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Today's Top News1. Samuel Israel III: Disgraced hedge fund manager's colorful life
In the aftermath of a scandal, the whole truth has a way of coming out. Someone once said that best time to start reporting a story is long after it is over. Samuel Israel III languishes in prison, and his faked suicide attempt has been all but forgotten. But the man and his crimes have been brought back to life in the pages of New York Magazine, by the definitive chronicler of his life. The life-story of Israel is rich indeed. "Investors gave Bernie Madoff money because they trusted him. They gave Sam Israel money because they liked him—a gregarious, disarming goofball who, as a Wall Street apprentice, had invented an alter ego he called Captain Proton, a fearless superhero whose special powers were granted by vodka and cocaine. Now in his forties, he lived in a Westchester mansion, rented from Donald Trump for $22,000 a month, with an adjacent chapel in which he had built a replica of the Bayou trading floor alongside an 800-gallon saltwater fish tank and a menagerie of rare reptiles. He'd also installed a high-end studio for jam sessions, where he'd play with the Allman Brothers' drummer when the band was in town. He owned a fleet of Porsches and signed personal checks printed with the image of SpongeBob SquarePants." The story gets even wilder, with the article noting that, "Once he'd welcomed his family home from a short trip standing in the driveway wearing cowboy boots, his wife's bikini underwear, a lacrosse helmet, swim goggles, a life jacket, and a cape, then started screaming at his wife when she didn't get the joke." It's quite a life, but after the end of his 20 year term, however, all will be forgotten. For more: Related articles: Read more about: Hedge Funds, fraud 2. Goldman Sachs loses Bayou appeal
Creditors of bankrupt hedge fund Bayou Group won $20.6 million in arbitration from Goldman Sachs, an award that was just upheld on appeal. Reuters notes that, "The appeal had been closely watched by Wall Street firms, who worried that upholding the decision could raise the legal standards placed on clearing brokers such as Goldman. The Securities Industry and Financial Markets Association argued a ruling for the Bayou creditors could force brokers to 'analyze the huge volume of trading they process along with daily transfers of funds to determine if customers are engaged in wrong-doing.' " Recall that the Bayou Group was run, fraudulently as it turned out, by Samuel Israel III, who is now serving a 20 year prison term. The sordid scandal, which featured a faked suicide attempt by Israel on the eve of his report-to-prison date, has been back in the news as of late, as personal details of the fraud are just now coming to light in a book and various articles. For prime brokers, this is yet another sign that they need to be vigilant in terms of monitoring, to the extent they can, their customers. It's an added burden to be sure, but the world has changed since the financial crisis. For more: Related articles:
Read more about: Hedge Funds 3. Andrew Feldstein, man in the middle
Bloomberg weighs in with an article on Andrew Feldstein, the man in the middle when it comes to JPMorgan's massive CDS index bets and the subsequent effort by the bank to wind down those disastrous trades.
"One of the trades BlueMountain has mastered better than almost any other hedge fund, according to market participants, involves arbitraging the gap between credit-swaps indexes and contracts on the companies tied to those benchmarks. When the cost to buy protection on the index drops below the average cost of swaps on the companies, the fund will purchase protection on the benchmark and sell it on its constituents, profiting when the swaps converge," the article noted. At some point, as JPMorgan sold index protection in stunning volumes to hedge against its earlier trades, BlueMountain was there as a counterparty. When it came time for the bank to unwind those positions -- to take its medicine so to speak -- the fund was there again, this time by buying up index CDSs and then selling them to JPMorgan, which used them to offset losses. The bank was thus able to exit its positions to a large extent while avoiding market ripples. For more on this, I eagerly await the bank's second quarter earnings release. For more:
Read more about: Hedge Funds 4. Analyst's sell recommendation falls flat
Sell recommendations from analysts still tend to be somewhat rare. So rare that they draw attention to the analysts, who are often praised as being willing to break with the optimistic default position that seems so ingrained. But what if the "sell" recommendation is wrong? Rodman & Renshaw's Michael King "had rated Amylin Pharmaceuticals an underperform with a $22 price target amid questions about its ability to get its diabetes drugs to the market. King believed that Amylin's assets were 'mediocre' in an important growing space. But, alas, he was wrong – on the stock call at least. Bristol-Myers was willing to pony up $31 a share for Amylin, meaning anyone who followed King out of the stock would have lost out on a significant boost," according to Deal Journal. But he did not shy away from the issue. "We are admitting defeat and moving on," King wrote. "Clearly, our negative thesis on AMLN did not play out as we had expected. But that doesn't stop King from giving more ideas. In fact, what appears to be a remarkable deal from his perspective means that other diabetes companies could be scooped up. And he suggests Vivus and MannKind as possible targets." We'll see if the Amylin experience makes him more reticent to issue sell recommendations in the future. For more:
Read more about: Stock Analysts, Stock Research 5. Barclays blames regulators in scandal
Barclays seems to be settling on a defense in the LIBOR rate-setting scandal, making it known that its rate-submitting practices as part of the LIBOR process were anything but secret. According to DealBook, "Over the course of a year, the bank discussed its Libor submissions 13 times with the British regulator, the Financial Services Authority, and 12 times with the Federal Reserve." Regulators have amassed some interesting emails. "In building the case, regulators benefited from a series of brazen e-mails that outlined the scope of the scheme. At one point, a trader called a colleague a 'superstar' for furthering the illicit actions. Another employee even acknowledged that the bank was submitting 'patently false' rate information." Even more intriguing are some phone calls in which employees tell regulators essentially that they are in grey zone, that they are not "clean clean" but "dirty clean." This has the potential to be really embarrassing for the regulators, as the bank will seek to make them willing accomplices who later turned on the bank. To be sure, the regulators will argue that at no point did the bank say explicitly that they were manipulating rates in cahoots with other banks. But they will come across as very naïve to not link the dots. In any case, this will all come to fore very soon, as Barclays ex-CEO Bob Diamond will appear before Parliament soon. There's a lot on the line on both sides, and this could get ugly. For more: Related articles: Read more about: LIBOR Scandal Also NotedSPOTLIGHT ON... Financial advisor or adviser If there's one thing that the traditional stock broker crowd and the fee-only wealth manager crowd can agree on, it's this: The use of the term "advisor." Both sides prefer to refer to themselves as "advisors," as opposed to "advisers." They two terms are synonymous, but why does the industry prefer the latter? Total Return takes a fun look. There may be nothing to do this. But government regulations use the term adviser, and the industry may have developed a subtle internal aversion to the term over the years. Article
Company News: And Finally…Smaller iPad on the way. Article
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Friday, July 6, 2012
| 07.06.12 | Disgraced hedge fund manager's colorful life
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