Posted on 12/09/2011 6:09:02 AM PST by tcrlaf
article and info in post #20
Drudge is carrying story with this link:
http://online.wsj.com/article/SB10001424052970204319004577086652040716704.html
Errr... AFTER the collapse by the bankruptcy administrator... and the adminstrator used the clearing house of the bankrupt company...
Alledged ping.
That would be collusion.......and conspiracy.
"Soros may have allegedly bought $2 billion bonds but he may have allegedly only paid $ 200 million or about 10% on the dollar for the alleged bonds.
Transaction was done at arm's length by a third party administrator, charged with liquidating the European bonds that MF had bought on margin for underlying repo-to-maturity contracts (high-yield sovereign bonds of Italy, Spain, and France) and they were offered to several bidders through a mechanism of Dutch Auction. I don't see how Soros could get much better discount deal than any of the other qualified bidders would agree to.
..... A number of large investors passed on the bonds ..... < snip > ..... the overwhelming majority of the European sovereign debt portfolio was liquidated by LCH before the second week in November. ..... < snip > About $2 billion worth of European bonds owned by MF Global were bought by billionaire investor George Soros's family fund ..... < snip >
This is a typical, well-executed liquidation of a large relatively illiquid financial estate. The administrator, correctly, was willing to do the transaction as fast as possible, especially for such a large tranche ($2B) and Soros has no problem with cash or collateral, so he can easily hold these short-term bonds to maturity and collect interest (or sell them at higher price as the interest on the new bonds came down and price of the bonds rises), in addition to buying at discount.
Additionally, through this transaction, Soros, who is very involved in eurozone markets, indirectly signals and expects to bolster the confidence in the Euro (€ currency) which may help his other positions.
Since Dodd-Frank required new reporting and reserves maintanence, many hedge funds eliminated their public listings and either shut down, scaled down, broke apart their operations or, like Soros, became "family" funds that do not require SEC disclosures.
Thus, the drive for more "transparency" and "accountability" presumably expected after passing Dodd-Frank reform, actually made hedge fund world less transparent and less visible from the outside. Another case of "Law of unintended consequences" and pretentious "good intentions".
“a nation of sheep breeds a gov’t of wolves”
Great quote. Is that original? If so, it was brilliant. If not, it was merely great. :)
sadly it is not original from me. Thanks for noticing because this is what we have now with Solyndra and unionized Gov’t workers and a lot more ripping off the private sector taxpayers
By this time George Soros is semi-out of it. This is his ravenous sons and the Soros family organization who interestingly enough own part of Dinosaur BBQ in NYC and NY State.
George Soros is capable but only some days. This is my take. But it helps to hoist the old bugger up there as a boogeyman.
Yes, Soros Fund Management LLC (888 7th Avenue, 33rd Floor, NY, NY 10106) is now mostly run by his sons, Robert (Deputy Chairman) and Jonathan (Deputy Chairman and President).
His longtime friend and right hand, pro-Palestininan activist Abbas F. "Eddy" Zuaiter, is the COO and Abbas' brother Ahmad F. Zuaiter is also a high level executive in the company; their youngest brother, Waleed F. Zuaiter is a TV and movie actor.
Ref: Soros' latest Gambit - FR, posts #27, 28, 2011 September 12
Best I can tell the Zuaiter brothers are Kuwaiti-Americans. The younger one was born in America. They are probably highly intelligent but even more important they would be bringing large sums of Muslim money into Soros hedge funds. They have the family and ethic connections to do this. George Soros publicly hating Israel helps this. His sons are half Jewish at best they can all go to hell
Not unusual and there was not much of a choice.
London Clearing House (LCH) and Clearnet unit of Euronext merged in 2003 to form a non-profit cooperative LCH.Clearnet Group Ltd, the largest central counterparty clearing house in Europe. It clears trades for major international equity and derivatives exchanges and most of sterling and Euro-denominated bond, swaps and repo markets (managed by its RepoClear €GC and recently formed SwapClear units).
LCH.Clearnet should not be confused with LCH Investments NV which is a hedge fund research and investment unit of Leveraged Capital Holdings NV based in Netherland Antilles and managed by the Edmond de Rothschild group.
Major clients include London Stock Exchange (LSE) and Euronext. Competitors include Chicago-based CME Group and London-based Man Group plc (the original parent company that spun off MF Global Holdings brokerage business).
LCH.Clearnet is owned by its users / customers / clients (83%) and exchanges (17%) after Euroclear Group sold its 16% stake in the company (10% to various banking clients of LCH.Clearnet and 6% to exchanges).
Attempt by New York based clearing holding company Depository Trust & Clearing Corporation (DTCC) to create world's largest clearing company by buying LCH.Clearnet for about €739M ($950M) fell through in April 2009 after counterbid from consortium formed by its customers and shareholders.
In September 2011, LSE (London Stock Exchange Group plc) has begun talks to buy majority stake and control of LCH.Clearnet for approximately €1B ($1.4B).
As short-term bonds, Soros likely purchased them at, say, a 10% discount from par, not 90% as the comment to the CNBC article surmises. Because of the lower risk of short-term bonds, Soros, or any other buyer, could have hypothecated them for, say, 90% margin credit. That is probably the source of the $200 million figure. That’s how much cash Soros has into the purchase.
Bonds are usually bought at a coupon rate discount to par / value at maturity.
I am sure that when they say Soros bought bonds at a discount, they meant that it was in addition to “normal” market price of the bonds, because of the large sum (about $2B par value) and urgency (to cancel repo contracts and provide liquidity to bankruptcy court), as well as a very limited market for this tranche of bonds (due to the nature of the current sovereign risk and, again, relatively large sums involved).
With the rates on short-term sovereign euro bonds already high, getting 10+% total discount (about $200M in profit, as combination of coupon rate plus discount to market price of bonds) over relatively short period of time should be a no-brainer for anybody who has this kind of liquidity and can stand the risk of sovereign default.
Having easy access to the bond market, to sell bonds at retail market prices if they appreciate quickly as rates drop (current European headline risk-on/risk-off trade volatility is very high) is certainly a bonus and he can take profits as a capital gain.
When Soros “broke the Bank of England” (he didn’t, it was always a hyperbole) betting on the plunge of pound sterling, he made $1B profit over few months, but it was a group making a $20B short currency arbitrage bet, of which his part was $10B so it was only a 10% profit. Stanley Druckenmiller, who worked for Soros at the time, was actually the one who realized and provided the basis for the trade.
As impressive as $1B usually sounds, it was only about 10% gain (had he borrowed some of it, he would have gained more from leverage). Admittedly, it happened over relatively short period of time (few months), but also at the time when interest rates on pound were much higher than today, and this kind of percentage return in the more volatile stock market wouldn’t be considered unusual.
There are not a lot of opportunities to deploy large amounts of money for almost guaranteed double-digit profit. At times of distress it’s time of the opportunity to invest.
Similar thing was done by Warren Buffett with Goldman Sachs in 2008 and, more recently, with Bank of America. Several hedge funds sometimes known as “vulture investors” (Wilbur Ross, Alec Gores, Tom Gores / Platinum Equity, Leucadia National et al) are specializing in distressed properties, whether equities or debt. Some of them were offered the same deal as Soros, through Dutch Auction, but they passed up on higher bids for whatever reasons.
Buffett's BAC warrants are currently out of the money even after last week's equity ramp, leaving him with a coupon that doesn't compensate for the risk inherent in BAC's toxic assets. These bets are sometimes losers.
I agree with your assessment that the terms of Soros' MF Global deal were likely arm's length.
Most likely. I was trying to cobble up and overstate / stretch the potential total return, including high coupon rate and market discount and potential for capital gains in fast market, by giving all the benefits of the doubt I could find - urgency, eurozone market volatility, real and headline sovereign risk, deal size...
And still, in the end, to paraphrase some T-shirts, "... all I had left was the 'lousy' 10 percent."
This is not an easy money without risk, and the total returns are not outsized in percentage terms (often, higher return can only be achieved through high leverage, which only magnifies risk, as LTCM and MFGH, among others, have shown). The numbers, in percentage terms are never as "impressive" for lay people as absolute numbers in dollars (or other currencies) and that's what I tried to show with the Soros' "breaking Bank of England" example.
The fact is, were the deal any more lucrative, adjusted for risk, it probably wouldn't be left on the table for Soros to pick up.
Bond market is liquid, players are very sophisticated, plenty of available cash is looking for deployment, and credit is cheap and easy enough for qualified investors and deals.
Buffett's BAC warrants are currently out of the money even after last week's equity ramp, leaving him with a coupon that doesn't compensate for the risk inherent in BAC's toxic assets.
Buffett is usually willing to be patient, even adding to his positions if he thinks that the "market" is wrong, and he sees no better use for cash. In the meantime he is pretty happy with clipping BAC coupon. The biggest problems for BoA are not financial, but political, though these are by no means trivial and should not be understated.
These bets are sometimes losers.
Yes, anybody can buy BAC preferreds, it's not limited to the likes of Buffett, but few will either have the knowledge, understanding, guts or decide that there are no better risk-reward opportunities somewhere else.
But that's how more money can be made (or lost) - by correctly differentiating, and exploiting market inefficiencies while avoiding most value traps. Bill Miller of Legg Mason was doing it for almost two decades, but then the "streak" snapped, in part because of the fund size, in part because of reversion to the mean.
Few investment are without risk (sovereign debt mess in Europe is one prime example), especially with huge sums of money to allocate - many markets are crowded or simply not available, while there are some advantages which they have to be willing to exploit to put capital to work.
People are overlooking many of these issues because the absolute "dollar" amounts are big enough to obscure the risk or total percentage returns. So quite often people tend to suspect or see something nefarious where it doesn't exist, in normal market trades or strategies.
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