Monday, June 30, 2008

Yanked By The Shorts

Right now is a great time to be a pessimist about the markets. There are so many factors helping you out it is unbelievable. The oil price, instability in the middle east, jobless figures, housing markets etc etc. But the best comments I have seen from a pessimist is Albert Edwards, strategist at Societe General in London.

“America is leading the way, diving into deep recession as a collapse in consumer confidence induces the great unwind,” he said. Edwards compares the economy with a pyramid scheme that is poised to crash to earth and interest-rate changes can do nothing to avert it.

He thinks Wall Street and the other main markets have a lot further to drop, and will end up 70% below the peaks of last year. That would imply a level of just 500 for the S&P 500, which was at 1,280 on Friday, and 4,500 for the Dow, compared with Friday’s closing level of 11,346.

The FTSE 100, which closed at 5,530 on Friday, will plunge to 3,000, he predicts. The good news is that he expects the oil price, which was above $142 on Friday, to slump to $60 a barrel. The bad news is that he sees this occurring as a result of “deep” recession in the advanced economies and a sharp slowdown in emerging markets.

Crickey. Shorting just 1 contract for $10 a pop on each of these markets would be a nice $100,000 profit if he is right. But is he the only voice in the wilderness?

Not really, the gloom on Wall Street, where the stock market dropped again on Friday, is almost all-pervading. Veteran banking analyst Richard Bove of Ladenburg Thalmann said there was “an absolute unwillingness among clients to talk about anything other than how bad things are”. Investors wanted to know which bank would be the next to blow up or be forced to raise capital. Even though there were hopeful signs of recovery in the sector, albeit from a low base, many in the market had “lost perspective”, he said.

“The last time loan losses were at these levels was 1934,” he added. “I don’t believe we are going back to a 1930s environment with people living in tents.” Bove predicts bank losses will at least stabilise in the coming months.

However, Scott Anderson, senior economist at Wells Fargo, summed up why the markets are so gloomy. The economy is caught between the twin problems of near-recession and sharply rising inflation. “Consumer confidence levels are at their worst since the early 1980s, we have record oil prices and the Fed will have to react to that and start raising rates by the end of the year if they don’t recapitulate soon,” he said. “That would certainly drag out the housing correction and be a further drag on consumers.”

He has scaled back his forecasts for the end of this year and into 2009. “One half [of Wall Street] is worried about growth, and they are scared,” he said. “The other half are worried about inflation, and they are scared too. Sell in May and go away may have been the best strategy this year.”

A drop in the oil price would be the best remedy for jittery markets and a shaky economy, though it could also cause problems. One fear is that a sharp fall in oil and other commodity prices would bring a new wave of troubles for investment banks and hedge funds. As it is, most have been revising up their forecasts for the oil price.

A survey by Reuters shows that analysts expect the price of American crude to average $113 a barrel this year, remaining around that level next year, before increasing to $115 in 2010. Last year the average was $72.

Some analysts, though, are much more aggressive in their forecasts. Fortis, the Belgian-Dutch financial group, sees crude averaging $125.70 this year, $171.50 next year and $224.90 in 2010. In contrast, Royal Bank of Scotland sees a price average of $86 next year.

So what can you do, as an investor, sit around and wait for Armeggeddon?

I was alkig to a client the other day about the state of the markets and he said that he was staying out of the markets for 'the foreseeable future'. This, from a conservative investor, would be a predictable comment and one which could not be argued with, however, this particular client has been a massive bull ove the years, buying what he ca when he can and he has done very well. However, this bullish attitude was always based on the press he had read, or his feelings on a particular sector. He gets extremely excited about 'things moving by large amounts'.

I pointed out, that if these analysts were talking baout the markets going to the moon, he would be a buyer, he did't disagree. Now that that they are talking about a deep decline in the markets should he be a seller? I suggested.

This then became a discussion about shorting the markets using various instruments and my client is now intent on doing just that. I guess it is just a case of whaht perspective you have. In our business, if the markets are falling... short them... if they are going up, go long. A simplistic view, I know, but I was always taught that volatility is our friend. It is when the markets are going sideways that we should worry...

As a follow on to this, this was an article in the Times that showed up some shorts on the market with new rules implemented by the FSA:


A NEW RULE came into force last Monday obliging hedge funds to disclose short positions they had taken in companies that were raising money from shareholders, writes Kate Walsh.The rule, announced by the Financial Services Authority on June 13, lifted the lid on the funds that were betting against companies such as HBOS, Bradford & Bingley, Johnston Press and UTV Media.

Going short involves borrowing shares and selling them straight away - in order to buy them back later at a lower price.

The names that came out last Monday included well-known fund managers such as Lansdowne, GLG, Fidelity Investments and Odey Asset Management alongside the not so well-known Oceanwood Global and Steadfast Capital.

These were the main positions disclosed last week and the men behind the funds. Harbinger Capital: 3.29% short on HBOS Harbinger’s Phil Falcone, the so-called Iron Man of the New York hedge-fund world, is renowned for making a fortune out of others’ misery. Early last year he had determined that the American housing market was on the brink of plunging and shorted nearly 60% of his $20 billion (£10 billion) fund on sub-prime-backed bonds. The bet paid off and he subsequently paid himself $1.7 billion for a good year’s work. This year, Falcone bought a stake in The New York Times, where he is calling for a radical shake-up.

Lansdowne Partners: 0.58% short on HBOS Lansdowne partners Peter Davies and Stuart Roden are regarded as among the best in their field. They have worked in tandem for well over a decade and left the asset-management division at Merrill Lynch in 2001 to take over what was then a $2 billion fund; it now has $19 billion under management. Lansdowne has a reputation for being cautious and is known for the thoroughness of its research - for example, it is believed to have taken a short position on Northern Rock some four years before the bank’s crisis began.

Meditor Capital Management: 0.3% short on HBOS Talal Shakerchi, born in Birmingham but of Kurdish descent, is the main force behind Meditor. Even within the hedge-fund community little is known of Shakerchi other than that he is an aggressive fund manager who does very well in bear markets. He left Old Mutual in 1998 to set up Meditor after poaching his entire former team. Last year, Meditor was one of the hedge funds, along with GLG, that was fined by France’s financial watchdog for allegedly misusing information in a convertible bond issue by Vivendi. Meditor said it didn’t breach any regulations.

GLG Partners: 4.14% short on B&B The founders of GLG - a fund with $24 billion under management - are Pierre Lagrange and Noam Gottesman. They are among the highest-paid hedge-fund managers in Britain and their lifestyles reflect it - the pair are leading lights on the London social scene. GLG made headlines this year when its star trader Greg Coffey resigned, forsaking $250m of shares. Industry sources said that Coffey was a “sizeable” trader on the short side although his main focus was emerging markets.

Odey Asset Management: 0.28% short on B&B When Crispin Odey quit Barings in 1991 to launch his own fund-management firm he admitted he did not even know what a hedge fund was. Early backing from the billionaire George Soros and Lord Rothschild quickly turned Odey into one of the first hedge-fund stars.

In 1993 he paid himself a £10m salary but the abrupt turn in the world’s bond markets in February 1994 hit the fledgling fund hard. Last year, Odey’s $4.9 billion fund made a killing on wheat, though he is always on the prowl for distressed assets or, in his words, “the company that has no chance in hell of meeting the market’s expectations”.

Funds that disclosed short positions in Johnston Press were Lone Pine Capital, Trafalgar Asset Managers, Fox Point Capital Management and Valinor Management. Old Mutual Asset Managers revealed it had taken a short position in UTV Media.

Scary stuff for the housing market...interesting opportunities for the short trader....

Tuesday, June 24, 2008

Transaction Valued At More Than $20 Million Will Enable Creation of New Safe and Secure Social Networking Websites Around Dolphin's Core Brands of Popular Children's Television Shows

TORONTO, June 24, 2008 (PRIME NEWSWIRE) -- Logica Holdings, Inc. (OTCBB:LGHL), a developer of social networking websites using state-of-the-art biometric identity authentication technology, announced today that it has completed its acquisition of Dolphin Digital Media, Inc. (Dolphin Digital). The acquisition paves the way for Logica Holdings, Inc. (Logica) to create and manage social networking websites around Dolphin's core brands of popular television programs for children, including Nickelodeon's top-rated series Zoey 101, Ned's Declassified School Survival Guide, and the mystery movie franchise Roxy Hunter, among many others. Earlier this year, Dolphin Digital became the exclusive ten-year licensee of Dolphin Entertainment's worldwide digital rights to its current and future properties.

Under the terms of the acquisition, Logica exchanged 24,063,735 shares of Common Stock, equal to 51% of its fully diluted issued and outstanding Common Stock, in exchange for the entire issued share capital of Dolphin Digital. Based on the trailing five-day average closing price of Logica Common Stock prior to the closing, this had an approximate market value of $20.2 million.

"Our merger with Logica will help us deliver the highest standards of online safety for children and tweens around our properties and eventually other destinations," said Bill O'Dowd, President and Chief Executive Officer of Dolphin Digital and Dolphin Entertainment (Dolphin). "With Logica's proprietary state-of-the-art biometric security platform behind our highly popular brand content, we are confident that we can create a safe and desirable online environment for young audiences."

"We are excited to be working with Dolphin Digital Media," said Pino Baldassarre, Chief Executive Officer of Logica. "We are committed to creating a secure and protected online environment for young people where users must be authenticated before entering our websites, enabling our children to experience the Internet in a safe and secure environment."

Dolphin Entertainment controls the international distribution of its programming, with its roster of highly successful programs available in more than 100 countries and 300 million homes worldwide. "Zoey 101," in particular, has been a major hit since its premiere on Nickelodeon in January 2005, having been nominated for an Emmy(tm) Award for Outstanding Children's Program that same year. "Zoey 101" and other shows produced by Dolphin have achieved several ratings records in the United States and Canada, and have performed exceptionally well overseas. Many of Dolphin's international broadcast partners have created the most successful online campaigns in their history utilizing Dolphin properties.

At the heart of Logica's high-tech security platform are the solutions of its technology partners: Novell Corporation, Rackspace, Fujitsu, and 123ID, all integrated through an exclusive worldwide license with Weblock International. Working with its technology partners, Logica is able to offer a proprietary platform of identity management and database solutions.


Dolphin Entertainment, founded by Bill O'Dowd in 1996, is one of the world's leading entertainment companies, specializing in children's and young adult programming. In addition to the Roxy Hunter mystery movie franchise, Dolphin's other 2007 Executive Producer credits include Emmy-nominated(tm) and top U.S. rated Nickelodeon series Zoey 101, and the hit series Ned's Declassified School Survival Guide, as well as Nickelodeon's first-ever TV movies Shredderman Rules! and The Last Day of Summer. Complementing its financing, production, and distribution divisions, Dolphin has successfully launched an international merchandising and licensing group with Zoey 101 campaigns in Canada, Australia, and Western Europe, with plans to expand into more than two dozen countries. Dolphin Digital was also founded by Bill O'Dowd to take advantage of Web 2.0 and social and digital media opportunities.


Logica Holdings, Inc. is a company whose primary focus is in the digital media, e-commerce and information technology sectors. The current configuration of held companies reflects a common theme: the growing global market for social networking and downloadable entertainment content. This is the essential idea behind the entities that are currently part of Logica, which include Plays On the Net, a comprehensive and global online guide to theater, Anne's World, licensee of, the world's first secure social networking site for girls ages 5-14, and Curtain Rising, a user-friendly search engine which will enable theater-goers to locate productions, venues and information with ease.

The Logica Holdings, Inc. logo is available at


This press release may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to anticipated revenues, expenses, earnings, operating cash flows, the outlook for markets and the demand for products. Forward-looking statements are not guarantees of future performance and are inherently subject to uncertainties and other factors which could cause actual results to differ materially from the forward-looking statements. Such statements are based upon, among other things, assumptions made by, and information currently available to, management, including management's own knowledge and assessment of the Company's industry and competition. The Company refers interested persons to its most recent Annual Report on Form 10-KSB and its other SEC filings for a description of additional uncertainties and factors, which may affect forward-looking statements. The Company assumes no duty to update its forward-looking statements.

Monday, June 23, 2008

Oil And The 'Big Rollover'

We picked up an interesting tid bit at today:

"SAN FRANCISCO (MarketWatch) -- TrimTabs Investment Research, which tracks asset flows into exchange-traded and other funds, said Thursday oil speculation risked tipping the world economy into financial ruin. TrimTabs backed up its hand-wringing by noting the potential impact of these funds in the futures markets: this year, commodity trading advisors and commodity ETF's have received $2 billion a month.

If just half those monthly assets bought oil futures, these would present long positions in 100,000 contracts a month, or about 3% of the open interest in oil futures. "The U.S. is going broke, and the rest of the world is sure to follow," said TrimTabs CEO Charles Biderman. To bring down oil prices, he recommended more disclosure of large oil futures holders. And he suggested oil users and the U.S. government short oil".

That is pretty strong language and fairly kooky suggestions. Short Oil? That would be a brave move but I guess if you want to reduce the price that is one way of going about it...suicidal...but one way. Can you imagine the scenario shoud a sovereign state intervene and try and force the markets to short? It would be like shooting ducks in a barrel as oil traders the world over piled in knowing that, at some stage, government bodies could not longer hold back the tide of millions of speculators. Couldn't happen? Remember Sterling and the ERM and Soros wandering into the sunset with billions of pounds in his pocket? Happy days..

It is far more likley, in our opinion, that some sort of regulatory situation will make speculating more difficult or uneconomical but would that be fair?

You could argue that oil is so important to the world's economy that speculation should not be allowed but how, therfore, would it be priced? You risk the possibility of the price of oil being set by governments and vested interests.. would that be a better situation? I am not so sure about that. We already have OPEC who, at the stroke of a pen could stick a few more million barrels of oil a month into the system and have speculators running for their own short positions in droves.

The real question is; What should be the price of oil? It is a finite commodity so as it become more scarce the price should naturally go up, but are we are that point yet?

I came across an interesting article written in 2000 where the author speculated that we were due for a 'big roll over'. Not actually a point where we would run out of oil, but where demand outsripped supply. Spookily the following chart has proved to be prophetic.

The chart is based around a paper and writings in 1999 by retired Professor of Geology at the University of Oregon, Dr. Walter Youngquist and Dr. R.C Duncan who set out to look at where oil production would be outstripped by demand their various statistics are most vividly presented in the charts above and below.

It is not only oil that is the target of these guys. If you would like to fry your brain have a look at their theory on food and the agri-business...

I wish these guys were on my prop desk.....


Friday, June 20, 2008

Bear Stearn Bankers Arrested...We told you so..

"We have said it before on this blog, the regulators are getting tough and are probably being backed by a political will to catch the big guys. Someone's scalp will be on the mantle of an ambitious politician soon, we are sure of it".

So we said in this blog back in October 07 and the regulators and politicians have not dissapointed us.

Two former Bear Stearns managers were arrested Thursday on securities fraud and other charges linked to the collapse of a hedge fund that bet heavily on subprime mortgages before the market collapsed, federal authorities said. Matthew Tannin was taken into custody outside his New Jersey home on Thursday morning and Ralph Cioffi was arrested at his New York City home, the FBI said. They became the first executives to be charged criminally in the wake of the subprime market debacle.

Fall out, however, is beggining to spread. Not only have these guys been arrested in cuffs, Wall Street style but the FBI announced Thursday that it had arrested about 300 real estate industry players since March, including dozens over the last two days, in its crackdown on incidents of mortgage fraud that have contributed to the country's housing crisis.

The Justice Department and FBI plan to announce the recent arrests, including apprehensions in Chicago, Atlanta, Miami, and suburban Maryland, at a news conference set for Thursday afternoon in Washington. An indictment unsealed in federal court charged both ex Bear Stearns men with securities and wire fraud, and Cioffi with insider trading. The U.S. attorney's office in Brooklyn planned a news conference later Thursday.

In a separate complaint also filed Thursday, the Securities and Exchange Commission alleges that in the first five months of 2007, Tannin and Cioffi "deceived their own investors, as well as the fund's institutional counterparts, by fraudulently concealing from them the full extent of the fund's deepening troubles."

The complaint says that in March 2007, Cioffi withdrew $2 million of his own money from a hedge fund without revealing to investors that he was substantially reducing his exposure to the toxic loans.

"Cioffi's clandestine redemption caused the Enhanced Leverage Fund to pay out $2 million at a time when the markets were weak and the fund was facing another month of losses, as well as escalating margin calls and forced sales," the SEC said.

"Although Cioffi had lost faith in the funds, as evidenced by his own redemption from the Enhanced Leverage Fund, he nonetheless falsely expressed his supposed confidence in the funds, encouraging investors to add money to the funds and attempting to dissuade them from redeeming," the complaint said.

The complaint alleges Cioffi and Tannin revealed their secret doubts about the survival of the funds in internal e-mails. Tannin, the complaint says, sent one e-mail last March to a third fund manager with only question marks in the subject line. The e-mail said, "Is Ralph doing what he should be doing right now?"

Around the same time, it adds, Cioffi wrote to a team economist, saying, "I'm fearful of these markets. ... As we discussed it may not be a meltdown for the general economy but in our world it will be. Wall Street will be hammered with lawsuits."

The complaint alleges violation of security laws and seeks an unspecified fine.

A law enforcement official told The Associated Press on Wednesday that an indictment naming the men was the result of a year-long federal securities fraud investigation. The official spoke on condition of anonymity because the outcome of the investigation is pending.

Tannin "is innocent," said his attorney, Susan Brune. "He is being made a scapegoat for a widespread market crisis. He looks forward to his acquittal."

Cioffi's attorney declined comment on Thursday.

The fallout from defaults on U.S. mortgages has rattled the global economy and the American housing market. Subprime mortgages, those issued to people with shaky credit, were repackaged as securities and sold across the globe.

Despite positive assessments by Cioffi and Tannin, the Bear Stearns hedge funds failed in June 2007. The funds had more than $20 billion in assets before crashing.

Cioffi, 52, and Tannin, 46, already have been named in lawsuits brought last year by hedge fund investors, including Barclays Bank PLC, who allege they were purposely misled. Barclays accused Bear Stearns of knowing for months that certain assets in the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund were worth "far less" than their stated values.

The bank alleged Bear Stearns managers "hatched a plan to make more money for themselves and further to use the Enhanced Fund as a repository for risky, poor-quality investments."

Er... Come again!..."Barclays accused Bear Stearns of knowing for months that certain assets in the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund were worth "far less" than their stated values". Forgive me but are they talking about the same Barclays bank that I know?

That would be this Barclays Bank (quoted from their website):

February 2008 Barclays Capital is named Commodity and Energy Derivatives House of the Year by Risk magazine.

February 2008 Barclays Capital wins two awards in Treasury Management International’s 2007 Awards for Innovation and Excellence in Treasury and Risk Management (doh!..that comment not taken from their site).

February 2008 Barclays Capital wins six awards, including Commodity House of the Year and FX House of the Year for the second year running, at mtn-I’s Global MTN Awards.

Are we therefore to believe that the bank who won an award for 'Excellence in Treasury and Risk Management' is blaming two guys for not telling them that "certain assets in the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund were worth "far less" than their stated values".

The words 'of', 'crock' and another one come to mind.

Yes..insider trading etc puts a slur on us all and tips the balance against investors in an unfair way, but that is what regulators are for, n'est pas? Did Bear Stearns pass its compliance audit last year? OK.. bang the guys who audited it up... who was dumb enough at Barclays to take the word of one guy (if that is how it happend, which I doubt), surely if he would have taken a trip over to the desk of the 'award winning' risk management guy he would have known that all was not as it should be in the sub prime market? ...bang him up for not doing his job properly.

In my opinion this is just another politically motivated situation with pictures of bankers being hauled off in hand cuffs meant to let everyone know that the authorities are roughty-toughty lawmakers, able to pin the blame for an exploding market at the door of a couple of highly paid schmucks.

Have we not been here before? Greedy and dim savings and loans guys invest zillions in junk bonds and get burnt. I know.. lets take the guy who was seen as the creator and bang him in prison. Micheal Milken got 8 years and pretty much the only thing they could pin on him was suspicion of insider trading for $300k... when the guy was on a salary that had him earn that every 5 hours!!!

If these guys are going to get banged up on a similar deal then this time we should line those up against the wall who said that 'this will not happen again' after the junk bond situation.

Oh and I don't see any law makers in cuffs.. do you?

What about the "1977 Community Reinvestment Act (CRA)", which compels banks to make loans to low-income borrowers and in what the supporters of the Act call "communities of color" that they might not otherwise make based on purely economic criteria?

CRA supporters claim that over $1 trillion in CRA loans have been made, although no one seems to know the magnitude with much certainty. That is a hell of lot of money that banks have been forced to lend at pain of law suits from the loony left. (if you want to read more there is an excellent article here)

So if you are a bank that has been saddled with a bunch of crappy (sorry 'subprime') loans, woudn't you want to bundled them up, securitise them and sell them to hedge funds???

The architects of this meltdown are many and varied. To blame two guys for doing their jobs and selling their fund is a little petty.

Thousands of tragic deaths in Iraq were caused by Bush over selling his particular story to the world and right now he is on a jaunt around Europeland picking up leaving-presents from Prime Ministers, Presidents and Queens, not sitting in a jail cell.

I believe if you are going to start imprisoning bankers and salesmen you should go all the way down the line and bang up the regulators who let it happen, the loony lefties who forced banks to lend sub prime and the murky politicians who allow such criminally stupid people to legislate on such ridiculous ideas in the first place...

Thursday, June 19, 2008

AB Cap - Death By a Thousand Cuts

Absolute Capital was once a high flying hedge fund business headed by a flambouyant CEO in the form of Florian Homm. The company was worth close to $400mn and it seemed all was rosey.

It all started to come apart after a seemingly petty argument between the company and Mr Homm. Homm resigned saying that he was unhappy about his managers not getting paid bigger bonuses and the shares fell dramatically.

Then, enter the credit crisis and volatile markets. Ab Cap reviewed their funds and found that a number of funds were heavily weighted with illiquid shares in small companies. Law suits were threathened, shareholders, rightly upset, and a company that Ab Cap had just bought intent on reversing that purchase if things did not go their way.

It looks as if the final cut has been made and Ab Cap will sink or swim on its own.

The company's shares dropped by more than 60 per cent on Monday after an extraordinary general meeting of shareholders held in the Cayman Islands approved a demerger of the Argo credit hedge fund business. At the close on Wednesday Absolute Capital had a market capitalisation of just GBP6.15m, down more than 98 per cent in 12 months.

The slump in Absolute Capital's market value has been interpreted by the market as a sign that the company's value lay mostly or wholly in the Argo fund management business and very little if at all in its battered original equity hedge fund activity.

In May three out of Absolute Capital's eight equity hedge funds are estimated to have lost ground during a month when most hedge fund indices indicated an average gain of around 2 per cent across the industry. Another three of the Absolute Capital equity funds have not yet reported performance estimates.

Argo Capital was acquired by Absolute Capital in January 2007. Its former principals, Andreas and Kyriakos Rialas, are now the largest shareholders in both Absolute Capital and Argo Group with more than 33 per cent of the shares.

Following approval by the EGM of all the resolutions required to authorise the demerger of the Argo business, Absolute Capital will carry out the separation of the two companies by making a distribution of shares in Argo Group to its shareholders. Following this distribution, Argo will be owned independently, albeit by the same shareholders in the same proportions as Absolute Capital.

Absolute Capital's ordinary shares continue to be traded on London's Alternative Investment Market. Argo will initially be a private company, but the newly-independent firm intends to apply for its shares to be admitted to trading on AIM within six months, with Panmure Gordon acting as financial adviser.

The board of Absolute Capital Management Holdings has also announced that Jonathan Treacher has stepped up to become non-executive chairman, and that Glenn Kennedy has succeeded him as chief executive. Kennedy joined the company in December 2006 as general counsel and was appointed to the board of directors in February this year.

In a statement issued before the fall in the company's share price, Treacher said: 'We are delighted with the result of the EGM. The demerger of Absolute Capital and Argo Group is a significant step forward for both companies as they will now be in a stronger position to execute their own growth strategies and enhance overall shareholder value.

'The appointment of Glenn as chief executive is a logical step forward for Absolute Capital as we continue to strengthen our management team to build a solid foundation for further growth and development.'

The Ab Cap story is just a side note to the big situations such as Bear Stearns but it is a sobering thought when you consider the numbers involved. When a company can lose £390mn of value in just twelve months it shows us that, in future, listed hedge fund companies may not have the luxury of keeping the secrets that they so closely guard while taking public money.

Friday, June 06, 2008

The IRS Strikes Back - UBS Under The Kosh

Amendment to business plan: NO AMERICAN CLIENTS.

Don't get me wrong, as I have said before, I love our American cousins. Any nation that can put up with the nanny state like they do and still smile and wave the flag is OK by me. Their TV is great, their movie stars gorgeous (Sorry Megan Fox, I am married) and their soon to be President is black and cool.. go Obama.

There is a tincy,wincy problem though; the IRS. I cannot imagine being subject to the draconian laws that the IRS lay down, it is incredible and now the all seeing, all powerful IRS has its sights on Switzerland... and guess what? We have another canary spilling his guts..

The federal authorities are now intensifying an investigation into offshore bank accounts, the secrets of this rarefied world are being dragged into the open and its UBS who are backed against a wall.

As if they don't have enough problems, UBS is considering whether to divulge the names of up to 20,000 of its well-heeled American clients, according to people close to the inquiry, a step that would have once been unthinkable to Swiss bankers, whose traditions of secrecy date to the Middle Ages. (source CNBC)

Federal investigators believe some of the clients may have used offshore accounts at UBS to hide as much as $20 billion in assets from the Internal Revenue Service.

Doing so may have enabled these people to dodge at least $300 million in federal taxes on income from those assets, according to a government official connected with the investigation. One prominent UBS client, a wealthy property developer in California named Igor Olenicoff, has already pleaded guilty to filing a false 2002 tax return.

But as the investigation tears holes in the veil of secrecy surrounding tax havens like Switzerland and Liechtenstein, other names are surfacing, according to the authorities. New revelations are likely to come Monday, when a former UBS banker is expected to testify in a court in Florida about how he helped Mr. Olenicoff and other clients evade taxes.

The former banker, Bradley Birkenfeld, is set to plead guilty to helping Mr. Olenicoff conceal $200 million. "He's going to sing like a parakeet," (Europeans read 'Canary') one of Mr. Birkenfeld's former clients said. UBS said that it was 'cooperating' with investigators and that it was against its policy to help Americans evade taxes. Officials at the bank declined to comment for the CNBC article.

Using offshore accounts is not illegal for United States taxpayers, but hiding income in so-called undeclared accounts is. At issue is whether the UBS clients filed W-9 tax forms with the I.R.S., disclosing securities and assets held offshore, as required by law.

Switzerland does not consider tax evasion a crime, and using undeclared accounts is legal here.

The case could turn into an embarrassment for Marcel Rohner, the chief executive of UBS and the former head of its private bank, as well as for Phil Gramm, the former Republican senator from Texas who is now the vice chairman of UBS Securities, the Swiss bank's investment banking arm.

It also comes at a difficult time for UBS, which is reeling from $37 billion in bad investments, many of them linked to risky American mortgages.

The federal investigation, which is part of a broad, international crackdown on tax cheats, suggests that United States authorities are shifting their focus to Liechtenstein and Switzerland from Caribbean havens like the Bahamas and the Cayman Islands.

The Senate Permanent Subcommittee on Investigations is scheduled to hold hearings as early as this month on offshore products sold by UBS and by the LGT Group, the bank owned by Liechtenstein's royal family.

At the center of the UBS investigation is Mr. Birkenfeld, 43, who grew up in the Boston area and went on to live what might seem like a charmed life as a private banker in Switzerland. Through his lawyer, Danny Onorato, Mr. Birkenfeld declined to comment.

Mr. Birkenfeld's testimony could deal a stinging blow to UBS, the world's largest money manager for people whom bankers politely call "high net worth individuals." Since 2006, the bank has opened plush offices in New York and six other United States cities, among them Boston, Chicago and Houston, to cater to people who are worth at least $10 million.

Many UBS customers are worth far more than that. To lure them, UBS bankers canvassed cultural and sports events like Art Basel, the America's Cup and Boston Symphony Orchestra concerts said CNBC.

"It's not a question of finding wealthy people; it's a question of how do you develop a network," said Purvez Siddiqi, who recruits private bankers like Mr. Birkenfeld for big banks.

But Mr. Siddiqi said he was "astonished" by how aggressively UBS marketed its offshore accounts to Americans. Mr. Birkenfeld took care of important clients for UBS's private bank catering to United States citizens with offshore accounts, and was central to UBS's effort to lure them.

Most of the above is from the CNBC site so please, UBS, sue them and don't close my account! The thing is UBS, in Switzerland at least, are the quintessential Swiss bankers. Polite, informed, discreet and efficient but when expanding overseas you may take your brand name, but do you take your culture?

Being 'astonished' at how aggressively UBS market their products in the US is a bizarre statement. If I stay in a hotel in the US the breakfast is marketed with 'astonishing' aggression.. "What tea would you like sir.. Earl Grey, breakfast, green tea.... and how would you like your eggs? Sunny side up? Hard boiled, soft boiled, scrambled.. over a naked dancing girl? It can take a week just to order some sausages.

That is the culture of the US, nothing wrong with it, it's just the way it is. Do we imagine for a second that UBS in the States is staffed by 5000 Swiss bankers? It's Americans who are taught from an early age to 'Go For It'. I bet the UBS products were no more aggressively marketed than the sausages at my hotel. If UBS have made a mistake it is being outside Switzerland.... With the UK tax mafia, the German secret police bribing people and the IRS squeezing ex bankers... its time to baton down the hatches and close offices anywhere the other side of the Alps.

The problem in the US is with a bazillion million trillion dollar debt, wouldn't you chase every penny of tax dollars you could get?

No, sorry US People... love you and all that.... but being whisked away by men in black suites while I am on my way for fondue and being dumped in 'Gitmo' for ten years is not my cup of aggressively marketed tea...

Tuesday, June 03, 2008

Brokers Fight Club

A day at the office for a trader can be a roller coaster ride of highs and lows. You just called the Dow for +100 points, then threw it all away on Oil. Yahoo and Microsoft pair trade not going your way? Or have you spent the day whipping the Hang Seng?

Whatever your day has been like it is always great to let off steam at the local watering hole, or if you are more fitness oriented, down at the local gym. But beware! Taking your office enthusiasm to the gym might be harmful for your health.

Monday saw the acquittal of stockbroker, Chris Carter, who was charged with confronting a noisey gym customer during a spinning class in an Upper East Side fitness club last summer.

Apparently our stock broking buddy was two bikes away from Stuart Sugarman in the Equinox sports club. By all accounts, Mr Sugarman, a senior partner at an investment firm, was grunting, groaning and shouting, issuing exclamations like "You go girl".

Now shouting such exclamations in our office would have the 'fool of the week' award locked up for many a month, but doing so in a gym with a stressed stockbroker got slightly more reaction.

Mr Carter dismounted his bike grabbed Mr Sugarman's handlebars, raised the front end off the ground driving the rear of the bike into a wall and then let the bike go.

Mr Sugarman spent two weeks in hospital saying the injuries sustained have caused him chronic neck and back pain. The jury seemed to understand the frustration and pronounced Mr Carter 'not gulity'.

This incident occurred on August 15th 2007 when we were just seeing some problems in the markets.... with all the volatility we are seeing now maybe the local City gym is not the place to verbally vent your market frustrations... just a thought...

Rumors of my death have been greatly exaggerated

Regulators and doom merchants are shedding a tear today as the HF Global Hedge Fund Index is reported to have risen by 1.4% in May. Add this to the 1.2% in April and the industry is only 0.2% behind the game for 2008.

Easing of some volatility has helped the industry recover and the arb funds have benefited from buyouts moving closer to completion, such as Clear Channel Communications.

``Some people may have prematurely started writing obituaries for the hedge-fund business,'' said Stephen Oxley, managing director of Pacific Alternative Asset Management Co. in London, which has about $10 billion invested in hedge funds. ``I've been around long enough to have heard several times the cry that `this is the end of hedge funds as we know them'.''

Arbitrage funds, those that bet on a difference between prices, got a lift on May 22, when Clear Channel said banks had fully funded the debt portion of its transaction to be bought by firms including Bain Capital LLC and Thomas H. Lee Partners LP. Highfields Capital Management LP and Third Point LLC are among hedge funds that hold Clear Channel shares, according to filings with the U.S. Securities and Exchange Commission.Merger arbitrage funds in May had their best month since October.

Gains in the industry are reported to have been lead, not surprisingly, by the marco funds which can make bets across a wide range of investments from commodities to currencies and interest rates. These funds climbed 11 percent according to HFR data. The Global Hedge Fund Index is based on returns from more than 2,000 funds and is published with a two-day delay, according to HFR's Web site. H.

Clearly there has been some 'deaths in the family' with those funds that made the wrong bets on the mortgage market going the way of the Dodo and there will be, no doubt, some more to come.

``There's still a huge amount of uncertainty out there,'' said Sophia Brickell, an investment specialist at GAM in London, which runs $28 billion in funds of hedge funds, who expected 2008 to be a ``weed-out year'' for hedge funds.

It looks, however, like we are seeing a calmer environment for funds with most of the potentially big problems having already been removed.

``We're seeing a break from the big losses out there and that's a good start,'' said Cambiz Alikhani, who helps manage hedge-fund investments for Iveagh Asset Management, the investment arm of the Guinness family brewing fortune.

So the industry may not be totally strong and healthy, but it looks as if the hedge fund industry has, once again, shown that it is a long term player in the markets and is not going away in a hurry.