Sunday, January 31, 2010

From The State of the Union Address

About one-third of the way through the President's State of the Union Address on Wednesday night there came the following passage:

As hard as it may be, as uncomfortable and contentious as the debates may become, it's time to get serious about fixing the problems that are hampering our growth.

Now, one place to start is serious financial reform. Look, I am not interested in punishing banks. I'm interested in protecting our economy. A strong, healthy financial market makes it possible for businesses to access credit and create new jobs. It channels the savings of families into investments that raise incomes. But that can only happen if we guard against the same recklessness that nearly brought down our entire economy.

We need to make sure consumers and middle-class families have the information they need to make financial decisions. (Applause.) We can't allow financial institutions, including those that take your deposits, to take risks that threaten the whole economy.

Now, the House has already passed financial reform with many of these changes. (Applause.) And the lobbyists are trying to kill it. But we cannot let them win this fight. (Applause.) And if the bill that ends up on my desk does not meet the test of real reform, I will send it back until we get it right. We've got to get it right. (Applause.)

Frankly, I'm not sure what this means. "Look," I'm not interested in pedantry for its own sake, but Obama now has two very different financial reform plans in the air. There is on one hand the plan that the Treasury Dept under Geithner put together in June of last year, which centers on enhanced wind-down authority for the Fed, bank capital requirements, the creation of a new consumer protection agency and the regulation of over-the-counter derivatives. Some of the elements in this plan did pass the House of Representatives on December 11.

There is on the other hand, a very different set of proposals, centered on the so-called Volcker Rule, which would bring back something like the old Glass-Steagal segmentationb of thebanking industry. I say "something like" with deliberate vagueness. It is not a simple return to Glass-Steagal. My point, though, is that Obama didn't announce this new plan until January 21, 2010. So there was obviously nothing like it in the bill passed by the House in December.

So, does the above passage mean that he is already retreating from the Volcker Rule, and that he is angling instead to take what he can get from the June Plan? Which one is the "real reform" that he says he would demand of any bill that ends up on his desk?

Damned if I know.

Wednesday, January 27, 2010

Outside the Safe Harbor

The Second Circuit requested that the Securities and Exchange Commission give it some help with certain issues as to the lawfulness (or otherwise) of forward-looking statements under the Private Securities Litigation Reform Act of 1995.

Accordingly, the SEC has filed an amicus brief in the case of Slayton v. American Express Co.

The litigation arose out of certain statements in the May 2001 Form 10-Q filed by the American Express Co. regarding losses in the high-yield investments of Amex subsidiary American Express Financial Advisors (AEFA).

Here's the link.

In section 102 of the PSLRA, Congress sought to protect certain forward-looking statements from liability in civil lawsuits, in order to weed out what the legislators decided were meritless claims. This was part of the Gingrichian "contract with America."

Civil liability will not attach due to a forward-looking statement that is identified as such, "and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement."

The controversial May 2001 10-Q said that Amex expected that total losses of AEFA's high-yield investments would be lower in the second quarter than they had been in the first. But at the end of the second quarter that year, Amex issued a press release that announced that its subsidiary AEFA would be recognizing a loss of $826 milion, due largely to write-downs of high-yield debt.

Slayton came about because the plaintiffs alleged that Amex should not have made the statement it did in May, because "the Company and the other Defendants had no basis for making this representation."

The SEC's amicus filing is generally but not entirely supportive of the plaintiffs. Amex was outside of the safe harbor, because the cautionary statements were not sufficiently meaningful. Furthermore, "A speaker who makes a forward-looking statement with actual knowledge that he or she has no reasonable basis upon which to make the statement has actual knowledge that the statement is misleading," it says. That is what the plaintiffs want to hear. On the other hand, the SEC added that the defendants are entitled to be particular about the pleadings. "[To] survive a motion to dismiss, the plaintiff must plead facts sufficient to establish the defendant was subjectively aware that one of the implicit factual assertions underlying its forward-looking statement was false when the statement was made." The defendants must either have disbelieved their own statement about what the second quarter would show, or they must have known that they had no reasonable basis for that belief, or they must have been "aware of ... undisclosed facts tending to seriously undermine the accuracy of the statement."

So, although the good ship Amex is outside the safe harbor and the waters are a bit choppy, it is not necessarily sunk.

Tuesday, January 26, 2010

Lawsuit Over VW Price Surge

Back in the overly-exciting autumn of 2008, several hedge funds took a beating as a result of their speculation in the shares of Volkswagen, and the spike in VW's share price I discussed here at the time.

Those who were on the business end of a beatdown included Greenlight Capital, SAC Capital, Glenview Capital, Marshall Wace, Tiger Asia, Perry Capital, and Highside Capital, according to reports at the time. There have been rumors of effects going beyond that list, and beyond the hedge fund world.

Over the weekend of October 25-26, Porsche unexpectedly disclosed that through the use of derivatives it had accumulated a 74.1% stake in VW, up from 34%. The state of Lower Saxony owns 20.1% This meant that there was a "free float" of only 5.8% of VW's capitalization. It also meant, as a matter of arithmetical necessity, that some of the shares that were on loan for shorting must actually have been the property of Porsche or Saxony, though the short sellers presumably obtained them through the services of a prime broker.

It didn't take long for short sellers to do the math and decide that the exit door was shockingly narrow. They rushed to cover their shorts, and the price spiked, up 145% when the exchanges opened for business Monday, October 27.

Four of the large hedge funds involved (Elliott, Glenhill, Glenview, and Perry) have now filed a lawsuit in federal court in New York alleging market manipulation and seeking to recover these losses.

In a statement, Porsche said: "The lawsuits have not been delivered to us yet. We point to the fact that we have always complied with current capital market regulation."

Monday, January 25, 2010

JPM's Acquisition of Bear Stearns

Bill Bamber was Senior Managing Director at Bear Stearns in its final days. He is also the first person singular "I" in the memoir "Bear Trap: The Fall of Bear Stearns and the Panic of 2008," though Bamber received assistance in writing the book from Andrew Spencer, Director of the Literary Division for the Creative Management Group Agency.

Anyway, regarding the matter discussed in yesterday's entry in this blog, the contract snafu that allowed Bear Stearns to renegotiate the terms of the acquisition, quintupling its cost to JPM ... Bamber's book has this to say.

"The lawyer's name wasn't released, so only a few select individuals know his name. I myself am not part of that great and solemn fraternity who were privy to his name, but whoever he is, I would one day like to find him, buy him a beer and shaking his hand for making me smile when I thought I would never smile again. All because of a single solitary sentence....Those of us who were still sitting around on the trading floor at Bear Stearns, in stark contrast to the vein-popping fit of rage that was consuming Jamie, were in collective fits of laughter bordering on hysterics."

Sunday, January 24, 2010

The class-action lawyers don't get credit

A New York state court, in rejecting plaintiffs' attorneys' efforts to cadge themselves some fees out of JP Morgan Chase, have provided us all with an opportunity to walk down memory lane and review the shotgun marriage of JPM and Bear Stearns almost two years ago now.

On Sunday evening, March 16, 2008, in the face of a run on Bear Stearns, the board of that storied broker-dealer agreed under Federal Reserve pressure to a "stabilizing transaction" in which it would disappear as an independent entity. It was to be effectively acquired by JPM for $2 a share. When I first saw that figure, I thought it was a type. Surely what was meant was $20. It couldn't possibly be only $2, thought I (and several other observers, some considerably more canny than I). After all, the stock had closed at $30 a share at the end of business Friday. Surely, it couldn't have lost $28 of that value of the course of a not-quite-concluded weekend, could it?

But it wasn't a typo. The agreement was that Bear Stearns would sell itself for $2 a share. Naturally, what came as a shock to onlookers like myself came as a much uglier shock to folks who had a substantial chunk of their nest eggs in Bear Stearns stock. And plaintiffs' attorneys filed a lawsuit on their behalf almost immediately, In Re Bear Stearns, 21 Misc. 3d 447 (Sup Ct., New York County 2008), claiming that the directors had violated their fiduciary duty by low-balling this.

On Tuesday, (as the usual story goes) lawyers for JPM discovered flaws in the hastily-compiled documentation they had prepared for this deal. They discovered language that "inadvertently" would require JPM to be responsible as a backstop for Bears' deals even if the deal didn't close. In other words, even after signing of to the $2, Bears' execs and lawyers discovered that the wording left them with a neat blackmail weapon. They could breach the contract, file bankruptcy as an independent entity, and leave JPM stuck dealing with a variety of angry counter-parties.

It was in reaction to that threat, and a promise to change the disturbing language about backstopping deals, that JPM agreed reluctantly a week later to raise the $2 price to a munificent $10. So, everybody was playing hardball all around. You might ask: so what?

The amusing point here is that the class action lawyers sought to take credit for this twist in fate. They said: because we filed the lawsuit, the defendants decided they had to be better fiduciaries, so they pressed for the increase from $2 to $10. Accordingly, we provided great assistance to the class we represented, and we are entitled to layers' fees.

Well, the court had earlier decided against the plaintiffs on the merits: that the directors did the best they could be expected to in the crisis circumstances they faced. This brings us back to where we started. On Dec. 28, 2009, the court also ruled against the lawyers on the issue of fees. "Here, there is not an iota of evidence in the record to suggest that the shareholder suits filed by plaintiffs after the announcement of the Initial Merger Agreement, had any causal impact on the negotiations that eventually resulted in the Amended Merger Agreement."

A bit more on this tomorrow.

Wednesday, January 20, 2010

Kraft-Cadbury Concord

Kraft and Cadbury have settled on terms, with Kraft increasing its offer from about $17 billion to $19.5 billion, in a deal that is part cash purchase, part stock-swap.

Hershey had apparently been planing a white-knight offer of $17.9 -- Kraft has obviously now leapfrogged past that. This purchase price is a multiple of 13 times Cadbury's underlying 2009 EBITDA.

I don't believe I've ever defined that acronym in this blog. Just for the record, then, EBITDA means "Earnings Before Interest, Taxes, Depreciation, and Amortization."

The acronym became popular when analysts noticed that the P/E ratio could otherwise be very misleading. According to an older theory, if a corporation's stock price reflected a low ratio of market cap to earnings, the stock itself was undervalued, and a good investment. Obviously, that is a theory that runs into some difficulty given the premise that capital markets are efficient (or even not horribly inefficient) at incorporating such data. But never mind that for now.

No ... the fatal problem for the P/E ratio, as it turned out, was that the earnings number incorporated a lot of fluff in terms of distinct ways of computing amortization, etc. EBITDA, then, is the "E" part of the P/E ratio with the subjective or fluffy stuff taken out, which is supposed to be a more relevant number for purposes of comparison.

As it happens, the "price" side of the old P/E ratio has been modified too over the years for the purposes of analysis. Instead of price-to-EBITDA, one often hears about Value to EBITDA, with value defined as price (i.e. market cap) + the market value of debt. That particular refinement is a subject for another day.

We'll give the final word to Cadbury Chairman Roger Carr: "We believe the offer represents good value for Cadbury shareholders and are pleased with the commitment that Kraft Foods has made to our heritage, values and people throughout the world. We will now work with the Kraft Foods' management to ensure the continued success and growth of the business for the benefit of our customers, consumers and employees."

Tuesday, January 19, 2010

Sierra Geothermal

Sierra Geothermal Power Corp. (TSX: SRA) is what one might guess it is from that name. The company, based in British Columbia, Canada, has been developing geothermal energy products located in Nevada and California.

The company's website says that it "intends to finance development by utilizing a combination of corporate equity, joint venture partnerships and project debt, with the support of US government grants and loan guarantees."

Dissidents led by Richard Rule, and a company he controls (Exploration Capital Partners) seeks to change the size of the board in a way that would put majority control up for grabs. They are unhappy with the existing board's efforts to remain independent, at a time when similar companies are consolidating.

At this time, RiskMetrics is supporting the incumbents. That proxy advisory company says, "The board has the right strategy of becoming a major independent producer of geothermal power. Two future milestones: (i) 50 MW bankable feasibility by the end of 2010 and (ii) power production by 2012, have been conveyed to the market. $20 million out of the $50 million required for (i) have been secured. A future financing plan has also been outlined. There is no contrary evidence to prove Sierra is not on track now."

Monday, January 18, 2010

Something that must worry a few lawyers

After a lengthy sentencing hearing on Thursday, January 14, Joseph Collins was consigned to seven years in prison in a connection with a scheme to help executives at the defunct commodities broker Refco conceal its financial troubles. He had been convicted of his part in that scheme in July.

After the eight week trial, a mistrial was declared on some of the counts, but the jury did convict on conspiracy, two counts of securities fraud, and two counts of wire fraud.

The federal district court judge involved, Robert P. Paterson, sentenced Collins, formerly of Mayer Brown LLP partner, to the seven-year term to be followed by three years of supervised release, saying, "I think this is a case of excessive loyalty to his client," the judge said. Collins' lawyer, William J. Schwartz, vowed an appeal.

The jury deliberations appear to have been quite contentious (hence the partial mistrial). In particular, a male juror identified as "Kevin" told that court that a female juror "Abigail," had threatened to cut off his finger and to have her husband come after him (to cut off other bits?). Separately, security personnel reported having heard jurors screaming at each other.

All this passion, even to the point of threats, may have somethig to do with the idea and idealof a lawyer as a zealous advocate -- a notion deeply engrained in the culture in the U.S. Perhaps so deeply engrained that the idea that a lawyer could be too zealous in Collins' situation itself offended either Kevin or Abigail -- I don't know which.

Sunday, January 17, 2010

A timeline for the fall of WaMu

Feel free to correct me about any of the particulars below. It does seem that the forced sale of the assets of the operating company, Washington Mutual, and the bankruptcy filing of the Holding Company, were both key events in the financial chaos of the autumn of 2008, and here is a simple effort to set forth some pertinent facts in chronological order.

We begin our timeline while WaMu is still engaged in a buying spree.

2002, purchases HomeSide Lending Inc., a major mortgage lender.

2003, Chief Executive Officer Kerry Killinger says, "We hope to do to this industry what Wal-Mart did in theirs."

2005, purchases Providian Financial Corp., thereby becoming a large player in the credit card business.

2006, purchases Commercial Capital Bancorp, the third largest player in the multi-family residence lending market in California.

2006, WaMu bans referral fees from banks to agents, fearing they could be construed as illegal payments. But the ban is only unevenly applied within the organization.

October 2007, WaMu enters a period of consistent heavy losses as its easy-money "power of yes" policies meet the great "no" of a collapsing housing market.

February 2008, WaMu introduces the "Whoo Hoo" advertising campaign, applies to register a trademark in the phrase. But by this time, the view from the executive suites would have been better expressed by another Simpson expression, "D'oh!"

March 2008, Killinger calls Jamie Dimon, CEO of JPMorganChase, to talk about a merger -- in effect, putting his company up for sale. On March 16, a JPM team went to Seattle for talks with WaMu.

April 2008, JPM makes an offer of $7 billion. It is rejected.

July 22, 2008, WaMu posts a loss of $3.3 billion for the second quarter.

September 8, Ratings agencies downgrade WaMu, and its stock price plummets. The board fires Killinger, replaces him with Alan Fishman

From Sept. 9 to September 18, depositors withdraw a total of $16.7 billion.

September 14, [Sunday] Lehman Brothers files for bankruptcy, guaranteeing market chaos through the following week.

September 15 - 19, Hell week on Wall Street. WaMu stock price falls to $2.01.

September 19, Sheila Bair, of the FDIC, calls Dimon of JPM and tells him to think about taking over WaMu.

September 24, JPM's head of retail, Charlie Scharf, submits a bid of $1.888 billion for WaMu's assets to the FDIC. This is the winning bid. It is regarded by some as on the high side under the circumstances, though significant lower than the $7 billion they had offered for the company in April.

September 25, FDIC seizes WaMu, makes the deal official.

September 26, The holding company, WMI, enters bankruptcy in Delaware.

Wednesday, January 13, 2010

Neo Material Technologies

The Ontario Securities Commission has long been averse to "poison pills." But in recent months it seems to have become somewhat less so, as evidenced by its handling of the case of Neo Material Technologies (TSX: NEM).

Securities regulatory hearings throughout Canada could become a good deal more interesting because of the uncertainty generated by NEM in September 2009. You can read that decision here.

NEM produces, processes, and develops neodymium-iron-boron magnetic powers and other engineered materials at plants in China and in Thailand.

The bidder, Pala Investments Holdings, asked the OSC to remove the impediment to shareholders’ ability to tender their shares to the Pala Offer posed by the Second Shareholder Rights Plan. As that commission noted, this plan "was adopted by Neo’s Board of Directors (the “Neo Board”) in the context of the Pala Offer, and can be seen as a tactical defensive pill. As well, in the context of the unsolicited Pala Offer, a significant majority of Neo’s shareholders recently voted to retain the Second Shareholder Rights Plan."

Given that statement of the issue, Pala had some reason for confidence. But the OSC denied that holding company its requested remedy, saying that a pill may be maintained. It derived this result through a bit of ad hoc balancing, weighing the duty of the directors of NEM to maximize shareholder value "in the manner they see fit" against the "right of the shareholders to decide whether to tender their shares to the bid."

One possible meaning of this ruling, going forward, is that target boards will be permitted to "just say no" to unsolicited bids that they (reasonably) consider to threaten the best interests of the corporation – at least when, as in this case, the continued deployment of the pill was properly ratified by the shareholders.

Tuesday, January 12, 2010

Wikipedian nonsense

On January 4 I participated in a discussion on a wikipedia Talk page concerning journalist/author Gary Weiss.

The Weiss article is something of a hot potato for many wikipedians, because Weiss is the author of a controversial book, Wall Street Versus America: The Rampant Greed and Dishonesty That Imperil Your Investments (2006).

This book is critical of hedge funds, mutual funds, and the Wall Street securities arbitration process, as well as the New York Stock Exchange. It is especialy critical of former Securities and Exchange Commission chairmen Arthur Levitt and William H. Donaldson.

But none of that is the reason it is such a bone of contention in wikipedia. The key to that is that Weiss' book is strongly critical of the campaign against naked short selling, because Weiss believes it threatens the ability of short sellers to deflate pump-and-dump schemes, thus providing cover to the scam artists behind such schemes. [I've adapted some of the wikipedia description of that book in writing these last two paragraphs -- but then, I helped edit it there in the first place, at least two years ago, as wiki editor Christofurio.]

Specifically, Weiss wrote passages such as this: "Suffice to say ... that there's no question that naked shorting bends, or even breaks, the rules that govern short-selling. That is not because naked shorting is wrong. It is because the rules are wrong....Naked shorting breaks a window that lets in some fresh air and lets out the stench."

The anti-nakedness crusade is very vocal on wikipedia, and the crusaders want to see Weiss look bad, by for example referring in the article on him to a long-ago and quickly-resolved matter as if it were some evidence of wrong-doing on his part. That is the point that led to the latest nonsense.

On January 4, as noted above, I participated in the discussion, and expressed some skepticism about the value of adding that bit about the long-ago matter. It violates the key wiki principle of "Neutral Point of View" to do so, IMHO.

The anti-nakedness crusaders would not have it so. On the morning of July 6, I awoke to find that I had been blocked from further editing. And then unblocked. This all happened rather quickly, literally as I slept through the night of Jan. 5-6. Someone with admin powers in wikipedia named Alison wrote on my personal talk page: "Hi there. Your account was inadvertently blocked as a sock of another editor today. I have removed the block now, having reviewed the situation in detail. I understand that there has been some canvasing in the areas in which you've been editing and I recommend in future that you steer clear of the topic area lest you be accused of editing on behalf of someone else - Alison ❤ 05:09."

To which I of course replied: "Codswallop. I am nobody's sock, nobody is my sock, and although I suppose your caution is kind-hearted enough, I will continue to make my contributions where I think they are needed."

So, no harm was done, and indeed some good was done, in that the editor who initiated the block on inaccurate grounds may have been somewhat embarrassed into more honest behavior in the future. (Okay, that last sentence was obviously typed by Pollyanna -- how did she sneak into the room?) Still, some lessons about wikipedia may be drawn: first, that the debate over naked short selling is one in which some of the participants are willing to silence dissent and call the result consensus; second, that as promising as Wikipedia sounds (and it can be a helpful first step in research) it must still be treated with some caution; finally, that some debates have more value as entertainment than as enlightenment.

Monday, January 11, 2010

Closed end funds

The multidisciplinary blog has linked to an article discussing the attraction of some activist investors to closed end funds.

We discussed the general issues here before, as for example here or here.

The instant paper, by Douglas Ott, suggests that activist investors "can be a desirable element for all investors in the targeted closed-end funds as they may be able elect directors that are more independent and are often able to decrease the discount to NAV just with an announcement of a proxy contest." That's from the abstract./ But let's delve into the depths.

One of Ott's points concerns the "unitary board." A single management group can run several funds, with different investors and portfolios, and can have a single board of directors for all or most of these funds. If I understand him, Ott believes that this is an inherently conflicted arrangement and to this he attributes much of the discount of fund share prices to net asset value (NAV), both because the attentiuon of the directors is divided among the funds and because the directors are too beholden to the management.

The whole paper is here.

Sunday, January 10, 2010

Three brief items

1. Icahn Fight May be Brewing

Carl Icahn may be ready to wage aproxy contest against Genzyme, a Massachusetts-based biotech firm. He bought 1.5 million Genzyme shares in the third quarter, perhaps toward that end.

Meanwhile, Genzyme has entered into a "mutual cooperation agreement" with Relational Investors LLC, one of its top shareholders. A good releationship there may be quite useful if Icahn is in fact ready for battle.

Icahn built up a substantial position in Genzyme in 2007, then sold it by year's end.

2. News from Venezuela

Hugo Chavez, the President of Venezuela, has announced the devaluation of that country's currency, the bolivar. It had been pegged to the US dollar at 1:2.15. Now Chavez is adopting a dual exchange system, treating the importation of "essential goods" differently, and maintaining something close to the old peg for those goods, but adopting a ratio of 1:4.3 otherwise.

The Chavez regime may be headed for a fall. This move, a Rube Goldberg machine for currency control, has the look of desperation.

3. Another quote from Duff McDonald.

A week ago today, in a blog entry here, I quoted a passage from Duff McDonald's new book about Jamie Dimon and JPMorgan Chase, "Last Man Standing." This passage concerns Morgan Chase's purchase of WaMu's deposits and loan portfolios in a deal brokered by the OTS and FDIC in the hectic days of September 2008.

It took awhile for news of this deal to get to Alan Fishman, WaMu's CEO. But I'll let McDonald tell it.

"Remarkably, the staff of WaMu found out about the deal before Fishman, who'd been on a plane at the exact moment of the seizure and sale. Because of the importance of keeping the deal under wraps until it was announced, JPMorgan Chase staffers had worked with WaMu's auditors to get access to WaMu's internal network before the news broke. In the process, they secured a list of employee's e-mail addresses without having to get them through WaMu's top management. Within minutes of the deal, too, visitors to were greeted by a message from Chase welcoming customers to JPMorgan Chase. This too had been prepared on the sly."

Pieces of the maneuverings of that autumn keep falling into place. That one paragraph speaks to me vividly, because I last year became very interested in the bankruptcy proceedings affecting WaMus's holding company, WMI. The WMI proceedings are still quite confused because the hurried sale of the assets of the operational company left a lot undone.

Wednesday, January 6, 2010

Cadbury and Buffett

We noted last month that the EC had given itself until January 6 to study the issue of Krafty's desire to take over Cadbury.

That time has now run, and although I have yet to see an announcement, the general expectation is that Kraft has or will receive Phase One clearance to proceed with its takeover plan. [UPDATE: The general expectation was right. The EC is now saying that it will allow the deal if Kraft divests Cadbury's Polish and Romanian chocolate confectionary businesses.]

But the pieces on this chessboard have been in motion while the EC has been mulling over the shape of the board. Warren Buffett, of Berkshire Hathaway Inc., has weighed in, for example. Also, Kraft is selling its pizza business to Nestle, for $3.7 billion, and Nestle says it is not in the bidding for Cadbury.

I'm not sure what all this means. Buffett isn't saying that he doesn't want Kraft to make the deal, but he is saying that he opposes the issuance of new shares as a way of paying for it. And Buffett, who has a 9.4% stake in Kraft via Berkshire Hathaway, is not one to be trifled with in such matters.

Will Kraft be able to get the deal done in cash, and at the curent bid? Stay tuned, sports fans.

Tuesday, January 5, 2010

Some links

Some thoughts for boards of directors as we and they head into a new year.

A very different view of boards, from Findlay.

And, from the same source, outrage about bonuses for Nortel execs.

Peerless and Highbury kiss and make up says the Daily Breeze.

Peerless and Highbury, Back in the Day!

Rakoff order in Bank of America case is worth a read.

as is Tracy Coenen, on the latest news regarding Overstock.

Monday, January 4, 2010


UC Rusal plans to raise up to US$2.6 billion through an IPO in Hong Kong later this month. Rusal would thereby become the first Russian company to list in Hong Kong, a coup of sorts for the controlling figure, Oleg Deripaska.

The HK regulator, the SFC, was rendered unhappy last month by this news, and it took under consideration two possible measures:

1. Permitting only an institutional placing, i.e. no public offer tranche, and
2. Requiring that minimum transaction size for automated trading be set at a very high level to deter smaller retail investor involvement.

It opted for the latter. Rusal can only sell the IPO to investors who subscribe for at least HK$1m worth of shares. Following the listing, shares will be traded in board lots of at least 200,000 shares each.

If we entertain for a moment the theory that retail investors need to be protected, then wouldn't they have to be "protected" from the secondary market, too? Anyone who can make a bad decision to buy in an IPO context could also make a bad decision to buy the next day! With a minimum lot size defined by share rather than dollar amount, it isn't at all clear how that will shake out.

My own view of course is that investors have to be allowed to make their own decisions, and [even!] retail investors are generally better at knowing what to do with their own money than regulators are at knowing how to 'protect' them.

Indeed, from more than one perspective, the proposed limits would make things trickier for retail investors , not safer at all.

I'm told the prospectus makes a fascinating document, though I have myself yet to dig into its 1,141 pages. If any of my readers wants to study that material, here it is. Go wild.

Sunday, January 3, 2010

Amaranth and JPMorgan Chase

I recently read LAST MAN STANDING, Duff McDonald's biography of Jamie Dimon, the Chief Executive of JPMorgan Chase.

It is rather too hagiographic for my taste, but it does use Dimon's POV to give a clear account of some of the recent Wall Street turmoil, and for this I am grateful.

I appreciated the brief of the post-Amaranth litigation in particular, and will quote a bit of that here both for its inherent interest and to give a bit of the flavor of the book.

"In the summer of 2006, Dimon, [and his co-heads of investment banking Steven] Black, and [Bill] Winters made their most audacious play of the year when they snapped up a portfolio of disastrous bets on natural gas prices that had been made by Amaranth Advisors, a $9.2 billion hedge fund that was facing collapse if it couldn't get the underwater trades off its books. On the weekend of September 16, Amaranth was desperately seeking a buyer for the trades. Goldman Sachs offered to do a deal for a portion of the total, but it demanded a $1.85 billion payment to relieve Amaranth of the positions.

"Lacking that much cash, Amaranth turned to JPMorgan Chase, the hedge fund's clearing broker, and asked if the firm might return $2 billion of posted collateral so it could get the deal done. Steve Black and Bill Winters refused. [Then there was a similar back-and-forth involving Citadel]. The answer, in the end, was obvious. JPMorgan Chase and Citadel made a joint bid for the trades. (With JPMorgan Chase in on the deal, the question of releasing collateral somehow disappeared.) The company made about $725 million in profit on the positions, in part by turning around and selling many of those it had just purchased to Citadel....Amaranth later sued JPMorgan Chase for more than $1 billion, accusing the company of abusing its position as the hedge fund's prime broker to put the kibosh on the deals with Goldman and Citadel in favor of its own purchase....

"Dimon, who considers the lawsuit 'silly,' had no pity for the collapsed fund."