Post by jannikki on Feb 24, 2007 18:55:42 GMT -4
Treasury Secretary's Misguided Loyalties – February 26, 2007
Dave Patch
Without playing into the politics of it all, it is certainly becoming harder and harder to put any faith in the leaders the President chooses to read the tea leaves of any possible crisis in the making and come up with a lucid and proactive resolution. The most recent misreading of such tea leaves comes after the Presidents Working Group (PWG) led by Henry Paulson, US Treasury Secretary and former CEO of Goldman Sachs, released publicly the results of an 11-month study into regulation of the hedge fund industry.
After eleven months of analysis the PWG concluded that more regulation isn't necessarily the answer for hedge funds. Instead of higher levels of regulation, the group concluded that self-discipline and a higher level of self-imposed information flow is all that is really needed to be embraced by this growing industry. The government should remain hands-off.
The group concluding that the secret investment pool managers only need to be more open, voluntarily, and our markets will become better protected from potential catastrophe.
Such sentiment was not so easily received by Connecticut Attorney General Richard Blumenthal who spoke publicly about the PWG report. In a televised interview Blumenthal let his feelings be known that he felt the PWG report lacked any conclusive guidance and was clearly frustrated at the teams lack of official effort to force a greater level of transparency from the hedge fund community. The idea that these secret investment pools will arbitrarily decide, on their own, to disclose the necessary information for sound investments just won’t happen.
Blumenthal, in his closings, suggested that if the federal regulators were to do nothing about this potentially explosive issue that the states may have to take up the charge in order to protect the people.
Blumenthal even be may be on to something.
In the days that preceded the release of the PWG report, a Bankruptcy Court Judge fined prime bank Bear Stearns $125 Million plus interest for the banks role in the $500+ Million collapse of hedge fund Manhattan Investment Fund. The court ruled that Bear Stearns knew of the fraud being undertaken by the fund yet continued to allow the fund trading privileges despite the fraud in order for the bank to recoup any losses they may incur. Bear Stearns was conflicted between investor protection and profit protection and chose profit protection.
The news of this judges findings undermine the credibility of the PWG trust in the banks ability to self-regulate the activities of the funds who trade through them as apparent conflicts of interest exist between compliance and profits.
With former Goldman Sachs CEO Henry Paulson leading this group it is no wonder the conclusions drawn by the PWG defy logic. Goldman is one of a handful of major prime brokers in the industry and would certainly have represented several of the dozens recently involved in the “ponzi” type scams.
A simple Google search into recent hedge fund cases illustrates the significant growth of fraud taking place in the markets. Fraud the PWG clearly overlooked.
From billionaire crooks and convicted felons like Sam Israel founder of hedge fund Bayou Capital, who stole hundreds of millions from unsuspecting investors, to the small time crooks like Evan Misshula who stole a paltry $550,000 while managing Sane Capital the number of fraud cases have been on the rise.
In most of the cases presented in this search the mechanism of the fraud was repeatable; ponzi type schemes leveraged off false account statements to the investors. Each time, fund managers were “cooking the books” so to speak as most falsified the account statements mailed to investors of the funds under management to hide losses and generate further investments.
Ultimately, the data highlighted an Enron type accounting problem that the PWG was willing to overlook as a growing systemic problem. The beneficiaries to the fraud in each case were limited to the fund managers who committed the fraud and the banks who receive fees from these funds.
To name just a small sampling of the funds highlighted in the Google search were International Management Associates LLC, KL Group Fund, LLC , KL Financial Group Florida, LLC, KL Financial Group DB Fund, LLC, KL Financial Group DC Fund, LLC, KL Financial Group IR Fund, LLC, KL Triangulum Group Fund, LLC, and Philadelphia Alternative Asset Management Co..
There was also Daedalus Capital Relative Fund I, Cornerstone Capital Management, Samaritan Asset Management Services, Inc., Johnson Capital Management, Inc., Cogent Capital Management, Groundswell Partners LLC, Manhattan Investment Fund, and XL Capital Partners, Inc. to add to the list of funds recently exposed for such fraud
In fact, in a November 2006 Associated Press article the author identified that more than $1 Billion in investor losses due to hedge fund fraud had been identified in just the previous 5 years. And these are just the small percentage that were identified by regulators and where enforcement action was taken.
And while these funds, and the type of fraud they committed, will not bring down our capital markets, the collapse of funds such as Amaranth may over time.
Amaranth collapsed after been overly leveraged in the energy sector and suffered a $6 Billion loss when the energy market shifted against their position. The severity of the loss was in part due to the banks willingness to allow Amaranth opportunity to leverage into a single bet that failed and partly due to a lack of compliance procedures at the fund itself. The NY Mercantile Exchange had even notified the fund of a growing concern over the position taken weeks before the collapse but nothing was done.
Not yet fully understood is what impact the Amaranth trading and the trading of another hedge fund that lost the same bet, Mother Rock, had on the nation’s energy prices. Amaranth thought to have lost $6 Billion in bad energy bets while Mother Rock lost merely $400 Million on the bad bets with each being controllable.
It was a potential Long Term Capital Management event all over again.
According to the theories of the PWG, these funds were creating market liquidity prior to the collapse with liquidity never being considered anything but beneficial. Unrecognized by Paulson and the PWG is that irresponsible market liquidity impacts every investor who is likewise trading in these markets and in this case every household who pays the cost of energy. Traders in the energy markets even surmised that unwinding Amaranth would cause volatility in the market by moving quickly to liquidate holdings to meet margin calls. Because the unwinding was not transparent we will never know how true their concerns were.
It is no surprise that Paulson and the PWG found justification in the uncontrolled and unregulated liquidity of the hedge funds. Paulson’s previous employer, Goldman Sachs, split over $150 Million in total compensation to three of its top executives this past year for the record revenues generated by the firm. Revenue advanced through the profit margins obtained as a prime broker lending leverage and liquidity to these hedge funds and to a trading operation generating tremendous commissions on the liquidity generated by the hedge funds.
Paulson saw no wrongdoing when he was head of Goldman Sachs despite the growing evidence of abuses and in his latest role he can use the power of position to deny necessary changes.
With the continued exposure of fraud taking place in our markets where the hedge fund is the centerpiece to the activity, we can only hope that Senate Banking Chair Chris Dodd and House Financial Services Chair Barney Frank stay the course they are on. The public deserves full transparency of open hearings into this matter and not some closed door wrangling of a bunch of past and present Wall Street suits looking out for their peers.
The only take the average person can take from all this; Wall Street is running Washington and until that tide is turned none of us can trust that we are safely investing in these markets and therefore none of us will have the financial freedoms we work so hard to achieve. The wealthy are making our decisions for us by protecting their peers, fraud and all, at the expense of our nation’s stability.
For more on this issue please visit the Host site at www.investigatethesec.com
Copyright 2007
Dave Patch
Without playing into the politics of it all, it is certainly becoming harder and harder to put any faith in the leaders the President chooses to read the tea leaves of any possible crisis in the making and come up with a lucid and proactive resolution. The most recent misreading of such tea leaves comes after the Presidents Working Group (PWG) led by Henry Paulson, US Treasury Secretary and former CEO of Goldman Sachs, released publicly the results of an 11-month study into regulation of the hedge fund industry.
After eleven months of analysis the PWG concluded that more regulation isn't necessarily the answer for hedge funds. Instead of higher levels of regulation, the group concluded that self-discipline and a higher level of self-imposed information flow is all that is really needed to be embraced by this growing industry. The government should remain hands-off.
The group concluding that the secret investment pool managers only need to be more open, voluntarily, and our markets will become better protected from potential catastrophe.
Such sentiment was not so easily received by Connecticut Attorney General Richard Blumenthal who spoke publicly about the PWG report. In a televised interview Blumenthal let his feelings be known that he felt the PWG report lacked any conclusive guidance and was clearly frustrated at the teams lack of official effort to force a greater level of transparency from the hedge fund community. The idea that these secret investment pools will arbitrarily decide, on their own, to disclose the necessary information for sound investments just won’t happen.
Blumenthal, in his closings, suggested that if the federal regulators were to do nothing about this potentially explosive issue that the states may have to take up the charge in order to protect the people.
Blumenthal even be may be on to something.
In the days that preceded the release of the PWG report, a Bankruptcy Court Judge fined prime bank Bear Stearns $125 Million plus interest for the banks role in the $500+ Million collapse of hedge fund Manhattan Investment Fund. The court ruled that Bear Stearns knew of the fraud being undertaken by the fund yet continued to allow the fund trading privileges despite the fraud in order for the bank to recoup any losses they may incur. Bear Stearns was conflicted between investor protection and profit protection and chose profit protection.
The news of this judges findings undermine the credibility of the PWG trust in the banks ability to self-regulate the activities of the funds who trade through them as apparent conflicts of interest exist between compliance and profits.
With former Goldman Sachs CEO Henry Paulson leading this group it is no wonder the conclusions drawn by the PWG defy logic. Goldman is one of a handful of major prime brokers in the industry and would certainly have represented several of the dozens recently involved in the “ponzi” type scams.
A simple Google search into recent hedge fund cases illustrates the significant growth of fraud taking place in the markets. Fraud the PWG clearly overlooked.
From billionaire crooks and convicted felons like Sam Israel founder of hedge fund Bayou Capital, who stole hundreds of millions from unsuspecting investors, to the small time crooks like Evan Misshula who stole a paltry $550,000 while managing Sane Capital the number of fraud cases have been on the rise.
In most of the cases presented in this search the mechanism of the fraud was repeatable; ponzi type schemes leveraged off false account statements to the investors. Each time, fund managers were “cooking the books” so to speak as most falsified the account statements mailed to investors of the funds under management to hide losses and generate further investments.
Ultimately, the data highlighted an Enron type accounting problem that the PWG was willing to overlook as a growing systemic problem. The beneficiaries to the fraud in each case were limited to the fund managers who committed the fraud and the banks who receive fees from these funds.
To name just a small sampling of the funds highlighted in the Google search were International Management Associates LLC, KL Group Fund, LLC , KL Financial Group Florida, LLC, KL Financial Group DB Fund, LLC, KL Financial Group DC Fund, LLC, KL Financial Group IR Fund, LLC, KL Triangulum Group Fund, LLC, and Philadelphia Alternative Asset Management Co..
There was also Daedalus Capital Relative Fund I, Cornerstone Capital Management, Samaritan Asset Management Services, Inc., Johnson Capital Management, Inc., Cogent Capital Management, Groundswell Partners LLC, Manhattan Investment Fund, and XL Capital Partners, Inc. to add to the list of funds recently exposed for such fraud
In fact, in a November 2006 Associated Press article the author identified that more than $1 Billion in investor losses due to hedge fund fraud had been identified in just the previous 5 years. And these are just the small percentage that were identified by regulators and where enforcement action was taken.
And while these funds, and the type of fraud they committed, will not bring down our capital markets, the collapse of funds such as Amaranth may over time.
Amaranth collapsed after been overly leveraged in the energy sector and suffered a $6 Billion loss when the energy market shifted against their position. The severity of the loss was in part due to the banks willingness to allow Amaranth opportunity to leverage into a single bet that failed and partly due to a lack of compliance procedures at the fund itself. The NY Mercantile Exchange had even notified the fund of a growing concern over the position taken weeks before the collapse but nothing was done.
Not yet fully understood is what impact the Amaranth trading and the trading of another hedge fund that lost the same bet, Mother Rock, had on the nation’s energy prices. Amaranth thought to have lost $6 Billion in bad energy bets while Mother Rock lost merely $400 Million on the bad bets with each being controllable.
It was a potential Long Term Capital Management event all over again.
According to the theories of the PWG, these funds were creating market liquidity prior to the collapse with liquidity never being considered anything but beneficial. Unrecognized by Paulson and the PWG is that irresponsible market liquidity impacts every investor who is likewise trading in these markets and in this case every household who pays the cost of energy. Traders in the energy markets even surmised that unwinding Amaranth would cause volatility in the market by moving quickly to liquidate holdings to meet margin calls. Because the unwinding was not transparent we will never know how true their concerns were.
It is no surprise that Paulson and the PWG found justification in the uncontrolled and unregulated liquidity of the hedge funds. Paulson’s previous employer, Goldman Sachs, split over $150 Million in total compensation to three of its top executives this past year for the record revenues generated by the firm. Revenue advanced through the profit margins obtained as a prime broker lending leverage and liquidity to these hedge funds and to a trading operation generating tremendous commissions on the liquidity generated by the hedge funds.
Paulson saw no wrongdoing when he was head of Goldman Sachs despite the growing evidence of abuses and in his latest role he can use the power of position to deny necessary changes.
With the continued exposure of fraud taking place in our markets where the hedge fund is the centerpiece to the activity, we can only hope that Senate Banking Chair Chris Dodd and House Financial Services Chair Barney Frank stay the course they are on. The public deserves full transparency of open hearings into this matter and not some closed door wrangling of a bunch of past and present Wall Street suits looking out for their peers.
The only take the average person can take from all this; Wall Street is running Washington and until that tide is turned none of us can trust that we are safely investing in these markets and therefore none of us will have the financial freedoms we work so hard to achieve. The wealthy are making our decisions for us by protecting their peers, fraud and all, at the expense of our nation’s stability.
For more on this issue please visit the Host site at www.investigatethesec.com
Copyright 2007