Hedge Funds Skirt Paulson’s Flak

Hank Paulson's efforts to prop up financial stocks has not worked; today's price action was delayed, but probably inevitable.

It has been a hell of a (bad) run for Paulson, who was on top of the world 2 1/2 yeara ago, and turned down the job as Treasury Secretary twice before President Bush talked him into it by granting him unusual powers that, essentially, clinched the deal:

Paulson finally agreed but insisted on some terms. He would answer only to President Bush and not be subject to meddling by the president's economic policy advisers. And, Paulson recalled, he wanted it in writing.

Paulson used his influence within the administration to win even broader powers from Congress, allowing him to nationalize major financial institutions, either in part or entirely. The bills were sweeping in scope and gave him the latitude to spend hundreds of billions of dollars as he saw fit.

And Paulson unilaterally pushed his authority to craft initiatives even when, according a senior government official, he was not sure he had an airtight legal basis. Washington Post

The market continues to vote daily on Paulson's stewardship; what more can you say (besides bait and switch on the TARP). This is beyond ugly.

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Splat

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The Queen of the Sell Side had some choice comments today:

“The Treasury’s announcement of a 180-degree shift in direction for the allocation of Tarp monies sent the credit markets into a tailspin,” says Meredith Whitney, analyst at Oppenheimer. “As Tarp monies will no longer be allocated to buy illiquid assets off bank balance sheets, the market for such assets got even more illiquid.

“As has been the case over the past two years, such disruption in the credit markets does not portend well for the equity markets,” says Ms Whitney.

Diruptions indeed. Paulson decided that banks had to be saved at all costs, and really put a major hurt on the hedge funds via sneak attacks, and flip flopping.

Of course, the Banks have long been the rogues here, intentionally or not. Recent shenanigans at a Canadian bank point out the behavior we have witness all across North America:

The Securities and Exchange Commission today charged four individuals for engaging in a fraudulent scheme to overvalue the commodity derivatives trading portfolio at Bank of Montreal (BMO), and thereby inflate BMO’s publicly reported financial results.

The SEC’s complaint alleges that David Lee, formerly the Managing Director of BMO’s Commodity Derivatives Group, fraudulently overvalued BMO’s portfolio of natural gas options by deliberately “mismarking” trading positions for which market prices were unavailable....After the scheme was discovered, BMO restated its financial results by reducing net income for the first quarter of its 2007 fiscal year by approximately $237 million Canadian dollars ($204 million U.S. dollars), which reflects a 68 percent overstatement of BMO’s net income for that quarter. sec.gov

Regulators have long been asleep at the wheel, hedge funds were effectively policing the markets, that is part of their job.

And while they certainly get in trouble from time to time rogues traders are few and far between, thanks in part to their culture and other issues.

But the two-piece series in the Washington Post reveals some very disturbing behavior from Paulson; I am convinced he has lost his mind. Targeting Hedgistan was a huge mistake, and now Washington is finding out the hard way that nobody is bigger than the market.

There is incessant chatter about hedge funds closing their doors, but there are many hedge funds doing well this year.

For the most part I don’t want to publish their investor letters; that is between them and their clients. But some of them deserve a shout out; it they can get the job done in 2008 they can probably handle anything.

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The hedge funds that dodged Paulson’s flak (performance Oct 31st or early November):

Clive Fund +43.42%

Bluetrend Fund, Ltd +33.75%

Tudor Tensor Fund Limited +32.7%

Tulip Trend Fund. Ltd +51.27%

Paulson Advantage Plus LTD. + 29.38%

Brevan Howard Asia Fund Limited +16.62%

Brevan Howard Fund, Ltd. +16.86%

Comac Global Macro Fund +28.11%

Conquest Macro Fund, LTD +47.72%

Well done.
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Chris Whalen has some words of encouragement for investors...not all the banks are screwed. His favorites have one thing in common - modest capital markets businesses. It is time to leave that game to the pro’s.

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Amid financial crisis, a conversion for Henry Paulson
Part One

A Skeptical Outsider Becomes Bush’s ‘Wartime General’ - (Part 2)
Washington Post

Ugly reaction to Tarp U-turn
FT

Paulson’s Explanation Leaves More Questions
Business Week

SEC Charges Banker and Brokerage Executives With Multi-Million Dollar Financial Fraud
sec.gov
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The content contained in this blog represents 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.

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