Unstructured Finance

Carl Icahn in his own words

Icahn’s Big Year in investing and activism

By Jennifer Ablan and Matthew Goldstein

We held an hour-long discussion with Carl Icahn on Monday as part of our Reuters Global Investment Outlook Summit, going over everything from his spectacular year of performance to his thoughts on the excessive media coverage of activists like himself who push and prod corporate managers to return cash to investors. We also talked about the legacy he wants to leave.

There was much Icahn wouldn’t talk about on the advice of his lawyer, however. While he said he took a look at Microsoft, he won’t say why he decided not to join ValueAct’s Jeffrey Ubben’s activist campaign. He also stayed mum on any plans for his Las Vegas white elephant, the unfinished Fontainebleau Las Vegas resort, which he bought out of bankruptcy proceedings in 2010.

Never one to mince words, Icahn said he takes issue with Bill Ackman’s brand of activism which he believes borders on micromanaging by telling chief executive officers how to do their jobs. “I think Ackman is the opposite of what I believe in activism. You don’t go in and you don’t go tell the CEO how to run his company.”

Icahn, 77, is arguably this year’s investor story of the year, not just for his daring, profitable bets in Herbalife and Netflix but also for his transformation as the dean of activist investing.

The following are excerpts from our discussion.

On the meteoric rise in Icahn Enterprises shares this year. We ask if he feels they are overvalued now:

Money manager titans who can’t wait until 2014

The year can’t end fast enough for some of the world’s biggest investors.

Bill Gross, who many like to consider the King of Bonds, lost one of his prized titles last week when his PIMCO Total Return Fund was stripped of its status as the world’s largest mutual fund because of lagging performance and a swamp of investor redemptions.

The PIMCO Total Return Fund — somewhat of a benchmark for many bond fund managers — had outflows of $4.4 billion in October, marking the fund’s sixth straight month of investor withdrawals, and lowered its assets to $248 billion, according to Morningstar.

Wall Street goes to war with hackers in Quantum Dawn 2 simulation

Wall Street will have a simulated cyber war called Quantum Dawn 2 this month.


Quantum Dawn 2 is coming to Wall Street.

No, it’s not a video game or a bad zombie movie; it’s a simulated cyber attack to prepare banks, brokerages and exchanges for what has become an ever-bigger risk to their earnings and operations.

Organized by the trade group SIFMA, Quantum Dawn 2  will take place on July 18 – a summer Thursday that, with any luck, will be a relatively quiet day in the real markets.The drill involves not just big Wall Street firms like Citigroup and Bank of America, but the Department of Homeland Security, the Treasury Department, the Federal Reserve, the Securities and Exchange Commission, according to SIFMA officials.

“We go through a pretty rigorous scenario where we look at multiple threats being thrown out at the U.S. equity markets,” said Karl Schimmeck, vice president of financial services operations at SIFMA.

NJ Governor Chris Christie spotted outside Goldman Sachs

New Jersey Governor Chris Christie shakes hands with Lloyd Blankfein lookalike outside Goldman Sachs on Wednesday

Editor’s note: Updated with reason for Christie’s visit.

These days it seems New Jersey Governor Chris Christie is everywhere, from TV talk shows and radio appearances to accompanying Prince Harry on a well-publicized tour of the devastated Jersey Shore. So maybe it’s not too surprising he was spotted outside of Goldman Sachs’s Lower Manhattan office Wednesday morning. An Unstructured Finance reporter happened to see the sharp-tongued Republican governor walking into 200 West Street just before 11:30. Spokespeople for Goldman and the governor’s office said he was there for the bank’s Global Macro conference, which invites politicians, regulators, diplomats, CEOs and other power players to talk about big-picture trends.

Christie, who filed papers last year to run for re-election in 2014, recently announced that he had gastric bypass surgery to deal with his weight problem and he was looking in good spirits on Wednesday. He had a thick security detail and shook hands with a guy who, from behind, looked like Lloyd Blankfein but turned out not to be. He buttoned his jacket and waved to onlookers on his way into 200 West Street.

“I’m from the Treasury, and I’m here to help”

Ronald Reagan famously said that the “nine most terrifying words in the English language are, ‘I’m from the government and I’m here to help.’” But according to a report from SNL, the government may actually help banks when it forces them to add directors to their boards. Every bank CEO’s worst nightmare is having the government name directors to his or her board. Usually, banks pack their boards with clients or prominent people that offer prestige and potential business leads, but little substantive oversight. At the smaller banks that SNL is focusing on, that often amounts to people like the owner of the local car dealership, or the owner of the local golf equipment seller. (For a stereotypical example of a community bank’s directors, consider the board of Smithtown Bancorp, which was sagging under the weight of failed loans before being taken over by People’s United Bank in 2010.)
The Treasury, on the other hand, tends to appoint people with actual banking experience, who can do what board members are supposed to do: keep an eye on management for the benefit of shareholders. The government only does so for banks that have lost their way: the Treasury has the right to name directors to boards of banks that received bailout money under the Troubled Asset Relief Program, and that missed six quarters of dividend payments. Typically, these appointees are bankers with more than 20 years of experience.
By SNL’s reckoning, the banks with Treasury-appointed directors have racked up median stock gains of 50.38 percent since taking on the new board members, compared with a median gain of 28.22 percent in an index of bank stocks.
Of course there may be other reasons for this outperformance – for example, it may be that small bank stocks in general have outperformed larger bank stocks over the relevant time frame, or that relatively weak banks have been in greater demand from value investors betting on an improving economy. But it may also be that the government has found a fix for the principal-agent problem at banks that have stumbled into trouble.

The gold rush in foreclosed homes picks up steam as mad money flows freely

By Matthew Goldstein

Institutional money keeps rushing into the market for foreclosed homes, with some big players snapping up homes at breakneck speed. But the question is whether the big buyers are throwing money around indiscriminately and Wall Street’s big housing long will come up a bit short.

The other day Bloomberg reported that Blackstone Group has already spent $2.5 billion to buy 16,000 homes to manage as rentals and eventually sell them when prices appreciate high enough. Blackstone says it’s finding that the going price for homes sold at foreclosure auctions and out of bank inventories are rising quicker than anticipated.

But Blackstone, which some believe could spend up to $5 billion on single family home space, isn’t alone in racing to snap-up foreclosed homes in states like Florida, Georgia, California, Nevada and Arizona. American Homes 4 Rent, a firm that has $600 million from the Alaska Permanent Fund, is buying up hundreds of homes a month, industry sources say. Colony Capital, the other big institutional player is no less aggressive.

The new Goldman way: Less cushy compensation?

By Lauren Tara LaCapra

On a conference call to discuss Goldman Sachs’ new chief financial officer yesterday, an analyst asked departing CFO David Viniar why he was leaving when the stock is at a historic low.

Viniar avoided the question by joking that his successor, Harvey Schwartz, would trump that performance. But some investors think they have a better way to fix Goldman’s stock slump: cut back further on comp.

Goldman has brought compensation costs down, in part, by firing, nudging into retirement, or happily accepting the resignation of people who make a whole lot of money. (Viniar, whose salary clocked in at $15.8 million last year, is among that group.) Overall, the bank reduced comp costs by $3.2 billion last year and has cut 3,400 staffers from its payroll since the end of 2010.

The eminent domain brush fire

By Matthew Goldstein

It didn’t take long for the powerful voices on Wall Street to rise up in protest over an intriguing and controversial idea to condemn distressed mortgages through local government’s power of eminent domain.

Two weeks after Jenn Ablan and I first reported that officials in San Bernardino County, Calif. were giving serious consideration to the novel idea being pushed by financier-backed Mortgage Resolution Partners, 18 financial trade groups are voicing strong objections. The groups, led by the Securities Industry and Financial Markets Association, are concerned that if local governments can seize underwater mortgages it might discourage bank lending. Why? The argument is that if it can happen now, who knows when local governments might move to condemn mortgages again–crisis or not.

The unified opposition may make it difficult for Mortgage Resolution Partners, which says it is talking to public officials in Nevada, Florida and on Capitol Hill, to get much traction for its plan outside of San Bernardino. And if San Bernardino County goes forward with using private money to buy-up underwater mortgages held by banks and in mortgage-backed securities, a U.S. Supreme Court lawsuit challenging the legality of the measure seems more than likely.

Eminent domain for underwater mortgages could have biggest impact on banks

By Matthew Goldstein

A controversial idea of using the power of eminent domain to seize underwater mortgages may hurt some of the nation’s biggest banks more than investors in mortgage-backed securities.

The reason is the process of condemning a mortgage in which a borrower owes more money than their homes are worth will likely result in a seizure of any home equity loan–or second lien–on that property as well. And that could spell trouble for many U.S. banks, which at the end of the first quarter had $700 billion in second liens on their books, according to SNL Financial.

The trouble is that analysts say many banks have not adequately reserved against losses on those second liens or taken write-downs to reflect the impairment in value on the underlying mortgages. So an outright seizure of those second liens by a local governments could result in unexpected losses for the banks.

Surfing the sector flows

By Merieme Boutayeb, Research Analyst at Lipper. The views expressed are her own. PARIS, April 13 (Reuters) – A successful asset management strategy requires a thorough reading and consistent analysis of macroeconomic events and cycles for fund managers to identify sources of performance and capture them at the right time via appropriate asset allocation. An approach which analyzes the performance and flows of different sectors in light of market events and anticipations, is a concrete example that can be undertaken with Lipper data. There are 20 listed equity sector-based Lipper classifications, which correspond as of the end of February 2011 to a universe of 946 primary funds (2,030 share classes in total) domiciled in Europe and invested worldwide. Analyzing the performance realised and the flows captured or lost by these categories during the last five years provides an insight into trends which have dominated investment thinking. It is worth noting that the sectors favoured by investors year after year are very volatile and do not necessarily reflect the best performers, with the exception of funds invested in natural resources. Since 2006 these funds have had the best figures among the Lipper categories in terms of inflows (+11.83 million euros for 2006, +19.86 million euros for 2007, +6.013 billion euros for 2009, and +1.815 billion euros for 2010). The only negative year was 2008, when outflows of 4.491 billion euros were recorded in the aftermath of the subprime crisis and on lingering fears of global recession. During that same year 2008, all equity sector-based Lipper classifications (with one exception) experienced massive outflows – 12.62 billion euros in total – reflecting a widespread feeling of uncertainty. Funds invested in gold and precious metals were the only ones benefiting from the situation; they were used by investors as an investment haven after the crisis and collected 488 million euros for 2008. But interest in these funds declined severely in 2009 – with outflows of 55 million euros – despite the fact that they recorded the best performance over the year – up nearly 57 percent. Favoured instead were sectors such as natural resources (inflows of 6.013 billion euros), real estate (inflows of 1.113 billion euros), and banking and financial services (inflows of 304 million euros). TECH FLOWS Unsurprisingly, the banking sector has been particularly abused since 2007, following the bursting of the subprime bubble with outflows of 1.297 billion euros for 2007 and outflows of 264 million euros for 2008. The trend was reversed in 2009, reflected by inflows of 304 million euros, as investor confidence was rebuilt. This upbeat sentiment faded abruptly in 2010 on the difficulties encountered by some euro zone countries in managing their debt and on mounting fears of an eventual spillover. It is interesting to note that funds invested in information technology are on the road to recovery in light of encouraging results since 2009. Continual and massive outflows were recorded after the bursting of the tech bubble (still hitting 1.386 billion euros for 2008), but the trend reversed, with 182.5 million euros of inflows for 2009 and 1.080 billion euros of inflows for 2010. This was accompanied by a turnaround in performance; down 43.15 percent for 2008 turned into a gain of 51.78 percent for 2009 and a return of +22.30 percent for 2010. The pharmaceuticals and healthcare sector is struggling to evolve as a defensive sector as illustrated by the disappointing returns and significant outflows recorded during the last five years. In 2007, for example the health sector was the only so-called defensive sector that did not attract inflows (1.567 billion euros of outflows), compared with the 1.498 billion euros of inflows into utilities funds and the 1.258 billion euros of inflows into funds invested in noncyclical consumer goods and services. Funds invested in real estate posted the strongest outflows – from 6.173 billion euros of inflows for 2006 to 2.313 billion euros of outflows for 2007. The year 2008 was also catastrophic, with more than 3 billion euros of outflows. Since then, real estate funds have managed to claw some of that back with 1.113 billion euros of inflows for 2009 although 2010 saw only 77 million euros of net inflows. Focusing on last year, the funds invested in cyclical sectors were the most successful. The fear of a global recession had dissipated, thanks to the dynamism of emerging economies, including China. The sectors that topped the rankings were the cyclical goods and services consumers sector (automobile, luxury, household goods), with an positive return of 33.76 percent on average and 1.216 billion euros of inflows. The general industry sector (aerospace, electronic equipment), posted positive returns of 29.50 percent on average and 7.73 million euros of inflows. Since the beginning of this year, the market has witnessed an important sector rotation, with the acclaimed sectors of the previous year lagging behind. During the first two months of 2011, the cyclical goods and services consumers sector lost 0.68 percent and posted 135 million euros of outflows, while the gold and precious metals sector decreased 6.00 percent and recorded 110 million euros of outflows. Investors are more exposed to the natural resources sector (2.557 billion euros of inflows), the information technology sector (880 million euros of inflows), and the banking sector (247 million euros of inflows). The beginning of 2011 has been very eventful, making it difficult to comment with certainty on the development of sectors for the remainder of the year. The uncertainty about oil prices given political turmoil in the MENA region and the real danger of contagion, the unremitting difficulties of the peripheral euro zone countries to meet their sovereign debt obligations, the awareness of nuclear risk, and the inflationary pressures in emerging economies — hitherto the main driver of global growth — are key factors to watch carefully. In this uncertain economic environment it seems judicious to focus on noncyclical sectors such as food processing, tobacco, and information technology. Gold, which has been neglected by investors since the beginning of this year, is likely to attract important flows. Instability in the MENA region will push up the oil price and thus support the oil sector. The pharmaceutical sector is one to monitor because of the eventual impact of the development of generic drugs and the drastic reductions in public spending, while the utilities sector could be affected by the increased profile of nuclear risk. (Editing by Joel Dimmock) ((merieme.boutayeb@thomsonreuters.com; +33 (0)1 49 49 50 56))

By Merieme Boutayeb, Research Analyst at Lipper. The views expressed are her own.

A successful asset management strategy requires a thorough reading and consistent analysis of macroeconomic events and cycles for fund managers to identify sources of performance and capture them at the right time via appropriate asset allocation.

An approach which analyzes the performance and flows of different sectors in light of market events and anticipations, is a concrete example that can be undertaken with Lipper data.