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DealBook: Despite Losses, Investors Stick With Paulson

November 2, 2011 by Leave a Comment

One of John Paulson’s funds returned 600 percent in a bet against subprime mortgages in 2007.Rick Maiman/Bloomberg NewsOne of John Paulson’s funds returned 600 percent in a bet against subprime mortgages in 2007.

John A. Paulson, the billionaire hedge fund manager who made his fortune betting against subprime mortgages, has been fodder for Wall Street gossip as rivals wondered whether investors would bolt after suffering staggering losses this year.

At least for now, pensions, endowments and wealthy individuals are standing by their money manager. Redemption requests, which were due by Oct. 31, totaled less than 8 percent of assets, or roughly $2.4 billion, according to a letter that Mr. Paulson sent to investors on Tuesday.

It’s a rare feat for a hedge fund. When returns sink by as much as 50 percent — as one portfolio did at Paulson Company — investors typically flee at the first opportunity.

But Mr. Paulson has built a reservoir of credibility, largely through past performance and marketing efforts.

Longtime clients are still giddy from 2007, when one credit-focused fund gained 600 percent amid the broader market downturn. Newer institutional investors that have lost millions, like public pensions in New Mexico and Missouri, figure returns will bounce back. Some are even pouring additional money into its funds in anticipation of a turnaround, money that will help offset some of the withdrawals.

“We still have a very high conviction that long-term Paulson is a very good investor,” said Jon Sundt, the chief executive of Altegris in La Jolla, Calif., an investment manager that oversees $3 billion. “We have had some investors who have been adding to their investments in Paulson.”

Still, Mr. Paulson, who is set to report positive monthly returns in a few days, is in a precarious spot. Since employees account for half of the fund’s overall assets, the recent withdrawals amount to nearly 16 percent of the outside capital. And the firm is also attracting new money mainly by offering a break on fees to existing investors, rather than by cultivating new clients.

Should returns remain in the doldrums, some big clients have indicated they will withdraw their money. The next deadline to withdraw from most funds will be next year.

Mr. Paulson’s spectacular fall has been watched as closely as his impressive rise.

The soft-spoken son of a corporate finance executive, Mr. Paulson, a former investment banker, ventured out on his own in 1994. Over the years, he produced steady gains, returning an average 16 percent a year in his oldest fund through 2006. He entered the big leagues in 2007, earnings billions of dollars betting against subprime mortgages.

Since then, investors have plowed money into his firm, encouraged by consultants like Cliffwater Associates and banks like Morgan Stanley and Bank of America Merrill Lynch. At the start of the year, Paulson Company oversaw $38 billion compared to just $4 billion in 2007.

Some industry players have complained that Mr. Paulson has shown little restraint in his fund-raising efforts, amassing assets at the expense of performance. His marketing team boasts a staff of more than two dozen professionals, higher than many large hedge funds. And he also has separate teams devoted to different types of investors, including endowments, foundations and pension funds.

The firm started to show cracks this year. Mr. Paulson lost $500 million on Sino-Forest, a Chinese timber company accused by an analyst of running a vast Ponzi scheme. His stakes in Bank of America, Citigroup and Hewlett Packard — part of a bullish call on the economy — have also withered.

He conceded to investors in October that he “made a mistake.” The Advantage Plus fund is off 47 percent through September. To climb out of that hole and start charging lucrative performance fees, the fund will need to post least 100 percent. Other funds like Advantage and Recovery will have to notch returns of at least 60 percent to get above water. The losses are so significant that some competitors joke Mr. Paulson would need to pull off a Hail Mary, with returns on par with the subprime play.

Investors who have recently met with the money manager say his usual swagger has diminished, and he appears worn. Last month, protesters at Occupy Wall Street focused on his Upper East Side townhouse. He responded in a statement, that “instead of vilifying our most successful businesses, we should be supporting them.”

Despite the reversal, investors are largely remaining patient. Some are loath to sell their positions in Mr. Paulson’s funds at their low point. Other big institutions are willing to stick by the money manager given the proven team and strong record.

“With a fund of our size, we are going to constantly have investments that do very well and those that don’t,” said M. Steve Yoakum, executive director of the $30 billion Public School Education Employee Retirement System of Missouri, which has $118 million with Mr. Paulson. “One of the biggest differences between institutions and private investors is the tendency to sell when things are bad.”

Article source: http://feeds.nytimes.com/click.phdo?i=59eb6861b041930047ebbf67d497759e

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DealBook: Taking on a Veteran Antitrust Judge in the AT&T Fight

September 2, 2011 by Leave a Comment

Judge Ellen Segal HuvelleCharles Dharapak/Associated PressJudge Ellen Segal Huvelle

8:21 p.m. | Updated

As ATT prepares to defend its $39 billion deal for T-Mobile USA against a lawsuit by the Obama administration, the two sides will face a judge who has refereed many big antitrust fights.

Judge Ellen Segal Huvelle, in her 12 years on the United States District Court for the District of Columbia, has overseen numerous antitrust cases brought by regulators, including one in which she ruled against the government. She has also presided over prominent matters like the trial of the disgraced former lobbyist Jack Abramoff and the Securities and Exchange Commission’s settlement talks with Citigroup over subprime mortgages.

The Justice Department’s lawsuit against ATT is one of her biggest cases to date. It is the Obama administration’s most significant effort to halt a landscape-altering transaction, one that would combine two of the nation’s biggest cellphone service providers. And the tenor of both the Justice Department’s complaint and ATT’s response suggests that a contentious brawl may be in the works, even as both sides leave open some possibility of a settlement.

In a case this complex, with reams of market and technological data to consider, a jurist with experience presiding over antitrust matters may prove a boon for both parties

Born in Boston in 1948, Judge Huvelle graduated from Wellesley in 1970 and Boston College Law School in 1975, and served as a clerk for the chief justice of the Massachusetts Supreme Judicial Court. (Unusually for a federal judge, she also earned a master’s degree in city planning from the Yale School of Architecture in 1972.) She then moved over to the law firm Williams Connolly, where from 1976 to 1990 she represented clients like the flamboyant boxing promoter Don King.

In 1990, she was appointed a District of Columbia Superior Court judge. Nine years later, the Clinton administration nominated her to the District of Columbia federal bench.

That seat has put Judge Huvelle in line to hear several major antitrust cases — at least 12 since 2004, according to Justia.com, a legal information site.

Among antitrust experts, she is perhaps best known for presiding in 2001 over the Justice Department’s suit to block the $825 million SunGard Data Systems bid for Comdisco’s data recovery business. The government argued that the deal would combine two of the nation’s three biggest providers of data recovery services, creating an unacceptable level of market concentration.

But lawyers for SunGard and Comdisco countered that customers had alternatives, including offsite data storage solutions, to which they had actually lost more customers than to competitors. Judge Huvelle ultimately ruled for SunGard, writing that the United States could not prove “the proposed transaction is reasonably likely to substantially lessen competition.”

It was the Justice Department’s first significant antitrust loss in years.

Judge Huvelle later heard a 2007 case brought by the Justice Department over ATT’s $2.8 billion purchase of Dobson Communications. To secure approval of the deal, the company agreed to sell off assets in seven markets.

She also presided over the Justice Department’s lawsuit seeking to block the UnitedHealth Group’s $2.4 billion takeover of Sierra Health Services in 2008.

In that case, the government argued that combining the two would give UnitedHealth 94 percent of the Medicare Advantage market in Las Vegas, a segment with $840 million in annual fees. UnitedHealth settled the case by agreeing to sell its Medicare Advantage business.

ATT, which said it was caught off guard by the government’s move, may follow SunGard’s example and argue that its competitors include more than the big four national cellphone service providers. Newer companies like LightSquared could emerge as upstart national rivals, while virtual network operators like Virgin Mobile could expand in the low-price end of the market.

“From ATT’s standpoint, SunGard showed that she is not just going to rubber-stamp what the government is going to do,” said David F. Smutny, a partner at Orrick, Herrington Sutcliffe.

Judge Huvelle also overruled government lawyers in the S.E.C.’s initial proposed settlement with Citigroup over the bank’s subprime disclosures, asking curtly, “I look at this and say, ‘Why would I find this fair and reasonable?’ ”

But many experts say that the Justice Department has a strong argument in this case. Should the T-Mobile deal go through, the nation would labor under a de facto mobile duopoly of ATT and Verizon Wireless, according to the government’s complaint.

“Justice has done a thorough job,” said Susan Crawford, a professor at the Benjamin N. Cardozo School of Law. “ATT’s surprise shows they took this as political matter and not a legal matter.”

Article source: http://feeds.nytimes.com/click.phdo?i=18b10d732f333dbf2627104e21bb31bd

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Economix: A ‘AAA’ Q. and A.

August 7, 2011 by Leave a Comment

7:12 p.m. | Updated to elaborate on bank bailout.

Why did Standard Poor’s lower the credit rating of the United States to AA+?
FLOYD NORRIS

FLOYD NORRIS

Notions on high and low finance.

The rating agency thinks the United States has too much debt, or at least will: “Under our revised base case fiscal scenario — which we consider to be consistent with a AA+ long-term rating and a negative outlook — we now project that net general government debt would rise from an estimated 74 percent of G.D.P. by the end of 2011 to 79 percent in 2015 and 85 percent by 2021.”

Why is the debt so high?

One reason is that the government had to spend huge sums to bail out the banks and try to offset the impact of the deep recession caused by the financial crisis. It looks as if the government will more or less break even on the bank bailouts, but it cannot recoup the money it had to spend to keep the economy afloat.

Did S.P. issue warnings when the mistakes leading to the financial crisis were being made?

No. One cause of the crisis was that S.P. and its competitors handed out AAA ratings to almost anyone who wanted one for a mortgage-backed security. They did that even for securities whose only source of repayment was subprime mortgages issued to buyers with poor credit who had taken out what were known as “liars’ loans” because no one checked to see if they had any income at all.

Why did they do that?

They had models that showed a lot of such mortgages would never default.

Are those securities still AAA?

No. Many of them are rated in the lower regions of junk. It turned out there were a lot of defaults.

Does this mean that S.P. thinks the U.S. ability to meet its obligations is in question?

No. It knows the United States borrows in dollars, and also has a dollar printing press. The recent Congressional circus raised some fears the country would refuse to pay, but that seems to have passed.

There have been complaints that the rating agencies are always behind the market. Is that true this time?

No. In recent months, Treasury borrowings costs have declined, because investors around the world engaged in a flight to safety. The market thinks there is nothing safer than a Treasury bill.

How have other AAA countries done?

Generally O.K. But rates have gone up in France because of worries about the euro and a recognition that France, unlike the United States, does not have the ability to print the currency it must repay.

So the market seems more concerned about France, but S.P. does not. Is that because France has less debt outstanding?

No. S.P. believes that in 2015 France’s debt will be 83 percent of its GDP, compared to 79 percent in the U.S. But it thinks France will do a better job of bringing down budget deficits.

So the market seems to have a different view than does S.P. of the relative merits of U.S. and French debt? Whom should I believe?

That is up to you. But the market figured out subprime mortgage securities were junk long before S.P.

So the U.S. debt is up partly because S.P. was incompetent before the financial crisis. Is there any particular reason to assume they know what they are doing now?

Next question.

What impact will this have on trading in Treasuries in coming days?

There is no way to be sure. Anything that causes a lot of people to sell a security is likely to cause prices to fall. But it is hard to see there is any new information in S.P.’s report.

Article source: http://feeds.nytimes.com/click.phdo?i=c74e844385e9c9456e658b94e0562776

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Sheila Bair’s Bank Shot

July 9, 2011 by Leave a Comment

It was midmorning on a crisp June day, and Bair, the 57-year-old outgoing chairwoman of the Federal Deposit Insurance Corporation — the federal agency that insures bank deposits and winds down failing banks — was sitting on a couch, sipping a Starbucks latte. We were in the first hour of several lengthy on-the-record interviews. She seemed ever-so-slightly nervous.

Long viewed as a bureaucratic backwater, the F.D.I.C. has had a tumultuous five years while being transformed under Bair’s stewardship. Not long after she took charge in June 2006, Bair began sounding the alarm about the dangers posed by the explosive growth of subprime mortgages, which she feared would not only ravage neighborhoods when homeowners began to default — as they inevitably did — but also wreak havoc on the banking system. The F.D.I.C. was the only bank regulator in Washington to do so. During the financial crisis of 2008, Bair insisted that she and her agency have a seat at the table, where she worked — and fought — with Henry Paulson, then the treasury secretary, and Timothy Geithner, the president of the New York Federal Reserve, as they tried to cobble together solutions that would keep the financial system from going over a cliff. She and the F.D.I.C. managed a number of huge failing institutions during the crisis, including IndyMac, Wachovia and Washington Mutual. She was a key player in shaping the Dodd-Frank reform law, especially the part that seeks to forestall future bailouts. Since the law passed, she has made an immense effort to convince Wall Street and the country that the nation’s giant banks — the same ones that required bailouts in 2008 and became known as “too big to fail” institutions — will never again be bailed out, thanks in part to new powers at the F.D.I.C. Just a few months ago, she went so far as to send a letter to Standard Poor’s, the credit-ratings agency, suggesting that its ratings of the big banks were too high because they reflected an expectation of government support. If a too-big-to-fail bank got into trouble, she wrote, the F.D.I.C. would wind it down, not bail it out.

As an observer of the financial crisis and its aftermath, I have frankly admired most of what she tried to do. She was tough-minded and straightforward. On financial matters, she seemed to have better political instincts than Obama’s Treasury Department, which of course is now headed by Geithner. She favored “market discipline” — meaning shareholders and debt holders would take losses ahead of depositors and taxpayers — over bailouts, which she abhorred. She didn’t spend a lot of time fretting over bank profitability; if banks had to become less profitable, postcrisis, in order to reduce the threat they posed to the system, so be it. (“Our job is to protect bank customers, not banks,” she told me.) And she was a fierce, and often lonely, proponent of widespread mortgage modification, for reasons both compassionate (to help struggling homeowners stay in their homes) and economic (fewer foreclosures would help the troubled housing market recover more quickly).

I thought something else as well: with her five-year term as F.D.I.C. chairwoman drawing to a close — her last day was July 8 — she never really got her due. The rap on her was always that she was “difficult” and “not a team player.” There were times, in Congressional testimony, when she disagreed with her fellow regulators even though they were sitting right next to her. Her policy disputes with other regulators were legion; in leaked accounts, Bair was invariably portrayed as the problem. In “Too Big to Fail,” for instance, the behind-the-scenes account of the financial crisis by the New York Times business columnist Andrew Ross Sorkin, Bair is described as one of Geithner’s “least favorite people in government.” As Paulson, Geithner and the Federal Reserve chairman, Ben Bernanke, raced to bail out banks and companies like A.I.G., Bair resisted, fearing that they were being overly generous by putting the interests of bondholders over those of taxpayers. I couldn’t help recalling that the last female financial regulator to be labeled difficult was Brooksley Born, the head of the Commodity Futures Trading Commission in the mid-1990s. Fearful that derivatives were becoming a threat to the financial system, Born wanted to regulate them but was stiff-armed by Alan Greenspan and Robert Rubin.

Joe Nocera is an Op-Ed columnist for The Times and the co-author of “All the Devils Are Here: The Hidden History of the Financial Crisis.”

Article source: http://feeds.nytimes.com/click.phdo?i=83b11278ea12c696d42bbf7b5a23886f

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