PrefBlog

JPMorgan, or one of their clients, wants to make a big bet on Collatteralized Loan Obligations:

JPMorgan Chase & Co., the largest U.S. bank, is seeking as much as $780 million of AAA rated portions of collateralized loan obligations, according to a list of securities the company circulated to traders and investors.
…
New York-based JPMorgan, which has received capital from the government and has obtained loans from the Federal Reserve, told traders it may be willing to accept yields of about 4 percentage points more than the three-month London interbank offered rate for dollars, three of the people said. That’s less than the spread of 5 percentage points that the securities typically trade at, according to JPMorgan’s research department.
…
The purchase may aid the $475 billion CLO market, where prices began falling after the July 2007 collapse of two Bear Stearns Cos. hedge funds that owned collateralized debt obligations.

CLOs, which are a type of CDO, repackage loans used to fund leveraged buyouts and other non-investment-grade, or junk, rated companies into new securities with varying ratings.

The world has gone mad and it has been a week of what Portfolio.com calls a trend of “Rich white men throwing it all away for nothing.”.

And they didn’t even mention the Sextant thing! The OSC has alleged:

15. At November 28, 2008, approximately 5% of the assets of the Sextant Fund were invested in a portfolio of cash, stocks and futures contracts, including stocks of private companies. The portfolio is held in accounts with Newedge Canada Inc. (“Newedge”), the custodian and prime broker for the Sextant Fund.

16. The balance of the assets in the Sextant Fund are invested in two private Luxembourg companies: Iceland Glacier Products S.a.r.l. (“IGP”) and Iceland Global Water 2 Partners SCA (“IGW”).

17. At November 28, 2008, 92% of the assets of the Sextant Fund were invested in IGP and 2.5% of the assets were invested in IGW. These investments are not recorded or valued on Newedge’s books and records.

18. IGP and IGW both purportedly own rights to glaciers in Iceland and intend to use those rights for the purpose of developing and selling bottled water. Neither IGP or IGW have earned any revenue and there are no indications that they will do so in the immediate future. Neither is currently operating.

19. Despite having earned no revenue and having no immediate prospect of doing so, IGP’s shares have purportedly increased in value from an initial average cost of €0.226 to €2.45, or approximately 984% since initial investment by the Sextant Fund. This has contributed to the increase in value of the Sextant Fund by 730.7% over the less than three years between its inception in February 2006 and November 28, 2008.

20. There are no third party valuation reports that support the monthly, material upward revisions in value of IGP, and therefore there is inadequate support for the claimed rate of return of the Sextant Fund.

21. Significant performance fees, in excess of $3 million dollars have flowed out of the Sextant Fund based entirely on its purported rate of return. Fees for the month of November 2008 alone were assessed at over $1.5 million.

22. IGP and IGW are owned almost entirely by the Sextant Fund, the Sextant Offshore Funds and Spork.

The Globe and Mail notes:

Mr. Spork also runs two offshore funds totalling $100-million (U.S.) – Sextant Strategic Hybrid2 Hedge Resource Fund Offshore Ltd. and Sextant Strategic Global Water Fund Offshore Ltd. – which do not have Canadian investors.

After his fund shot up 74 per cent in July alone, Mr. Spork was reluctant then to reveal how his commodities-focused strategy has been racking up stellar returns.

“We make our returns or business grow by having an edge that is not transparent,” Mr. Spork told The Globe and Mail at that time.

Just what the investors were receiving by way of disclosure is not clear. And I am not an expert in the exciting new field of glacier investing. But it seems to me that before I wrote a large cheque – especially to buy large ice-cubes – I would want to know a little more about the non-transparent edge.

Then today after the markets closed the SEC released allegations against Bernard Madoff:

alleged that Madoff yesterday informed two senior employees that his investment advisory business was a fraud. Madoff told these employees that he was “finished,” that he had “absolutely nothing,” that “it’s all just one big lie,” and that it was “basically, a giant Ponzi scheme.” The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion.
…
According to regulatory filings, the Madoff firm had more than $17 billion in assets under management as of the beginning of 2008. It appears that virtually all assets of the advisory business are missing.

It’s not clear to me how the two figures cited are reconciled, but with numbers that big it doesn’t matter much does it? One wonders what his client list looked like and what the collateral damage tomorrow is going to be.

It’s not going to be the only headline, either! Carmakers won’t get bailed out:

Senate negotiations for a U.S. automaker bailout plan collapsed, in a blow to General Motors Corp. and Chrysler LLC, which may run out of cash early next year.

“It’s over with,” Majority Leader Harry Reid said on the Senate floor in Washington. “I dread looking at Wall Street tomorrow. It’s not going to be a pleasant sight.”
…
Connecticut Democrat Christopher Dodd, who was involved in the negotiations, said the final unresolved issue was a Republican demand that unionized autoworkers accept a reduction in wages next year, rather than later, to match those of U.S. autoworkers who work for foreign-owned companies, such as Toyota Motor Corp.

“More than saddened, I’m worried this evening about what we’re doing with an iconic industry,” Dodd said. “In the midst of deeply troubling economic times we are going to add to that substantially.”

Accrued Interest has a post about negative yields on US T-Bills, asking:

So when I heard that there were T-Bill trades occurring above par, I was more stunned that Princess Leia aboard the Tantive IV. Who bought T-bills above par? Why would you enter into that trade with a certain loss when you can simply hold currency at no loss?

Currency? How currency? Put it in a bank, it’ll go bust. Put it under your mattress, you’ll get robbed. Put it into actual folding paper in a safe deposit box, you’ve got transaction costs out the wazoo, what with money laundering laws and safekeeping fees, not to mention a certain risk of your employees robbing you. How currency?

There are some good comments to that post. I’ll suggest that the commenter Oregon Guy has the right of it:

Say you have a $2,000,000 CD maturing. You can deposit the proceeds in a money market account with FDIC insurance, but the insurance won’t cover the $2,000,000 and you don’t want the bother of opening a plethora of accounts. Treasuries are bubble-priced, so you don’t want to go there. Corporates are shaky because defaults are high and you’re risk adverse. You can roll-over the CD, but that opens up the possibility of uninsured loss again.

I will suggest the additional mechanism of segmentation. There are a LOT of T-Bill funds out there, and a lot more private-manager mandates that will only allow T-Bills. They HAVE to buy bills – they don’t even have the currency option.

Volume continued heavy today, but the market was down this time.

There were seventy-eight index-included $25-pv-equivalent issues trading over 10,000 shares today

This entry was posted on Thursday, December 11th, 2008 at 11:50 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.