Lehman Pointing Fingers at Och-Ziff

Nearly two years after Lehman's failure, despite the piles of evidence pointing to neglect, mismanagement and outright fraud committed by Lehman's leaders, some people still believe that short sellers caused Lehman's downfall. Lawyers for Lehman's estate are furiously subpoenaing Wall Street firms and hedge funds for documents that they think will show that rumor-mongering led to the demise of the storied investment bank. Apparently, Och-Ziff was the only target that objected outright in court to producing the documents. Oh sure, it makes the fund appear guilty, but perhaps it's the $3.3 million cost associated with producing 3.9 million documents that the fund objects to? The lawyers for Lehman's estate claim that Och-Ziff was involved in the spreading of false rumors but provided no additional evidence to support the that claim, other than the fact that Och-Ziff refuses to produce the documents.

According to the WSJ:

Och-Ziff Capital Management LLC "likely disseminated and/or was the recipient" of an inaccurate rumor that Lehman had spun off debt to two Lehman-controlled hedge funds to reduce the investment bank's leverage, according to the filing. Investors were focused on Lehman's debt levels in the months before its failure.

The rumor was one of many "lies" spread by unscrupulous market participants looking to profit from shorting the troubled investment bank's stock, alleged the filing, made on Wednesday by lawyers investigating Wall Street firms on behalf of Lehman's bankruptcy estate.

Ah yes, all those "lies" that everybody was spreading that the investment bank was insolvent and wasn't going to make it and would wind up bankrupt. Those crazy crazy untrue rumors that the investment bank was lying about its leverage ratio, its liquidity, the value of the assets on the balance sheet etc. etc. And now, we must expose those rumor-mongerers in bankruptcy court after said firm has gone bankrupt. How come nobody is subpoenaing all the real lies from all the investment pros that insisted the firm was solvent and cheap at $15 per share?

The Fed Also Forecloses

The WSJ reports on the current state of the Maiden Lane portfolio the Fed acquired in March 2008 when it helped facilitate the sale of Bear Stearns to JP Morgan. You know, that portfolio that was just marked up and showing a "profit" as of the last quarter end? Turns out, not all the assets in the vehicle are performing that well, as it is stuffed to the gills with souring commercial and residential mortgages. The Fed is in the curious position of not wanting to sell problem assets at a discount because it could"disrupt markets and hurt banks." That's funny, because every day I keep reading about how much money banks are making again. Is the Fed suggesting that bank profits are a mirage? In any event, the Fed is going to have to deal with the thorny issue of either foreclosing on delinquent borrowers, or doing workouts. Going ahead with the numerous foreclosures scheduled in coming months on residential properties could raise the hackles of legislators who still believe homeowners need to be protected. Like the real estate investor profiled in the article who is just dying to hand over his investment property because he is obviously upside down on the mortgage. He filed for bankruptcy and the Fed is offering to lower his rate, but he says it's not enough. He needs an extension and a much lower rate to get his investment to workout for him. Apparently, no amount of failed HAMP mods is going to stop politicians from trying more mods!

So far, the Fed has only taken ownership of one commercial property, a mall in Ohio that it is trying to sell. But more commercial foreclosures are on the way. Much less political risk with foreclosing on malls. Malls are as American as apple pie. Why shouldn't the US government own a bunch of them?

Maiden Lane made its first monthly principal repayment in July equal to $30 million. In not entirely unrelated news, Blackrock was paid $35 million in fees last year for its work managing the Maiden Lane portfolio, even though a 22-person team at the Fed is also working on it. I'm guessing the entire Fed team took home roughly $1 million in comp last year? But they probably aren't working as hard as the guy at Blackrock who billed the Fed for $35 million.

Buried in the article is my favorite part: "Maiden Lane now owns a large amount of relatively safe securities guaranteed by GSE's Fannie and Freddie. Many were bought over the past two years with cash Maiden Lane received from interest and principal payments in the portfolio and they have helped make up for some value declines from soured assets." When exactly did Maiden Lane turn into a trading account? Why isn't the money being used just to pay down principal on the loan? Is that because Blackrock's fees are based on the size of the portfolio? So we just want to keep reinvesting so the portfolio maintains its size so we can keep cutting a check to Blackrock? So the Fed, the most leveraged entity on the planet, is buying assets from the other most leveraged entities out there. This is what our government borrows money for, so it can trade with itself and pay money managers in the private sector fees. When will the madness end?

Joseph Cassano is Really a Hero

The man responsible for blowing up AIG, nay our entire financial system, has finally slithered out from his hole to say his piece to Congress. A reasonable person might expect a tone of contrition from the tool who bankrupted the world's largest insurance company in a matter of years because he loved subprime so much he couldn't stop selling insurance way too cheaply on it. Maybe something like: "Props to you guys and all your constituents for all the dough. We did a few trades that didn't really work out, so, it's awesome that the government could be a backstop for us. I mean, we could've just gone bankrupt and that would've sucked." Or even "Wow, I feel so bad about causing all this trouble that I'm gonna write a $300 million check, equal to all the pay I collected on profits I never made." But then apparently none of you people know Joseph Cassano. Widely reported to be an arrogant jerk BEFORE the crisis, it turns out that the implosion of AIG has only strengthened his self love. The following are the highlights from the WSJ's account of Mr. Cassano's testimony:

• Joseph Cassano, who led the division of American International Group Inc. responsible for the mortgage trades that proved the insurer's downfall, on Wednesday staunchly defended his actions, maintaining he made "prudent" decisions and that American taxpayers would have been better off had he stayed on.
• AIG's problems, he said, were brought on by a liquidity crisis when credit markets seized up— and weren't a result of lax underwriting practices or defaults among mortgage assets his unit had insured.
• "I think I would have negotiated a much better deal for the taxpayer than what the taxpayer got"
• Mr. Cassano said things might have turned out differently, had he not been asked to leave AIG.
• Mr. Cassano did not hesitate to parcel blame and responsibility elsewhere. He said he still disagrees with the decision by AIG's outside auditors, PricewaterhouseCoopers, to disallow an accounting adjustment that made his unit's reported losses from derivatives look smaller. "I still believe now that it was a wholly appropriate adjustment," his testimony said. The accounting firm declined to comment, saying it does not comment on client matters.

He didn't cause any of these problems. But still, he would've handled the clean-up way better from all those problems he never caused to begin with. The market was wrong, the auditors were wrong, the government was wrong, Goldman Sachs was wrong. All those margin calls? Meaningless! My marks were right. I'm never wrong about anything! EVER! Somebody should give me a cape. Oh, and build a statue of me too. Several statues. Like that guy who used to run Uzbekistan. No wait, maybe its Turkmenistan? One of the Stans. Anyway, you know what I mean. I'm a friggin hero!

AOL Punts Bebo For Next To Nothing

Need a lesson in how to incinerate $850 million in two years? Witness AOL's purchase, then pukage of Bebo. Let me summarize: pay a preposterous sum of money untethered to any sort of economic fundamentals to jump on the social networking bandwagon circa 2008. Can't get your hands on the first (Facebook?) or second tier (Myspace?) property? How about Bebo?! Ever heard of them? Nah, me neither. But I hear they are huge in the UK among 13-22 year olds. Seems those young British folk are fickle and now that they're all grown up to be 15-24, they've abandoned Bebo. In any event, now that the value of Bebo has become somewhat more crystalized, AOL has punted the social networking mini for a realistic, yet "undisclosed" value. Those in the know claim it is far less than $10 million. Far less than Ten = Closer to Zero.

This kind of loss would be embarrassing for most companies, but probably not so much for AOL which set the standard for money punting ten years ago in its historic purchase of Time Warner, which wound up costing shareholders $100 billion or so. Everybody was too busy day trading internet stocks like they were going out of style (and they were!) to count.

In any event, everybody needs a good tax break, even AOL, which will receive a deferred tax benefit in the second quarter of $275-$325 million. The good news is that somebody got rich in the meantime, namely the founder of Bebo, who reportedly paid the highest price ever paid for a single family home in San Francisco. It's always nice when you can sell the high so you can afford to pay the high.

WaMu, Lehman and Fraud

The FT reports that the underwriting at Washington Mutual leading up to its spectacular implosion was "riddled" with fraud, according to a 500 page report being released today. Apparently, fraud rates of 58% and 83% were found in two of Wa Mu's California's offices. Furthermore, nobody at the bank did anything to stop the rampant lying and fraud. The WSJ quotes Stephen Rotella, a former president and COO, at WaMu in a 2007 email that he thought Wa Mu's home-loan division was the worst managed business he'd ever seen in his career, until he saw the company's subprime unit. In any event, former CEO Kerry Killinger, defended his actions, as well as I'm sure the over $100 million he collected in pay during his time at the helm. I mean, it's not easy blowing up the country's largest S&L in five year's time by encouraging employees to commit fraud. It's gotta be worth at least $100 mil.

Meanwhile, in other completely not shocking news for anyone who actually followed what was going on at our nation's banks, the NYT has an article today that discusses Lehman's use of a company that it likely controlled called Hudson Castle, where the investment bank liked to park its risk. If the 2200 page Lehman examiner's report didn't convince you that something was amiss at the investment bank, perhaps this will. Hudson Castle created four separate vehicles, one of which was called Fenway, that issued commercial paper and then used that money to do repos with Lehman. Now read the direct quote from the NYT article: "Lehman itself bought $3 billion of Fenway notes just before its bankruptcy that, in turn, were used to back a loan from Fenway to a Lehman subsidiary." The loan was secured by Lehman's investment in a California property developer, SunCal, which owned a bunch of land. Seriously? Yeah, no fraud going on there.

"Hard Work" of Selling Build America Bonds Costs $1 Billion

The WSJ has an amusing article about Build America Bonds this morning. The new bonds were introduced in April 2009 under the economic stimulus plan to create jobs building roads, schools and hospitals. Unlike traditional muni-debt, Build America Bonds are taxable and generally carry higher interest rates. The US pays 35% of the interest, which helped the local governments to borrow during the credit crunch while saving money on interest payments.

Naturally, this has been a huge profit center for Wall Street firms, as it has allowed them to collect fees for a new product. Furthermore, the clients have unlimited resources, so why not jack up the fees? Apparently the fees Wall Street is charging are "surprisingly high" according to a Federal Reserve economist and amount to a significant mark-up over traditional muni bonds. The underwriters have netted approximately $1 billion in fees over the past year from $78 billion in sales and will continue raking it in on the more than $150 billion in forthcoming Build America Bond issuance. The banks don't deny charging higher fees, but claim that the fees are justified because they are "wording harder to sell the bonds to investors who wouldn't traditionally buy municipal debt, such as pension funds, insurance companies and foreign investors." Right. Because it's such hard work picking up the phone, calling a bunch of pension funds, insurance companies and foreign investors that are already your clients and saying "hey, I've got some bonds that have high yields, where the interest is subsidized by the federal government."

Yes, selling muni debt is such hard work. The investment banks probably had to pay out a bunch of disability to the sales forces for sprained fingers from dialing too hard. Certainly worth $1 billion in fees. Seriously, does our government ever, even for a second, consider negotiating for better rates from the private sector?

How Dumb Did CMBS Investors Get?

Even on the most boring financial news day, the WSJ Property Report always offers up a few tasty morsels of mock-worthy stories. You can skip over the tale of Istithmar World Capital, the private equity arm of the Dubai government's investment fund, which is handing back yet another building to lenders. As it turns out, buying a former hotel-turned-office building in Times Square, kicking out all the cash-flow producing tenants, in the hopes of turning it back into a high end hotel, maybe wasn't such a great idea. Must've been a bug in that excel spreadsheet that spit out the ridiculous purchase price in 2006. Then there are the continuing problems of former real estate mogul Kent Swig who used to like to do deals in just nine days because he was just so great at ripping apart the numbers and analyzing the deal "very, very quickly." Now Mr. Swig is being sued by lenders and five of his properties are listed by Real Capital Analytics as "troubled." You don't need nine days to analyze that.

No, the real juice this morning is in the article about the Biscayne Landing development (or lack of development) in Miami. Sure we've read a multitude of stories about silly CMBS issued in the 2005-2007 period secured by properties with extremely optimistic and preposterous future cash flow assumption. But this is the first time I've read about CMBS that was used to finance a land acquisition. In Florida. On landfill. That had been on the EPA's Superfund site list. Sure it was taken off the EPA's list in 1999, but still. Are you kidding me???

The developer of the project, Boca Developers, had grand visions to build 6,000 residential units, a hotel, a town center, pools and clubhouses. Oh, and they were going to cleanup the groundwater that had been contaminated by the aforementioned landfill. Credit Suisse gave the developers a $233.5 million loan, of which $163 million was repacked into CMBS secured by the ground lease and sold off to a bunch of investors who were apparently too sophisticated to read offering documents. In any event, the project is now largely unbuilt except for two condo towers that are involved in a separate foreclosure action. Furthermore, the affordable housing and the Olympic training facility that the developers agreed to help build elsewhere in the city has yet to materialize so the Mayor is pissed. "The project currently is a failure" says the angry Mayor. Ya think? Apparently the next step for the failed development is for someone to step up to take on the ground lease. Shockingly, there are few bidders that are willing to sink equity into unimproved property that doesn't throw off any cash flow. Any takers?

BofA Controversy Settled, Sort Of

Judge Rakoff reluctantly approved the $150 million settlement reached between Bank of America and the SEC over the bank's failure to disclose mounting losses at Merrill Lynch prior to the shareholders' vote that approved the merger. Still, the venerable federal judge blamed the bank for hiding "material information from its shareholders" and blamed the SEC for being "content with modest and misdirected sanctions." Judge Rakoff also asked the parties to distribute the $150 million to shareholders harmed be the alleged nondisclosures. So the bank, which is owned by shareholders, is being asked to pay its shareholders. Interesting. Sort of like writing myself a check from my own bank account. That'll teach me.

Of course, all of the leadership responsible for this colossal failure has moved on and the bank's new leadership would never allow such a thing to happen again. Right. Remember when Chuck Prince became head of Citi to solve the bank's legal problems? Then Vikram Pandit replaced Chuck Prince to solve its risk management problems? That's the one thing you can always count on with Wall Street. The revolving door will always shuttle through new and improved leaders who will continue to botch the job because their incentives will always be skewed to the short term. Walk the ethical tightrope now, collect your fat check and watch somebody else pay a small fine after you are long gone. The only thing different this time around is that government dollars were used to facilitate this bungled merger, which were immediately used to pay a bunch of people piles of money in 2008, a year in which both banks became insolvent. Maybe Andrew Cuomo will have better luck in crafting a more satisfying settlement.

AIG Drops Plan to Sells Derivatives Portfolio, Thinks Market Will Rally Forever

In the latest bold announcement from the government supported insurance behemoth that still thinks and acts like a private company, AIG has decided to hold on to its derivatives portfolio. According to the FT account of the company's reasoning: "The decision underlines the management's confidence in AIG's future." Or alternatively, the decision underlines the management's lack of ability to find a buyer of its toxic wares at prices that it likes. Apparently AIG's crack CEO Robert Benmosche believes that holding on to $300 to $500 billion of the derivatives portfolio would "reduce the need for fire sales and enable AIG to reap the benefits of rallying credit markets." You see, Mr. Benmosche looked into his crystal ball and foresaw that credit markets plan to rally forever. If AIG sells the portfolio now, AFTER an already powerful credit market rally in 2009, just think of all of the upside AIG is going to miss out on. After all, who needs to think about risk-reward when you can predict the future?

What's funny, in a sort of depressing way, is that AIG is still moving forward with its plans to sell off any business line that it can actually get a bid for, such as the Asian life insurance unit for which Metlife is a potential buyer. Yet it doesn't seem to want to part ways with the crap that has no bid, or rather a bid that it doesn't like. Since the company takes a massive charge every time it actually sells a unit, it's not going to pay back the government any time soon. Furthermore, after the functioning units are sold, the government will be left with a burnt out hull of company that is really just a bunch of illiquid crap with very suspicious marks that the next CEO is waiting to "rally back" to non-fire sale prices.

This is precisely why I hate the term "fire-sale" prices. According to the FT article, "AIG recorded billions of dollars in paper profits on its derivatives in the third quarter of 2009." Either it is just marking up positions to prices that don't exist in the market, which is really bad, or it just wants to continue to ride the coming rally, which is even worse. In other words, either there are accounting irregularities at the firm, or Mr. Benmosche's plan relies on gambling on an uncertain future instead of just taking his chips off the table and admitting that AIG will never pay the government back. Pretty ridiculous any way you slice it.

CIT Hires Former Merrill CEO John Thain To Run Lender

Good news for the nation's employment statistics! John Thain is heading back to work today after a 13 month absence from the work force. CIT Group has hired the former Merrill CEO to run the show at the bankrupt lender. But is this good news for CIT? As usual, I don't think it will make much of a difference. CIT made its bed years ago when it veered away from the staid business of lending to small businesses and dove headfirst into subprime and student lending. Ironically, the brilliant move into toxic lending was pioneered by CIT's former CEO, Jeffrey Peek, another Merrill banker. I'm not sure why the board at CIT thinks that hiring yet another investment banker is the solution to all that ails the lender. One would think that after all the debacles of the past couple of years in the banking industry, it might sink in at company boards that celebrity CEO's aren't worth the money. Yet it hasn't. Perhaps CIT's board thinks that Mr. Thain will convince Bank of America to pay $50 billion for CIT? After all, that was Mr. Thain's only accomplishment in his brief tenure as the head of Merrill Lynch (other than redecorating the office.) It's not like he somehow magically made all of Merrill's losses on its CDOs disappear. The funny part is, selling Merrill wasn't even his idea. And yet somehow, he's worth $5.5 million in restricted shares.

AIG Finds New Legal Counsel, Shuffles Bonus Money

AIG has found someone to fill its General Counsel position, recently vacated by Anastasia Kelly, who left in a huff over a pay dispute. Other than leaving the firm with yet another dent in its cash balances, Ms. Kelly's departure will change absolutely nothing at AIG. Furthermore, the appointment of the new General Counsel, Thomas Russo, won't help the insurer pay back the multiple billions that it owes the government either. But, at least Mr. Russo is thankful for the new job, having recently left a legal position at Lehman Brothers. Mr. Russo worked at Lehman through the investment bank's collapse and its subsequent bankruptcy, so he is highly qualified for his new gig as the insurer voted most likely to fail when the government tires of the political controversy required in propping it up. Mr. Russo also compared himself to Brett Favre, indicating that he fulfills the inflated ego requirement necessary for working in a senior management position at AIG. What kind of personality tests do the recruiters for AIG administer? ("Please insert celebrity whose talent you consider similar to your own. The more preposterous, the better.")

Separately, and yet entirely related, AIG has recouped $20 million in bonuses from its employees. Yet the insurer has moved to pay out as much as $100 million in bonuses this week. But somehow the $100 million is different from the $20 million, as it goes towards the $45 million it promised the pay czar it would recoup from last year's bonuses. See? They aren't related at all. According to AIG, it believes the recouped $20 million "allows us to largely put the matter behind us." So leave them alone, would you?

What the Future Holds After Fed MBS Purchases End

Other than how to deal with the AIG backlash, the largest conundrum facing the Fed is how and when to pull back on its massively expansive monetary stimulus. Certainly Bernanke maintains that he will know what to do and when to do it. You know, just like he saw the housing bubble from a mile away and prevented the whole thing from happening. Right. Moving along, the Fed made it relatively clear in its announcement on interest rate policy yesterday, that it would be ending its massive Agency and MBS purchases as originally scheduled. So that's been settled. Hope everybody's ready.

Most folks are anticipating an increase in mortgage interest rates when the Fed's purchase program is over. With the Fed purchasing roughly 80% of all GSE issuance from last year, it seems the most logical conclusion. However, the WSJ did manage to find that the ranks of "mortgage bulls" are growing. These folks argue that investors who are "reaching for yield" in this great new bull market of ours will step in to purchase MBS because it is a lower risk investment than other corporates that are not explicitly backed by the US government. We saw how well that "reaching for yield" argument worked in early 2007 too, when bubble investors were trying to convince themselves to continue to purchase all sorts of crap at ridiculous prices.

So who are these fools that are about to dive into the market when the largest and currently only buyer is about to step out? Sadly, it might be your pension fund. A very interesting, yet widely ignored, article in the WSJ yesterday mentioned that pension funds were considering leveraged fixed income investments as a way to make up for all the money they have lost in the credit crisis. The pension managers were really unhappy about the fact that they had piled into stocks in the late 90's, only to get smoked. Then they followed that shrewd move by piling into private equity and hedge funds in the '00's, then got smoked. So now they are going to make up for all of it by using that low-risk strategy of purchasing high- rated fixed income products and levering up to juice returns. Because leveraged fixed income investing never blows up in your face, particularly when you dive in when rates are at historical lows and the Fed is considering pulling back on its easy monetary policy. I mean look at how well Orange County did with this strategy in 1994, and Long Term Capital in 1998. It's bound to be a big winner.

Naturally, this idea is the brainchild of pension consultants who are just looking for more and better ways to blow-out pensions so they continue to lose money so they need to hire more consultants. Because frankly, I can't think of a single reason why anyone would advise this strategy right now. Furthermore, if you wanted to give a pension fund some good advice on how to meet its 8% a year earnings target, you could've told them to pile into fixed income, without any leverage, in 2008-2009 when high quality corporates were yielding double digits. But most consultants were probably too busy cowering in the corner while their customers were yelling at them because they couldn't get their money out of that hedge fund the consultant had recommended. Not to mention the private equity fund. Or the money market fund. Oh yeah, and why the hell were their stocks all trading back at 1997 levels?

White House Proposes New Bank Fees, Bankers Yawn

While yesterday's front page financial market headlines warned of the escalating furor over bank bonus payments, today's news hits back with the administration's threat to impose new banking fees. The intention of the administration is to punish the banks for their evil misdeeds in causing the crisis, and to make average Americans feel better about the fact that they are unemployed while many in the financial sector expect to take home multi-million bonus packages and are somehow still complaining because it won't come in an all-cash payout.

Somehow, someway, those greedy bankers are going to learn their lesson, right? I mean, if you hit them up with a really harsh penalty filled with bracing specifics, they are bound to wise up and become far more contrite. According to the WSJ, "The administration is wrestling with who should pay, when it should be implemented and what would happen if banks pay more than the government-bailout program ultimately loses...Even though the proposal is still under discussion, it is expected to be included in the White House's budget, due next month, if only conceptually." Sounds terrifying. The administration has no idea what it is going to do, but it's going to do something, something really big. So big that it needs to be leaked to the press, put on the front page, and then included in the budget as a revenue item to help with the deficit.

I suspect that this fee, much like the financial regulation, and bonus restrictions, will be watered down until it too becomes completely meaningless. The problem is that once we bailed out the financial institutions, we crossed a line from which there is no return. No amount of fees, restrictions or regulations are going to make a difference in how these institutions operate now. It's just too late. The opportunity to extract concessions passed us by when our leaders at the Fed and Treasury had the banks by the balls in the fall of 2008, and chose instead to throw unrestricted gobs of money at them. Oh there is one former Wall Street high flyer that is contrite and demoralized and would've agreed to any concessions in September 2008. No bonus for five years? No problem. Pay the government 50% of all of our profits for the next ten years? Sure. Anything, I'll do anything, just don't let my company fail. He goes by the name of Dick Fuld.

Buy Low/Sell High Still Best Way to Make $7 Billion

The WSJ reports today that David Tepper's hedge fund Appaloosa was the big winner this year in the competitive world of hedge funds. Appaloosa managed to eke out gains of 120%, which amounted to over $7 billion in profits this year. Even taking into account Appaloosa's lousy 2008, where it punted 25%, a 120% return is amazing. What complicated strategy did Mr. Tepper employ? Surely something involving derivatives, structured something or others, hedged against CDS. Nah. He just bought the low. He bought some Bank of America while it was trading below $3 and Citi when it dipped below $1. He kept buying and buying bank stocks, preferred shares and bank debt, even though at times in the depths of the market's misery in February and March, it seemed as if he was the only one buying. While rumors of bank nationalization floated around earlier in the year, investors dumped bank stocks for fear that shareholders would be wiped out, much like in the case of the conservatorships of Fannie and Freddie. However, Mr. Tepper steadfastly held onto his belief that the government would do nothing of the sort. After all, Geithner promised to prop up the banking sector by injecting additional capital and the Fed swore it would take drastic measures to pump free money into the economy. It seemed only logical that we would avert a Great Depression. He didn't understand why government officials would lie about this type of thing, so he just kept buying. And then he rode the rally all the way up.

Market volatility of the kind we've seen in the past couple of years always produces a couple of huge winners. John Paulson emerged as the big winner on the short side as the market imploded, with his prescient shorting of subprime, while Tepper is being crowned king of the long side on the way up. It's usually never the same guy who outperforms in both directions, which is why I personally find Mr. Paulson's returns to be far more impressive so far. Not only did he short financials and produce spectacular returns, but he's had decent returns this year as he was also a big buyer of bank stocks earlier in the year.

Regardless, Mr. Tepper deserves his time in the limelight as the reigning hedge fund master of 2009. Certainly the folks at Carnegie Mellon will be calling him soon. The business school of Carnegie Mellon is named after Mr. Tepper since his $55 million donation in 2004. Although generous to his alma mater, Mr. Tepper still lives in the same two-story home he purchased in 1990 for $1.2 million. And if you discount the fact that he owns a brass replica of a pair of nuts that he likes to rub for luck during the trading day, he doesn't sound like your run-of-the-mill mega-rich hedge fund clown.

AIG Pay Problems Grow More Ridiculous

The WSJ presents yet more evidence this morning that the true reason for AIG's failure was its executives' propensity to spend all day crafting their pay packages rather than focusing on running an insurance conglomerate profitably. Five high-ranking executives threatened to quit last week if their pay is cut significantly. The charge is being led by AIG's general counsel, Anastasia Kelly, who informed her other co-conspirators of how they can "protect themselves" against losing what amounts to some golden-parachute payments that the executives are "entitled" to collect.

The new pay fracas revolves around a severance plan that was put in place before the bailouts, where certain executives are entitled to severance benefits if they resign for "good reason" which includes significant cuts in their annual base salary or target bonus. First of all, what compensation committee in their right mind would agree to this type of a provision? If your pay is about to be cut, it generally means that you are doing a lousy job. So, why would a company agree to let you quit and then agree to pay you a huge severance? Yet more evidence that boards are too conflicted and not operating in the best interest of shareholders.

Worried that this opportunity to collect severance won't be around next year, the execs thought it only fair to use it as a negotiating tactic to keep their current pay packages in place. I know that Mr. Geithner and Mr. Bernanke don't enjoy negotiating and have pretty much let AIG dictate their own bailout terms. But maybe the Pay Czar is a better negotiator. Here's my advice on how to resolve some of these pay standoffs. Anyone threatening to quit over comp at AIG should be immediately fired for cause for neglecting their professional duties and devoting too much time to personal matters at work. I'm sure the company would have no trouble finding another general counsel. There are plenty of highly skilled, out of work lawyers floating around who would love the job.

Benmosche Backtracks

AIG's feisty and possibly manic depressive CEO has backtracked on his threat to quit after just three months on the job. In an internal memo, conveniently leaked to the press, and aimed at assuaging employees' fears of losing all of his talent after only getting a taste of it, Mr. Benmosche wrote that he remains "totally committed to leading AIG through its challenges." Well, maybe except for when he's on vacation in Croatia. Or, maybe except for if he's not getting paid $10.5 million for his trouble. Or, if it means having to suffer more indignities at the thought of some Paz Czar telling him how he can pay his employees. But other than that, he's really committed.

According to the FT, a meeting last week in New York between AIG's directors, led by Mr. Benmosche, told Ken Feinberg (aka "Pay Czar") that his recent decision to slash salaries for 12 of its top executives by more than 90% was leading to high level departures and upsetting employees morale. That's interesting, because I can only think of one thing more upsetting to employee morale than getting a cut in salary and that would be bankruptcy. The great thing about your employer going bankrupt is that you not only lose your job, but you now become an unsecured creditor for any accrued benefits that you had tied up in the company. Then you get to join the other 8 million or so people who've been laid off in the past year and a half. Or better yet, you get to join the many, many people who have exhausted their unemployment benefits and are taking huge cuts in pay just to get a job. In any event, Mr. Feinberg replied that AIG "did not get" the fact that it had been bailed out with billions of dollars in taxpayers' funds. Nice response, Mr. Feinberg. At least somebody gets it.

What's interesting about this whole brouhaha over pay is that there is a brouhaha over pay going on. Mr. Benmosche has been on the job for three months and all we're doing is arguing over pay, as if pay is the most important thing going on at AIG. Furthermore, AIG is using comp as a way to insist that somehow paying people more is going to miraculously make the company earn over $120 billion in the next few years to pay back the government. It's just not going to happen. With the huge rally in credit spreads and the stock market in the past six months, AIG should be making multiple billions now if it had a shot of ever paying the money back. Sure the company turned a $455 million profit this quarter, but so what? Every time it sells off a unit, it takes another huge hit to earnings, because it seems everything was carried at extremely optimistic valuations on its books. So, I say, let the talent leave, replace it with others who want or need the job and wind the damn thing down and put it out of its misery.

The Duffman

Every once in awhile, when not busy crafting ridiculous headlines, Bloomberg actually writes fairly decent "exclusives" on interesting finance stories. Today's tasty treat covers Phil Duff, a finance whiz that flamed out in a rather large and embarrassing way in 2008. According to Bloomberg's account, Mr. Duff earned degrees from Harvard and MIT, became CFO of Morgan Stanley at 36, and was recruited as CFO to Tiger Management in 2000. Then, he founded his own hedge fund firm, FrontPoint Partners, which he sold to Morgan Stanley in 2006 for $400 million. So far, so good.

Not satisfied with this impressive winning streak, Mr. Duff decided to try to top himself. With much fanfare in March 2008, Mr. Duff founded Duff Capital Advisers LP, claiming it would be bigger than Tiger. He secured $100 million from Lindsay Goldberg, a $10 billion buyout firm in New York, and then promptly blew through all the money in under a year. Most hedge fund start-ups would consider $100 million in investment capital to be a gift worth investing right away, particularly during some of the most volatile and interesting markets we've seen in decades. But no, the $100 million was just working capital for Mr. Duff, that he used to create some fairly spectacular infrastructure for a massive fund, without really bothering to figure out how he was going to raise any capital. Mr. Duff signed a 15-year lease, costing $5.5 million a year, on 43,400 square feet of office space in Greenwich Connecticut. The new digs had a custom food court, two jumbo flat-screen televisions, showers, a boardroom table for 20 and a skylight with panes that filtered bright light to keep traders from squinting. Did I mention Mr. Duff's $39,000 desk? Mr. Duff hired approximately 104 employees and offered some of them lucrative pay packages, although several actually invested in the fund by purchasing shares.

Right before Lehman's collapse, Linsay Goldberg started asking some questions. Well, actually just one important one: Why are you spending so much money and not earning any? They eventually forced Mr. Duff to fire many of his employees and eventually forced him to hand over control of the firm. The firm was renamed Investment Risk Management Group and changed its focus to developing risk analysis tools. The company was strung along until May 21st, when Lindsay Goldberg finished raising its next private equity fund. Cause really, embarrassing failures like this need to be swept under the rug until new investment capital is raised. The private equity concern was forced to settle with some of the former employees over a pay contract dispute, but everyone signed NDAs, so nobody's talking.

Stories of hubris and excess like this sometimes make me thankful for the great recession of 2008. Anytime people begin to resemble cartoon characters, particularly from the Simpsons, you know we are due for a correction. Mr. Duff should've seen the writing on the wall when he ordered his $39,000 desk.

LTCM Take Three

John Meriwether is back. Remember him? The founder of Long Term Capital Management, the hedge fund that blew itself up in 1998 and almost took down Wall Street with it? Then there was JWM Partners, a vehicle he set up right after Long Term's collapse, a much more conservative fund that only lost 44% in last year's crisis. Mr. Meriwether wound that one down, presumably not thrilled about the prospect of having to work for free to get back to that high water mark again. Not one to rest on his laurels, Mr. Meriwether is launching yet another fund, this one to be called JM Advisors. Has he discovered some new money making scheme? Nah, he's planning to stick to his tried and true strategy of relative value arbitrage, aka "making a little money for a few years before you give it all back in one fell swoop." Anyone willing to invest in this new vehicle deserves exactly what they get. But pensions and endowments should not be allowed in.

Why Buy a House in Malibu When You Can Squat?

A Wells Fargo executive who heads up the commercial real estate foreclosure division has been using one of the properties seized from Madoff victims for weekend jaunts to the beach. Personally, when I squat in empty multi-million dollar beach front properties, I play it sort of low key. I definitely don't throw any loud parties because it's probably not a good idea to piss off the neighbors when you're doing something that is so preposterous that it may wind up in the pages of the LA Times, not to mention get you fired. Nevertheless, Cheronda Guyton, was caught red handed during the weekends boozing it up with friends in the $12 million Malibu home. Perhaps this is some sort of marketing scheme in this tough economic environment? Not according to angry real estate agents, who wanted to show the property to interested clients but claim that Wells Fargo wouldn't allow it. However, the bank claims that an employee's use of property that has been surrendered to satisfy debts is a violation of its ethics code. I'll take their word for it. And I suspect that Ms. Guyton will have much more free time on her hands and will be spending it in her own, less lavish, accommodations.

Investors in Citi's Alternatives Search For Alternatives

If you ignore the issues with subprime mortgages, SIVs, auction-rate securities, leveraged lending and commercial real estate (just to name a few), the rest of Citi's businesses are doing well, right? Right?? Well, not exactly. The WSJ has an article this morning detailing the problems surrounding Citi's alternatives business. One only has to look at assets under management, which have shrunk from $54 billion to $14 billion in the past year to know that something isn't really sitting right with investors. The article doesn't detail how much of the shrinkage was from investor withdrawals and how much was from investment losses but one can assume it was a healthy a combination of the two.

Citi plans to scale back its approach to alternative investments by pulling back from peddling the investments to retail clients and instead focusing on private-banking and institutional customers. As if the rich and institutions are more interested in poorly managed alternative investments with terrible returns than retail clients. Nevertheless, this is Citi's new strategy and I wish them luck. However, it seems like clients are perhaps not going to go for it. I offer exhibit A as evidence: clients of a private-equity fund that amassed $3.4 billion in airport, road, and other infrastructure projects last month voted to bar it from making new investments after its co-head quit and several high-profile deals collapsed. A second, smaller fund geared towards sustainable development failed to attract clients and was shelved. It's not a very high vote of confidence when your clients tell you to stop making investments and no longer wish to invest in your brilliant new fund ideas. The funds were the brainchild of Michael Froman, former operations chief of Citigroup Alternative Investments, who was apparently so bullish on the alternatives group's prospects that he left to go work for the Obama administration in January. Another co-head of the group has also recently left. But, no hard feelings from those who remain at Citi slugging it out. After all, with the government taking a stake in Citi, they too are working for the Obama administration. Citigroup's Vice Chairman praised Mr. Froman for doing "an outstanding job" at Citigroup. Other executives agree that he assembled a strong team of managers and that his funds "were hurt by market forces beyond his control." You know, market forces such as deciding to invest in leveraged illiquid infrastructure projects at the peak of a credit bubble. Because really, you can't control market forces like that.