It wasn’t a good week for hedge funds, banks, or for one large private equity fund. But some homeless bankers were re-housed.
Peloton Partners, the struggling hedge fund company, whose 1bn asset backed securities (ABS) fund imploded last week, revealed that investors in that particular fund are likely to get nothing and that its multi-strategy fund is being wound up too. Founder Ron Beller said sorry to his investors, amidst speculation (according to the FT) that he might be crying down the telephone.
Carlyle Capital Corp., a Dutch-listed hedge fund offshoot of private equity firm Carlyle Group, also had a bad week thanks to the US sub-prime ‘problem’. The fund had invested $21.7bn in supposedly ultra-safe US mortgage backed securities, but got into trouble when the banks it had borrowed from got cold feet and demanded additional collateral to secure the loans. Its shares fell 50% and were then suspended from further trading.
Alistair Darling tried to breathe life back into the increasingly moribund mortgage and mortgage backed securities market, with plans for a kitemark system for mortgage loans, in which trustworthy borrowers with big deposits would get one (a kitemark) and those without wouldn’t.
Hedge fund woes could be about to get a whole lot worse, despite Darling’s loving touch. The Financial Times reported that ‘several funds specializing in credit are close to crisis.’ The Libor rate on interbank lending rose to a two-month high as banks hoarded cash in the expectation of hedge fund bust-ups.
Merrill Lynch saw its share price decline nearly 7% in one day. The US bank attempted to place a large obstacle between itself and further sub-prime nasties with the news that it was closing First Frankin, its US sub-prime mortgage business. Shares in the bank promptly plummeted when it was realised that the US bank was also trying to discourage investors from exercising a right to sell convertible debt back to the company early next week, thereby implying that it didn’t have the cash to pay for it.
Citigroup had a tempestuous time after the head of Dubai International Capital (DIC), a sovereign wealth fund, said it would need to raise more than the $20bn it’s amassed so far in order to stay afloat. Shares promptly fell 4%, and there was renewed speculation on CNBC that Citi redundancies could reach 30k before the year ends. However, things improved as the week progressed, particularly as DIC’s CEO claimed he hadn’t said Citi needed more money after all (according to DealBook).
French banks revealed their wounds. Natixis’ profits declined by half last year, thanks to sub-prime related writedowns. Credit Agricole’s profits fell nearly 17% due to writedowns of €3.3bn at investment banking unit Calyon. According to Financial News, Credit Agricole will now follow the time-honoured tradition of increasing its risk controls.
Redundant bankers had reason to feel optimistic, however, particularly if they were willing to shift down a tier or two. Reuters said Hawkpoint, a UK corporate finance and advisory firm, had hoovered up five energy and power bankers ejected from Bank of America. Meanwhile, Financial News revealed that US-based McDonnell Investment Management had hired a former co-head of CDOs at Deutsche, and Bloomberg reported that Royal Bank of Canada had already hired four leveraged financiers made redundant from CIBC last year, and has plans to hire another 11 people for a new leveraged unit in the foreseeable future.
John Lewis also came out of the cupboard as a potential haven for redundant bankers in need of a bonus. The retail group revealed it was paying employees an annual bonus of 20% of their annual salaries after profits at the company rose by a similar proportion. The average payout for the 70,000 staff will, however, be a negligible 2.6k. But, unlike in the banking industry, where the Institute for International Finance is cooking up plans to reform the bonus system to discourage risk taking, employees who sell too many home furnishings have no fear of John Lewis clawing back the payouts next year.