A Bridge To Far (for Snookered HFs)

Germans may have been resoundingly defeated in two world wars, but they can claim some vicarious pleasure from Porsche's unilateral victory in their legal fight with Allied Hedge Funds over Porsche's perfect corner of VW shares, the irony of which I discussed on separate occasion here, and here. The decision is final, and while there are no formal surrender documents, the Germans must be feeling rather satisfied.

When the HFs sued Porsche, you have to wonder what the HFs were thinking. Presumably, one would have thought they assessed the probabilities of success - something they do for a living.  And as any good decision-makers do, they must have taken the advice of expert legal counsel, taking into account that top lawyers, as Madoff and Lehman creditors can attest, in a complicated case, aren't cheap.

Yet, something is not right. Did they really think that a German commercial judge was going to give nefarious offshore hedge funds - primarily American-run and British-run - a couple of billion dollars from one of the poster-children of German industrial success? I'm no lawyer, but I know a thing or two about assessing probabilities, and this one always looked like long odds from every angle. Heavens knows what the aggregate legal bills of the case and two appeals came to, but likely sufficient to alleviate poverty in more than few under-developed countries for a reasonable period of time. One might wonder about how impartial an advising counsel can be as he mentally tabulates the hours involved in the case and its appeals.

This reminded me of Baron Thyssen-Bornemisza's bid, at the behest of his former-Miss-Spain (and fifth wife!!) "Tita", to dissolve The Baron's airtight Bermuda-domiciled family trusts that favored his children from previous marriages, at the expense of hers, resulting rather remarkably in what is now known as the most expensive court case in history. Now the skinny was this case never had a chance of success, trust law being inviolable. Yet Tita was sold the dream of success, and bought it whatever the cost. Armies of lawyers were dispatched to the case,  and more than a few visiting lawyers rented some of the expensive houses on the island,  flying to Bermuda so frequently, they were reputedly on a first-name basis with the cabin crew. The case had a predictable outcome, with everyone looking bad, but only the lawyers with anything tangible to show for their actions.

In the case of the plaintiff hedge funds suing Porsche, it is unlikely that the management companies paid the costs, more probably being expensed to the Funds' investors. If this were in fact the case, we have managers with mostly upside (potential performance fees receivable), egged on by litigators who cannot believe their luck at the cash-cow, working a case whose bill is footed, with only investors having the unfavorable pay-off pattern.

But monetary reasons are the less-than likely motive: after all, what are a few pennies to Croesus?? Rather, the relentless pursuit of legal action is likely a way for egoists to avoid culpability, to avoid admitting they were wrong, to preserve a proverbial "the clean sheet".  Not that there is anything shameful in getting royally squeezed out of a position. Supreme beings just don't like to admit it too loudly in public…for then, investors may start to believe they are mere mortals, easily taken out by a couple of amateurs, and where will 2&20 be then?

Hypocritic Oath

So David Einhorn is upset that someone was spoiling his game in MU before he'd fully loaded-up and had the chance to "leak" the information himself, or talk his book on the numerous bully-pulpits on offer. He is sufficiently upset to sue. Which he can do. Mostly because he is well-lawyered and can afford it.

I cannot say I feel sorry for him because I reckon talking one's book in the trading game is different than a long-term investor expounding on the long-term growth prospects of the apple of their affection. For those who do not know the difference, the former all-too-often uses the timing, publicity of disclosure and subsequent price reaction to shift their position to those who cannot distinguish between a trade and an investment. So while those enamored with, say someone like Mr Einhorn and his investment prowess, are buying - they are being sold the stock precisely by those touting its virtues. That doesn't mean I approve of violations of confidentiality. I do not. It is illegal, and talking your book is legal, even if you're doing the opposite which is merely devious and of a dubious ethical standard. But if, in the process, such leaking shines light (errrr Greenlight?) upon the practice of pump and dump, however slick, and/or professionally packaged, then I am tempted to focus upon its silver lining.

NYT's Dealbook today took note of the aggressive legal action. It said:

Mr. Einhorn contended in the petition that “the only persons who lawfully possessed information regarding Greenlight’s position in Micron were persons with a contractual, fiduciary or other duty to maintain the confidentiality of Greenlight’s position: Greenlight’s employees, counsel, prime and executing brokers and other agents.”

The irony and hypocrisy of this wasn't lost on me, again not because I do not agree with it, but because Mr Einhorn only a short time ago was censured for illegally dumping his 14% Punch Taverns position on a hair-trigger the just moments after he discovered (possibly even while he was discovering) material non-public information about forthcoming corporate finance activity, in breach of UK FCA code, (and probably every relevant line in CFA's code of conduct).

My point is clear: You cannot eat your cake, and then have it too (which, BTW I am told is the correct version of this proverb, not "Have your cake and eat it too"). If Mr Einhorn wants to play in, and profit from, the grey areas, be they regulatory or ethical, then he really shouldn't be hounding bloggers (or joining the plaintiffs suing Porsche over their snookering of VW shorts). To his credit, Mr Einhorn has an innocent-looking, impish grin that undoubtedly makes his grandmother very happy. But there is nothing nice or decent in his hypocritical actions.

Un-Diddled Markets

List of Markets Not Tampered With By Bankers, Traders, Dominant Corporates & Hedge Funds.


Girl Scout Cookies
Fresh Fish (thanks Joe W.)
Cut Flowers
Rice Noodles
HIBOR
Gold Fix
Foreign Exchange
Oil
Natural Gas
Payment Protection Insurance
Art
HY/IG Derivative Markets
Aluminium
Equity Markets
New Issues
LIBOR
EURIBOR
Collateralized Debt Obligations
Wholesale Electricity
Cheese
FTSE Derivative Expirations
Split Capital Trusts
Lead
Copper

I Was Sooooooo Wrong

It takes some honesty and fortitude to confront one's mistakes. Everyone makes them, though not everyone admits to them, perma-bears (like ZH & MISH) being, being amongst the worst offenders. Many Hedgies, most likely for reasons of ego and hubris, also have great difficulty accepting culpability for their errors, evidenced by their letters, blaming everything and everyone but themselves and wayward theses. Hugh Hendry, at least, maintains the intellectual flexibility to thoughtfully, and articulately throw in the towel, whereas the most effective do not invest themselves so fully into their investment theses that they cannot cut-and-run without inflicting egotistical self-harm. Because I operate in the land of the diversified portfolio, excising errant positions has never been traumatic, nor do I self-flagellate with cutters-regret. So long as my distribution is skewed-right, and the tail not overly kurtotic, I am sanguine.

Macro is different. The calls are fewer. Gestation time to trade maturity is longer. False breakouts and devasting swoons create further potholes. One can be very right and still get completely hosed in one's expression (and timing) of the trade (just look at Corzine if you have any doubts!!). Needless to say, one should ideally approach one's positions with the same sense of detached objectivity described above. Many, however, find this challenging whether it is due to personal political bias that clouds reasoning, or the resulting delusion caused by the 24-7 talking of one's book, whatever the evolution in ummm … errrr… let's called 'objective reality'.

Rest assured, I make no claim to be better. My worst prediction - the one that haunts most, confronting me each and every day - was not a trade per-se (though there are no shortage of bad ones). Rather, it was a political-economic scenario that not only hasn't panned out, but evolved (and, continues to do so) in completely the opposite direction. This was my forecast for what I call "Peak Inequality", along with all the deterministic knock-on effects such a scenario would have upon everything from luxury goods, and trophy real estate and high-end everything-else. For a short time in 2008, I smugly felt vindicated witnessing halts in construction of premier projects, bankruptcy of uber-luxury developments and the failure of high-end props to catch a bid. As things stabilized and bounced, and embedded counter-cyclical stabilizers blew gargantuan holes in Govt fiscal income statements throughout the world, I believed that 1) markets would [wrongly in hindsight] press for austerity 2) consumption was too fragile to raise taxes generally or cut govt spending; 3)the highest inequality and lowest marginal top-decile rates in generations would be the obvious target; 4)this would occur across the DMs, and draw the line-in-the-sand for inequality; 5)For IF the authorities were to bail out and make beneficiaries of asset-owners (levered ones in particular) in a pull-out-all-the-stops attempt to reflate, I reasoned the moons would be aligned for the State to recapture a meaningful amount of this (via tax) as a quid-pro-quo for not letting the soon-to-be angry hordes do "a Romanov"; 6) This would go some way towards capping and sustainably financing a yawning fiscal gap while maintaining general consumption and employment with a more constructive balance than otherwise might occur were reflation to float top-decile boats with scant participation by the median.

It would be understatement to say I was wrong, so far was I off the proverbial mark. On the surface, Like ZHers and MISH, I committed the cardinal sin of letting my political ideals get in the way of assessing the true probabilities. I had thought that under the circumstance, political expediency and policy pragmatism would extract 'sacrifice' from, or or co-opt, the top decile beneficiaries, given the backlash against the financial sector and the levered, that would in other times prove tortuous or impossible. Saving the system, at public risk and expense, with all its attendant property rights, is, after all, useful to the beach-masters, and the old adage of 50% of a goldmine being preferable to 100% of nothing must (so I thought) ring truer during such moments.

I'd thought it would be obvious to largest asset owners, and the top-decile earners, that they had escaped by the skin of the proverbial teeth, and expected they would have been grateful (excepting Hank Greenburg), and that these people would have not reneged on their promises to the Supreme Being made as the plane was falling from the sky. Instead, they offered-up "austerity" rather than contributing, as the Koreans did in 1998, a bit of the family sailver. Mark Blyth @Brown said: "Democracy is 'asset protection for the rich'….Don't skimp on the payments!". But the incessant rise in inequality is, a sure sign, they've been skimping on the payments. This has had profound implications: delaying and muting recovery, swelling deficits unnecessarily, undermining fiscal confidence, and exacerbating political divisions and preventing pragmatic action where and when required.

While some has resulted from unabashed or calculated "smas-n-grab", globalization has laid the substrate for great windfalls for some while undermining real median incomes. This is not meant pejoratively, or suggest anything should be done to throttle the trend or pace of globalization, but rather as a statement of fact. But the strength of the current should be noted by those who argue against the ill effects of inequality on the basis of libertarian personal fortitude. Formerly domestic pursuits (entertainment) now have global audiences. Software, healthcare, and yes, asset management) often have fixed development costs and mind-boggling scalar effects producing unimaginable wealth while median wages are throttled by competitive global labour markets and technology that increasingly allows outsourcing to ever-lower cost venues. These dynamics have incredible inertia, and are lifting vast numbers out of poverty elsewhere, and are difficult to decry. But somewhere, in this process, democratic insurance payments have been missed, and responsibilities by the beneficiaries, ignored, resulting in a listing economic boat, a mis-firing distributionalengine, a drought of sorts, an entirely unnecessary and man-made creation as a result of the rules of the game as drafted.

If one use the Lord of the Manor, as an analogy, he would have had the property rights over his domain, but in exchange, would assumed responsibilities and obligations both up and down the food chain. He would support (albeit with a lower-case 's') those below during bad times, and would have fiscal obligations to the that above (not meaning god for the avoidance of doubt), and if required, raise men for armed conflict. Failing on either account might very well threaten the property rights granted, or worse, his life. They were not inalienable, despite his position. Today, the same metaphorical "Lord", has all the rights, and they are inalienable, but none of the responsibilities outside a modicum of fiscal contribution to the State which can, with effective counsel, be minimized to great extent. His properties are, excepting rights of Eminent Domain, fully enclosed in the medieval sense. The Modern State, over time, has assumed many of the responsibilities, with the provision of a social safety net, and a tax rate that can be raise or lowered according to the requirements of public finance. That is, until recently, it seems, with the War on the State, a war on what remains a social work-in-progress that is "government", one which at its extreme in the USA is seemingly stuck in a Mondale-esque deer-in-the-headlights inability to adjust (or even reform) the rates (and structure) of tax to meet the obligations and responsibilities of the State to her people. The Grover Norquists, if nothing else, have succeeded in framing the popular political-economic debate such that it is believed [in that parallel universe that exists in parts of the nation] that austerity is divinely good, that hyperinflation is around the corner, that the state should barely exist, and shouldn't have a strong sense of the public interest. And we can witness the result: no new taxes, less progressively on existing taxes, starved public investment, unnecessarily higher unemployment and lower wages, hardship, and an incessant rise in inequality that most economists believe is inimical to growth and a well-balanced economy. Few desire sharing their income - whether rich or poor. And few would choose to shoulder responsibilities, if they could be avoided. But we, and the economy upon which we depend, and/or thrive, all share fates and fortunes that are inexorably tied, that if not demand, then certainly benefit from civic responsibilities (mostly economic in modernity) that are not transmutably-minimalist, but should remain flexible so as to respond more pragmatically.

Yea, I got it wrong, which I wish wasn't the case. But I do not regret my lost investment opportunities. Rather I fret about the future threat property rights, of lawlessness, of the lost economic potential, of the diminished social mobility, and of the resulting coarseness and divisiveness that stems from all these negative pressures.