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2. Internal debate at Bank of America comes to light

It's been a great year for hedge funds who decided to drink the "great rotation" Kool-aid just a bit. If you went long on stocks, you are likely enjoying a decent year.

A great example of a hedge fund in this situation: Appaloosa Management, owned by David Tepper. The fund has generated a return of 17 percent in the first half of the year, according to Bloomberg. That compares with a 14 percent return, including reinvested dividends, for the Standard & Poor's 500 and with a 5.3 percent return for event-driven hedge funds.

"Tepper, who started out trading in distressed companies and emerging-market debt, has been a stock bull this year. In January he said on Bloomberg Television that 'the key is to be long equities this year.' " How right he was. He's on his way to matching his historical annual average gain of 28 percent.

While equity-oriented hedge funds may be putting up some gaudy numbers, this owes much to simple correlation. Equity hedge funds on average generated alpha of only 0.9 percentage points despite an average total return of 6.6 percent, according to data from Blackrock, as noted by Financial News.

"This reflects the fact that many equity strategies are highly correlated to equity markets, something for which they have been criticised." On the flips side, global macro hedge funds have average total returns of only 0.7 percent. But they delivered more alpha than equity funds, with a median of 3.3 percentage points.

For more:
- here's the item

Read more about: Correlation, Equity Hedge Funds
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By Jim Kim

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Emails figure prominently in civil cases these days, and it's often enlightening to follow the internal debates on tricky issues. In the Justice Department's complaint against Bank of America, we get an interesting inside glimpse of the critical issue: did the bank mislead investors by failing to note that it had included a lot of toxic mortgages in about $850 million worth of residential MBSs.

Bloomberg offers some choice excerpts from the complaint. "None of these loans are suitable for a prime jumbo A-credit securitization," one trader wrote in an e-mail. Another one wrote: "Like a fat kid in dodgeball, these need to stay on the sidelines."

The specific topic was apparently whether the structured finance pros should include a lot of Alt A loans and wholesale loans, both of which were of obviously lower quality, into the securities.

The bank closed its wholesale channel "amid concern those loans were too often flawed. In a July 2007 conference call with analysts, then-CEO Kenneth D. Lewis said debt from that source 'tends to be toxic waste.' Months later, the firm put remaining wholesale loans into the bond with inadequate disclosure, the government said."

Employees who worked on the origination of the mortgages were quoted in the complaint to the effect that the bank "emphasized quantity over quality" and that they were "instructed by supervisors that it wasn't their job to discover mortgage fraud."

One wonders if there is whistleblower involved with this complaint.

All in all, the bank would be wise to settle. It has little to gain by defending its conduct, even if the securities performed relatively well.

For more:
- here's the article

Read more about: Bank of America, mortgages
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3. Preet Bharara's media tour

By Jim Kim

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4. Carl Icahn boosts stake in Dell

The always influential U.S. Attorney in Manhattan apparently thinks that now is a good time to burnish the image of his office with some media outreach. You cannot blame him for jumping while the iron is hot. Preet Bharara's office has done yeoman's work in holding hedge funds and others accountable for the insider games that have apparently been going on for years. He has so far racked up more than 70 insider-trading convictions, putting the likes of hedge fund honchos like Raj Rajaratnam in jail and bringing down the likes of former Goldman Sachs director Rajat Gupta.

Bharara is now basking in the glow of the criminal charges again SAC Capital, a rare move that speaks to his confidence. The big issue, one that he will be asked over and over, is why the Justice Department after expending phenomenal amounts of resources on the investigation failed to bring personal charges against founder Steven Cohen.

Here is how DealBook transcribed a recent CBS appearance:

"As I said when we announced the charges, the investigation is ongoing; it is not closed," Bharara said, adding, "The case remains open.

Mr. Rose and Ms. O'Donnell pressed Mr. Bharara on the question of why he did not bring a case against Mr. Cohen.

"Wow," Ms. O'Donnell said. "It must have bothered you that you couldn't indict him."

"Nothing bothers me," Mr. Bharara said, smiling.

It will be debated for years whether Cohen got lucky by dodging a personal criminal indictment and thus avoiding any possibility of jail time. It's fair to say that if the U.S. Attorney could have brought charges, he would've. As of now, thanks in part to the Omerta-like refusal to cooperate by the likes of Mathew Martoma and Michael Steinberg, the prosecutors just didn't have the goods.

For more:
- here's the item

Read more about: U.S. Attorney
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By Jim Kim

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5. More hedge funds opt to become family offices

At this point, it's tempting to say that Carl Icahn is fighting an uphill battle against the sweetened offer from Michael Dell and his partner Silver Lake. Michael Dell is now willing to pay $13.75 a share with a special 13 cent dividend (in addition the regular 8 cents divided), which trumps the original bid of $13.65 a share. To lock in the higher offer, the board's special committee agreed to some voting rule changes, which makes the deal that much more likely to gain approval when shareholders vote Sept. 12.

But Icahn isn't about to give up. His latest move is to boost his stake in the company to roughly 8.9 percent from 8.7 percent. He is now the second largest shareholder of the ailing company, after the founder himself.

According to media reports, Icahn bought the shares at an average price of $12.94. Dell shares are hovering near the $13.60 level, giving Icahn a paper gain already. If Michael Dell's offer is accepted, he will end up with a gain of about 7 percent, not including transaction costs. That will ease the sting but just a bit.

Icahn seems hell bent on extracting more value from his shares of Dell. He is moving on several fronts, including filing a suit in Delaware that seeks to prevent the committee from changing voting rules, prevent Michael Dell from buying more shares and generally halting the agreed-upon offer. He would also like the deal to be voted on the same day as the annual meeting, at which he might raise a ruckus. At some point, a formal proxy battle would not be surprising, though time is short.

At this point, all shareholders are pondering their options. It's still too early to call. But it may be that this is the Dell-Silver Lake offer is the best one possible, especially with the PC market so troubled.

For more:
- here's a Barron's article
- here's an eWeek article

Read more about: Leveraged Buyout, Dell
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By Jim Kim

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