Europe's Hedge Funds

Deliberations among the nations of the European Union about a new level of regulations for hedge funds there have reached an impasse.

I wrote here 11 months ago that the draft directive circulating at that time was dead as written. There have been lots of developments since.

The U.K., where most of the Europe-headquartered funds actually are, has been working to water down the more draconian aspects of these proposals from within the EU system, and the U.S. has been exerting some pressure from without.

The Brits are worried that this will hurt London's status as one of the world's great financial hubs, while the U.S., and in particular Treasury Secretary Geithner, worries that the EU is going protectionist -- that it will put barriers in the path of any institutions and high net worth investors there who want to entrust their money to operations in New York.

Meanwhile, the French and the Germans are pulling in the other direction, to make the regulations tougher on the nasty hedge funds, whether of New York or London, than the drafts of the directive would have it.

There is an idea circulating in some quarters that hedge funds were at fault in the 2007-08 credit crunch. That is utter nonsense. Quite old-fashioned, supposedly conservative and stodgy, institutions like banks were the real trouble makers. The hedgers generally did a good job of keeping their head while bankers all around them were losing theirs.

At any rate: the news this week is that EU diplomats tried to push the process forward at a meeting Monday, the 27th, but they failed.

A big possible winner is Switzerland. A map will tell you that the Swiss are in Europe, but they don't act like it. They've stayed away from the EU, and if EU rules do become too onerous for HFs, we might see a lot of them developing a taste for Alpine air.

Three brief items

1. Equus Total Return

The incumbents won. Dissidents claim moral victory. Why am I reminded of Calvin & Hobbes? Calvin would claim a moral victory even when Susie turned the tables on him, and of course he could count on the support of one tiger pal.

As I've noted here Equus Total Return is a business development company (BDC) HQ-ed in Houston that trades as a closed-end fund on the New York Stock Exchange.

The Committee to Enhance Equus says: "We also believe that the Company conducted the meeting in a manner intended to discourage personal attendance and voting by shareholders....Despite these concerns about the integrity of the process, we have concluded that further contest of the 2010 board election is not in the best interests of the Company or its shareholders."

2. Greg Meyer

Greg Meyer, a shareholder of Blockbuster (NYSE: BBI), seeks to have himself elected to that company's board.

The meeting is scheduled for June 24, in Dallas, Texas.

Control of the board is not at issue. So far as I can tell, Meyer represents only himself and would occupy just one seat out of seven. The one currently held by Gary Fernandes.

3. Seattle pension fund demand rejected.

Meanwhile, a court has told pension fund managers in Seattle that they should act like big boys and wipe those tears, despite losses in connection with Epsilon Global Active Value Fund II.

The Seattle City Employees' Retirement System had requested a preliminary injunction to force Epsilon executives to provide audited financial statements etc.

The judge, Richard Jones of the U.S. District Court, observed that "SCERS did not contract for transparency" when it made the investment.

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."

Bear Stearns Trial: Final Arguments

Defense lawyers made their final arguments Friday on behalf of both Matthew Tannin and Ralph Cioffi, the former Bear Stearns managers accused of securities fraud largely on the basis of the e-mails they sent one another.

Mr. Tannin, for example, emailed to Cioffi on the basis of a recent market research report, saying that if the report is "ANYWHERE CLOSE to accurate, I think we should close the funds now." But soon thereafter, he told investors he was "comfortable" with the funds' performance. According to the prosecution, this crosses the line between permissible puffing and criminal lying.

In final argument, Tannin's attorney, Susan Brune, said that in the context of the whole email the "anything else" comment ceases to seem incriminating. She asked the jury to "send Matt home to his family."

Was she crying when she said this? I wasn't there, but apparently somebody heard or thought that they heard a quaver in her voice. The rule for a professional advocate is: what works, within the law. And there is no question but that a quavering voice is within the law. we'll see how it works.

Sanctions

There was a decision by the Second Circuit Court of Appeals Wednesday, Sept. 2, that may be heartening to long/short equity funds, short dedicated, etc. The question it helps answer is: "When might market makers and hedge funds receive compensatory damages from lawyers for the parties who bring lawsuits against them on claims such as 'naked short selling'?"

A lawyer who has become something of a short-sellers' nemesis, Wes Christian, has been sanctioned on connection with a lawsuit he filed against Knight Capital, the market maker, along with a collection of hedge funds and individual traders. He represented issuer ATSI, and alleged stock manipulation by Knight Cap and the others.

The district court dismissed the complaint with prejudice in February 2005. Defendants then moved for rule 11 sanctions against the attorneys involved. The district court agreed and imposed sanctions in March 2008 on the ground that the attorneys "lacked any reasonable factual basis" for bringing the suit. Crucial to the precedential significance of this is: the district court imposed sanctions of close to $70,000 without making a specific finding of bad faith.

On appeal to the 2d Circuit, the issue was whether sanctions against a lawyer in such a matter should be applied by a subjective or an objective standard, i.e. whether a finding of bad faith was required.

The court answered that question in favor of an objective standard, upholding the imposition of sanctions, although remanding for reconsideration of the amount.

Not-so-stealth trading

What happens when the same management groups runs two very different funds, one targeted to more sophisticated investors and the other to suckers ... um, retail customers?

What happens, to be more concise, if one group runs both a hedge fund and a mutual fund?

For many years there has been a widespread assumption that the danger in uch arrangements is this: the hedge fund will frontrun the mutual fund, taking advantage of its opportunties.

In 1993, Michael Barclay and Jerold Warner set out this theory in respectable academic form in an article in the JOURNAL OF FINANCIAL ECONOMICS. The gist of their hypothesis was that when these "concurrent managers" became aware of a really good profitable opportuntiy, they would trade in it first for the hedge fund account, because after all the fees they take from a hedge fund are very high and tied to profits. The mutual fund and its investors would get at best the left-overs from these opportunities.

Recent research, though, indicates the opposite is the case. Concurrent management is more likely to be biased AGAINST the hedge fund than in its favor. The empirical data is summarized in an article in the August 2009 issue of the Journal of Banking & Finance. How could this happen? Why bias your activity against the source of the larger set of fees?

The authors of that paper, Li-wen Chen and Fan Chen, hypothesize that concurrent management is often an effort to use in the hedge fund domain the "reputational capital" developed in the mutual fund domain. The mutual fund results are by far the more transparent, the more widely available, in any such case, so they work as advertising for both of the funds.

At the margin, then, the concurrent managers favor their mutual fund.

Europe's Draft Directive

On April 29, 2009, the European Commission issued its "Directive on Alternative Investment Fund Managers," in essence a set of rules for the regulation of a broad range of alternative asset managers, the firms that manage hedge funds and similar vehicles.

At the time, the general expectation was that the rules would be enacted in some form similar to that of the draft, though with some tinkering. Pursuant to my employment, at that time I contacted some HF managers and some of the attorneys who work for them in Europe, They explained how the process works -- the draft rules would have to move through two parallel tracks toward implementation. This has the amusing name of the Lamfalussy Process, never mind now why.

One track is an executive one, so to speak -- the Council of the European Union. The other track of Lamfalussy is legislative -- approval of the Parliament.

Everyone I spoke to on this subject told me that tightening hedge fund regulations, through this draft or something more severe than this draft, would be a pretty straightforward matter in on the legislative track, because they all expected socialist victories in these elections. (These conversations were taking place in middle of May.) These were people involved in the hedge fund industry, so they weren't happy about that expectation, but it WAS their settled expectation. But they also thought the regulatory draft might run into trouble in the executive Council.

They were wrong about the legislative end. There might be any number of reasons why. Personally, I suspect they were probably right about sentiment when we spoke, but there was likely a quick shift in sentiment in late May.

The election took place over four days in early June, and they resulted in a rightward-shift of the balance of power in the EU. The situation, in terms of which parties are associated with which, is very confused and confusing, so I'll say very little about it, seeking the safety of this simplicity: the "right" may be roughly defined as consisting of those parties that are suspicious about the role of the Parliament they are joining: the "left" as those that see a need for a more activist EU, as against both separate national agendas on the one hand and global business interests on the other.

In the Czech Republic, the election saw the victory of the Civic Democrats, a group zealous of Czech sovereignty vis-a-vis the EU.

In Austria, where five years ago the EU election was a virtual dead heat, this time the People's Party -- the more rightward of the two major parties there -- won the clear victory though against a background of low turnout, and voter dissatisfaction with both major parties. The People's Party had gotten 33% of the vote in 2004, but were down to 30% this year. That wasn't as far a distance to fall though as the Socialists, who had gotten just over 33% in 2004, but just 23.5% this time.

In Portugal, the Social Democrats (PSD) defeated the Socialists. That country's Socialists, who had polled 44.5% in the 2004 EU elections, polled only 26.58% this time around. The PSD ended up first past the post with 31.68%.

And so it went. The bottom line? Anyone in Brussels looking forward to reguatory authority over hedge funds may have to settle for something less than only quite recently seemed inevitable.

An Industry that Dodges Bullets

Entering the year of our Lord 2009, many participants in the hedge fund and alternative-investment industry in were of the opinion that the industry was on the eve of a radical transformation, at worst, effective elimination, due to government actions in a variety of jurisdictions that might result from the ongoing credit/financial crisis.

Yet it now appears that the industry may survive that impulse. I’m impressed by what hasn’t happened – by how any bullets it has dodged of late. Six come to mind at once.

1. The Insurance Department in New York appears to have lost interest in a plan, mooted last year, to regulate CDS’ as insurance.

2. The Governor of New York backed away early this year away from a plan to tax carried interest as ordinary income in that state's income tax

3.. The composition of the EU Parliament has changed in a way that will create difficulties for the implementation of new regulations of hedge fund managers there

4. Three efforts to regulate hedge funds failed in the General Assembly of Connecticut this year: although one of them had passed the state senate, they’ve all died with the end of session

5. In the US federal government, the new administration has dropped plans to radically rework the chart of its financial regulatory agencies

6. And the ban on short selling of a range of finance industry firms announce last fall was allowed to expire, and there seems no impetus to renew it.

Mark-to-market accounting IV

IMHO, the move toward mark-to-market accounting, a gradual process through much of the 1990s and into this century, was a good idea, driven by business realities and, in its final stages, by a sensible reaction to the ludicrous bookkeeping of the late Enron Corp.

If a management's valuation model relates to reality it ought to be possible to get quotes backing that up. If it is not possible, then it is very likely management is either trying to pull something at the expense of somebody or has deluded itself, and neither possibility sounds like a sound basis for accounting rules.

"Oh, but some assets can't be sold right away except at fire sale prices!"

Market-based valuation doesn't require immediate sale. It is my understanding that conversations between corporate folk (CF) and auditors looking for GAAP compliance often go something like this.

CF: We can't mark these assets to market.

A: Why not?

CF: Nobody's buying them. So there's no market except a fire sale one.

A. How long do you think it might take you to get a non-fire sale price?

CF: Maybe six months.

A: So how much do you think you might be getting if you had started asking around for quotes six months ago?

That dialog comes (adapted by yours truly) from Einhorn's recent book.

With this, I leave the issue of mark-to-market accounting, and I'll try to get back to the chronicling of proxy fights next week.

Mark-to-market accounting III

Continuing.

On April 9 the FASB issued its final staff positions "to improve guidance and disclosures on fair value measurements and impairments," i.e. the modifications to mark-to-market.

You can see the relevant press release here.

Effects were felt immediately. Indeed, the changes were beginning to have an impact before they were finalized. I was at the Manhattan office of Kaye Scholer on April 2, the day the prelimary draft was under discussion by the FASB.

Kaye Scholer, a law firm prominent in the alt-invest world, was hosting a seminar on
“Using Private Equity and Hedge Fund Structures and Strategies to Invest in Distressed Assets.”

The consensus at the seminar was that the government, by pressuring the FASB in this direction, had cut off its nose to spite its face. For the same government was trying -- still is trying -- the get private party participation in what it calls the PPIP (public-private investment program), in which a government-organized consortium is supposed to buy 'toxic assets' from banks in order to hold them until their toxicity wears off ans re-sell them then at a profit.

In the meantime (so runs the theory) the sale of these assets by the banks will improve the balance sheets of said banks, making them more willing to make loans, and getting the wheels of commerce rolling again.

But for PPIP to work, mark-to-market accounting should still be in force. The significance of M2M is precisely that it gives banks an incentive to sell assets they aren't prepared to hold, and let somebody else, somebody more daring and speculative, perhaps a hedge fund, (or perhaps PPIP, a nineteenth century Brit lit figure in the form of a 21st century acronym) hold them instead.

The FASB decision, and other ongoing efforts by elected officials and regulators to relax mark-to-market accounting rules, would reduce banks’ incentives to sell distressed assets at prices that would make them attractive to private investor participants in the PPIP, and would thus undermining the viability of the program.

We haven't heard much from PPIP since. He's expecting a fortune from Miss Haversham but she no longer has any incentive to bestow it. (Okay, I've got the plot a bit wrong there, but I'm working with the 21st century template as best I can.)

Final thoughts on mark-to-market tomorrow.

Mark-to-market accounting II

On Thursday, April 2, the FASB met to discuss a new staff position, FSP, addressing the issue and in part modifying the system, addressing objections to M2M.

The FSP outlined how a reporting entity could determine whether a market is inactive and whether a transaction is not distressed in the sense pertinent to the application of SFAS 157. In terms of Angel’s metaphor, this is an effort to exorcise the ghost of Arthur Anderson from future auditor/reporting-entity interactions.

It established a two-step process. The first step involves the consideration of seven factors that would indicate the inactivity of a market. These factors are:
• Few recent transactions (based on volume and level of activity in the market)
• Price quotations are not based on current information
• Price quotations vary substantially either over time or among market makers (for example, some brokered markets)
• Indexes that previously were highly correlated with the fair values of the asset are demonstrably uncorrelated with recent fair values
• Abnormal (or significant increases in) liquidity risk premiums or implied yields for quoted prices when compared with reasonable estimates (using realistic assumptions) of credit and other nonperformance risk for the asset class
• Abnormally wide bid-ask spread or significant increases in the bid-ask spread
• Little information is released publicly (for example, a principal-to-principal market).

The proposed FSP said that the entity shall consider the significance and relevance of each factor, yet it cautions that the list is not all-inclusive; “other factors may also indicate that a market is not active.”

If the entity concludes after step 1 that the market is not active, it has created a rebuttable presumption that a quoted price is associated with a distressed transaction. Yet it must as step 2 consider evidence that would rebut that presumption. This would be evidence that (a) there was sufficient time before the measurement date to allow for usual and customary marketing activities for the asset and (b) there were multiple bidders for the asset. If both of those factors are present, then the presumption of distress is defeated.

In the absence of one or the other of those defeating factors, the presumption of distress prevails. “When that is the case, the reporting entity must use a valuation technique other than one that uses the quoted prices without significant adjustment.

The board told its staff, "you're doing good work, but you need to go back to the drawing board and modify this a bit." That's actually my paraphrase.

Specifically, the board said the staff should “eliminate the proposed presumption that all transactions are distressed (not orderly) unless proven otherwise.” The final FSP should also require an entity to disclose a change in valuation technique, and the related inputs, resulting from the application of this FSP and to quantity the effects of that change if practicable.

Mark-to-market accounting I

SFAS 157, issued by the FASB in 2006, became effective for financial assets and liabilities issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. It defined fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This definition applies to assets that are held for trading – not to assets held for investment or to maturity.
From this definition of fair value follows a three-level hierarchy of valuation based upon the type of inputs available:
• Level One inputs include directly observable market data, such as quoted prices in an active and unimpaired market;
• Level Two is applied when a market is impaired (such as the market for bonds at mid maturity), and value is derived indirectly from the prices of Level 1 assets;
• Level Three is applied when the market is inactive (such as the market for mortgage-backed securities in recent months) and value can be derived from management projections and modeling.
For a more complete account, see “Mark-to-Market Accounting in the Absence of Marks,” The Hedge Fund Law Report, Vol. 2, No. 1 (January 8, 2009).
Many institutions have complained that this system, combined with the incentives of auditors, is far too niggardly in allowing managements to move down the hierarchy from one to two, and from two to three.

They found academic support too, for instance from James Angel, Associate Professor of Finance, McDonough School of Business, Georgetown University.

I spoke to Mr. Angel not long ago, and he asked me to consider a hypothetical asset that a bank or hedge fund has purchased for a dollar.

“The management believes in its heart of hearts that its present value is $0.75. But nobody is buying that sort of asset right now, except for a bottom-fisher who offers them a nickel. Under mark-to-market strictly applied, it is worth a nickel.”

But, Angel continued, the fact that management chooses to hold on to it is evidence that it is in fact worth more than a nickel. “Its value is somewhere between 5 and 75 cents. I believe in a mark-to-management approach that would explicitly take account of management’s own view of asset value.”

More tomorrow.

Redemptions

What was the selling Tuesday on Wall Street all about?

On Monday, the market spent most of the day going down, but had a significant uptick in the final minutes.

But then yesterday ... boom. The Dow, the S&P, and Nasdaq all declined by more than 5% of their total value which, in the case of the Dow, amounted to more than 500 points.

As usual, the pundits have their theories:

1. The big one-day decline was a response to an announcement from Bank of America that it was cutting its dividend, or
2. It was a reaction to a rumor that MUFG is pulling out of a deal to acquire a large chunk of Morgan Stanley, or
3. Bernanke scared the traders with his mid-day statement, or
4. all of the above and other stuff.

None of that looks persuasive to me. One can hypothesize that one of those butterflies caused this hurricane, but I think there's a much larger wing than any of those flapping about.

Call this the hedge fund capitulation. Hedge funds have lock-up periods, sometimes for months at a time. As the term suggests, hedge funds are by design illiquid. An investor, having put his money in on Monday, can't simply say, "I've changed my mine, I want to liquidate my interest" on Wednesday.

Well, actually, he can say it on Wednesday if he wants, but he can't expect the managers will act on that demand any time soon thereafter. They're entitled to wait until the lock-up period has expired, i.e. that the "redemption" date has arrived.

This can have a systemic impact on the markets because it is natural for hedge fund managers and investors to agree on the end of a financial quarter as the redemption date. Much of the hedge fund industry was committed to allowing hedge fund withdrawals on October 1, AND much of the industry had just had a lousy third quarter, making it very likely that they'd receive demands by September 30.

Those hedge funds that didn't have enough cash hanging around in the office furniture to meet the redemption demands they've just received have taken to selling shares of stock to obtain the liquidity needed to pay off these exiting investors. Hence the downward pressure we've seen of late.

I call this the hedge fund capitulation , because the italicized term is used in finance-world jargon to mean a particular sort of crash -- one with a valuable cleansing effect. It means the final shuddering sell-off after which everybody who can be scared away has been scared away. All the selling likely to be done any time soon will have been done, and a floor established.

October 1987 saw a capitulation. The Dow lost 20% of its value in a single day. Within 1.5 years, it had returned to the pre-crash level.

We didn't have 20% at one clump this time, but the market has lost almost that in about two months. But as August of this year began, the Dow was at 11,500. It is now at 9,447, which is about 18%. Let's hope that's enough, and that with the final kicking-in of this hedge fund liquidation component, capitulation has been accomplished.

Talking about Biden's Son

My readers are no doubt aware that the presumptive Democratic Party nominee for President, Sen. Barack Obama, has now selected Joseph Biden, a sort of Senate foreign-policy mandarin, as his running mate.

This means that Biden, and his immediate family members, come in for the usual scrutiny that follows such an announcement.

One of the first consequences of the new scrutiny involves Biden's son, Hunter, who was for a time the president of a hedge fund group, Paradigm Companies.

Hunter and his uncle James Biden (the Senator's brother) are now engaged in civil litigation with Anthony Lotito Jr., a former Paradigm partner. Lotito accuses the Bidens, and they in turn accuse him, of fraud.

The Washington Post had a big write up on the matter yesterday.

What piques my interest is the possibility that Senator Biden at some point made a strategic decision, that it was better for him politically to have a son in the hedge fund industry than to have a son who is a lobbyist. The negative fall-out woiuld be lesser in the former case than in the latter.

Lotito's complaint: Senator Biden "was concerned with the impact that Hunter's lobbying activities might have on his expected campaign for the 2008 Democratic presidential nomination," and, "told Lotito that, in light of these concerns, his brother had asked him to seek Lotito's assistance in finding employment for Hunter in a non-lobbying capacity."

I wish hedge funds well, because in a sense they are a proxy for my own broader belief in a vigorous capitalist financial environment. So, I'm happy that the political climate is such that a powerful politician would set his son up in a hedge fund as a way of getting him out of harm's way.

Nick Maounis

Bloomberg is reporting that Nick Maounis, formerly the boss of Brian Hunter at Amaranth Advisors, is trying to raise money for a new hedge fund.

I'm not sure that they're right. Bloomberg seems to have been reporting this story for a long time. They ran this worried column on the subject sixteen months ago.

Amaranth collapsed in September 2006. As Mr. Maounis explained in a teleconference that month with investors: "We lost a lot of our own money this month. We lost even more of yours."

The reaction of many commentators back in January 2007 to the possibility that Maounis might be trying to start up a new fund was: It's too soon.

Well, this is May 2008. Is it still too soon? If it will always be "too soon," then the problem isn't timing and one shouldn't pretend that it is.

My own view, for what it's worth, is that Maounis seems to have been duped by his employee, Brian Hunter. If that's right, then it is possible nearly two years of reflection has taught him something about, say, the need for rigorous in-house controls. So take another shot, Nick! Best of luck.

Temple-Inland: yesterday and today

Temple-Inland, a manufacturer of corrugated packaging, will hold its annual meeting this Friday.

No fireworks are expected. This might be a good time, though, to reflect on the long-range effects of stockholder activism of the Icahn sort. For it was little more than a year ago that Carl Icahn was making a lot of noise about this company, with a plan to divide it into three parts, etc. Here's a news story from that era.

Before Icahn started talking up a proxy contest, Temple-Inland's stock was worth a price in the low 60s range. His interest helped push the price up to close to $80. After his Emily Latella "never mind" announcement, the price fell to $73.45.

Also at that time, an analyst for Banc of America said that the price was unlikely to return to the pre-Icahn range. Since then, the company has spun off two of its units -- a finance operation and a real-estate concern. What is left is worth $11.74 per share. And no, that isn't just because of the spin-offs. The three parts together aren't worth the pre-Icahn whole.

This would suggest that there is truth to a classic indictment of hedge funds and greenmailers: that they produce a short upward boost in price but that their activity is bad for a business as an ongoing concern.

Too small a data base, of course, but hey ... I'm a blogger, not a guru.

Working on the railroad

CSX Corp., a railroad headquartered in Richmond, Va., is in an increasingly bitter dispute with TCI, a British hedge fund, over what the hedge fund sees as CSX' incompetent management, and what the railroad sees as the hedge fund's potentially ruinous effirt to produce a perpetual running recall election.

CSX this month has amended its bylaws to provide that a special meeting would be called only after the company received a written request from shareholders representing at least 15 percent of its voting power.

I'll wait until next week to detail this fight somewhat for you. For now, here is a little history. Its corporate ancestors include The Baltimore and Ohio Rail Road Company, one of the four railroads known to every enthusiast of Monopoly, the famous board game.

The B&O, America's first common carrier, was chartered in 1827. Its first rails were useful only for the purpose of assisting the horses, making the carriage-pulling work a bit easier. Steam replaced horses three years later.

The B&O was acquired by the Chesapeake & Ohio -- which had been a canal company in the old days, when proponents of canals and rail debated over who represented the future -- the acquisition didn't happen until the early 1960s, and the present name, CSX, was originally suggested by the phrase, "Chesapeake, Seaboard, and many things more."

Last year, CSX spent $3.2 million on Washington lobbyists. At least some of that money went into the company's support for legislation that would require hedge funds to register with the SEC -- oops, we've wandered back into the TCI/CSX controversy again, haven't we?

Til we meet again.

More About That Furniture Company

As I indicated yesterday, Costa Brava, the hedge fund managed by Roark, Rearden, & Hamot, wants to take over the board of a Virginia based furniture company.

It is a challenging business in these days of disintermediation, and Bassett has been shrinking. Of course, they prefer words like "consolidating" and "cost-cutting." But they're shrinking.

In the words of their latest annual report, "Over the last seven years, we have reduced our number of facilities from 13 to 3 and reduced our headcount from approximately 4,200 to 1,450. During 2007, we closed a large wood manufacturing facility in Bassett, Va. This resulted in headcount reductions of approximately 280 employees and leaves us with one small wood assembly plant in Martinsville, Va., one fiberboard supply facility in Bassett, Va., and one upholstery facility in Newton, N.C."

They also seem nowadays to receive a lot of their income not from the furniture business at all, but from running their own portfolio. They have $51.8 million invested in The Bassett Industries Alternative Asset Fund LP.

Hmmm. So is Costa Brava actually trying to obtain control over the furniture company -- that wood assembly plant, the fiberboard supply facility, the upholstery facility -- or is this a matter of one hedge fund trying to merge with another. Except that the merger target still has some of the trappings of a furniture company around it?

There's 11.8 million shares of Bassett outstanding. The stock price is in the neighborhood of $12. Simply multiplying them gives us a market cap of about $140 million. So the "alternative asset fund" is more than one-third of that, raising the prospect (in my simple mind anyway) that the fund is the prize, not the fibreboard.