Opening Bell

In CJR's a.m. business-press roundup: More Street spooks; Jingle mail; WSJ's dollar delay; Bush to recession: Drop dead; and more.

Lots of scary news yesterday, including the implosion of a major UK hedge fund from Peloton Partners.

In a sign of how quickly things can go wrong in leverage land, just last month Peloton was named “best new fixed-income hedge fund” and it gained 87 percent last year on bets against dodgy mortgages, the Financial Times reports. What went wrong? It appears the fund decided to call a market bottom and started buying up what it believed were “deeply discounted” mortgages.

Oopsy, smart guy.

Peloton holds upwards of $10 billion in assets which “could send ripples through credit markets,” if the manager is forced into a fire sale, The Wall Street Journal says, though in its lead the paper tells us the fund isbeing forced into a fire sale. The paper says investors in the $2 billion fund (it had debt of about four to five times its equity, thus the nearly $10 billion in assets) will probably lose just about all of their money.

Interestingly, Bloomberg and the WSJ report that Peloton is blaming its liquidation in part on banks reducing their exposure to hedge funds by lending them less money. The New York Times is nowhere to be seen on this story.

It looks as if Peloton’s other major hedge fund won’t survive either. It suspended withdrawals after a run on the bank. The FT:

“It is the classic story of when leverage goes wrong,” one investor in the fund said. “But I can’t believe this problem is confined to these guys alone.”

Insurance behemoth AIG announced yesterday it is writing down nearly $15 billion in assets yesterday. About $11 billion of that comes from declines in the value of credit-default swaps—a kind of insurance—on collateralized debt obligations. The rest is from declines in the value of its mortgage investments. That led to a fourth-quarter loss of more than $5 billion.

What does this all mean? Hard to tell from the business pages. The WSJ says AIG “left open the possibility that actual losses on the portfolio could be ‘material’ in some future reporting period,” while the NYT says “A.I.G. did not expect the portfolio deterioration to be material in the long run.” The FT says “Based on its latest analyses, it believed credit impairment losses realised over time would ‘not be material to AIG’s consolidated financial condition.’”

And another story from the trading house of horrors: futures firm MF Global Ltd. announced a $142 million loss on wheat-price bets after its risk-management processes broke down, reminding jittery markets of the Societe Generale debacle, though this is on a much smaller scale. The WSJ headline says it all: “Safety Net Breaks Again.”

A trader in Olive Branch, Mississippi, Evan Dooley, bet against wheat prices before sunrise on Wednesday. By that morning, his position had gone badly wrong as wheat prices moved higher and the trader tried to liquidate his positions in a panic, helping push prices up a record 25 percent on the day, the Chicago Tribune reports.

The Trib does some terrific first-day reporting, digging up information that raises questions about Dooley’s background. After reading its story, we’re inclined to think there’s much more to come out of this one.

Public records paint a more complex picture of Dooley than the one provided thus far by the brokerage, whose roots date to 1783. Dooley filed for bankruptcy in 2002. He owned the Dooley Trading Co. between 1995 and 2005. And two months after he joined MF Global, Dooley founded the Global Equity Exchange, according to Tennessee corporate filings.

The Global Equity Exchange bills itself as “the #1 Source of Private Equity Investors Worldwide!” and offers real estate investments, according to its Web site.

The NYT does some quick background digging, too, but turns up fairly uninteresting stuff, like “Former classmates said he played intramural basketball and football and held several officer titles at his fraternity.”

The Journal’s spadework finds that Dooley was betting for himself and that he had just one client, who MF Global said hadn’t done any business with him in “some time.”

That jingling sound you hear this February 29 is keys being mailed back to banks all across this great land. The NYT and WSJ leap on reports today that the housing bust has homeowners increasingly walking away from their mortgages.

It appears one paper got wind that the other was working on a story, as there’s no specific news peg here. The NYT puts it on its front page while the WSJ puts it on A3.

The Journal says falling home prices are leaving owners owing more on their notes than their houses are worth, and they’re bolting even if they can afford their payments.

The papers both present the increased defaults as the result in part of a huge culture change in what a house represents to Americans—a shift the lenders themselves encouraged as much as anybody. The WSJ:

A rise in the number of people choosing to default on their mortgages would represent a significant departure from past behavior of American homeowners, who during past housing downturns tended to walk away only as a last resort, often because they couldn’t afford to pay because of unemployment, illness, divorce or other life-altering changes that reduce income. And even then, the number of people who walked away was relatively small…

Some borrowers, says Mary Kelsch, senior director at Fitch Inc., are less willing to make the sacrifices needed to stay in their homes, given the current environment. “It’s a change of mind-set” she says. They are “looking more at their home as an investment that has lost its appreciation potential and don’t really want to continue to pay.”

Both reports have lots of interesting stuff. The Times says much of the problem is, of course, due to the aggressive lending of the bubble era that required little or no down payment from buyers, many of whom had negative equity the minute they closed on their loans because of closing costs. It says the median down payment for first-time buyers last year was just 2 percent.

The WSJ includes numbers that indicate further that the press should lighten up on its use of “subprime” when describing the current housing crisis. Subprime was just the canary in the coal mine. The Journal reports that $3 trillion worth of mortgages—or nearly one in three— could be “underwater” by year’s end. Total subprime mortgages equal about $1 trillion.

The WSJ has the best anecdote, with a look at an Army sergeant who bought a $455,000 house an hour from San Francisco in the spring of 2005, when he was fresh off his first tour in Iraq. It’s now worth about $285,000 and his adjustable-rate mortgage payment has soared by more than one-third. He’s walking away.
Here’s the Times:

“There’s a whole lot of people who would’ve been stuck as renters without these exotic loan products,” Professor Sinai said. “Now it’s like they can do their renting from the bank, and if house values go up, they become the owner. If they go down, you have the choice to give the house back to the bank. You aren’t any worse off than renting, and you got a chance to do extremely well. If it’s heads I win, tails the bank loses, it’s worth the gamble.”

It’s hard for the banks to blame their customers for their greed now isn’t it? These are some of the same guys trying to walk away from their own commitments when the economic value doesn’t favor them anymore.
Which brings us to our Quote of the Day, from the NYT:

“Will everyone walk out?” he said. “No. But there’s been a cultural shift. Buying a house used to be like entering a marriage, a commitment for life. Now, if you see something better, you go back into the dating market.”

The WSJ is a day late and (sorry, we couldn’t resist) a dollar short with its front-page splash on the falling greenback, noting it has tumbled more than 40 percent against the euro in six years. The NYT and FT went big with this yesterday.

Still it’s a must-read when the Journal brings its considerable powers to bear, as it does here. The story’s lead author, Craig Karmin, has a new book called “Biography of the Dollar” and we get lots of good background here on the dollar’s place in the global economy, whose $3.2 trillion in transactions a day are 86 percent dollar-denominated in some form. We specifically love the brilliant analogy of the buck as PC Guy:

Yet for all of the gloom, the world is unready to let go of America’s unloved dollar. Akin to the way Microsoft’s often-criticized Windows operating system remains indispensable to the majority of computer users, the dollar remains the common language of finance, the medium of exchange in everything from sugar to wheat to oil. Shaking the dollar loose from that place would require a vast reworking of the global financial system that few parties seem prepared to confront.

So is the euro the Mac of the global financial system?

And here’s an interesting bit of history:

At the beginning of the 20th century, the U.S. was already the world’s largest economy, but the British pound still accounted for nearly two-thirds of official foreign-exchange reserves held by the world’s central banks. The dollar didn’t emerge as the dominant currency until after World War II devastated Europe. Even then, some commodities still traded in pounds: The London sugar market didn’t jettison sterling for a dollar-denominated trading contract until around 1980.

Some stories are worth waiting for.

The WSJ pairs its front-page dollar story with one on the commodities boom, reporting that jittery stock and bond investors have inflated prices by taking money out of those markets and parking it in things like oil and wheat futures. Of course prices are also being inflated by, well, inflation as they buck slides as the economy tanks and the Fed prints money to bail out the financial system and rescue said tanking economy.

Is this where the bubble’s gone now? First tech, then real estate, and now commodities? Sure looks like it.

The price run-ups are leading some analysts to declare bubbles in the hottest markets. That raises the prospect that some commodity prices could come tumbling back down as rapidly as they have risen if they aren’t underpinned by genuine demand.

“As an economist it’s hard for me to sit here and look at corn and bean and wheat prices and explain it with fundamentals,” says Dan Basse, president of AgResource, an agriculture market-research company in Chicago. “The market would suggest we’re extremely overpriced,” he says.

Meanwhile, oil hit a new nominal record, and is less than a dollar away from an all-time, inflation-adjusted high.

The WSJ reports on its Money & Investing front that accounting regulators are looking into tightening rules on banks’ off-balance-sheet practices, which helped fuel the credit bubble that has burst so disastrously. The rules were tightened after Enron, but the banks found loopholes easy enough.

Any changes could have a big impact on bank business models. In 2007, Citigroup Inc. had about $1.1 trillion in assets—equal to about half the bank’s overall assets—in off-balance-sheet vehicles.

For investors, consolidation of more assets on banks’ books could be a mixed blessing. In the short term, it would place additional strain on banks at a time when they can least afford it. Longer term, investors would be less likely to get sandbagged by losses, while bank executives likely will have a better handle on risks that are on their books.

Floyd Norris, in his C1 NYT column, says banks haven’t even been following the rules as they are currently written.

The FT reports that there’s still a lot of cash out there, and the private-equity folks aren’t having trouble getting their grubby little hands on it. The pink paper says fundraising in the business is at levels similar to those at the peak last year.

Mr Brem believed investors continued to embrace private equity because they had learnt “the best time to invest is when things look like they are going wrong”.

I guess it’s never a bad time to hand your money over to these guys.

Sprint Nextel posted a whopping $30 billion loss on a write-down of its Nextel unit—yet another example of a dud merger. The WSJ on its Marketplace front, says things aren’t getting better for the wireless company. The NYT puts up high in its C1 story that the company suspended its dividend and raises questions about its solvency in the second paragraph.

Finally, everyone, you can quit worrying now. Buy that condo. Go for that crazy subprime mortgage-backed security. The great and wizened economist George W. Bush has looked into the future and tells us the economy is going to greet us as liberators.

May be time to buy sweets and flowers stocks.

Opening Bell is your guide to the top business stories of the day from all over. But I can’t read everything out there—it’s 3 a.m., for Pete’s sake! If you’re an editor or reader who sees good work in local or regional papers—anything besides the WSJ, FT, NYT, and Bloomberg—send it my way at

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.