Joseph Giannone

Could Carl's silence be golden?

Our favorite billionaire blogger and corporate raider Carl Icahn is safely avoiding writer's cramp. His Icahn Report, launched to much fanfare as a hub for corporate governance  and reform, has not been updated since April 16.

Reuters caught up with Icahn this week to discuss his intervention in CIT's attempted rescue. The legendary investor threw a bomb into the lender's efforts to strike a debt swap deal with its creditors, and to stay in business through a reorganization plan, by offering a $6 billion loan. Asked about the lack of production on his blog, Icahn explained he's been fully engaged this year:

"I've been sort of busy. And right now, with the market up, there's not as much interest in corporate governance like the were was a couple of months ago.  I've been so busy, with all these positions we've got. There's a lot going on."

So we checked with Damien Park, who runs activist research group Hedge Fund Solutions LLC and has his own blog tracking activist activity.  He observed that Icahn has been seeking board seats at Enzon Pharmaceuticals, Biogen, Amylin and Lions Gate.  He was actively pestering Yahoo late last year and has remained a vocal shareholder.

"He's been livelier than most of the larger activist investors this year.  That's for sure," Park said.

More interesting, perhaps, is Icahn's point that corporate governance fades as an issue when markets rebound. He announced the blog in 2007 and finally posted his first item on June 2008, as the credit crisis worsened. Perhaps his logging off  is a good signal.

It's official: Salomon Brothers has been completely picked apart.

Citigroup's agreement to sell Phibro, its profitable but controversial commodity trading business, to Occidental Petroleum today puts the finishing touches on a slow erosion of a once-dominant bond trading and investment banking firm.

When Sandy Weill (pictured left) staged his 1998 coup -- combining Citicorp and Travelers, Salomon Brothers was a strong albeit humbled investment banking and trading force. Yet little by little, a succession of financial crises, Wall Street fashion and regulatory intervention has whittled away at the once-dominant firm.

Not long after the Citigroup was formed, proprietary fixed income trading --  once the domain of John Meriwether, was shut down after the Asian debt crisis fueled losses that Weill could not stomach.

The Salomon name disappeared long ago as investment bankers and underwriters were rebranded Citigroup Global Markets.

Now Phibro, the former Philips Brothers that merged with Salomon in the early 1980s, is to be cast off because its energy traders made too much money when the rest of the bank suffered losses and required a $45 billion of taxpayer bailout.

The global hedge fund industry has recovered from last fall's lows, thanks to bubbly markets, but investors this year continued to yank out their cash. Until now.

HedgeFund.net, which tracks industry performance and trends, in a report released this week estimated that total hedge fund assets rose more than 2.5 percent, or $47 billion, to reach $1.89 trillion at the end of last month. Nearly half that growth came from net inflows of $19.6 billion. 

"The rate of organic growth increased in August to 1.05% ... nearly matching rates seen in June, a very positive sign for the industry," the firm wrote.

Beyond the headline numbers, August revealed some interesting trends. Managers in Europe enjoyed greater inflows than other regions. Allocations to fixed income outpaced equities. Mortgages had the highest inflow rates of all. One exception: global macro funds that thrived last year suffered notable outflows last month, Hedgefund.net found.

The firm also noted that many hedge fund strategies have already or will soon surmount their peak levels set in October 2007, when the recent drawdown wave began. Those strategies already operating at peak levels include merger arbitrage, mortgages, special situations and statistical arb.

Fund strategies still well below their high water marks: energy, long-only equity, emerging markets, distressed debt and long-short equity.

Other industry watchers have yet to report the return of positive flows, so this trend bears watching. Hedge Fund Research reports the industry suffered a record $152 billion of outflows last year, plus another $146 billion of withdrawals in the first half.

The industry coffers are still far from full.

(See also Green Shoots? and Out of the Woods)

The infamous "2 and 20" scheme once reserved for a few stars is now the standard. Master and mediocre managers alike charge the same top-tier prices. Yet 2 percent fees for assets under management plus 20 percent of a fund's profits should be exceptional pay for the best managers, he said, not the rule. 

"Pricing in the investment management business was very uniform, and it shouldn't be," said Howard Marks, chairman of Oaktree Capital Management, a Los Angeles firm that manages $60 billion alternative investments. "If markets are working right, different things have different prices." 

Marks, who recently told Reuters the biggest distressed bargains were already behind us, observed investors during the good times didn't asset themselves when negotiating terms with fund managers since they didn't want to risk missing out on the gains. 

In a recent "Chairman's Memo" to investors, Marks observed incentive fees "should go only to managers with the skill needed to add enough to returns to more than offset the fees." To illustrate, he noted a credit hedge fund charging 2 and 20 fees would have to earn a 16-3/8 percent gross return to achieve the same net results as a fund generating 12 percent return but charging a 0.5 percent fee.  

The hedge fund manager has to outperform his rival by 36 percent more, ideally without taking more risk or piling on leverage. "How many managers in a given asset class can generate this incremental 36 percent other than through an increase in risk? A few? Perhaps. The majority? Never," he wrote. "Thus, incentive fee arrangements should be exceptional, but they're not." If fund managers sold cars, Cadillacs and clunkers would all boast the same price tag. 

Yet the financial crisis of the past two years has prompted investors to reexamine the fees they pay and the results they get. Some big investors, including public pensions in California and Utah announced they would renegotiate their terms. Still, contesting fees us tricky. Many of top performing hedge funds won't budge, so investors wind up with an adverse selection of discounted but under-performing funds. 

"The differences between investment managers are so large it's unlikely that a fee discount will make an inferior investment manager the right choice," he sad. "You probably wouldn't choose between surgeons based on price."

Turns out Goldman Sachs is a staunch advocate of going organic -- when it comes to the money management business.

As Barclays auctioned off its Barclays Global Investors unit this year, Goldman was widely seen as a likely acquirer. That is until Blackrock In under Larry Fink emerged as the buyer with a $13.5 billion deal.

Lots of other money managers are expected to be sold, as the industry consolidates and cash-strapped banks look for valuables to pawn. But Viniar told analysts Goldman's preference is to grow the business without deals, and appeared to question the very idea of money manager deals.

"If there were an acquisition that made sense financially for us to do, we would certainly consider it," he said, something he says every three months to calm down excitable analysts. "When we look at the prices of most of the acquisitions, we think that they haven't made sense in that you've had to assume really heroic growth rates that we don't think are realistic." 

Jefferies Putnam Lovell recently said it counted 35 management deals in the second quarter, compared with 52 deals a year earlier. Besides the BGI takeover, Aquiline Capital Partners acquired Conning & Co,  JPMorgan Chase bought the remainder of its Highbridge Capital Management hedge fund unit and Woori Finance purchased Credit Suisse's 30 percent interest in a joint venture.

Yet Viniar notes money management firm deals are tricky, since buyers have to pay a premium for the company and then put up more money to retain star managers. And even as billions of profits come sloshing into Goldman's coffers, Viniar apparently doesn't like to part ways with the firm's cash.

"It has taken a while, but we've grown (the asset management business) quite successfully, almost exclusively organically." he said. "And the high likelihood is that is the way we are going to continue to grow it in the future."

(Photo: A customer walks past organic products in an organic food chain store in Taipei/Pichi Chuang)

Hedge fund manager John Paulson, who made a fortune currectly betting on the U.S. housing market collapse in 2007 and then the broader financial crisis last year, is starting to wield a Midas touch long associated with Warren Buffett.

Thanks to its bearish views, Paulson & Co over the past few years vaulted to the top ranks of the world's largest hedge fund, multiplying its assets and earning Paulson a king's ransom.

More recently, though, Paulson has been scooping up stakes in some beaten down companies. The latest winner: CB Richard Ellis. Earlier today the world's largest real estate services firm said it sold $100 million of stock to Paulson & Co.  Shares surged 15 percent on the news.

Investors are poring over his holdings with the same fervor they track investment moves made by Buffett, widely known as one of the world's most successful investors.

Earlier this year, Paulson was part of an investor group that acquired failed lender IndyMac Bancorp, providing a small vote of confidence in the recovery of the U.S. banking system.

Less comforting has been his views on gold, historically a hedge against inflation. In March gold miner Anglo American announced the sale of its remaining 11.3 percent stake in AngloGold Ashanti Ltd to Paulson for $1.28 billion. In his latest SEC disclosures, Paulson also reported large new positions in SPDR Gold Trust, Gold Fields and the Gold Miners ETF.

Gold futures and mining companies have surged as many investors share Paulson's concern about inflation risks. For all our sakes, we'll have to hope Paulson is wrong this time.

(Photo: Paulson testifies before U.S. House committee hearing in November 2008/By Jonathan Ernst)

David Einhorn again sent markets scurrying last week when he told investors he was shorting Moody's Corp, but the Greenlight Capital manager's latest thumbs down packed a weaker punch than his past, celebrated broadsides.

To be fair, Einhorn had a tough act to follow. A year ago, he boldly said Lehman Brothers was in much worse shape than its management would admit. Four months later -- the bank went bankrupt and the shares were wiped out. It took more than six years, but his warnings about business lender Allied Capital also proved accurate and ultimately very profitable.

Last week, the soft-spoken Einhorn turned his sights on the parent of credit rating agency Moody's Investors Service. Investors dutifully followed Einhorn's lead and sent Moody's shares down as much as 8 percent before they closed at $26.89.

Yet in the three trading days since, Moody's stock has recovered its Einhorn losses and more. The shares traded at $28.66 a share Tuesday.

In a speech titled "The Curse of the AAA," Einhorn said Moody's credibility was wrecked after perfection-rated companies like AIG, bond insurer MBIA and Fannie Mae, not to mention the mortgage- backed securities market, all collapsed.

"Investors who bought AAA-rated structured products thought they were buying safety, but they instead bought disaster," he said. "Investors have figured this out and many deny that they buy bonds based on rating, unless they are forced to by law."

But that is hardly news to all the people who though Enron was a solid bet ... until it went belly up. Einhorn told Reuters he has contemplated a ratings agency short since Pershing Square's Bill Ackman publicly questioned the AAA rating of MBIA in 2002.

Einhorn declined to elaborate on the reasoning for his Moody's short, though his speech indicates it boils down to a bet that the U.S. government changes the rules that created the Moody's/Standard & Poor's/Fitch Ratings oligopoly. He called on regulators to eliminate this system.

Compare that with his Lehman call, when Einhorn unleashed a barrage of details that showed Lehman's financial statements were riddled with problems.

Einhorn, speaking last week to more than 1,000 hedge fund investors at the annual Ira Sohn Investment Research Conference, observed that Lehman made investors dig through tables and footnotes to find its exposure to CDOs -- mortgage-related assets that had been the subject of scrutiny for months.

When the bank actually took write downs, he showed they were low-balled. He blew the whistle on a $1.1 billion discrepancy -- positive to Lehman -- between Level 3 assets in its 10-Q filing and former CFO Erin Callan's description of them in a conference call with analysts.

He raised red flags when the bank booked a more than $400 million gain for a nonexistent round of capital raising and when it did not mark down Suncal, a large California land developer slammed by the housing slump.

Yes, Moody's trades at a healthy 19 times earnings, but the stock is already down 61 percent from its 2007 peak -- a fall twice as hard as the S&P 500 index.

So, David, we see the smoke, but where's the fire?

(Einhorn, in an e-mail response, observed that short term stock movements are not the best barometer of the quality of an investment call. Lehman shares rose on the morning of November 28, 2007, the first time he spoke about his negative views on the bank, and continued to climb for months thereafter. Allied Capital, of course, saw its shares climb for five years before the credit crunch exposed its weaknesses in latye 2007.)

Embattled Cerberus Capital Management, a private-equity firm named for the mythological three-headed dog that guards the gates of Hades, has been overwhelmed by clients seeking to withdraw money from its $2 billion hedge fund, Cerberus Partners.

Website FINAlternatives said that fund investors representing 17 percent of the assets wanted to withdraw their money in December, the most recent month for which statistics are available. Now, with Cerberus's investments in Chrysler and GMAC going bad and unemployed investors needing to tap more funds, that figure may be heading higher.

Now, according to this Bloomberg report, Cerberus sent a letter to clients warning them that it could take "years" to meet all the redemption requests, which have stacked up since the firm imposed gates in December.

“The fund’s withdrawal requests have increased substantially since the fund suspended withdrawals, partially because investors wanted to reserve their place in line and partially due to individual investors’ own liquidity needs,” according to the letter.

Like some other hedge fund firms juggling the desires of investors who want their money, with trying to avoid gutting their portfolio with forced selling, Cerberus is considering creating a special vehicle that would carve out a portion of the fund to be liquidated and distributed to investors who want out.  But it also says this would not be a quick fix. Company founder Stephen Feinberg told investors the fund “Would be managed by the general partner until it is fully liquidated, a process which might take several years.”

So should Cerberus investors lump the hedge fund in with its auto wrecks? The Cerberus Partners fund lost 16 percent in the year ended last November and fell 3 percent to $1.99 billion in the first two months of February, but at least one private equity investor tells us they are not any worse at this business than their competition. Still, investors may want to tread warily around the three-headed dog when Feinberg says the current mess has created some great new distressed debt opportunities for his firm.

Cerberus spokesman Peter Duda declined to comment for this post.

(PHOTO: A Belgian shepherd practises an attack on his trainer during the European dog show in Budapest October 3, 2008. REUTERS/Laszlo Balogh)

Embattled Swiss bank UBS struck a deferred prosecution agreement with the U.S. Justice Department that will cost them $780 million. It could have been worse.

Though paying a hefty fine, the Swiss bank is paying ZERO punitive fines, despite conceding that they helped U.S. residents -- estimated to number 250 -- avoid paying income taxes over an eight year period.

The agreement announced on Wednesday specifies that UBS will give up $380 million of profit from eight years of cross-border business -- of which $200 million will be paid to the U.S. Securities and Exchange Commission and $180 million to the Department of Justice -- and $400 million for back taxes, tax penalties and restitution for unpaid taxes and interest .

But it will not pay a penalty. In addition to wining points for its cooperation, Uncle Sam evidently took pity on a bank that has already suffered billions of losses from fixed-income trades and investments during the credit crunch. Halfway down Page 3 of the agreement Reuters found this little nugget:

"In recognition of the current international financial crisis and after consultation with the Federal Reserve Bank of New York, the government will forgo additional penalties."

Not bad considering the 43-page agreement spells out some seriously naughty behavior.

"Beginning in 2000 and continuing until 2007, UBS, through certain private bankers and managers in the United States cross-border business, participated in a scheme to defraud the United States and its agency, the IRS..."

Maybe the moral of the story is: if you have to get caught, do it during a financial slump.

UBS officials declined to comment on the absence of punitive damages.

(PHOTO: Swiss President and finance minister Hans-Rudolf Merz gestures during a news conference on UBS in Bern February 19, 2009. REUTERS/Pascal Lauener)