Every Bailout Has Failed! | Bianco Research

The Financial Times – Goldman reclaims most of $2bn rescue funds
Goldman Sachs has reclaimed 90 per cent of the $2bn it used to bail out one of its troubled hedge funds last summer as the investment bank moved to shrink the fund and avoid consolidating it on its balance sheet. Goldman withdrew $1.8bn from its Global Equity Opportunities fund at the end of February, its first opportunity under a lock-up agreement made when it invested in August, according to people familiar with the quantitative, or computer-driven, fund. It wrote to investors last week to explain its decision but declined to comment on Wednesday. Eli Broad, the US billionaire, has also withdrawn the money he invested in August to help bail out the fund. Mr Broad joined hedge fund Perry Capital and others in putting in $1bn to help rescue the fund. The withdrawals comes after investors abandoned GEO and two other Goldman quantitative hedge funds, one of which – North American Equity Opportunities, or NEO – was closed earlier this year. Goldman had the highest profile of several big quantitative hedge fund managers hammered by wild swings in markets in early August. GEO plummeted from more than $5bn of net assets at the start of August last year to just $1.2bn now owing to a combination of poor performance and withdrawals.
Dealbreaker.com (Blog) – On Second Thought
Goldman Sachs has agreed with its clients’ assessment of Global Equity Opportunities, which is that the fund is, how to put this, a big fucking failure. The bank has taken back $1.8 billion of the $2 billion it used to bail the fund out last summer, which was GS’s effort to say to investors, “Hey, guys, this fund is good. To prove it to you, we’re going to stick our own coin in it as well and pray to god we don’t lose too much.” But damn those smartass clients, they didn’t fall for it, and continued to ask for their money back. Which made Goldman think, “Hey, maybe they’re on to something?” and follow in suit. The other big name brought in to stick a guarantee on the box, Eli Broad, has pulled the $1 billion he put up as well. The fund is now down to $1.2 billion in net assets, from $5 billion at the start of August.

Comment This means this credit crisis has a perfect record! Not a single bailout, rescue package, or government scheme has worked. Whether it was the SIV bailout, the monoline bailout, B of A investing in Countrywide or any one of the 27 government attempts to halt the credit crisis, not one of them has worked! (To be fair, some of them have yet to be completely discredited, like the Federal Reserve’s moves of the last few weeks, but we believe they will fail over time).

When are we going to get it? The problem is the financial system is shrinking. And until financials raise hundreds of billions to replace the lost capital, the crisis will continue despite Bernanke’s and Goldman’s best efforts. If raising this capital is painfully dilutive to existing shareholders, so be it. Anyone that is still long these firms gets what they deserve. See the next block.

Commodity Speculation

Barron’s – Cover Story: Commodities: Who’s Behind the Boom?
Commodities index funds, which arrived on the scene in the late 1990s, have come into their own in the past several years. The biggest index fund, Pimco Real Return (ticker: PRTNX), has seen its assets swell to $14.3 billion from $8 million since its inception in January 1997. Index funds offer investors an easy, inexpensive way to gain exposure to a segment of the commodities markets or a broad-based basket of commodities. Result: The funds have drawn many private investors who have never ventured into futures, along with pension funds and other institutional players looking to diversify. But for all the virtues that the funds hold as a way of spreading bets across commodity markets, they take only long, or bullish, positions, avoiding short-selling. In other words, they trade on the naïve and potentially fatal assumption that commodities have the same tendency as stocks to rise over the long run. That this large, bullishly oriented group of funds is flourishing is partly a result of a regulatory anomaly. In recognition of the fact that the commodity markets are too small to absorb an excess of speculative dollars, the Commodity Futures Trading Commission, in conjunction with exchanges, imposes position limits on speculators. But the agency has effectively exempted the index funds from position limits. The dislocations caused by allowing so much money into markets that have limited liquidity is now causing alarm in the trading pits. That, in turn, is prompting the CFTC to call for an industry gathering April 22 at its Washington headquarters “to hear firsthand from participants to ensure that the exchanges are functioning properly.” On this and related issues, CFTC Acting Chairman Walter Lukken declined to comment to Barron’s.

Comment This story picks up on a theme we wrote about in a Market Facts two weeks ago:

By these rough estimations, money in long-only commodity index funds has increased by more than $183 billion, more than double, between January 16, 2007 and March 11, 2008. At over $336 billion in long index positions as of March 11, 2008, index trading accounts for almost 70% of all the money in the commodities market as measured by the CRB as calculated on Page One. These numbers are even more impressive considering long-only commodity index funds essentially did not exist before this decade.

The ironic part of this is while we agree there is tremendous speculation in commodities, those that go on CNBC and deride its existence are often employed by the firms doing most of it.

It bears repeating that the commodity speculator circa 2008 is not the commodity speculator circa 2005.

In 2005 it was a young hedge fund manager sitting in front of a bank of computer screens barking out rapid fire buy and sell orders in a phone.

In 2008 it is an individual investor taking the advice of conservative Wall Street investment houses to place a small part of his investment portfolio in commodities. He does this through commodity-based ETFs or “real return” mutual funds. In 2008 it is large institutional investors and pension funds defining commodities as an asset class and buying an index fund that is designed to mimic the Dow Jones AIG Index or the GSCI (Goldman Sachs Commodity Index).

It is not new to say that money is powering the relatively small commodity markets higher. Some even call it a bubble. And when they do, they argue it has a “tech stock in early 2000s feel to it.” This is true, but it also has a “tech stock in December 5, 1996 feel to it” as well. This is when Greenspan famously fretted about “irrational exuberance.” On this date the NASDAQ composite was at 1,300 on its way to 5,100 by March 2000.

Likewise, we don’t know if now is the peak in commodities or if it will be years from now at prices vastly higher. In mid-2005 we were interviewed on CNBC about crude oil “collapsing” to $41 and asked if the bubble was pricked. Today we are asked the same questions at $104. Why couldn’t they still be asking these same questions in a few years at $200?

As the chart below shows, commodities make up $500 billion in a world of $60 trillion of assets ($40 trillion in bonds and $20 trillion in stocks). As long as strategists and pension managers keep believing that investors should hold 5% to 10% in commodities, these markets are destined to get $3 to $5 trillion of money thrown their way. If so, they could go a whole lot higher!