Cerberus Promises to Give Up Nothing for Something
The private equity business has been ravaged over the past 16 months; perhaps no firm has lost their mojo faster than the dogs at Cerberus Capital Management.
PE professionals are busy scrambling to keep their heads above water, but the professionals at Cerberus are going from guarding the gates of hell to checking in to Hades for an extended stay.
Under the old rules of capitalism their buyout of Chrysler Corporation would probably result in their entire $7.4 billion investment being written down to zero, although you have to admit they saw it coming:
February 2008
Some of the possible failure scenarios include a nasty recession, an extreme slowdown in the car market, or a further credit downturn. Credit is already looking green around the gills, and the potential for a widespread domino effect that starts with an implosion of the teetering mortgage business would be catastrophic for Chrysler Financial and GMAC, of which Cerberus owns 51 percent.
They were 3 for 3 on those scenarious, and are in desperate straits. The former masters of the universe are the latest to get in line for a helping hand, although they are careful on the wording:
Cerberus Capital Management LP, the buyout firm that owns Chrysler LLC, would forgo any profit from a future sale of the automaker should it receive federal financial aid.
Chrysler also expects the U.S. government to take a stake in the company in any bailout, Chief Executive Officer Robert Nardelli said today at a conference in Palm Desert, California.
Cerberus founder Stephen Feinberg ``has basically gone on record saying he would forfeit'' profit on a Chrysler sale in those circumstances, Nardelli said. ``This would not be supporting a private-equity company with government funds.'' Bloomberg
How Meredith Whitney’s Mentor Crushed It
While I have not been very impressed with some of the pieces Michael Lewis has written for Bloomberg over the past year, he has redeemed himself in a big way.
He has written an long article that is, hands down, the best thing I have read this year.
It is not a story about Merrill, but one about Steve Eisman, an analyst who trained Meredith Whitney out of college, and ultimately provided her with an edge that few of her peers possessed.
A Merrill anecdote, in which Eisman explains to Brad Hintz why he is short Merrill, is hilarious:
“We have a simple thesis,” Eisman explained. “There is going to be a calamity, and whenever there is a calamity, Merrill is there.” When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit.
That was Eisman’s logic—the logic of Wall Street’s pecking order. Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be a part of things. The game, as Eisman saw it, was Crack the Whip. He assumed Merrill Lynch had taken its assigned place at the end of the chain. Portfolio
This is a story about CDO’s, greed, and the death of Wall Street.
A must read.
illustration by Ji Lee
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The End
Portfolio
Meredith Whitney’s Latest- “Ring of Fire”
FT Video
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.
Citadel’s Retrenchment Continues
Buzzard's continue to circle over Citadel Investment Group, and until the news flow improves the boys in Chicago will have to fend off the ongoing rumor mill:
Citadel Investment Group, one of the world's biggest hedge funds, is shuttering a Bermuda reinsurer it formed in 2004, according to a source familiar with the matter.
Citadel, which manages roughly $18 billion (11 billion pounds), thought it had a winning business plan with CIG Re because it was fully collateralized, giving the insured certainty their claims would be paid if catastrophe struck.
It is unwinding the reinsurer, according to this person, because the company's cost of capital is too high. The reinsurer, which does not have a financial strength rating, has also had a hard time competing with rivals who do.
The Chicago-based firm formed the property-catastrophe reinsurer, CIG Reinsurance Ltd, four years ago because it saw reinsurance as uncorrelated with its other investment strategies. Reuters
News like this is likely to keep Instant Messages flying around, and Griffin back on his heels...
Short Seller Jim Chanos Wins Big in ‘08
Piggybacking well respected money managers has been prescription for disaster over the past year; resource equities and infrastructure plays became one of the more crowded trades in recent memory as everyone piled in long.
But piggybacking short seller Jim Chanos has been a bit more successful; one of his best ideas was being kicked around mid-2007, at least if you were following the smart money:
July 2007
Chanos is getting more vocal about his short position in Moody’s.
Chanos said in May that Moody’s might face lawsuits for keeping its ratings of subprime loans too high.....Moody’s (MCO-NYSE) is ``integrated into the whole underwriting cycle of structured finance,’’ or bonds based on the repayment of mortgages and other loans. ``We believe they and the other rating agencies have been reticent to downgrade anything.’ 1440 Wall Street
Sometimes it is even better to be lucky than good. Chanos stated that he was not short banks and brokers in mid-September because "We don’t short people we do business with." He likely averted the mid-September short squeeze in financials, and was apparently busy shorting infrastructure plays this summer, even though he did not expect the domestic economy to necessarily crash and burn two months ago:
Top Performing Hedge Funds Not Immune From Redemptions
The bloodletting in the stock market shows no sign of ending, and the wind should be in the face of the bulls well into 2009. The roots of the puke-athon go back to early September when Ospraie wound down its flagship fund, and institutional investors began to nervously eye the exits.
Ospraie, Harbinger Capital and Atticus got the ball rolling as their resource equities and institutional favorites were put up for sale, and it has been a brutal two months since fund-of-funds began to provide diapers to their rank and file:
September 10th
Atticus Capital tried to dispel rumors of fund-of-fund redemption requests, but their 13-F has been mandatory reading of late, and yesterday the list was drawn and quartered with their typical name (MA, V, CCI, BBD, ITU, NYX, UBB) down perhaps 6%. And the lemming like fund-of-funds that provide the industry with their lifeblood are entering their offices in a tizzy today, and are being greeted with more bad news, at least if they allocated money to London-based RAB Capital. 1440 Wall Street
Managers with the strongest historical performance were able to demand strict lock-up provisions, and some even set-up controversial "side pocket" arrangements that pissed off a number of their clients and got tongues a waggin'. Of course, when you have made hundreds of millions of dollars over the preceding years you probably have better lawyers than your clients. Although telling them to bugger off is bound to haunt you, eventually.
