Corriente Capital

Yesterday Bloomberg ran a story on Corriente Capital's bet against the credit worthiness of European sovereigns. The WSJ provided additional coverage on Mark Hart, who is the founder of Corriente - a Fort Worth group named after a breed of cattle.

The story in the journal was written by Gregory Zuckerman, the WSJ reporter who wrote the in-depth account of John Paulson's bet against mortgage securities, "The Greatest Trade Ever". I'm guessing the Bloomberg reporter was called up by a marketer of Corriente's funds with the idea for a topical story. The Bloomberg guy reported on the facts, and then the guys over at the WSJ did additional leg work on the personal info on Mark Hart. Because investors not only want to see a good track record of successful investments before investing in a fund, they want a story to go along with it.

Fed and Ted's Excellent Adventure.

The TED spread (difference between LIBOR rates and T-bill rates, with the three-month duration being the most commonly cited gauge of the interbank lending market's condition) has been all types of crazy over the last year. A new paper out of the San Fran Fed claims that the LIBOR rate is being artificially suppressed by actions taken by the FED.

Thank You, GM?

Megan McCardle writes that public approval of union's has dropped below 50% for the first time ever, according to a recently published Gallop Poll. With public opinion in the gutter, the chances of the 'Employee Free Choice Act' passing Congress are now dismal. If not for the blatant cronyism of the bailout process, which has since stigmatized the Union in the minds of the American public, the Obama administration may have been able to pass legislation which would have crippled America's economic competitiveness for generation's.

Gettelfinger Motors

The latest developments in Washington's restructuring of the auto industry amount to this irony: Having burdened the Detroit companies for decades with restrictive work rules, enormous health-care obligations and generous retiree benefits, the United Auto Workers union will now end up controlling two of them. Specifically, the UAW will own 55% of Chrysler and 39% of General Motors, where only the government will have a larger ownership interest.

A moment for regulation

An economist who I very much respect - Robert Schiller of Yale - has an op-ed in today's journal about regulation.  Most debates about regulation are framed from either the liberal standpoint of "Capitalist pigs and their multinational conglomerates!!!!!!!"  or the conservative standpoint of "Capitalism is fucking awesome.  Leave it alone."  Schiller argues that this crisis is not a failure of capitalism, but a failure of regulation keeping up to an adapting game.  Every year the NFL implements new rules for a sport which is continuously evolving (Roy Williams, Marion Barber, Helmet-to-Helmet, below the knee of quarterbacks).

Schiller does a good job of using the always popular sports analogy to break down this topic:

"Such a world of animal spirits justifies the economic intervention of government. Its role is not to harness animal spirits but really to set them free, to allow them to be maximally creative. A brilliant player wants a referee, for only when the game has appropriate rules can he really show his talents."

The Diminished Prop Desk

Daniel Och recently stated that "The proprietary trading desks at banks are substantially less active."  This claim seems to be supported by today's Heard on the Street column by Justin Lahart.  Mr. Lahart uses the yields on Resolution Funding Corp zero-coupon bonds to prove the point. 

 Refcorp was set up in 1989 to fund the Resolution Trust Corp., the government-owned entity created to address the now quaint-seeming savings-and-loan crisis.

It issued about $30 billion of debt, and because that debt was backed by the full faith and credit of the U.S. government, investors came to view it as nearly the same as a Treasury debt.

The spread between comparable Refcorp debt and treasuries has been around 100 bps historically.  However it is around 700 bps right now.

The Importance of Capital Structure

Michael Milken has a good editorial in today's WSJ regarding a firms capital structure.  Modern finance theory holds that capital structure does not matter (which some assumptions, of course).  Milken argues that this credit cycle, like previous credit cycles (most recently the one of 1974), show us the importance of credit structures. Milken says:

The late Nobel laureate Merton Miller and I, although good friends, long debated whether this kind of capital-structure management is an essential job of corporate leaders. Miller believed that capital structure was not important in valuing a company's securities or the risk of investing in them.

My belief -- first stated 40 years ago in a graduate thesis and later confirmed by experience -- is that capital structure significantly affects both value and risk. The optimal capital structure evolves constantly, and successful corporate leaders must constantly consider six factors -- the company and its management, industry dynamics, the state of capital markets, the economy, government regulation and social trends. When these six factors indicate rising business risk, even a dollar of debt may be too much for some companies.