely that we would ask to be included,” said Richard Baker, president of the Managed Funds Association.

In an interview with Reuters, Baker said it was still unclear whether hedge funds are among financial institutions that would be allowed to participate in the massive Bush administration plan now being debated by Congress.

The former Louisiana congressman said one thing is crystal clear to hedge fund managers: “We understand that if you ask for benefits from the government, you generally get regulation, whether you like it or not.”

Hedge funds — investment pools principally used by the rich and large institutional investors such as pension funds — have fought for years to minimize government intrusion into their affairs, with mixed success.

Treasury Secretary Henry Paulson on Saturday unveiled a proposal requesting authority to purchase up to $700 billion in broken mortgage-backed bonds and other troubled assets. The plan is meant to confront the worst financial crisis to confront the United States since the Great Depression.

Paulson has said explicitly since then that hedge funds would not be eligible to take part in the taxpayer-funded bailout, but lawmakers have been less certain on that point.

Massachusetts Democratic Rep. Barney Frank, a key player in the negotiations, was asked on Monday night whether decisions had been made on letting hedge funds sell assets to Treasury

http://www.msnbc.msn.com/id/26637911

Lehman to sell stake in investment division
Wall Street bank taking steps to outrun the nation’s financial crisis

Associated Press

NEW YORK - Another of Wall Street’s renowned firms is taking drastic steps to try to outrun the nation’s worst financial crisis since the Depression.

Lehman Brothers said Wednesday it will sell a majority stake in its prized investment management business, slashed its dividend and indicated it may even consider selling the whole company. It reported an almost $4 billion third-quarter loss, boosting its losses so far this year to about $6.5 billion.

The nation’s fourth-largest investment bank said it will spin off $25 billion to $30 billion of its commercial real estate operations and slashed its dividend to 5 cents from 68 cents in a move to save $450 million a year.

The moves are intended to prove to Wall Street that the embattled bank has enough liquidity to survive.

But Lehman also said it is open to “examining all strategic alternatives to maximize shareholder value” which on Wall Street suggests it would consider a bid for the entire company.

Lehman Brothers Holdings Inc., whose shares have plunged more than 80 percent this year as investors lost confidence in the company, said it lost $3.9 billion during the third quarter. The company, like others on Wall Street, suffered from wrong-way bets on mortgage securities and other risky assets.

“This is an extraordinary time for our industry, and one of the toughest periods in the firm’s history,” Chief Executive Richard Fuld said in a statement. “The strategic initiatives we have announced today reflect our determination to fundamentally reposition Lehman Brothers by dramatically reducing balance sheet risk, reinforcing our focus on our client-facing businesses and returning the firm to profitability.”

Lehman’s quarterly loss includes gross write-downs of $5.3 billion on residential mortgages and $1.7 billion on commercial real estate positions. The results reflect a continued decline in Lehman’s portfolio — in the second quarter the company lost $2.8 billion for the period, and in the year-ago period it posted profit of $887 million.

Lehman said it has reduced its residential mortgage exposure by 31 percent to $17.2 billion, and expects its sale of $4 billion of its U.K. residential mortgage portfolio to BlackRock Financial Management Inc. to be completed within the next few weeks.

Lehman Brothers also reduced its commercial real estate exposure by 18 percent in the third quarter to $32.6 billion from $39.8 billion.

The bank said the spinoff of the commercial real estate portfolio into a separate publicly-traded company, Real Estate Investments Global, will be completed in the first quarter of 2009.

“Taken together, these actions will quickly de-risk and resize the firm,” Fuld told investors on a conference call. “We will have what we believe to be a strong and clean balance sheet that will allow us to focus on our core client businesses. In addition, we remain committed to examining all strategic alternatives to maximize shareholder value.”

With a spinoff of Lehman’s real estate assets slated for early next year, the company’s next injection of capital will come once a deal to sell a stake in its investment management business is completed. He said the firm was in late-stage talks with potential buyers for the investment management division, which analysts value at up to $10 billion for the entire business.

Wall Street remains skittish about financial stocks since the near-collapse of Bear Stearns Cos. in March. Like other investment banks, Lehman has been hit hard by deterioration in the credit and mortgage markets since the middle of 2007. Global banks have so far lost more than $300 billion from mortgage-backed securities and other risky investments.

The announcement on Wednesday could help convince investors that Fuld is handling the crisis, and will right its damaged balance sheet, analysts said. He took responsibility for a $2.8 billion second-quarter loss, which was the first since Lehman spun off from American Express Co. in 1994.

Lehman has approached a broad range of possible investors, including banks in Korea and Japan. Private-equity firms in the U.S. have also been contacted about investing in the investment-management business.

Besides Neuberger Berman, the business also includes everything from private client services to private equity components. Analysts believe it the entire business is worth up to $10 billion.

There is also talk that Neuberger’s management might get an opportunity to buy back all or part of the company. Lehman bought the firm in 2003, and Neuberger executives have expressed interest in completing such a deal, according to several media reports.