PrefBlog

Patric Edspar is now running the investment banking unit of Citadel Investment Group; there are two reasons that the Bloomberg story is instructive. The first is the mere existence of an investment banking unit at a hedge fund; this is good for the financial system and bad for the regulators. The second is his nickname “Juggernaut” and its origins:

People who know Edsparr describe him as outspoken, with a forceful personality. He earned the nickname “juggernaut” during his first job at Lehman Brothers Holdings Inc., where one of his tasks in the research unit was to collect daily price data from senior traders, one of the people said. Most of his predecessors failed because they were too intimidated to interrupt the traders, who would shout at them. Edsparr would stand behind them, often for up to two hours, until they gave him the data.

This is indicative of horrible management practices that are endemic in the industry. Anyone with a brain doesn’t hire a guy with three degrees to stand behind a trader for two hours begging for information. A well run firm will decide whether or not information transfer needs to take place and if it does, transfer it. As well, a well run firm does not permit any of its employees to treat other employees like that – as I recall, that was one of the major reasons why RT Capital blew up.

William C Dudley of FRBNY made a speech at the Center for Economic Policy Studies (CEPS) Symposium. Nothing particularly new, but I was very pleased to see him note that all these wonderful stabilizing ideas have a cost:

Higher capital requirements work to reduce the risk of liquidity runs, but potentially at the cost of making the process of financial intermediation much more expensive. In particular, a requirement that firms must hold more capital increases intermediation costs. Moreover, banks may respond to higher capital requirements by taking on greater risk. If an increase in risk-taking were to occur, the movement of the probability distribution to the right in Figure 2 might be offset by an increase in the degree of dispersion. Thus, higher capital requirements might not necessarily be sufficient to push all of the probability distribution above zero.

Second, regulators could require greater liquidity buffers. These buffers would help protect the firm against having to liquidate assets under duress, and would therefore help prevent the probability distribution from sliding left toward the zero line in Figure 2. But there is a cost to the firm from holding greater liquidity buffers in terms of lower returns on capital. So, requiring greater liquidity buffers would also tend to drive up intermediation costs. And, just as in the case of higher capital requirements, banks could respond by taking greater risks.

It doesn’t happen very often, but occasionally there’s a glimmer of sense in the world:

The U.K. government will oppose a European Union plan to impose the same pay restrictions on hedge-fund managers and private-equity firms that it proposed for bankers, the Treasury said.

The EU last week added the pay rules to alternative investment fund legislation that under review in the European Council and European Parliament. It suggests that senior managers defer a minimum of 40 percent of bonuses for at least three years and a “substantial amount” is paid in shares.

A spokesman for the Treasury said the last-minute addition to the rules failed to properly distinguish between funds and banks. He said regulation should be proportionate to the risk funds pose to the financial system. Hedge funds don’t take retail deposits and haven’t required bailouts despite a number of failures, the Treasury said.

Still no word on the results of the DFN / DFN.PR.A Rights Issue. The unit value was 18.98 on November 13, compared with the exercise price of 19.75, so success seems a little dubious … but there’s a twist: DFN closed at 12.51 on the announcement date, October 16, and stayed above $10 for the next two weeks, trading about 350,000 shares in the interim. One strategy might have been to short the hell out of the capital units (which were well above NAV at the time), aiming to replace with either a subscription to the rights or taking the chance. Still, I’ll bet a nickel that exercise was negligible.

A good solid day for preferreds, with PerpetualDiscounts up 15bp and FixedResets gaining 13bp. Volume continued to be relatively light, without much volatility.

This entry was posted on Tuesday, November 17th, 2009 at 11:54 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.