Wednesday, December 31, 2008

AIG Seeks Renegotiation of Loan, AGAIN

AIG is once again prepared to ask the Federal Reserve to relax rules on its $60 billion-plus asset disposal program.  Apparently, AIG is miffed about the high interest payments it must make to the Fed on the loan and wants to speed up the asset sales.  AIG is looking at installment payments and other flexible options to make it easier for potential buyers to bid for the assets (at inflated prices) and increase the chances that AIG can extract itself from the government's firm grip.  According to the current deal with the Fed, mind you the SECOND more lenient bailout from the Fed, AIG can only sell assets to bidders paying at least 90% of the price in cash.  Because of this onerous and unfair restriction, AIG is not getting what it deems to be high enough bids, if any, from potential bidders.  Given the current financing environment (i.e. lack of financing environment) and the restrictions on balance sheets (i.e. everyone else is a seller of assets too), this situation should not come as a surprise to anyone with a pulse, (i.e. including my one-and-a- half-year-old toddler.)  If the Fed falls for yet another one of AIG's whiny pleas for leniency to save it from the burden of having to actually pay for its financial sins, I will definitely be one of the bidders in AIG's next auction of a valuable subsidiary.  Instead of offering cash, I will be bidding with a pair of slightly used boots (very stylish), a nine-year-old Jeep Wrangler (still runs great), and a few shares of Enron stock (I'm sure they will pay off eventually, I always buy stocks for the long haul.)  Since I hear this is the type of collateral the Fed is currently accepting in the discount window, I'm hoping to pick up AIG's asset management unit on the cheap.  You see, I have no balance sheet restraints. 

Tuesday, December 30, 2008

GMAC Claims $6 Billion of the Bailout Pie

The government committed $6 billion in bailout funds to GMAC, the finance arm partly owned by General Motors and Cerberus Capital.  The Treasury purchased $5 billion in senior preferred equity in GMAC that pays an 8% dividend and offered a new $1 billion loan to GM so the auto maker could participate in a rights offering at GMAC.  The new loan to GM was in addition to the $17.4 billion in emergency loans recently announced.  GMAC will issue warrants to the Treasury in an amount equal to 5% of the preferred stock purchase that will pay a 9% dividend if exercised.
Last week, the Federal Reserve approved GMAC as a bank-holding company.  The approval was conditional on GMAC raising new capital, which the company attempted to accomplish through a fancy crappy-debt-for-crappier-equity swap that expired Friday.  GMAC was supposed to raise $30 billion by converting 75% of its issued debt into preferred-stock holdings.  Last week, less than 60% of bondholders had signed on and the offering had been extended four times.  Completely coincidentally, and slightly suspiciously, GMAC announced that it had raised enough capital to satisfy the debt conditions simultaneously with the Treasury's announcement that GMAC had been approved as a bank holding company.  According to the Wall Street Journal's account of the story, it wasn't clear whether the government's intervention prompted or followed GMAC's meeting the capital requirement.  My interpretation of the WSJ's statement is that John Snow, the most politically connected head on the three-headed monster that is Cerberus, is proving that what he lacks in investment savvy, he more than makes up for in Washington connections.  As the former Treasury Secretary to George Bush, Mr. Snow was able to convince the Bush administration in its waning days to help a fellow suffering white, absurdly rich, private equity brother out.  And although Mr. Snow was widely viewed as a terrible Treasury Secretary while at his post, sending Mr. Snow to lobby the government for bailout money was a far more palatable option than dispatching Dan Quayle, the other political clown advisor that Cerberus keeps in its arsenal for government lobbying opportunities when it needs a bailout for its incredibly poor investment decision-making.   
It is easy to argue that a bailout for GMAC is necessary if the government is interested in saving General Motors.  After all, GMAC finances about 80% of the wholesale purchases of GM's cars by dealers worldwide and has traditionally been the largest source of financing for the buyers of the vehicles.  Without access to auto-financing, most people aren't interested or capable of plunking down $20,000-$40,000 for a new car.  But I would've preferred it if Cerberus was forced to cough up a significant amount of new capital alongside the government, or had its equity investment wiped out, much like the shareholders of Fannie Mae, Freddie Mac, and AIG suffered when the government came to their rescues.  On second thought, given how carelessly the government funds have been doled out by the current administration, I'm not sure why I expected anything different. 

Monday, December 29, 2008

Cash Piles Grow in Bank Deposits and Money-Market Funds

Admittedly, the headline should read "Finance Bloggers Desperate for Material on Slow News Day," but this Bloomberg story on growing cash piles is the best I could come up with for interesting reading today.  According to Federal Reserve data complied by Leuthold Group and Bloomberg, $8.85 trillion dollars are currently held in cash, bank deposits and money-market funds, equal to 74% of the market value of US companies.  This represents the highest ratio of cash to market value since 1990.  Apparently, the eight previous times that cash peaked compared with the market capitalization the S&P 500 rose an average 24% in six months.  Note, however, that the rise in the S&P is dependent on knowing the actual peak, which makes this bold observation less meaningful.  The statement is similar to saying "100% of the time after the S&P reached its peak, it declined."  So while 74% seems high, who says this is the peak and that the ratio won't go to 120%?  
In theory, investors at some point will grow weary of earning 0% returns on their money, and start to dip their toes back into higher risk fare.  However, if we become trapped in a deflationary spiral, investors will have little incentive to part with their cash and return to the stock market.  So the big question remains:  Are we in for a period of deflation, as treasury yields suggest or will another bubble be stoked by the Fed's zero interest rate policy?  I am leaning towards the latter, albeit after a brief period of deflation due to asset prices over-shooting to the downside.  While I believe that some assets have already suffered significant corrections, many have not, as I will discuss in more detail in my forthcoming posts on predictions for the new year.  Certainly, the inflation versus deflation argument stands to be one of the most important of 2009, as the answer will determine if and when investors decide that stocks are worth the risk again.          

Wednesday, December 24, 2008

Economic Highlights and Lowlights Before the Holidays

In the good news department:

In the not-so-good-news department:
To summarize, the Fed's efforts to dramatically lower interest rates are reaching some consumers, in the form of lower interest rates for mortgage borrowers.  However, the news appears to only be good for those having enough equity in their homes in low-cost areas who were waiting for a good refinance opportunity.  Potential home buyers are still shying away from home purchases, most likely due to an increasingly dismal economic environment.  Although the MBA purchase index is higher, yesterday's new and existing home sales data were extremely disappointing.  Furthermore, borrowers who are upside-down on their mortgages are receiving little relief as none of the mortgage modification programs are showing signs of significant progress.  The employment picture remains weak, and the financial markets are still dependent on significant help from the Treasury's TARP.  Overall, the economic news is still relatively bleak, but with some signs of life popping up in a few indicators.
On a personal note, I wish all of my readers a very Happy Holiday season.  My posting may be on the light side for the next few days.  But if anything crazy, unexpected, and mockable occurs, I will not be stopped from writing about it.

Tuesday, December 23, 2008

New and Existing Home Sales Decline

Existing home sales fell 8.6% in November to an annualized rate of 4.49 million from a 4.91 million rate in October.  The median price dropped 13.2% from a year ago.  New-home sales were 2.9% lower in November to $181,300.  Inventories rose to 11.2 months' worth at the current sales pace, up from 10.3 months' at the end of October.
Meanwhile, new-home sales didn't fare much better, declining 2.9% to an annual pace of 407,000, with the median price declining 11.5% from a year earlier to $220,400.  The supply of new homes, however, fell slightly to 11.5 months' worth from 11.8 months in October.  
Clearly consumers aren't rushing out to buy homes in the face of all the gloom and doom spouted in the press daily.  Despite much lower interest rates for qualified buyers, it's hard to imagine locking into a large financial commitment when you're not sure you're going to make it through the next round of layoffs.  Or when looking at your 401K statement makes you want to vomit.  Or when you wonder how you're going to pay for your smart child's college education because his/her dream school plans to hike tuition because its endowment punted the money on "alternative investments."  Nevermind the fact that your less-cerebral child's shot at making a decent living in construction or on the assembly line at an automaker isn't looking so hot either.  So everyone is hunkering down and waiting to see what happens next.  When there is a glimmer of hope on the horizon, people will buy homes again.  Until that time, they'll be stashing any cash they can into a 0% FDIC insured account.        

Monday, December 22, 2008

Need a New Prime Broker? Call the Fed

On Friday, the Fed announced that it would offer low-cost three-year funding to any US company investing in securitized consumer loans under the Term Asset-Backed Securities Loan Facility (TALF.)  As a consequence, hedge funds will be encouraged to purchase ABS since they will have a convenient, cheap and stable financing source.  The Fed will in essence be taking on the role of a prime broker, by granting hedge funds access to leverage.  Prime brokers have been ratcheting back on the amount of leverage provided to hedge funds which has contributed to the seizing of the ABS market.  Apparently the outgoing Bush administration, in a last ditch effort to do even more damage than possibly conceivable by any twisted human being's imagination, is also considering including new CMBS (please see previous post) and RMBS.  But really, this is all fabulous news.  You see, I've been looking for a new prime broker because my current broker, for some crazy reason, will no longer lend to me at 0% without any haircut, allowing a 100-to-one leverage ratio so I can generate a 5% "risk-free" return before my two and twenty in fees.  It's just so unfair.  Thankfully, the Fed has taken my lousy prime broker's place, so my "business model" has been salvaged for now.  Can someone point me in the direction of the next bubble please?         

Developers Get in Line For TARP

Pity the poor commercial real estate developer.  Sure he made a pile of money in the boom, added a host of properties to his holdings, and probably built a bunch of buildings with borrowed money for which there is little current demand.  He may have even so far have survived the fate of his compatriots Harry Macklowe and Ian Bruce Eichner, both of whom have lost major properties to foreclosure earlier this year.  What ails him now is the prospect of roughly $160 billion in commercial real estate loans coming due in the next year without a single refinancing prospect, and approximately $530 billion within the next three years.  He can refinance, of course, at much worse terms than those he negotiated when the boom was in full force, and he will likely be forced to cough up significantly more equity to secure that loan.  But really, who wants to do that, when you can just write a letter to your buddy Hank Paulson and ask to be included in the TARP?  Sure it's the banks that own most of the CMBS that is set to implode and they have already received boatloads of cash from the government, but we want to make sure we cover all of our bases with the TARP.  Do you want your TARP funds too?  Get in line.

Friday, December 19, 2008

Minor Fraud Friday

In addition to labeling today as possibly the most boring options expiration Friday on record, I have also dubbed today "Minor Fraud Friday."  Due to the incredible and yet deserved amount of press surrounding the spectacle that is the Madoff ponzi scheme, some of the more minor recently unveiled frauds have taken a backseat in the press.  Far be it for me to discriminate against these minor frauds.  What they lack in sheer size, they more than make up for in absurdity.
Federal prosecutors and the SEC have alleged that a 35 year-old broker "stole" confidential information from his wife, a partner at a public relations firm that deals with high-profile takeover deals.  The broker then passed on the information to various colleagues, including one former Playboy Playmate, who used the inside information to generate roughly $4.8 million in ill-gotten gains.  The broker received some cash, a Cartier watch and porsche driving lessons in return for the valuable information.  Call me greedy, but I'd be asking for an actual porsche for risking my hide with maybe the driving lessons thrown in for an extra tip.  Furthermore, what is it with these pea-shooters who risk their jobs, and jail to make a measly $4.8 million?  If you're going to go for it, make it $50 million and then move to some island in the Caribbean.    
Perhaps the best little nugget in this story involves the statement by the wife's lawyer that claims she had absolutely no idea that her husband was passing on confidential information to his friends, and the aforementioned former Playboy Playmate.  The husband gained the confidential information by "being in his wife's proximity when she worked from home and knowing her schedule."  The article doesn't mention whether the wife blurted out things like:  "Guess what? InBev is going to pay $70 a share for Budweiser," while she was in the proximity of her husband but if her lawyer claims she was not complicit in the scheme, then I'm going to have to take him at his word. 
The story would be a tad juicier if the former Playboy Playmate was the broker's illicit girlfriend and the spurned wife was merely enacting revenge for his infidelity.  But alas, the Playboy Playmate was just the girlfriend of one of the traders that profited from the scheme.  Despite playing such a minor role in the scheme, the Playmate features prominently in the photo accompanying the story.  Clearly, she was the most attractive of the bunch of insider traders.  Even the Wall Street Journal has to sell papers in this tough economic environment.    

Banks Enabled Leverage in Madoff Scheme

What is worse than the lack of due diligence performed by the fund of funds that invested nearly all of their capital in the Madoff funds?  The banks that allowed the "feeder" funds to leverage their bets on the Madoff.  According to the Financial Times, HSBC, RBS, Nomura and BNP Paribas lent money to the fund of funds so they could lever up their investments in Madoff.  A simple ponzi scheme after all, is really nothing compared to a leveraged ponzi scheme.  These loans were ultra-safe, of course, because they were secured by "assets."  RBS (now mostly government-owned) and HSBC were extremely conservative by only allowing two-times leverage on the imaginary assets in the feeder funds.  Nomura, on the other hand, in an attempt to shirk its image as a conservative Japanese bank, allowed thrice the leverage on the underlying imaginary assets.  One would think that the banks would try to verify that some assets actually existed before going crazy with the lending.  But one would be wrong.  Little, if any due diligence was performed.  Much like the fund of funds, they were not hesitant to collect their fees, just didn't really want to work to justify them. 

GM and Chrysler Get Government Loans

GM and Chrysler will get $13.4 billion in initial loans from the government in exchange for a restructuring.  The automakers will receive an initial $4 billion in February.  The government loans will have priority over other debts and will come due by March 31st if the companies can't demonstrate financial viability by that time.  As is customary with the government bailouts, the deal is vague as "financial viability" is a somewhat nebulous condition during these highly unpredictable economic times.  Fortunately the loans come with some conditions:  The automakers must provide warrants, accept limits in executive pay, give the government access to financial records and not issue dividends.  The automakers must cut their debt by two thirds in an equity exchange, make half of the payments to a union retirement fund in equity, eliminate a program that pays union workers when they don't have work and have union costs and rules competitive with foreign automakers by December 31, 2009.  
The market likes the news, sort of.  Equity markets are marginally higher, indicating that the market was expecting the news.  Wake me up when something exciting happens.    

Thursday, December 18, 2008

Lennar Loses More Money, Investors Cheer

Lennar posted a fiscal fourth-quarter net loss of $811 million or $5.12 a share.  The average analyst estimate was for a loss of $1.64 a share.  The stock is rallying nicely.  In my next life, I'd like to be reincarnated as an investor in homebuilder stocks because their perennial optimism never ceases to amaze me.  If there is any certainty in this volatile investing climate, it is that the homebuilders will always rally no matter how much money they lose in a quarter.  I find this remarkable as there is so much working against the builders.  New-home sales in the US fell in October to the lowest level in 17 years and builders broke ground in November on the fewest houses since record-keeping began.  Meanwhile, the number of foreclosures and vacant homes is rising.  Certainly the Fed has taken significant actions to lower interest rates and boost demand for homes.  But with consumer confidence at multi-decade lows and the employment picture so cloudy, people are retrenching and saving for a rainy day.  
One of the fallacies that the real estate industry likes to spread like gospel is that there is all this pent up demand from people who need to buy a home because of personal and family changes.  Nobody "needs" to buy a home, particularly not a new home.  Certainly people want to buy homes when their families expand, but they can always keep renting until they feel far more secure about their financial situation.  Just exactly when consumers begin to feel confident enough about the future to take on the stress and responsibility of a new mortgage, in addition to actually getting approved for a mortgage in this lending environment remains an enormous question mark.   

Wednesday, December 17, 2008

Morgan Stanley Also a Loser This Quarter

Morgan Stanley reported a $2.2 billion fourth-quarter loss, wider than most analysts expectations, yet narrower than the same quarter a year ago.  Morgan joins Goldman in proving that even with massive stimulus from the Fed and Treasury, it's impossible to make money if nobody is willing to trade, invest, or pay for advice.  
Once again, even that $2.2 billion loss is extremely optimistic, as revenue was positively impacted by a $2.7 billion gain associated with the widening of Morgan Stanley's credit spreads.  In summary:
  •  The Fed has lowered interest rates to zero
  •  The Fed is lending the banks money versus crap collateral
  •  The Treasury handed Morgan $10 billion
  •  The FDIC guaranteed its debt
  • Morgan was able to book $2.7 billion in profit from the deterioration in its credit worthiness
  • The company still lost over $2 billion
Anyone else wonder why the Fed is terrified?

Tuesday, December 16, 2008

The Fed is Petrified

You can read the text of the Fed's statement here.

A quick summary:

  • Cut fed funds to a target range between zero and 0.25%
  • Cut discount rate to 0.5%
  • Will support financial markets by purchasing agency debt and MBS
  • Will look to possibly purchase longer term Treasuries
  • Will consider other methods to use its balance sheet to support markets and economic activity
  • Labor market conditions have deteriorated, credit is strained, the economic outlook has weakened significantly
  • If you can think of anything else the FOMC can do to further dump liquidity on the market, please send them a note...

Goldman Sachs Posts Loss

Remember when everyone thought that Goldman Sachs was immune to any downturn because they were just smarter than the plebian boobs working at other investment banks?  As it turns out, Goldman really is just another cyclical investment bank that can't escape the worst downturn the securities industry has seen since the Great Depression.  CEO Lloyd Blankfein's statement, after reporting negative net revenues of $1.58 billion and a net loss of $2.12 billion for the fourth quarter, summed up the situation nicely:  "Our results for the fourth quarter reflect extraordinarily difficult operating conditions, including a sharp decline in values across virtually every asset class."  The good news is that Goldman is still standing unlike Merrill, Lehman and Bear.  Even better news is that the government has shown its commitment to keeping what's left of the banking community afloat by guaranteeing its short-term debt via the FDIC, lending billions against shady collateral via the Fed, handing the investment banks capital infusions via the Treasury AND reducing interest rates to near-zero via the Fed.  So, let's just say that Goldman isn't still standing due to its own genius.  Regardless, if the investment bank makes it out of this mess alive, and the credit markets actually improve at some point within the next couple of years, Goldman will be poised to profit from the upturn.  But unlike those optimists who are currently buying the stock on this earnings announcement, I'm willing to wait until at least a small glimmer of hope is on the horizon.   

Monday, December 15, 2008

Fund of Funds Party is OVER

Contrary to popular opinion, the best job in America for the past ten years or so has not been that of a hedge fund manger.  Sure, rich people threw money at hedge fund managers, their prime broker let them lever up 50 to 1, and they could charge two-and-twenty on $10 billion in assets under management for barely outperforming T-bills.  No, the best job in America was that of a fund of hedge fund manager.  Why?  Because rich people threw money at fund of funds managers, their prime brokers let them lever up, they could charge two-and-twenty on $10 billion in assets under management for barely outperforming T-bills AND they didn't actually have to do any of the hard work entailed in trying to outperform T-bills.  What fund of funds managers were supposedly paid for was evaluating hedge fund managers and protecting their investors from potential fraud and losses in riskier assets due to a lack of diversification.  Fund of funds were supposed to be mutual funds for rich people.  Except with much higher fees.  This way, if you happened to be a grocery store magnate who had significant assets to invest, but didn't really have the time or patience to follow the market or care to hire your own private investigators to follow your hedge fund manager around, you could rest assured that you were paying someone a truckload of money to do it for you.  The fund of funds industry was founded on this principle.  It was a very clever money-making scheme.  Until Friday.
The most curious part of the Madoff Ponzi scheme pertains not to the rich people handing over their life savings to one guy without asking any questions.  Charming con men have always been able to talk the rich into parting with their cash.  What I find most amazing about this particular fraud is the unearthing of gross negligence in the fund of funds community.  So far, a fund of funds outfit called Fairfield Greenwich has announced the largest loss, that of $7.3 billion from its investment in Madoff's fund.  A $7.3 billion investment would be a perfectly reasonable allocation if Fairfield Greenwich managed around $1 trillion in assets.  But, alas, Fairfield Greenwich only managed $14 billion, having allocated more than half of its assets to one fund - a fund that was notoriously secretive, didn't have a legitimate auditor, or a separate custodian.  So I have to ask:  What exactly did the people at Fairfield Greenwich do all day?  I mean, other than calculate the fees they were earning on the phantom 10% returns that the Madoff fund "generated" for its investors?  After they performed all of that difficult and complicated due diligence that led them to believe that putting $7 billion into one fund was a fabulous investment decision, how did they spend their time at work?  They obviously weren't looking at confirms and making sure that all the returns tied out.  Did they even get statements from the firm?  From what I have read in other reports, the Madoff fund sent out statements that resembled this: "beginning balance $1 million, ending balance $1.2 million," without any further detail.  Weren't the crack investigators at Fairfield interested in a little bit more detail about how their returns were generated?  I am not casually throwing the term "investigator" around either, for one of the founders of Fairfield Greenwich was a former enforcement officer with the SEC, which perhaps explains why the SEC didn't unearth the ponzi scheme before Mr. Madoff's sons turned him in.    
Fairfield was not the only fund that perpetrated such negligence in its asset allocation decisions for clients.  Several other funds are on the list of offenders that had inexplicably large allocations to Madoff, with a few allocating ALL of their assets.  Did the managers of these fund of funds really think that their laziness and complacency was worth the multi-million dollars in fees that they collected?  Certainly their investors don't anymore.  Most of these funds will be sued to high heaven as investors go after refunds of fees collected on profits that never existed.  They won't survive and the founders will be tied up in a mass of litigation for years.  Furthermore, the fund of funds redemption game will begin anew.   

Madoff Fraud Exposes Regulatory Weakness

How do you perpetrate a $50 billion ponzi scheme?  The details are still hazy, but a few clues that something was amiss at Bernie Madoff's investment fund were enough to keep at least one shrewd advisor from steering clients into the massive fraud.  An advisory firm named Aksia, attempted to replicate the "split-strike conversion" strategy, using a quant analyst who failed to reproduce the returns indicated by Madoff's fund.  Furthermore, since all of the firm's assets were custodied with Madoff Securities, rather than a third-party clearing firm, Aksia investigated the auditor Friehling & Horowitz.  F & H only had three employees, one of which was a 78 year-old living in Florida, one secretary and one active 47 year-old accountant.  The office was in Rockland County, NY and was only 13ft x 18ft large.  Given the scope of Madoff's investment operation, the auditing firm appeared small.  Why other advisory firms and fund of funds firms didn't perform the same due diligence remains a mystery.  After all, what purpose do all of those extra fees on top of fees serve if not to fund extensive due diligence?  It is remarkable how many wealthy and sophisticated investors forked over money to Mr. Madoff given the lack of transparency.  Furthermore, it is even more incredible that some very wealthy investors were so enamored with Mr. Madoff that they handed their entire net worth over to one fund.  The Wall Street Journal has several interesting articles covering many of the issues raised by the Madoff debacle.  The victims of the fraud included many well known wealthy investors and Jewish charities.  Furthermore, an entire enclave in Palm Beach where Mr. Madoff recruited investors has been decimated by losses, with four ultra-luxury condos hitting the market this weekend in one resort, and investors calling the local high-end pawn shop on a Saturday (when it is ordinarily closed) to get loans. 
Where exactly was the SEC?  Asleep at the switch again.  According to the Wall Street Journal, the SEC investigated the firm several times over the years and came up empty-handed.  The agency's enforcement division even investigated a whistle-blower's concerns in 2007, but closed the probe without bringing a case.  Additionally, Mr. Madoff registered his firm as an investment advisor in September 2006 and was not examined within the first year, as is the  requirement for new investment advisors.  The SEC did not sue until December 11, 2008 when Mr. Madoff's sons turned their father in after his confession.  Clearly, there is something very wrong with the regulatory structure of the US securities industry if it cannot unearth a scheme this large without a confession from the guilty party.  The fact that this monumental scam went undetected for so long is mind-boggling and will be a tremendous blow to the hedge fund industry.  Make no mistake, if investors were scrambling to get their money out of hedge funds before the Madoff fraud was unveiled, redemption requests will only increase significantly on the heels of this news.  Analysts who have been calling for the industry to shrink by 30-40%, will have to revise their estimates much higher.  Try 70%.  That's if they can get around the "gates."    

Friday, December 12, 2008

Automaker Bailout Falls Apart in Senate, Grab Your Helmets

The Senate put the kibosh on the $14 billion temporary bailout of the U.S. auto industry.  Of course, the temporary bailout was merely a stopgap measure to keep the car makers operating until a more permanent bailout solution could be concocted by the new administration.  What held up the bill?  The sticking point was how soon union employees' pay should be adjusted to parity with employees of nonunion workers' at plants operated by foreign automakers in the U.S.  The Republicans wanted to reach parity in 2009 and the Democrats wanted more time because, according to Sen. Dodd, with the economy in recession, he thought it wouldn't be fair to force auto workers to accept wage cuts in 2009.  Apparently, he thinks it's completely reasonable for a bunch of autoworkers to be unemployed during the worst recession this country has seen in decades.  Without government aid, both GM and Chrysler will file for bankruptcy before the end of the year.  Wave goodbye to what remained of the U.S. manufacturing industry because once the companies go into Chapter 11 bankruptcy, it seems unlikely that they will emerge.  Unless the government is willing to provide DIP financing, they're headed straight for Chapter 7 liquidation, which is great news if you're in the market for a cheap manufacturing plant in Michigan.  Bad news if you happen to live in the Midwest, because the economy is likely to head straight into the toilet.  Although I suppose all of those out of work auto employees can just go work for AIG.  Maybe they can line up a $3 million bonus just for showing up for work.  
I'm not placing the blame solely on the Democrats, of course.  The Republicans didn't support the rescue package because of "concerns about government intervention in the marketplace."  You see, according to the Republicans, it's perfectly okay to intervene in the marketplace as long as you are keeping insolvent financial institutions afloat (i.e. AIG, Citi, Mer) and supporting bonuses for Wall Street employees.  Blue collar union employees are a whole different story.  Amazing, yet not surprising, where our legislators decide to draw the line.    
The market, of course, is officially back in panic mode.  Futures are off significantly, as investors understand that the repercussions of a bankruptcy of the Big Three will be spread far and wide.  If you thought we were out of the woods, you were sadly mistaken.  

Thursday, December 11, 2008

RIP BCE Buyout

I must admit, I'm somewhat sad to see the BCE buyout officially fall apart.  Witnessing the litigation circus that this deal morphed into has been extraordinarily amusing.  Why the private equity group, led by the Ontario Teachers' Pension Plan of all people, was so dead-set on completing a monster deal struck at the peak of the private equity boom remains a bit of a mystery.  Perhaps the Ontario Teachers have no business investing in private equity if they are so lousy at assessing such a stark change in the investment environment?  Or perhaps, they're smarter than we think?   
In a surprising twist, the deal was killed by a solvency, or rather lack-of-solvency opinion issued by the firm's auditor KPMG.  What do you do when your auditor tells you the firm will be insolvent if the deal goes through?  You try to find another auditor to express an alternate opinion!  BCE engaged Pricewaterhouse Coopers, which delivered a positive solvency opinion.  Because it is really reassuring to know that at least one out of two auditors think the firm will be solvent.  You definitely want to base a multi-billion deal on that.  In any event, the true irony is that BCE originally inserted the solvency-certificate condition in the merger agreement as a condition of closing to protect itself from  lawsuits by existing BCE bondholders, who were pissed about the company's proposed new debt-laden capital structure.  The negative opinion killed the deal, and all involved are certainly rejoicing, with the exception of BCE and its shareholders, who would love a $34-a share take-out, with the stock currently languishing at $18.
With the auditing industry famous for putting its stamp of approval on stellar outfits such as Enron, Worldcom, Bear Stearns, Lehman Brothers and a host of other companies that were basically insolvent and went bankrupt with nary an auditor raising a flag, I've got to ask the following controversial question:  Who bribed the auditors into killing the deal?  I'm not going to point any fingers because my conspiracy theories are purely a figment of my overactive imagination, but I have a few ideas... 

Economic Headlines

Investors have plenty of data to chew over while the Senate takes its sweet time debating the automaker bailout.  First the bad news:
In the deceptively good news department:

Wednesday, December 10, 2008

AIG: You Cannot Be Serious!

Presented without comment because I'm officially speechless:

Can it Get Any Worse For Cerberus?

While lawmakers were busy attempting to hammer out a bailout plan for the automakers, somebody looked up, scratched his head, and said "Wait a minute, isn't Chrysler owned by a private equity firm?  Don't we hate those guys for contributing to the credit crisis by piling on debt to cyclical companies, laying off employees under the guise of "efficiency" and then driving them to bankruptcy because they didn't really know what they were doing and it was just a bubble?  Don't we also hate them for paying themselves all kinds of money and getting favorable tax treatment?  Wait a minute!  Didn't they hire John Snow, a guy who was so bad as the Treasury Secretary that he was forced out by the worst President in the history of the US?  More importantly, isn't Dan Quayle on their payroll????!"  Bailing out the public automakers, GM and Ford, that have been shut out of the capital markets is one thing.  But why should the government bailout Chrysler, privately owned by the three-headed dogs at Cerberus?  Don't the dogs have loads of capital that they can inject?  Details of the bailout plan will be forthcoming, but I hope Cerberus is at least required to pony up some cash alongside the government.
In other Cerberus Sucks news, GMAC's application to become a bank holding company was denied due to insufficient capital.  GMAC is attempting to complete an old-crappy-debt-for-new-crappy-debt swap to restructure. Again.  After the last restructuring didn't work.  So far, only 25% of investors are going for it.  Without the debt swap, the company's prospects are not looking so hot.  Apparently, there are only so many financial engineering tricks investors are willing to fall for before they throw in the towel and decide to take their chances in bankruptcy court.  Did Cerberus really think that guarding the gates of hell would be easy? 

China Growth Machine Hitting the Wall

China's exports and imports both shrank unexpectedly in November.  And by "unexpectedly," I mean "Holy cow! Fire the economists!."  Exports fell 2.2% from a year earlier, compared to expectations of a rise of 15%, while imports dropped by 17.9% compared to expectations of a rise of 12%.  China was widely anticipated to buck the global credit and now economic crises, by continuing to grow, albeit at a slower pace.  But it looks like that isn't going to happen, despite the Chinese government's plan to spend 4 trillion yuan ($586 billion) to boost infrastructure spending and its move to slash interest rates to stimulate the economy.  A slight weakening in the yuan allowed by the government last week raised eyebrows and caused many to speculate that the government would move to depreciate the currency further to help boost exports.  Make no mistake, if China's economy starts contracting significantly, the rest of the world is in big trouble.  We were depending on China to grow us out of this mess. If they aren't going to do it, who will? 

Tuesday, December 9, 2008

Rescue Plan For the Credit Unions?

If you thought the automaker rescue plan was the only one in the works, think again.  According to the Wall Street Journal, federal regulators are preparing a rescue plan to shore up the finances of some of the large credit unions.  The plan will tap the $41 billion lending facility that Congress made available to credit-union regulators in September.  Apparently, corporate credit unions are reeling from paper losses (i.e. probably real losses by now) on MBS.  The Chairman of the National Credit Union Administration (NCUA) is not calling the lending facility a taxpayer-funded bailout.  It is instead a short-term "mechanism to stabilize the credit-union system" while regulators work on other steps (i.e. the actual taxpayer-funded bailout.)  A related program also to be announced by the NCUA will provide $2 billion in inexpensive loans to credit unions to reduce mortgage interest rates for homeowners.  
What are corporate credit unions and who cares about them?  Here is the WSJ's quick description:

"Credit unions are member-owned cooperatives that act much like banks, taking deposits and offering loans. At the end of last year, there were about 8,400 credit unions in the U.S. with $775 billion in assets. Most are faring fine financially.

The rescue plan is aimed at shoring up the network of corporate credit unions, which are wholesale-style institutions that provide financing, investment and clearing services to retail credit unions. The retail credit unions are cooperative owners of the corporate credit unions.

As part of their role, corporates take deposits from retail credit unions, then invest that money in longer-term assets. But some of the largest corporates invested in mortgage-backed securities, and lately have suffered paper losses."

So, really, no need to worry about the retail credit unions.  They are faring fine.  The problem is that they all rely on the corporate credit unions, which are apparently blowing out. Retail credit unions are pulling deposits exacerbating an already difficult situation for the corporates. The stabilization plan to be announced has two steps:
  • Retail credit unions borrow from a lending facility at a favorable rate (1.5%) and then deposit that money with a corporate credit union with a federal guarantee and a small additional rate of return.
  • Retail credit unions borrow up to $2 billion at a favorable rate (1.25%) and use the money to subsidize interest-rate relief for troubled homeowners.
Mind you, these are temporary financing measures that don't address the capital issue.  Perhaps a new administration will be more willing to help the plight of the credit unions as Hank Paulson chose to exclude them from the TARP.  A chart from the Journal depicts the mounting losses at the largest corporate credit unions:  

Monday, December 8, 2008

FedEx, TXN Spoil the Market's Party

A string of several positive days for the equity markets has nudged all the bottom-callers out from under their desks to confidently proclaim yet another bottom.  Unfortunately, they have been smacked in the face this afternoon by the official start of pre-announcement season.  Both FedEx and Texas Instruments pre-announced worse-than-expected earnings.  While FedEx said it expected to meet second quarter earnings estimates,  the company sharply lowered guidance for fiscal 2009 from $4.75 to $5.25 share to $3.50 to $4.75 a share.  
Meanwhile, in Techland, Texas Instruments said it expects fourth quarter earnings of $0.10 to $0.16 per share, and revenue of $2.30 to $2.50 billion.  The chip maker's prior estimates called for earnings of $0.30 to $0.36 a share and revenues of $2.83 billion to $3.07 billion a share.  Shares in FedEx are down roughly 11%, while Texas shares are off 3% in after hours trading.  Can the market sustain yet another rally tomorrow in the face of such sobering news from two important companies?  If we get a government bailout of the auto industry tonight, maybe.  But I wouldn't hold my breath if I were you.

Tribune Files For Bankruptcy, Fitch Downgrades Debt

In a widely anticipated move, Tribune filed for Chapter 11 bankruptcy protection this afternoon.  Despite the many headlines in the morning warning of a likely bankruptcy filing by the newspaper outfit, the crack analysts at Fitch waited until AFTER the bankruptcy filing to downgrade the company's debt.  Furthermore, the crack reporters at Market Watch reported the Fitch downgrade as if it was relevant news.  Because somewhere an investor must care that the bonds he holds of a now-bankrupt company have been downgraded to 'D' from 'CCC.'  Mock the Market's new rating for Fitch? F-!   

Wagoner Pressured to Resign, Thain Looking for Bonus

The front page of the Wall Street Journal rarely crackles with irony as much as today.  Clearly it was a fairly slow news day when two of the top stories revolve around CEOs.  Senator Chris Dodd is calling for Rick Wagoner's head (figuratively) if the government follows through with the billions in loans that GM has requested.  Meanwhile, in a separate, yet somehow completely related story, Merrill's John Thain is tussling with his board over a $10 million bonus, which he claims he deserves.  Mr. Thain believes that he saved the firm from imminent collapse by selling the company to Bank of America.  For this Herculean feat he is asking his (shocked? appalled? incredulous?) board for $10 million in comp.  I still firmly maintain, as I've stated many times before, that selling Merrill to B of A is not what averted the investment bank's collapse.  Sure, it was a shrewd move.  What saved Merrill was billions upon billions of financing from the Federal Reserve through a variety of new and unprecedented lending facilities, in addition to billions in direct capital injections from the Treasury.  Merrill's survival is due to actions by Ben Bernanke and Hank Paulson, not John Thain.  If Merrill's board is going to write a check to anyone, it should be to those two.      
Again, it is interesting that our lawmakers are even hesitating for a moment about helping the auto-industry, given how easily they showered their largesse over the banking system.  Furthermore, it is a bit hard to stomach that the bailouts were handed out to banks without any restrictions on dividends and pay.  The fact that Merrill's CEO is even thinking of asking his board for compensation in these politically charged times is unbelievable.  Even the heads Goldman Sachs, a firm that actually made money this year instead of losing billions like Merrill, gave up compensation.  Mr. Thain is demonstrating that what he lacks in common sense, he more than makes up for in cojones.    

Friday, December 5, 2008

Ugly Employment Report

The US shed 533,000 jobs last month and the unemployment rate hit 6.7%.  This is the worst employment report I have ever witnessed and indeed the US hasn't lost jobs at this pace in over 30 years.  163,000 of the job losses came from the goods-producing industries, with manufacturing firms cutting 85,000 jobs.  Construction employment was down 82,000 and the service-sector lost 370,000 jobs.  If that weren't enough, the prior month was revised down from 240,000 to 320,000 job losses.  Unsurprisingly, the market is unhappy with these numbers as it confirms that the current recession we are in will be incredibly painful.  Hopefully, our lawmakers are paying attention and can find a way to keep the US auto industry out of Chapter 11 (unless it is a government financed pre-pack) as the loss of our manufacturing sector would be devastating.     

Thursday, December 4, 2008

Treasury Working on Another Mortgage Scheme

The Treasury Department tested out another mortgage scheme, concocted in a panic, by leaking it to the press.  The plan is aimed at "revitalizing the US home market."  Details are sketchy, but it has something to do with lowering mortgage rates to 4.5% for buyers who can qualify for a conforming loan from Fannie and Freddie.  Only those who can document their income, and afford the monthly payments will qualify.  The fact that the Treasury has to make the clarification that people who cannot afford a mortgage will be excluded from the plan, gets to the heart of the Treasury's problem.  It is why, so far, no program that lawmakers have initiated has accomplished much more than averting a total collapse of the financial system.  In every speech I have heard Mr. Paulson deliver, he continues to stress that the root of the credit crisis is the correction in the housing market.  Sure, the correction in home values has caused significant damage, but it is merely a symptom of the real disease, which Mr. Paulson has completely misdiagnosed.  The root of the credit crisis was a period of lax lending and stupidity by the credit markets, where standards for lending versus all sorts of assets were lowered to unsustainable levels.  Easy lending led to inflated asset values which were not supportable by fundamentals.  This is precisely why the commercial real estate market is also collapsing, because buying properties for a 2.5% cap rate, which was customary in heated parts of the country, is moronic.  It does not make financial sense when you are borrowing at 6.5% to finance the purchase and putting in little equity.  Asset values are now in a free-fall and they aren't going to stop declining until the fundamentals make sense for buyers.  Sure credit is tight right now, but a credit-worthy person who can put 20% down and can afford the monthly payments can get a mortgage.  Maybe the government should stop trying to prop up housing values with crazy financing schemes, and just start buying houses in bulk at huge discounts from banks's REO departments, do slight renovations, and convert them into housing for veterans, or poor people.  Sounds crazy, but possibly not any crazier than anything else that has been proposed.     

Wednesday, December 3, 2008

Hedge Funds Overwhelmed by Redemption Requests, Uh Oh

Speculation has mounted in the past month about the number of hedge funds that would be forced to close their doors due to poor performance.  Hedge funds were supposedly bracing themselves for record redemption requests from investors by hoarding cash.  Noted hedge fund managers, such as George Soros, were making dire predictions about the industry shrinking drastically.  Now that the year-end is upon is, it appears as if the shrinkage may have been understated.  The past couple of days have been littered with headlines announcing that large hedge funds had halted redemptions due to an overwhelming amount of requests for capital withdrawals.  What's even more curious is that hedge funds with relatively decent performance have had to act to halt redemptions in order to keep from penalizing the investors that wish to stay in the fund.  Yesterday's announcement by Tudor Investments of its intent to halt redemptions was a bit of a surprise.  Tudor investments was only down 5% so far, a screaming outperformance of just about every single asset class with the exception of John Paulson (Paulson is his own asset class.)  Redemptions in Tudor Investments were halted so that the firm could avoid having to dump all of its liquid assets and leave its loyal investors holding a bunch of illiquid crap.  Perhaps the securities were liquid at some point, but not anymore, which begs the follow-up question: Is the fund really only down 5%?  
Today brought a string of similar headlines from hedge funds.  Fortress halted withdrawals from its global macro fund after it received requests for $3.51 billion, or nearly 50% in withdrawals.  The Fortress Global Macro Fund might ring a bell to my regular readers.  Back in August, I wrote about the manager of that fund receiving a $300 million share grant from Fortress, to keep him from leaving when the fund was already down 12% on the year.  Equity holders in FIG who may have been irritated at being so heavily diluted just to keep someone "motivated" can at least take some comfort in the fact that his $300 million grant is worth a heck of alot less today.
Dealbreaker had post after post today of funds posting lousy performance numbers and announcing halting of redemption requests, names including Farrallon and Highbridge, two of the largest and most well-respected funds in the hedge fund community.  I shudder to think of what we're going to hear in the redemption department from Citadel, which was already down nearly 40% on the year.  
All of this frantic pleading for a return of capital makes me ponder who wants their money back and why?  In particular, why all the redemption requests from funds that have performed reasonably well?  The obvious suspects are the pensions and endowments that have contributed to the hedge fund boom of recent years by increasing allocations towards alternative investments.  Clearly they are getting killed and need to raise cash to meet obligations as the value of all of their investments has fallen across the board.  If that is the case, then really, the hedge fund redemption frenzy will probably be over by year end.  Lots of shops will close, and those that are still standing will be able to buy assets on the cheap.  What concerns me is that the answer is far more ominous.  It's possible that many of the redemption requests are coming from rich people who are blowing out.  One of the things about this downturn that has been somewhat interesting is the number of very wealthy people that have been forced to liquidate stock holdings because of excessive personal leverage (Sumner Redstone and the CEO of Chesapeake to name two that come to mind.)  While it may be the case that wealthy investors are pulling money from hedge funds because they are worried about the market and the economy, it may also be the case that they really need the money.  Perhaps they got a little over extended, they have loans to repay, can't sell any one of their houses, have watched their stocks crater, have contemplated selling the family jewels, and frankly, they just NEED SOME CASH.  I suspect that a nice Fannie Mae conforming loan with a 4.5% interest rate is not even going to begin to solve their problems.          

Merrill Lynch Has Trouble With Math

A Bloomberg story this morning claims that Merrill Lynch is said to be cutting bonuses by 50% this year.  I'm sure that headline was meant to be eye-catching, so that readers are shocked by the huge haircut Merrill's bankers will be forced to stomach.  What caught my eye, however, was the fact that Merrill's revenues dropped 96% in the nine months ended September 2008 from a year earlier.  Investment banks generally pay out 50% of revenues as compensation.  Something about the math here doesn't really add up.  Revenues shrink by 96%, the firm loses over $20 billion, nearly fails, and is forced to merge and get various bailouts from the government.  Yet somehow, Merrill is only reducing bonuses by 50% from last year, which was a record year for pay?  The article clarifies that bonuses account for the bulk of a year's pay for most traders and investment bankers.  While that is certainly true, we are talking about people who have base salaries of $150,000 or so, and then receive bonuses of like $650,000.  Let's not be mistaken that anyone here is working for commissions alone.  So while our lawmakers argue over putting GM out of business, the recipient of $10 billion in cash from Mr. Paulson and multiple billions in loans via Mr. Bernanke, is busy handing out bonuses.  Nice.    

Tuesday, December 2, 2008

AutoMakers Plead For Government Funds: Take Two

Today was a very good day to make a case that the US auto industry needs a government bailout. November car sales were flat-out horrendous.  Even Toyota had a year-over-year decline in sales of 34%.  Ford outperformed the competition with a mere 31% drop.  GM saw sales plunge 41% and Chrysler won the prize for worst sales performance by an automaker with a wrenching decline of 47%.  Overall, the industry sold about 34%, or 400,000 fewer vehicles, in November 2008 than it did a year ago.
Both GM and Ford presented turnaround plans to Congress today.  GM requested a total of $18 billion in federal loans, stressing that it needed an immediate injection of $4 billion to stay afloat until the end of the year.  GM's situation is the most precarious as it will likely be forced into a Chapter 11 bankruptcy filing before Christmas without government funds.  The automaker began discussions with bondholders in an attempt to cut its debt load by $30 billion by swapping debt for equity in GM.  GM will also attempt to restructure obligations to a UAW health-care trust set to begin paying benefits to retirees in 2010.  Nevertheless, the company stated that it didn't have a "Plan B," and was depending on help from Congress.
Ford is in much better shape, primarily due to the fact that it borrowed every penny it could raise in 2006 before the credit markets fell apart.  Ford is only asking for a $9 billion credit line, in the event that the recession is longer and deeper than expected.  Ford estimated that it would return to profitability by 2011 and planned to accelerate the development of new hybrid and batter-powered vehicles.  Of course, with the price of gas plummeting every day due to the commodity rout, by the time the vehicles are completed, everyone is going to want to buy a Hummer again.  Because when you're living underground in a bunker with your canned goods, and your bars of gold (wondering what the hell they're good for) and you have to go out for groceries, it's going to help to have a Hummer handy.  You'll be using the electric car as a toaster.  

Weak Earnings, Economic Data Haunt Market

Although equity futures are higher in pre-market trading, most of the earnings releases this morning are marginal, at best.  Yesterday was a brutal day for the market, with all indices down sharply.  The day began with China reporting a steep decline in manufacturing and ended with Bernanke admitting he was ready to initiate Japanese-style monetary policy.  As a quick aside, is anyone else perplexed by the Fed's announcement to purchase long term treasuries during a period when it needs to be issuing all kinds of treasuries to finance these purchases?  I'm not an economist, but perhaps someone can explain how this makes sense.  Why not purchase corporate debt and fund it with treasuries?  Aren't widening spreads and risk aversion the real problem?  But I digress.  Back to the headlines:   
  • Sears swung to a larger than expected loss of $146 million.  Revenue declined 7.8% to $10.7 billion.  The company will close more stores and continue buying back stock. Great idea!  Because all of that stock that Sears paid $135 for last year in its buyback program has worked out really well for them.
  • Staples third-quarter profit fell 43% on costs to acquire Corporate Express.  Revenue rose 34% to $6.95 billion, but declined excluding the acquisition.
  • GE announced that profits at its GE Capital finance unit will decline to $8 billion this year, and $5 billion in 2009, lower than previous guidance.  Profit excluding charges at GE Capital will be around $9 billion, as forecast.  The company plans to keep the $1.24 dividend in 2009 and protect its AAA credit rating.  It seems highly unlikely to me that it can do both and I suspect that the dividend will have to be cut at some point down the line.
  • Beazer Homes posted yet another loss and a sharp decline in revenues.  The company wrote down deferred tax assets by $398.6 million, indicating that it had no plans to ever make money again.  The builder reported a net loss of $473.9 million or $12.29 a share.  Revenue decreased 35% to $712.6 million.
With news like this, it seems hard to imagine that the indexes can muster more than a anemic rally.  Although, in a crazy volatile market such as the one we're stuck with, anything is possible.

Monday, December 1, 2008

Exotic Illiquid Investments Losing Luster With Pensions, Endowments

According to the Wall Street Journal, The Pennsylvania state employees' pension fund may be forced to make cash payments of $2.5 billion or more to Wall Street trading partners, due to investments in a "complicated" strategy referred to as "portable alpha."  Portable alpha is basically a leveraged bet on hedge fund performance.  An investor buys derivatives to match the market's return (the beta) and then uses the excess cash to invest in hedge funds (the alpha.)  According to the Wall Street Journal, an estimated $75 billion or more has been invested using portable alpha, with pension funds being eager players.  This strategy worked brilliantly from 2003-2006, as did pretty much any investment in anything during the bull market.  Leverage in a bull market is fantabulous.  Those who weren't around during the Long Term Capital kerfuffle in 1998 just recently learned: leverage in a bear market is deadly.  What has contributed to the deadliness of this credit market blow-out is the use of leverage to enhance returns on illiquid investments.  It's one thing to borrow a bunch of money to buy stocks or plain vanilla bonds.  The market goes down, you are forced to sell your stocks and bonds to repay your debt and it's over.  You're out of business but it's a pretty quick hit to the market.  However, stocks and bonds are fairly liquid.  What happens when you are leveraged and invested in illiquid assets, such as private equity funds, hedge funds, land, and oh, I don't know, timber?  Now you have a big problem.  Maybe you thought your hedge fund was liquid, but, um, no, now that it has frozen all redemptions due to the fact that it is down 65% for the year, and it was invested in all kinds of crap you never understood; not so liquid.  Your private equity fund?  Oh yeah, those guys have been in the business for years, everyone is clamoring to get into that fund because it's so prestigious.  I'm sure I can just sell my stake in the fund to someone else who really really believes in the Chrysler, GMAC, Freescale [insert name of highly cyclical company taken private at the peak of the economic cycle and loaded up with debt] turnaround story.  Except that, um, maybe not.  Because, you see, Harvard and a host of other investors who used to have a long investment horizon are now rushing to sell those stakes too at discounts of over 50%.  Also in line to punt private equity stakes are AIG (must repay government loan) and Lehman (must finish liquidating to complete bankruptcy process.)  The problem is; too many people rushing for the exits, and far too few lined up to buy either because they can't or because they believe that even a 70% discount is a crappy deal.
Investors have learned a very hard lesson in the past year.  The common refrain pitched by Wall Street to investors with supposedly long time horizons was that the extra yield offered by less liquid investments was worth the risk of tying up your money in assets that weren't easily redeemable.  Unfortunately, investors didn't demand enough of a premium for liquidity risk.  Now that they need the money, they are paying the price by having to sell their stakes at huge discounts.  What this has created is a yawning divide in the price between liquid and illiquid assets that, frankly, should've always existed.  Sure stocks are down around 40% on the year.  But many hedge funds are down more, and if they've frozen redemptions, good luck ever getting your money back.  Hedge funds have turned out not to be liquid investments.  Private equity funds don't have to mark to market, but given the lack of an exit strategy for most of their investments, they are facing a much longer time horizon than expected to reap any returns.  The time horizons, of course, will be shortened when a host of firms that were recent leveraged buy-outs go bankrupt because they were terrible investments. 
Given the horrible returns that pensions and endowments are certain to post this year, there will be a huge backlash towards the alternative investing that has been the rage for the past several years.  Risk premiums will return to more realistic levels without everyone chasing after the same investment strategies.  Ultimately, extraordinary investment opportunities will abound for those willing to take the risk.  Investors who have patiently sat on the sidelines for years because they didn't believe all the hype, will be in a position to cherry pick from a variety of investment options offering significant returns.  Fees for hedge funds and private equity funds will be reassessed and reduced significantly.  The alternative investment party is finally over.