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I found this in my mailbox this morning. I think it's from the street.com people, but it did a good job.
The Long Term Capital story may be the biggest financial story to come down the pike this decade, and it certainly rivals the rise and fall of Mike Milken in its drama. It is so big that it must be covered and covered well by the press. Right now it is being covered almost haplessly, stupidly, and without any street smarts. It makes me sick to read the games these guys are playing with the press and how little we are really finding out about what went on up in Greenwich.
That's why I have decided to write a reporter's primer to help the press do a better job covering this story. As a hedge fund manager and a one-time buyer and seller of derivatives who is comfortable with much of the stuff that these guys did, I think I can help shed some light that will make for more honest and hard-hitting reporting than we have seen so far.
First: Let's stop the pretense that these guys were any good at all. Ever. Now that we know what kind of leverage they were using their returns sucked. The whole time. They should have been shooting the lights out with the amount of money they were borrowing. If borrowing means taking on risk, which it does by the way, regardless of what these clowns tell you up in Greenwich, these guys should have been up 100% to 150% without a problem. So stop praising their returns ex-this year. They were disappointing given the leverage.
Second: There is no "bail-out" of Long Term Capital. The principals will have nothing except for what they have hidden. They will be more than wiped out, they will owe huge when this is over. Stop buying that rap that they are being bailed out. They will be penniless. With or without justice, they will be penniless. All of the money they managed will be lost and chances are all of the people who had money in the fund will owe more money. The returns you have seen from this year still reflect Long Term's view of the performance. The real number is probably considerably lower. Ask these jokers how you would value their portfolio if they had to sell it. BECAUSE THEY HAVE TO. Hint: Not bid side, but through the bid.
Third: There is no federal bailout. No taxpayer's money is involved. This is not an s&l scandal where the government is on the hook. In fact, it is outrageous that private firms had to put up this capital, but it is a windfall that it is happening for everybody BUT them. It is a disaster for them. The money they will have to put up reflects a fraction of what they ultimately will have to put up because the only stuff that Long Term still had left was completely unsaleable. But if the Fed had not insisted that everybody pitch in, the unwinding in bankruptcy of this portfolio would have caused a financial meltdown and a credit collapse. The worst since the Depression. Be glad the Fed did what it did; now hope that the portfolio at Long Term wasn't so neutral that short rate declines don't help. Because they are coming.
Fourth: Get the numbers right. The $1.25 trillion was a joke. Most of the sums involved are just different pieces of the same contract. You go long the German 10-year and short the U.S. 10-year, for $1 billion. You hedge the mark. That's another billion-dolllar trade, but it is simply part of the first trade. You finance the trade with a billion repo. That's another billion, but it is also a part of the first trade. But in the parlance of the Street, that is all just a $1 billion trade with its derivatives. Don't get me wrong, these clowns took down way too much borrowing, but much of the numbers you see will turn out to be pieces of a trade magnified three or four times.
Fifth: Stop allowing these guys to be quoted like "we are back in business," or we will be roaring back. They are history. If I were a good prosecutor, after putting the CUC guys away I would be all over these guys for Federal Wire Fraud. Every day Long Term had to meet a new margin call. Let me tell you how it works for those of us without the big-time %$$&^% clout these guys had. On the third margin call a partner from Goldman Sachs calls you and shuts you down. Puts you out of business. You only get three strikes. These guys broke the rules many times over. They should be punished. Who let them off time and again? Let me know, I want them as my broker.
Sixth: Cover this story the way it should be: It is a disaster for the brokerage industry. Not only will these firms never be able to get their customers to borrow big money to take down their brokerage product, most of the people in fixed income will be taking massive pay cuts because of this. Wall Street partners will be out billions. Goldman Sachs, talk about being a quarter late. You want the public stockholders to help you hold the bag on this one. Big checks must be written. Out of the capital account! I think the firms involved will all have to kick in billions more because the stuff that Long Term is left with is unsaleable. Heck, it took a bunch of Nobel guys to put it together, to take it apart it will take Einstein. This stuff is worthless to all but Long Term. Hopefully, a lot of it will eventually just come off, but elaborate bets on yield curves of foreign countries? Give me a break. These have to be unwound at hideous losses to whoever is holding the bag.
Seventh: Stop giving them a free pass on stuff like Russia. You read that Russia was "only" 8% of their book. Well, 8% of their book turns out to be about $125 billion. That's where all of the paper must have gone that is missing. These guys had a massive bet on Russia, just massive. Idiots.
Eighth: Everybody had a clue what they were doing. They may have been secretive, but they did trades with other parties. Once Russia was bagged, everybody should have known they were dead. That's when the crisis could have been averted but somebody was asleep at the switch.
Ninth: Get someone to break down some of these trades to show us if they can be taken off at all. We have to figure out how long this is going to take. Will they unwind a billion a day, or will they try to unwind nothing for now? This is very important because we need to know if this thing can be contained in a year's time.
Tenth: Stop calling these people rocket scientists. They were hopelessly out of their league, doing things that your mother would have told you were just plain stupid. I don't know which is dumber, doing the kind of fool-proof trading that these guys were doing, or giving them money to do it. Stop respecting them. They are pariahs worthy of only one thing: a real cool stretch in a real bad place. If they show their faces on Wall Street again, you can bet that you will have to restrain two-thirds of the people who work there from killing them. Bring an army, you will need it. One thing they did know how to do though was rip off their investors. They pumped the books up and boosted their own management fees to do it. There was not an ounce of shame to these guys. They are the bond equivalent of Boesky in my eyes, and I don't invoke that name. Ever.
Stewart Taylor Taylor Fixed Income Outlook Voice: 501-219-9774 Fax: 501-228-0963 E-Mail: staylor@xxxxxxx Web Site: http://www.cei.net/~staylor/
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