Unstructured Finance

Gross miscalculation?

By Jennifer Ablan and Matthew Goldstein

It appears that Bill Gross’s PIMCO Total Return Fund is losing ground with investors — just not as fast as we originally thought.

Morningstar, the mutual-fund tracker, initially told us that PIMCO’s flagship fund had suffered $17 billion in net outflows over the last 12 months. It turns out Morningstar discovered this morning that it miscalculated and the figure actually is $10.3 billion.

That’s slightly better news for Gross but the trend still holds that the fund is seeing  a steady stream of outflows. Morningstar estimates that in October and November of this year, PIMCO Total Return fund has seen $1.69 billion in customer redemptions.

And since November 2010, total outflows from the fund have been $12.3 billion. November 2010 was a critical month for Gross, also known as “the Bond King,” because it was the first time his fund had suffered outflows in about two years.

Morningstar also reports that over the past 13 months, the Total Return fund has seen outflows in 8 of those months. Last December, it was a particularly brutal month for Gross. Roughly $6.7 billion was withdrawn from the fund. And given this year’s poor performance, there is a strong chance this December’s outflow could be hefty too.

With the December numbers still not in, it could be a very nervous holiday season in Newport Beach, California.

It appears that Bill Gross's PIMCO Total Return Fund is losing ground with investors, just not as fast as we originally thought. Join Discussion

Steven Cohen reenactment theater

By Matthew Goldstein and Jennifer Ablan

In the end, one of the more memorable takeaways from the Steve Cohen deposition we unearthed is the feud between the lawyers over what to call the billionaire hedge fund manager: “Stevey” or “Mr. Cohen.”

Bess Levin at Dealbreaker.com used a her unique wit to deconstruct the verbal dispute between Cohen attorney Marty Klotz and Fairfax Financial lawyer Mike Bowe.  And now CNBC’s David Faber weighs in with his own retelling of the verbal jousting. (see video clip here).

And yes, we agree with Squawk on the Street host Melissa Lee that we need to see a visual reenactment as well–since it’s unlikely anyone is going to get the videotaped version of the deposition anytime soon. But we’ll try.

 

 

 

In the end, maybe the most memorable takeaway from the Steve Cohen deposition we unearthed is the feud between the lawyers over what to call the billionaire hedge fund manager: "Stevey" or "Mr. Cohen." Join Discussion

Steven Cohen in his own words

By Matthew Goldstein and Jennifer Ablan

The thing about deposition excerpts—even lengthy ones—is that some of the tantalizing material gets left on the cutting room floor. And that’s certainly the case with hedge fund billionaire Steve Cohen’s two-days worth of  testimony in the long-running Fairfax Financial litigation.

Now don’t get us wrong—there is plenty of great and illuminating stuff in the 242 pages of deposition testimony Reuters obtained through a court motion to unseal documents in the civil lawsuit. As we noted in our story, Cohen is pressed at great length for his views on insider trading—he thinks the laws are “vague”. And as we highlighted in our blog, there’s even an amusing little feud between the lawyers over how the SAC Capital founder should addressed.

Still, it makes you wonder what was said by Cohen in the more than 400 pages of deposition transcript that wasn’t unsealed. And we’d love to see Cohen on videotape as sometimes body language can be revealing.

One of the more intriguing tidbits in the deposition is a very brief line of inquiry by Fairfax’s lawyer about whether Cohen had an early discussions in September 2008 about the Federal Reserve’s plan to backstop the commercial paper market. The Commercial Paper Funding Facility, or CPFF, was one of the most important steps taken by the Federal Reserve to keep liquidity following in the financial system after the collapse of Lehman Brothers.

Indeed, between July 2007  and the failure of Lehman Brothers, the relative use of commercial paper fell 10 percentage points, according to a research paper by the Federal Reserve Bank of Dallas. The Fed’s CPFF program, which was announced in October 2008, “helped prevent commercial paper from imploding by as much as it did in the 1930s,” the paper added.

When asked by Fairfax’s lawyer if he or someone on his team was given a heads up on the CPFF, Cohen responds, “I don’t remember that.” He then goes on to say, “I’m not a credit person.” (see page 352 of transcript)

The thing about deposition excerpts—even lengthy ones—is that some of the tantalizing material gets left on the cutting room floor. And that’s certainly the case with hedge fund billionaire Steve Cohen’s two-days worth of testimony in the long-running Fairfax Financial litigation. Join Discussion

Stevie Cohen Unplugged

By Jennifer Ablan

Steven A. Cohen, one of the world’s most successful and secretive billionaire hedge fund managers, shared some of his thinking on insider trading, something his worst critics have alleged SAC Capital knows a thing or two about.

Cohen in sworn deposition testimony earlier this year, an extended excerpt of which was obtained by my prolific colleague and partner-in-crime Matthew Goldstein, said: ”The way I understand the rules on trading on inside information, it’s very vague.”

Cohen added: “It’s my belief that the idea of material nonpublic informing could be interpreted differently, depending on which side of the transaction you’re on.” At one point, the 55-old-trader loses his cool a bit with Fairfax’s lawyer, Michael Bowe, commenting: “Well, you know, we’re having this conversation for about three hours about what’s material and whatnot. It’s pretty clear that you and I have a different view on it.” 

Cohen’s deposition testimony in February and April this year was part of a long-running civil lawsuit filed by Canadian insurer Fairfax Financial, which we reported on exclusively here.

The 600-plus pages of testimony makes for fascinating reading. Cohen goes on to define the term “edge” and provides a window into his web of contacts including DanielLoeb, the American hedge fund manager and founder of Third Point LLC.

Martin B. Klotz, a lawyer for Cohen and SAC Capital, also made a memorable appearance in the deposition when he objected to Bowe’s reference to Cohen as “Stevey.”

Steven A. Cohen, one of the world's most successful and secretive billionaire hedge fund managers, shared some of his thinking on insider trading, something his worst critics have alleged SAC Capital knows a thing or two about. Join Discussion

Bad data II

By Matthew Goldstein

Bad data continues to confound the U.S. government in its measurement of the economy, with the Federal Reserve Bank of New York noting it too has been a victim.

In the Fed’s most recent report on outstanding consumer debt, the nation’s central bank said it recently discovered it had been underestimating the total dollar amount of student loan debt for a number of years. In the report, the NY Fed said some of the under-counting may have stemmed from the methodology used by one of its vendors.

The Fed said it has fixed the problem, which was a significant one. The Fed says it may have been under-estimating outstanding student loan debt by some $290 billion.

But don’t worry, the Fed indicates there’s nothing wrong with its other data collection. And on that front, the Fed said overall consumer debt at the end of the third-quarter declined by $60 billion to $11.66 trillion.

Let’s hope the Fed hasn’t been under-counting outstanding home loans and credit card debt either.

Here is the Fed’s student loan debt correction:

Bad data continues to confound the U.S. government in its measurement of the economy, with the Federal Reserve noting it too has been a victim. Join Discussion

Phil Falcone’s ray of sunshine

By Matthew Goldstein

Leave it to Phil Falcone to find a glimmer of good news to relay to the beleaguered investors in his Harbinger Capital Partners. A day after U.S. securities regulators threatened to sanction the billionaire hedge fund manger for alleged trading irregularities, Falcone told investors in his roughly $4 billion firm that not all is lost.

In a note emailed to investors the day after Falcone officially learned the U.S. Securities and Exchange Commission is considering charging him with a number of securities law violations, the former Harvard hockey star told them that nothing the SEC is looking at involves his beloved LightSquared.

Additionally, it is important to note that neither Harbinger Group Inc. (“HRG”) nor LightSquared were the recipient of a Wells Notice, nor was either involved in any of the events being investigated.  Moreover, the Wells Notices received by HCP and certain affiliates are not related to any of the HCP funds’ investments in HRG, LightSquared or their predecessors.

Harbinger Group is the publicly traded company Falcone acquired over a year ago, which has served as an dumping ground for some of the hedge fund assets. But Harbinger Group is inconsequential compared to LightSquared, the upstart wireless telecom that Falcone has just about bet all of his investors money on. Falcone’s hedge fund has sunk more than $3 billion in equity into LightSquared and to this day it remains just about the only equity investor in the company.

As we said in a Aug. 2010 special report, the success or failure of Falcone’s hedge fund now rides solely on whether or not LightSquared can get its planned 4G high-speed network off the ground.

But that seems increasingly unlikely given the growing concern that LightSquared’s broadcast spectrum interferes with the global positioning systems used by the Dept of Defense and the aviation industry. On Capitol Hill, opposition to LightSquared grows with each passing day and some lawmakers like Sen. Chuck Grassley, an Iowa Republican, keep pressing the Federal Communications Commission to release more information about its dealings with the Falcone-backed telecom.

Leave it to Phil Falcone to find a glimmer of good news to relay to the beleaguered investors in his Harbinger Capital Partners. A day after U.S. securities regulators threatened to sanction the billionaire hedge fund manger for alleged trading irregularities, Falcone told investors in his roughly $4 billion firm that not all is lost. Join Discussion

MF Global: gross negligence or intent

By Matthew Goldstein

There was plenty of theatrics Thursday when Jon Corzine returned to his old stomping ground–Capitol Hill–to offer an apology and a mild defense for the events that led to the collapse of MF Global. But in the end little light was shed on just what happened during those final days of October, as Corzine’s firm spiraled towards bankruptcy and hundreds of millions dollars of supposedly protected customer money went missing.

Corzine said many times he didn’t know what happened to the money and was shocked as anyone to find out the money was gone. But there is one thing Corzine said that will prove to be the most critical part of his testimony and that’s his assertion that he never intended to do anything wrong. Or more precisely, he never intended to have customer money maintained in segregated accounts transferred to the firm’s own bank accounts.

As anyone who has been following the MF Global saga now knows, the one inviolate rule of the futures industry is that a firm cannot commingle its money with its customers, or take customer money in a segregated account to pay the firm’s bills or debts.

Yet it increasingly looks like customer money was moved and commingled with the firm’s own money. But the challenge for investigators from the FBI to determine is whether the commingling was an accident–the result of gross negligence by harried and frantic employees of MF Global. Or was the money moved in a deliberate and desperate attempt to the keep the ship afloat.

It’s an important distinction because gross negligence–no matter how bad that might be–would likely only expose those at MF Global to potential civil liability. That’s bad and could results in stiff fines and bans from the futures business for individuals, but probably no jail time.

On the other hand if someone at MF Global gave an order to begin wiring money hand-over-fist out of customer accounts to meet some margin call, then a crime might very well have been committed. The key thing is whether anyone at MF Global had the intent to break the law and move customer money. It’s why Corzine kept to the “I didn’t intend” construction in answering questions during the hearing.

All you need to know is about MF Global's is whether the events that transpired in the firm's final days crossed the line between gross negligence to intent. Join Discussion

Bad data?

By Matthew Goldstein

The jobs situation is still pretty bad in the U.S. and the nation has a long way to go to make up for the millions of jobs lost during the financial crisis. But today’s job’s report and recent revisions point out that maybe things aren’t as bad as everyone feared just a few months ago.

Remember this summer, when everyone was convinced the U.S. was headed into another recession. The August jobs report seemed to confirm that bleak outlook when the Department of Labor said the nation produced a big fat 0 in terms of new jobs. But now we know that 100,000 jobs were created in August. And the Labor Department says the 103,000 jobs thought to have been added in September was actually 210,000.

The October number also was revised up by 20,000 to 100,000.

So who knows, maybe November’s report, which said the nation added 120,000, will be revised upwards next year when the December jobs reported is released.

If nothing else, as Floyd Norris notes, the revisions “are signs of a generally strengthening labor market.”

But it could also be a sign of something else, continuing trouble with the government’s ability to collect economic data. And that’s something to ponder because the poor jobs numbers of August and September helped cement the view on Wall Street and elsewhere that the U.S. was headed for a double dip.

The jobs situation is still pretty bad in the U.S. and the nation's has a long way to go to make up for the millions of jobs lost during the financial crisis. But today's job's report and recent revisions point out that maybe things aren't as bad as everyone feared just a few months ago. Join Discussion

The curious Mr. Kotz and the SEC

By Matthew Goldstein

If we’ve learned nothing from the financial crisis, it’s that we need smart regulators to be minding the store. And we need someone to make sure the regulators are up to that job and not shirking their responsibilities.

So it was a breath of fresh air when David Kotz assumed the role of inspector general of the Securities and Exchange Commission in 2007.

Kotz attacked the job with a welcome aggressiveness and his exhaustive 477-report on the Madoff mess shed some much needed sunshine on the SEC’s fumbling and bumbling of the investigation into the world’s biggest Ponzi scheme. The report prodded regulators to speed up the creation of a new multi-million dollar database for handling tips and complaints from informants–a big failing of the SEC in Madoff.

But now questions are being raised whether Kotz has gone too far in trying to scour out the slackers at the SEC. Reuters reporter Sarah N. Lynch writes today about a number of SEC employees who have filed formal complaints about Kotz and his investigative tactics. Two of the women filing complaints were targeted by Kotz but ultimately cleared of any allegations of wrongdoing or improper behavior.

The complaints bring to light something that people close to the SEC have been whispering for a while–which is that Kotz’s many investigations are promoting a culture of fear within the agency. SEC lawyers who once responded to reporter emails or phones calls–even if politely to simply say ‘no comment’–now don’t even bother. SEC lawyers have told people they are afraid that by doing so, they will be investigated by Kotz for improperly leaking information.

Now it’s important for the SEC and any government regulator to have a strong and vigilant oversight. But at the same time, it’s important that oversight doesn’t become so onerous that regulators start looking over their shoulders and second-guessing everything they do.

If we've learned nothing from the financial crisis, it's we need smart regulators to mind the store. And someone to make sure the regulators are up to the job and not shirking their responsibilities. But now questions are being raised about David Kotz, the man who is responsible for keeping the SEC on its toes. Join Discussion

MF Global a month later and still a mystery

By Matthew Goldstein

It’s been about a month since MF Global began spiraling towards bankruptcy and still there’s no clarity about what happened to the missing customer money that was supposed to be kept in untouchable, segregated accounts. It’s not even clear how much money is missing.

When the Jon Corzine-led firm filed for bankruptcy on Halloween, it was believed some $900 million in customer money couldn’t be accounted for in MF Global’s segregated accounts maintained at Harris Banks and other institutions. That sum was quickly revised downward to about $600 million. And the number remained at $600 million until the court-appointed liquidation trustee surprised everyone last week by saying more than $1.2 billion in customer money might be missing.

But now even that $1.2 billion figure is in doubt. Officials with the CME quickly questioned the much higher figure and so did other regulators. A law enforcement source tells me federal investigators also doubt the $1.2 billion figure and believe the missing money is still about $600 million.

Still, $600 million is a lot of money and it’s a bit mystifying that regulators and federal investigators have yet to come up with a good working explanation for where the loot went.

At this point it seems pretty clear MF Global–whether intentionally or negligently–was commingling customer money with the firm’s own money. The speculation is that as the firm was careening towards bankruptcy, MF Global dipped into the segregated customer account to cover margin calls on the firm’s own trades and ones it made with customer money. But that’s just educated speculation–not an official working narrative of events.

Maybe some answers will emerge on Dec. 15 when regulators, Corzine and others from MF Global are scheduled to appear on Capitol Hill to testify before a Congressional panel.

It's been about a month since MF Global began spiraling towards bankruptcy and still there's no clarity about what happened to the missing customer money that was supposed to be kept in an untouchable, segregated account. In fact, it's still not even clear how much money is missing. Join Discussion