Short-Term Capital Mismanagement LLP. / Must Read :-)

Brilliant! Excellent Stuff from Marc Gilbert! One for the "Hall of Fame". On top of this i recommend How To Speak Hedgie from Dan Gross via Barry Ritholtz

Geniales von Marc Gilbert. Passend dazu empfehle ich How To Speak Hedgie von Dan Gross via Barry Ritholtz

WARNING:

Make sure you have no coffee in your mouth.....

Ihr solltet besser keinen Kaffe bei der Lektüre im Mund oder in der Hand haben.....

Aug. 16 (Bloomberg) -- Dear investor, we'd like to take this opportunity to update you on the recent performance of our hedge fund, Short-Term Capital Mismanagement LLP.

As you know, market selection for the entire fund is guided by a proprietary investing tool we like to call ``a dartboard.'' Once the asset classes are decided, individual security selections are generated by digitizing our unique hexagonal cuboid models.

Unfortunately, it transpires that our hexagonal cuboids are not as unique as we thought. Hundreds of other hedge funds possess identical dice. The technical term for this is a ``crowded trade.'' You may also see it referred to as ``climbing on a bandwagon already headed for the wall.''

As our alpha generation collapses, our beta has turned negative, our delta hedging has gone toxic and, trust me, you do not want to hear about our gamma. We can't even find our epsilons in the dark with both hands.

You will appreciate that accurate pricing is essential for evaluating our investment strategies. This has proven to be extremely challenging in recent days. Previously, we have relied on Bob, the sales guy at Hokey-Cokey Bank. Bob assured us the securities were still worth 100 percent of face value, so everything was cool. Bob sold the collateralized debt obligations to us in the first place, so he knows what he's talking about.

Bob, however, appears to have had a nervous breakdown, judging by the maniacal laughter that greeted our requests for price verification this week. Our efforts to implement an in- house CDO valuation framework, using a technique the ancients knew as ``making things up,'' proved unsatisfactory.
Where's the Bid?
Currently, all of the portfolios we manage are undergoing a rigorous screening known as ``crossing our fingers and praying that we don't have to try and find a bid in the market.'' This is supplemented by a cross-market statistical analysis originally developed by the U.S. military called ``don't ask, don't tell.'' This ``unmarking-to-unmarket'' procedure has been the benchmark for the hedge-fund industry for the past, ooh, 72 hours.

We have, of course, been in touch with the rating companies to update our default-probability scenarios, particularly on the AAA rated investments we own. They recommended a forecasting method using stochastics to regress the drift-to-downgrade timescales for the past 100 years and throw them forward for the next five minutes. The technical term for this is ``induction,'' though those of you of a less quantitative bent may know it as ``guessing.''

AAA or Toast?
We are pleased to report that, contrary to what current market prices might suggest, all of our top-rated securities remain absolutely AAA. Provided, that is, the future performance of the underlying collateral is identical to its history. Otherwise, the rating companies say our investments are likely to be reclassified as ``toast.''
We have also been checking our back-up credit lines with our friends in the investment-banking world. As soon as they return our calls, we'll be able to update you on our emergency liquidity position. We are sure they are fine.

Some of you have written to us asking for your money back, citing clauses in the fund documentation called redemption rights. Frankly, we never expected you to actually read that prospectus, which came prepackaged when we bought the Microsoft Hedge-Fund Guy software. We certainly have no idea what all those long words mean.

We have filed your letters in a special drawer in the filing cabinet marked ``trash'' for now. Do you have any idea how much trouble you all would be in if we actually sold this stuff in the market today? At these crazy prices? Fuhgeddaboudit. You'll thank us later.

Not a Rescue
Speaking of crazy prices, we know you'll be thrilled to learn that we've invited a bunch of our rich pals into the fund to participate in this once-in-a-lifetime opportunity. But this is not a rescue. Do not even think the word rescue. This is an opportunity. Not a rescue. An opportunity.

In fact, we think this is such a fantastic opportunity, we've agreed to forgo our usual management fee, and we'll only take half our usual slice of the profits. Provided there are any profits to slice. You, of course, are absolutely invited to participate in this offer by sending us yet more of your money on exactly the same revised terms as our rich pals.

Finally, a word for all of you who have been kind enough to inquire about my personal financial situation. I am relieved to report that my directors and officers insurance is fully paid up. Furthermore, my Bentley Continental was paid out of the 2 percent fee we levied when you wrote your first check to us, so I will still be able to trundle into the parking lot each morning in an open-necked shirt to ignore your telephone calls and e-mails. Yours, Hedge-Fund Guy.

Cramer Must See....

Folks this is a must see...... Like I said before someone has to call a doctor..... They should switch him to Comedy Central...... This clip has the potential to be one for the "Hall Of Fame"

Wie ich bereits vorher gesagt habe muß der Typ dringend zum Arzt..... Wer das verpasst hat selber schuld. Klares "Hall of Fame Potential :-)

Big hat tip to Keith from Housing Panic

> On the older pictures he looks harmless.......

> Auf den älteren Bildern sieht er recht harmlos aus..... Have a nice weekend

Allen ein schönes Wochenende

Deficit Attention Syndrome / Contrary Investor "Hall of Fame"

i highly recommend to read the full piece! please click on the headline this is only a very small extract. excellent!

lege jedem die volle dosis ans herz. bitte auf die überschrift klicken. wirklich brilliant!


...Quite importantly, it's this change in the rate of growth in goods imports that we believe may be a key tell regarding the broader economy. First, is it really any wonder that the rate of change in goods imports has been falling as of late when the annual rate of change in retail sales has slowed to levels last seen in early 2003? Of course not, as so many consumer goods are imported. Having said all of this, the following two charts are probably the most important in this portion of the discussion. First, the long-term picture of the year over year rate of change in US goods imports lies directly below.


As you will clearly see in the chart, there has only been one time in the last three and one half decades where we have fallen below the current rate of change level and the US has not entered or already been in an official recession. That exception was the mid-cycle economic slowdown of the mid-1980's. We suggest that the current possibility of a rate of change break below current levels may be more important than ever given the sheer nominal dollar magnitude of the current goods deficit as part of the overall trade numbers. As we're sure you know, the US runs a services surplus (tourism and travel related). The goods deficit is really larger than the headline US trade deficit. THAT's how important changes in goods imports and exports really are in the current environment.

The next chart is really the important one in terms of defining and characterizing the US trade deficit, as we know it today. What we are looking at is the percentage of the total US trade deficit being driven by both imports of crude oil and imports from China. We've delineated each separately as well as presented their ongoing combined value in the blue columns. The message is clear. In 2006, 66% of the US trade deficit is accounted for by crude imports and the trade deficit with China. It's no wonder China/US trade circumstances are such a perceptual political flash point. Unless something acts to change the trajectory of these trends, it will probably only be a year or two until crude and China account for three-quarters of the total US trade deficit. Outside of crude and China, it almost seems trade with the rest of the planet is an afterthought in terms of the overall US deficit specifically. ....

make sure you get the last paragraph from hank paulsen.....(click headline)

achtet besonders auf den letzten absatz von hank paulsen...(überschrift klicken)

Still Renting / PIMCO / Hall of Fame

once more excellent stuff from pimco. mark kiesel was right in the past and it his current outlook seems aslo be spot on.

einmal mehr eine tolly analyse von pimco. mark kiesel war einer der wenigen die in der vergangenheit richtig lagen und ich denke auch seine aktuelle beschreibung trifft ziemlich genau zu.


One question my friends and colleagues have asked me repeatedly over the past six months is: Are you still renting? Yes! I sold my house over a year ago and continue to rent.

Back in late 2005, I became anxious about my investment in the “American Dream,” after spending a considerable amount of time and effort researching several factors that I felt would influence housing prices. At the time, I was nervous about housing and ended up selling my house in early 2006 after owning for eight years, and then, upon closing, published For Sale, our U.S. Credit Perspectives, June 2006 publication. A year ago, I suspected housing prices were set to take a sharp turn for the worse and more “For Sale” signs were coming.

Based on the current outlook for housing, I will likely be renting for one to two more years. While many factors that influence housing prices have turned negative, I suspect we have not yet hit bottom. In fact, housing prices should head lower throughout the rest of this year and next year as well. Why? Housing inventories remain high, delinquencies and foreclosures are set to rise as homes purchased over the past few years by speculators and individuals with teaser-rate and adjustable-rate mortgages come back on to the market, affordability is low, and sentiment and risk appetite has shifted negatively. Most importantly, the availability of credit is set to take a turn for the worse as lenders tighten credit standards.

This is all great news for renters and buyers who are patient. Over time, housing prices and interest rates should decline, resulting in improved affordability. This adjustment, however, will take time and occur over a period of years, not months. Housing is illiquid and prices are sticky. As a result, potential buyers should exercise patience and not jump back into the housing market too early. A year ago, I described the state of the U.S. housing market as “the next NASDAQ bubble.” The NASDAQ took over 2 ½ years to go from peak to trough. I suspect that housing prices could display a similar pattern, and we are still over a year away from the bottom. Given these risks, I prefer renting versus owning, and an investment strategy which favors defense versus offense.

Unwinding the Housing Bubble
Housing was an asset bubble influenced by bullish sentiment, robust risk appetite and speculation, lack of fundamental analysis, cheap money, inflated appraisals and easy lending standards. These factors helped to drive housing prices up to new levels and the unwinding of these conditions is expected to drive housing prices down. Never before have we witnessed so many people lever-up real estate with so little money down or “skin in the game.” This growth in mortgage debt and risk appetite helped fuel consumer spending and corporate profits. As such, the unwinding of this bubble will have broad consequences for the overall economy.

As the housing bubble unwinds, what are the implications for the overall economy and credit spreads? The U.S. economy will likely experience sub-par economic growth for the next year as declining housing prices lead to weaker consumer spending, slower corporate profit growth, a decline in business investment and less job creation. This environment favors reducing credit risk, especially to cyclical industries and lower-quality sectors of the market. As lending standards tighten and risk appetite turns more conservative, housing prices are likely to face a further leg down.

What’s the big picture? Declining housing prices will lead to a pullback in job creation and a sharp slowdown in corporate profit growth, causing the Fed to lower short-term interest rates by the end of this year. Despite lower short-term rates, mortgage rates may not follow downward, because more cautious lenders will charge higher spreads relative to Treasuries. In addition, credit spreads should widen as consumers rein in their risk appetite for housing and investors turn more cautious on the outlook for the U.S. economy. We will now turn to an analysis of the supply and demand factors influencing housing. These factors should help to illuminate the future path of housing prices over the next year.

Inventory
On the supply side, the inventory of new and existing homes available for sale remains near all-time highs (Chart 1). The homebuilder industry helped contribute to today’s record inventories through its bullish sentiment and aggressive land purchases over the past several years. Unfortunately, homebuilders have little incentive to stop building once they have purchased land for development. In hindsight, homebuilders bought too many lots over the past few years, expecting that the run-up in land prices would continue for several more years. Given that undeveloped land is less valuable than developed land, homebuilders went through the process of getting zoning approvals on their land and started the build-out process in order to monetize their investments.

Even when prices appeared to have peaked over a year ago, homebuilders continued to commit to new developments and communities. Meanwhile, even in the face of large discounts and concessions, housing order rates have fallen more precipitously than most expected, resulting in inventories remaining stubbornly high. Undeveloped land cannot be monetized without a completed home. The cost of carry, including completion guarantees, provides strong incentives for builders to keep building. Unfortunately, housing is like a supertanker, which takes time to slow down. In addition, homebuilders have little incentive to stop building when a home is incomplete, even if economic conditions soften. All of these factors help to ensure that once projects are started, they are completed, and also help to explain why homebuilders’ inventories have remained elevated despite aggressive incentives such as –10% to –15% price discounts.

The housing market faces potential new supply from other sources as well. First, a large portion of incremental housing demand over the past several years has come from speculators and investors. With housing prices now falling in most of the markets where speculative activity was strongest, yesterday’s marginal buyer is becoming today’s marginal seller. Not surprisingly, the inventories in highly speculative regions such as Florida, California, Phoenix and Las Vegas, have risen sharply. In some of these over-heated markets, supply represents several years of demand. Not surprisingly, homeowner vacancies are soaring (Chart 2). This trend may even accelerate as recent speculators with low initial equity, and negative future equity, choose to walk away from paying monthly mortgage payments on a losing investment, especially factoring in the cost of 4-5% real estate commissions.

Another source of new supply will likely come from rising delinquencies which will eventually turn into more foreclosures. A growing segment of recent homebuyers have bought homes using teaser-rate, adjustable-rate, and no-money-down or low-money-down mortgages. As adjustable-rate mortgages reset upward, the housing market will likely see increased foreclosures involving individuals who can’t afford the new reset rate on their mortgage. The total inventory of homes in foreclosure has risen to 437,041 homes, a +39% increase over the past year.1 The problem is not only in the subprime category, as delinquencies for both prime and subprime loans are rising (Chart 3).

In fact, the market’s primary focus on subprime ignores a major issue, which is that Alt-A and prime borrowers will also face “sticker shock” when adjustable-rate mortgages reset upward. Lehman Brothers estimates $421 billion of ARMs will reset in 2007 ($308 billion subprime and $113 billion prime) and $542 billion of ARMs will reset in 2008 ($349 billion subprime and $193 billion prime).2 Clearly, this is not just a subprime issue, but rather an ARM reset issue as both subprime and prime borrowers potentially are forced to put homes back on the market with almost $1 trillion of ARMs resetting over the next two years. What impact will this have on housing? According to a study published last month by First American CoreLogic, a total of 1.1 million foreclosures with losses of about $112 billion will occur over a period of six years or more with roughly 500,000 homes going into foreclosure over the next two years.3

größer/bigger http://www.smugmug.com/photos/136440158-O.png

Rising foreclosures will result in homes coming back on the market not only at a time when current inventories are near record levels, but also when pent-up demand for housing is low. Easy lending standards and innovations in the mortgage market over the past several years brought forward future housing demand. People who would have qualified for a mortgage in the future were given a mortgage today. Why? Lenders, hungry for yield, relaxed their underwriting standards and provided cheap money. Naturally, consumers took the bait, and levered-up with record low down payments. In fact, 46% of homes purchased in the U.S. last year had less than a 5% down payment.4 Over time, homeowners with little capital at risk and negative home equity will likely walk away from homes under water. For all these reasons, housing inventories are likely to remain high over the next few years.

Affordability and Risk Appetite
On the demand side, housing affordability remains near 20-year lows due to a sharp run-up in housing prices (Chart 4). While mortgage rates have come down slightly over the past few quarters, housing remains unaffordable for a large group of new potential buyers. This buyers’ strike will continue until prices fall and/or mortgage rates decline. Given that homebuilders can’t control the absolute level of mortgage rates, we should expect buying incentives to remain elevated over the next several quarters. Given the strong incentives for buying a new home, owners of existing homes who are forced to sell will likely be forced to lower their asking prices.

We know from the NASDAQ bubble that once risk appetite changes, prices can shift violently in the other direction. Housing is different from equities because it is much less liquid; therefore price adjustments take more time. In a down housing market, the gap between buyers and sellers widens, and volumes fall. Buyers pull back and sellers take time to realize their listing prices are too high. Eventually, housing prices in entire neighborhoods will get reset downward by the weakest hand. Just as prices went up and everyone in the neighborhood applauded the newest neighbor who bought at the top, prices will likely start to fall as financially-stretched home owners and speculators sell, and are forced out of the market. As this process unfolds, risk appetite for housing should take a sharp turn for the worse. This year’s weak start to the traditionally strong spring selling season suggests we have indeed entered the “buyer’s strike” phase of the cycle.

Credit Availability, Lending Standards and Appraisals
A major headwind for housing in the near future will be more restrictive credit availability. Lenders are already increasingly asking for income verification and higher down payments. Countrywide changed their no down-payment lending policy last month, and is now requiring homeowners to have at least a 5% stake in their homes.5 Other lenders are following Countrywide’s lead, which will result in a smaller pool of potential homebuyers. The threat of increased government regulation and restrictive legislation is likely to cause lenders to reduce offerings of no-documentation loans, and to ensure that adjustable-rate borrowers can qualify at the higher reset rate. This trend will tighten credit availability for potential homebuyers.

As delinquencies and foreclosures rise, lenders will also suffer losses. This should reduce their willingness to take risk and cause credit spreads to widen, particularly for riskier borrowers. As lending standards tighten, less credit will be granted. And, credit that is granted will likely be offered at higher interest rates. In the long run, this will be a positive for the housing market, as only buyers who can afford to buy a house will buy one. However, in the short run, tighter lending standards will cause a reduction in demand for housing, and could cause the home ownership rate to fall. Given the significant increase in projected foreclosures mentioned above, an extended period of credit tightening could materialize.

As we discussed in Credit Innovation and Opportunity, our December 2006 U.S. Credit Perspectives, the mortgage industry’s ability to develop new products that kept initial monthly payments low enabled consumers to buy homes they could not otherwise afford, and was a major factor in driving the home ownership rate up 5% in the last 10 years to today’s level of 69%. With rising delinquencies and foreclosures, the downside of credit innovation will surface and may be met face-to-face with increased regulation. Innovation in the mortgage market, which has provided a huge lift to consumers and housing prices through growth in non-traditional products (Chart 5), is clearly at risk. Consumers will likely shift away from exotic mortgages, resulting in less overall stimulus for the housing market, particularly given the lack of pent-up demand for housing.

Lenders are not the only players in the real estate market who are turning more cautious. Real estate appraisers will also become more conservative in their evaluations of property. Some appraisers, who in hindsight probably inflated appraisals over the past several years, helped contribute to the housing bubble on the way up by helping to get marginal buyers and mortgages approved in order to “make the deal work.” Given heightened regulatory oversight, appraisers will turn more realistic. As lending standards tighten (Chart 6) and appraisals become more conservative, the pool of potential homebuyers will shrink. Why? A major problem in today’s housing market is not only sales to new home owners. The “move up” market, or existing owners who want to sell their current house to buy another house, is basically frozen. Outside of speculators exiting the market, this is a major reason why cancellation rates have risen. It isn’t only the speculators and investors backing away. Potential new homebuyers can’t sell their existing home to another buyer. As a result, they cannot move up. Changing buyer sentiment, more restrictive credit and less aggressive appraisals are all helping to restrict marginal buyers.

Where’s The ATM ?
Over the past several years, consumers leveraged rising housing prices and easy credit availability using their home as an ATM. Mortgage equity withdrawal (MEW) soared, allowing consumer spending to grow faster than income growth over the past several years. This process was facilitated by rising home prices and loose lending standards. As long as housing prices were rising, lenders were willing to lend, and consumers were willing to spend, as rising housing prices gave them the confidence to draw down on savings. Today, mortgage equity withdrawal appears tapped. Consumers have been accessing their homes as bank accounts, but housing prices are now falling in many areas, and credit is becoming more difficult to obtain. The slowdown in MEW has been remarkably swift. Over the past year, consumers tapped over $400 billion less equity out of their homes than the previous year. And, in looking at the four-quarter moving average of MEW divided by nominal GDP, the change in MEW as a percent of nominal GDP is now –1.8% (Chart 7). Slower housing price appreciation is causing mortgage equity withdrawal to fall sharply, and is set to detract from U.S. economic growth.

To understand why corporate profits may be at risk as a result of the slowdown in MEW, let’s turn our attention to consumer spending. Companies make money when consumers spend. And, consumers have been spending in part due to rising housing prices, which have allowed consumers to grow debt faster than nominal GDP. Why are corporate profits as a percent of nominal GDP at new highs? Some would argue the reasons are: (a) healthy productivity gains, (b) cost cutting, (c) strong global growth, and (d) low long-term interest rates due to robust global savings. Instead, I suggest turning the focus back to the consumer and housing. Thanks to rising housing prices, consumers have been able to grow spending significantly faster than income growth, through unprecedented increases in mortgage equity withdrawal. In fact, the growth in mortgage debt parallels the growth in corporate profits (Chart 8). As a result, corporate profits, and thus economic growth, are highly dependent on housing prices. As housing prices turn negative, corporate profit growth will eventually follow.

Housing Is Today’s Leading Indictor
Housing is today’s leading economic indicator. To quote our forecast from one year ago in For Sale, “with a softening housing market, we should expect tighter lending standards, a moderation in the willingness to take risk, a slowdown in the pace of asset price appreciation, less liquid markets, and rising volatility in financial markets.” On the economic front, I believe declining housing prices and tighter credit are set to unleash a sharp downturn in housing turnover and job creation. As housing prices fall, corporate profits are expected to be at risk as consumers pull back their spending.

Housing is a momentum market. Turnover rises when real housing prices, as defined as housing price appreciation (HPA) minus mortgage rates, are rising. Turnover slows when real housing prices are falling (Chart 9). Today, the growth in real housing prices is falling. We believe real housing prices will turn further negative in 2007, causing new and existing home sales to decline towards 5 million units per year, down from a peak of over 7.5 million units per year in 2005.

Housing starts and permits tend to be a good leading indicator of job growth. Through February 2007, housing starts are down –28% year-over-year. This type of decline in housing starts typically leads to a sharp slowdown in job growth, within roughly one year (Chart 10). As a result, I believe that job creation is set to slow, possibly materially. The U.S. economy created approximately 200,000 new construction jobs last year. It would not surprise me if we lost 400,000 construction jobs this year, as homebuilders complete their existing projects and then lay off workers. As corporate profit growth deteriorates with a slowdown in housing, business investment and consumer spending, layoff announcements across all sectors of the labor market will likely pick-up

here the link to the economic impact on the illegal immigrants

"Housing Slump Takes a Toll on Illegal Immigrants" http://tinyurl.com/22bv9l

The Fed should lower the Fed Funds rate as soon as we have confirmation that the employment situation is deteriorating. By that time, credit spreads will have already anticipated the fact that risk appetite is set to turn for the worse.......

For renters and potential homebuyers, my advice is to still rent. The housing market has turned for the worse but the unwinding of this bubble will take more time. Unfortunately, this is not good news for the U.S. economy, job creation or corporate profits. Nevertheless, investors who are patient and adopt a conservative investment strategy should prosper over the next few years.

The why and how America is in trouble / hall of fame

wow! this is a must read from credit suisse,bill cara and also tanta/calculated risk. make sure you click on the headline to see dozens of charts and data.

donnerwetter. das solltet ihr gelesen haben. die wohl bisher beste zusammenfassung des us hypothekenmarktes. dank geht an bill cara, credit suisse und tanta/calculated risk. bitte auf die überschrift klicken

the 3 ones are only a very small sample to increase your appetite.

die 3 charts sind nur zum neugierig machen.

In the past five years, subprime purchase originations have more than doubled in share to approximately 20% of the total in 2006. Over this time period, subprime lenders eased underwriting standards in an effort to gain market share. Loans were made to first time homebuyers with little or no down payments, as 2006 subprime purchase originations posted an alarming 94% combined loan-to-value, on an average loan price of nearly $200,000. Even more distressing is the fact that roughly 50% of all subprime borrowers in the past two years have provided limited documentation regarding their incomes…

after viewing all the charts and data i highly recommend this link from tanta/calculated risk

nachdem ihr die charts gesehen habt solltet ihr diesen link anklicken um noch mehr fakten zu bekommen.

http://calculatedrisk.blogspot.com/2007/03/tanta-credit-suisse-not-drinking-kool.html

Plundered Fortress / pump and dump at its best / hall of fame !

make sure you read this one. to me this feels like the mania in 1999/2000. it is just unbelievable that this ipo from fortress was such a success. it´s a wonder that they have the to file for an ipo......congratulations to the top 5 that made a fortune. but the rational from buyers of this modern "pets.com" is beyond me.........

i think they will someday wake up and see/feel like "emperor´s with new cloth"

das teil kann ich jedem wärmstens empfehlen. wenn das keine erinnerungen an das jahr 1999/2000 hervorruft.....ein wunder das dieses ipo ein erfolg geworden ist. alle achtung das die überghaupt den mumm hatten so etwas als ipo zu wagen.....glückwunsch an die 5 top leute die mrd gemacht haben. aber was die käufer dieser modernen "pets.com" denken entzieht sich meiner vorstellungskraft.

erinnert mich stark an "des kaisers neue kleider"......

thanks to txchick57 http://thehousingbubbleblog.com/?p=2413#comments and brett arends from http://www.thestreet.com/ ( looks there is at least one smart writer besides kass)

When it comes to hedge fund company Fortress Investments , one thing's for sure: Chief executive Wesley Edens and the other principals didn't get where they are today by leaving money on the table.

Fortress went public two weeks ago and doubled in price on the first day. But what investors may not realize is that the five principals pretty much stripped the company clean just before the IPO.

I don't mean they cleaned up the balance sheet. I mean they cleaned out the vault. Page five of the prospectus shows they withdrew $446.9 million from the company in "cash distributions" last year.

Plus another $409 million in January.

They collected a further $888 million on Jan. 17 by selling a small stake to Japanese bank Nomura. Oh yes, and they pocketed a further $22.8 million in the final weeks before this month's IPO.

A table buried on page 94 of the prospectus shows the remarkable facts. ( at least they have printed it in english...../immerhin ist das prospekt in english....)

Between January 2005 and this month's IPO, the five principals of Fortress -- Edens, Peter Briger, Robert Kauffman, Randal Nardone and Michael Novogratz -- cashed out $1.04 billion. "That does not include the Nomura transaction," adds company spokeswoman Lilly Donohue.

Total withdrawn in the two years before they took it public: $1.9 billion. Most of that was in the final few months.

This isn't just every penny that the company earned over that period -- it's a lot more.

By the time the owners opened the doors to the investing public this month, the company wasn't just out of cash -- it had negative book value. Liabilities actually exceeded assets by $507 million. / compared to fortress pets.com looked like a solid investment... :-) i know that this is not comparing apples to apples but i couldn´t resist........ damit sieht sogar pets.com rückblickend solide aus....:-) mir ist schon klar das man hier äpfel mit birnen vergleicht. konnte der versuchung aber nicht widersetehn.....

In other words, the owners didn't just clean out the vault. They left a pile of IOUs -- and used the new money to balance the books.

When the overallotment is finally calculated, ordinary investors will probably have put in $685 million.

Let's be clear. Edens and his partners have done nothing illegal. Let's even go as far as saying they did nothing unethical.

They sold a stake in the company to the investing public on an "as is" basis. And all this was disclosed in the prospectus. (So, too, by the way, is the company helicopter).

Caveat emptor.

....The emptying of the vault isn't the only interesting thing the prospectus turns up. There are, for example, various obligations that the newly public company still owes to the five principals.

For example, Fortress Investments has indemnified them for up to $283 million in investment management fees they may not have earned.

Those are performance fees that the principals have already pocketed from Fortress' private-equity and hedge funds, based on forecast returns. If the funds fall short of those forecasts, the principals may have to give some or all of that money back.

Now, thanks to the IPO, the money will come from the public company.

The obligations don't end there.

Even after the IPO, the principals will still own somewhere between 68% and 78% of the business, in the form of special units in the operating company. When the principals exchange these units in the future for ordinary shares, Fortress ought to get a tax benefit. The new shares, after all, will have a much higher tax-cost basis.

But according to the prospectus, whenever an exchange occurs, Fortress Investments has to hand over 85% of any tax benefit to the principal.

In cash.

As no one knows the value that shares will have when this occurs, you can't put a number on that obligation right now. But a fascinating footnote reveals just how big it may be.

The Nomura transaction alone, on a pro forma basis, raised the cost basis by $945 million. And that involved exchanging units for just 55 million new shares.

The amount of equity still to be exchanged: six times as much.

All of which is great news for people at the top of the company. The five principals own stock that is today valued at around $10 billion. There's another 51 million shares being handed out to key employees in the IPO. Value today: another $1.6 billion.

thanks to ggg bear for this link "Fortress execs hit $10 billion jackpot" http://money.cnn.com/2007/02/09/markets/ipo/fortress/index.htm

"Hall of Fame" A New Era / pimco

looks like the risktakers don´t need to invent the cash cow. they have found it .....for now.
once more fantastic stuff from pimco.

die cash cow muß momentan nicht erfunden werden. die scheint momentan überall vorhanden zu sein. wieder einmal mehr geniales von pimco

Global Liquidity Boom
The global financial system is indisputably experiencing a boom in liquidity, driven by growth in corporate cash balances, foreign central bank reserves, private equity and hedge funds. This liquidity boom, along with new financial products, is changing the way that investment professionals traditionally view, evaluate and invest in financial markets. On the corporate front, strong global economic growth and easy global monetary policy over the past several years have led to a sharp rebound in corporate profit growth. In the United States, corporate profits as a percent of nominal GDP are now at 40-year highs (Chart 1). Despite this solid profit growth, most CEOs have remained conservative with capital spending.

As a result, corporate cash flow and cash balances have soared, providing Corporate America with a surplus of funds.

The growth in cash on corporate balance sheets is serving as a catalyst for rising shareholder activism. Aggressive shareholders are increasingly putting pressure on management to redirect large cash balances toward share buybacks and increased dividends. High cash levels are further helping to facilitate more mergers and acquisitions. In addition, private equity investors are tapping into Corporate America’s significant cash position to use as part of an initial equity stake for leveraged buyouts (LBOs). These trends, influenced by high corporate cash balances, are fueling a global boom in equity markets. Thanks to easy access to capital from both the high yield and bank debt markets, cash is being transferred from bondholders to shareholders as Corporate America engages in a re-leveraging campaign.

International developments have also bolstered global liquidity. Solid global economic growth has boosted exports from emerging economies and supported rising commodity prices. The resulting trade surpluses have led to rapid foreign exchange reserve accumulation by central banks in emerging markets (Chart 2), ....., central banks have supported the U.S. bond market by helping to keep interest rates low, contributing to generous liquidity conditions.

The broader change in global savings patterns has been dramatic. Current account deficits in the emerging world have given way to current account surpluses. Borrowers have turned into lenders. China, now with a current account surplus of over 8% of GDP, exemplifies this trend of capital rolling “uphill” from the developing world to the developed world. In addition to Asian savings, the rise in crude oil over the past several years has resulted in massive savings by oil exporters, a large portion of which have flowed into sovereign investment funds in Middle Eastern countries. ...

foreigners have become the dominant bid in some segments of the U.S. market. In the U.S. corporate bond market, foreigners are increasingly shifting their bond allocations into credit markets, in order to earn higher yields. Due to large foreign capital flows, the credit market is currently in a state of technical imbalance in which the demand for bonds is greater than the new supply of bonds. Over the past three years, foreign buyers have absorbed more than 100% of the net new corporate bond issuance in the marketplace (Chart 4). Therefore, not surprisingly, credit spreads remain near all-time tight levels.

Finally, private equity capital and hedge funds have further benefited from a structural shift in the markets, and have helped to provide fresh liquidity into the financial markets. Private equity groups announced $700 billion worth of deals in 2006, more than double the record set in 2005.1 Deal sizes are also increasing. The Blackstone Group’s recent $39 billion all-cash purchase of Equity Office Properties (EOP) attests to the liquidity private equity players now have at their disposal. Hedge fund growth has also exploded and there appears to be no near-term end in sight given that these firms are now able to come to the public markets to raise equity to grow their capital base. As an example, Fortress Investment Group LLC recently raised $634.3 million in equity through an initial public offering (IPO).2 Private equity and hedge fund investors, driven by the need to justify lofty management fees, are seeking higher returns by embracing higher risk tolerances. As we discussed in our December 2006 U.S. Credit Perspectives, Credit Innovation and Opportunity, the quest for yield has fueled rapid innovation and rising risk in the credit markets.

New pools of capital are also seeking out alternative investments. .... Goldman Sachs has benefited tremendously from these secular changes in the financial markets . Goldman Sachs is not only one of the largest global advisory firms in the world, but it is also the largest manager of hedge fund assets.3 It is a primary beneficiary of the growth in collateralized debt obligations (CDOs) and credit derivatives, which have acted to expand liquidity in the credit markets through disintermediation and innovation. Goldman Sachs has aggressively moved into private equity capital fund raising, and reportedly just raised $19 billion through a new fund, ....

The trends that have contributed to tight corporate bond spreads are having a similar effect on the U.S. stock market. The supply of new stock issuance (Chart 6) has turned sharply negative due to rising share buybacks and LBOs. This technical imbalance, combined with solid economic and corporate profit growth, has helped lift equity prices to record highs. Robust global liquidity combined with reduced supply has changed the landscape of equity investing.

Asset Prices, Risk Premiums and Financial Conditions
The global liquidity boom has its consequences. Rising asset prices are leading to easy credit conditions, which in turn are supporting economic growth, lowering volatility and compressing risk premiums. In this environment, investors with relatively short memories have embraced this recent period of economic nirvana as if it were here to last, by taking on more leverage and adding even riskier investments.

In the credit markets, the low and declining default rate has encouraged a strong propensity to take risk over the past few years. As a result, the growth in global liquidity has increasingly been funneled into higher risk asset classes such as lower-quality investment grade corporate bonds, high yield bonds, emerging market bonds, collateralized debt obligations (CDOs), real estate and equities. This trend further reduces the cost of capital to take on leverage, supports more LBOs and provides additional fuel for the equity market. In fact, LBO volumes have grown at an annualized rate of 64% from 2002-2006.5 We have not seen this type of growth in corporate re-leveraging since the late 1980s. Given these conditions, it is no wonder the Federal Reserve is sounding hawkish. Accommodative financial conditions are providing a stimulus to the economy.

While monetary conditions have tightened somewhat with a higher Fed Funds rate, credit and financial conditions remain easy. These conditions are a significant reason why Moody’s consistently has pushed back its estimates for rising default rates (Chart 7). I believe investors are underestimating the risks present in today’s low default rate environment, because today’s credit markets are significantly impacted by technical factors. I am skeptical that credit spreads are at near all-time tights because of improved fundamentals, especially given the rise in shareholder-friendly initiatives, growth in private equity and increasing occurrence of LBOs. ...here an example where they are way too late..http://immobilienblasen.blogspot.com/2007/02/rating-agencies-fallen-asleep-doug-kass.html

Implications for Credit Investing
The liquidity-driven boom in today’s financial markets has had a significant impact on corporations. Cash continues to pile up on corporate balance sheets, and companies have never before found such easy access to capital, due to a benign credit environment and tremendous growth in the bank debt and private equity markets. Hedge fund growth has also led to strong demand for structured credit risk. These financial sponsors are flooding corporations and markets with new pools of capital. This trend helps to explain why corporate default rates have failed to rise despite projections of higher default rates. Simply put, it is hard to default when investors continue to lend money. http://immobilienblasen.blogspot.com/2006/11/leverage-buy-outs-lbos-private-equity.html

Despite low default rates, the credit market faces significant challenges arising from the growth in private equity and hedge fund capital. Equity-friendly measures, such as LBOs (chart 8), share buybacks, divestitures and mergers and acquisitions are on the rise. In addition, corporate profit growth is slowing, and management is beginning to re-leverage balance sheets in response to increasing pressure from hedge fund and private equity investors. As the pendulum continues to shift from bondholders to equity holders, we should expect shareholder-friendly initiatives to remain elevated.

Despite extremely tight credit spreads on investment-grade corporate bonds, investors continue to seek higher returns by investing further down the capital structure. This classic, late-cycle behavior supports the notion that we are in a liquidity-fueled market in which downside risk far exceeds potential upside returns, particularly for most investment-grade corporate bonds without covenant protection and for lower-rated, high yield bonds.