Unstructured Finance

Gundlach doesn’t whine over his stolen wine

By Jennifer Ablan and Matthew Goldstein

Who said bonds are boring? In recent days, Jeffrey Gundlach, the new king of the fixed-income world, has been dominating headlines with his lengthy CNBC interview on everything from counterparty risk to the market’s love affair with Apple stock to talk in the blogosphere about Gundlach’s pricey Santa Monica, Calif. residence being burglarized of more than $10 million in assets.

Against this backdrop, Gundlach’s firm, DoubleLine, hit a huge milestone this week as well, hitting $45 billion in assets under management.

For those who watched Gundlach’s TV interview on Wednesday they would never have guessed that the 52-year-old lost several high-end paintings and a 2010 red Porsche Carrera 4S in the burglary at his home a week earlier. The stolen goods include paintings by such artists as California Impressionist Guy Rose and landscape artist Hanson Duvall Puthuff. Also stolen were five luxury watches, wine and cash.

Sgt. Henry Martinez told Reuters that a “high end burglary like this is very unusual” in that neighborhood. If you want a full list of the stolen goods, click here

The burglary occurred sometime between Sept. 12 and Sept. 14 while the widely-quoted money manager was traveling. It’s not clear whether his Santa Monica home had an alarm system and whether it had been activated.

What the incident proves though is that Gundlach, who has no problem with trying to wrest the spotlight away from PIMCO’s Bill Gross, is one cool customer.

Who said bonds are boring? In recent days, Jeffrey Gundlach, the new king of the fixed-income world, has been dominating headlines with his lengthy CNBC interview on everything from counterparty risk to the market’s love affair with Apple stock to talk in the blogosphere about Gundlach’s pricey Santa Monica, Calif. residence being burglarized of more than $10 million in assets. Join Discussion

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.

But some shareholders think Goldman should be doing even more.

One prominent investor who focuses on financial stocks said Goldman is facing “the Lazard problem” — a culture where employees expect to get paid a lot, and will leave if they don’t. But, he says, management is not seeing things the same way as shareholders because they have fared much better financially, even in bad times.

To illustrate this gap, he compared return-on-equity for common shareholders against compensation as portion of common equity. (For ROE, he divided pretax earnings by common shareholder equity and for the compensation measure, he adjusted pay for estimated tax costs and divided that by common shareholder equity.)

As Goldman works to boost shareholder returns, compensation is at the forefront of some investors' minds. One investors examines the difference between Goldman shareholder returns and what the bank has paid employees to find that its workers got 10 percentage points more, on average, than shareholders since the firm went public in 1999. Join Discussion

UF Weekend Reads

So it appears Uncle Ben a/k/a Fed Reserve Chairman Ben Bernanke finally gets it:  to fix the U.S. economy, you need to fix housing. The trouble is the Fed’s remedy of buying $40 billion worth of mortgage backed securities each month may  not do the trick.

Bernanke argues that buying MBS will push mortgage rates even lower–something that will spur loan refinancings and make it easier for people to buy a home. He believes a rush of new home buying will spur home construction and create job, jobs, jobs.

It sounds good. But the problem is the housing market is not suffering from high interest rates. With the 30-year mortgage rate already down to around 3.65 %, it’s not interest rates that’s keeping the housing market from taking off. Two years after the recession officially ended, far too many homeowners are still weighed down by debt–especially mortgage debt.

Even lower mortgage rates will not help people with a poor credit rating to buy a home. And low mortgages don’t help the millions of homeowners who are underwater on their mortgages to refinance. Similarly, low rates don’t encourage banks or the FHFA to engage in meaningful principal reductions for cash-strapped borrowers.

The Fed chairman could have used his Thursday press conference to jawbone opponents of principal reductions on Wall Street, Capitol Hill and at the FHFA–the regulator of Fannie and Freddie. While Bernanke has no power to force Wall Street or the FHFA to cut mortgage debt for cash-strapped homeowners, he could use his bull pulpit to lobby for it.

And memo to my friends in the press: when Bernanke holds one of his press availabilities, there’s nothing wrong with putting him on the spot by asking about issues like principal reductions or whether local governments should be allowed to use eminent domain to fix underwater mortgages.

Maybe someone can even ask Bernanke if there is a way the Fed can come up with a strategy for banks to sell underwater mortgages to an entity sponsored by the Fed–which could then rework them and reduce the sum owed by the homeowners. The Fed charter doesn’t allow it to buy whole loans but the financial crisis has allowed the Fed to a lot of things no one ever thought possible.

So it appears Uncle Ben a/k/a Fed Reserve Chairman Ben Bernanke finally gets it: to fix the U.S. economy, you need to fix housing. The trouble is the Fed's remedy of buying $40 billion worth of mortgage backed securities each month may not do the trick. Join Discussion

FHFA is not on an REO speed wagon when it comes to full disclosure

By Matthew Goldstein

The FHFA continues to reveal as little as possible about its pilot project of selling foreclosed homes to private investors in bulk sales.

With surprisingly little fanfare, the Federal Housing Agency announced this week that Pacifica Companies, a little-known San Diego investment firm, is the first company to emerge as the winner in the pilot project. Pacifica is buying 699 single-family homes that are part of Fannie Mae’s REO portfolio in Florida.

In the coming weeks, FHFA says it will announce the winning bids for bulks sales of REO homes in California, Arizona and Illinois as part of the much-hyped pilot project to sell 2,500 foreclosed homes. The agency that regulates Fannie and Freddie Mac says there will be no winning bid for some 541 homes it was planning to sell in Atlanta. The agency didn’t offer an explanation.

The deal with Pacifica is structured as a joint venture with Fannie that will distribute the cash generated from renting out the homes and eventually selling them three years down the road. The San Diego company is paying $12.3 million for its equity interest in the joint venture that values the portfolio at $78.1 million, or 96 percent of the appraised market value for the single-family homes. In the deal, Fannie will retain considerable equity in the joint venture and collect up to $49  million in revenue before the deal terms become more favorable to Pacifica–which also collects a separate asset management fee.

The deal structure is a bit complicated but FHFA is not saying anything more about the process. A spokeswoman for the FHFA says the agency has no plans to reveal the number of bids it received for the Florida properties or provide additional details on Pacifica’s bid or how it intends to manage the homes as rentals.

The trouble is the FHFA isn’t letting the public know just what went on behind the scenes in the auction process. At a minimum, it would seem a government agency should disclose the number of bids submitted for the homes being sold. This would be a first step for the public to make its own assessment about the wisdom of bulk sales and the FHFA’s selection process.

The FHFA continues to reveal as little as possible about its pilot project of selling foreclosed homes taken over by Fannie Mae to private investors in bulk sales. Join Discussion

UF Weekend Reads

Two weeks of speechifying by the Dems and Reps has come to an end. Well not really–but the conventions are over. And for all the talk, there is one issue that got short-shrift–a solution to the nation’s still unfolding housing crisis.

Oh sure, there was talk about foreclosures and people struggling to pay the mortgages on their homes, but not a lot time for potential solutions.  And that’s unfortunate because as has been noted many times before, it’s going to be hard for the U.S. economy to take off as long as too many consumers are being crushed by mortgage debts they can barely afford.

Indeed, the disappointing August jobs report is a sober reminder of just how much work remains to get the economy humming again.  As we’ve said many times before on U,F it all still comes down to fixing housing, housing housing.

And after a long time without it, we welcome back Sam Forgione and his weekend reads:

From AR:

Managing a tail-risk hedge fund is trickier now than it was in 2008, writes Jan Alexander.

From BusinessWeek:

Two weeks of speechifying by the Dems and Reps has come to an end. Well not really--but the conventions are over. And for all the talk, there is one issue that got short-shrift--a solution to the nation's still unfolding housing crisis. Join Discussion

Jamie Dimon’s teflon coating

By Matthew Goldstein and Jennifer Ablan

Jamie Dimon’s coat of teflon is wearing well, even as the criminal and regulatory investigation into the London Whale trading scandal deepens.

Shares of JPMorgan Chase, which plunged more than 20 percent in the days after the bank revealed in May that the trading losses were much worse than previously believed, have rallied back. The stock is now trading around $38.66 a share. On May 10, when the bank disclosed after the bell that it had lost at least $2 billion on derivatives bets made by a group of London-based traders, the stock closed at around $40.

When Dimon was called before Congress to testify on the trading scandal in June, he was generally treated like the king of Wall Street by congressman and senators. At the time, bank’s internal probe had not yet found evidence that the three traders may have tried to hide their losses, so the fallout from the scandal appeared limited. The bank disclosed those finding to federal authorities before releasing its second-quarter earnings and restating its numbers for the first quarter.

So has Dimon, who came sailed through the financial crisis without a scratch–unlike say Goldman’s Lloyd Blankfein–once again emerged as a champion? Maybe, but a lot will depend on what the investigations turn up and whether it fits with Dimon’s attempt to portray the now $5.8 billion trading debacle as an isolated risk management failure–potentially carried about by a small group of traders bent on concealing their actions.

As Emily Flitter and David Henry have been reporting over the past few weeks, Dimon’s narrative has begun to take some hits. The once small group of people believe to be involve now includes at least 7 current or former employees who have hired lawyers, including several risk officers. On Wednesday,  Reuters reported a fourth trader who worked under Bruno Iksil, the man nicknamed the London Whale because of the big bets he has taken on, is now also drawing scrutiny.

And now comes word  that the Sen. Carl Levin’s powerful Permanent Subcommittee on Investigations maybe  looking to dig deeper into the scandal. That could prove embarrassing for Dimon, especially since it was the Levin committee that led to the grilling of Goldman Sachs over its subprime CDOs and an in depth review into allegations of money laundering by HSBC.

Jamie Dimon's coat of teflon is wearing well, even as the criminal and regulatory investigation into the London Whale trading scandal deepens. Join Discussion

Will FHFA opposition to principal reductions boost eminent domain efforts?

By Matthew Goldstein and Jennifer Ablan

There’s nothing surprising about FHFA head Ed DeMarco’s decision to nix the idea of writing down some of the debt owed by cash-strapped homeowners on mortgages guaranteed by Fannie and Freddie. DeMarco, whose agency regulates Fannie and Freddie, has been a consistent opponent of principal reductions–something we pointed out last October in our story on the need for a “great haircut” on consumer loans and including student and mortgage debt to stimulate the economy.

But DeMarco’s renewed opposition comes at a time that there is a growing consensus that something needs to be done on the housing front to get the U.S. economy going, as opposed to simply churning along at the current anemic rate of growth. More and more economists are saying that reducing mortgage debt will not only reduce foreclosures, it will give ordinary Americans more money to spend on goods and services.

It doesn’t take an MBA from Harvard to know that when people have spending power it translates into more demand and that usually prompts employers to hire more people to fill that demand.

DeMarco’s opposition also comes at a time that some local government officials in communities hit hardest by the housing crisis are toying with ideas that once seemed too controversial to imagine. We’re, of course, talking about the idea of using eminent domain to seize and restructure underwater mortgages–something we first reported on in early June. (Sorry, Matt Taibbi, we had the story first).

Mortgage Resolution Partners, the investment firm that is pushing the idea of eminent domain as a mortgage fix, is only talking about seizing home loans held in private labeled mortgage-backed securities.  The firm is deliberately avoiding MBS issued by Fannie and Freddie possibly because of DeMarco’s opposition to principal reductions. MRP’s focus on private label MBS has earned the wrath of many mortgage bond investor trade groups.

Up until DeMarco’s renewed opposition to principal reductions, the opponents of eminent domain appeared to be gaining the upper-hand–as questions about the legality of condemning a mortgage rather than real property have grown. But we wonder whether local government’s will now feel empowered to push ahead with an eminent domain strategy, especially if they see no relief coming from the federal government.

There's nothing surprising about FHFA head Ed DeMarco's decision to nix the idea of writing down some of the debt owed by cash-strapped homeowners on mortgages guaranteed by Fannie and Freddie. But we wonder whether his opposition will inspire proponents of eminent domain to power ahead. Join Discussion

UF Weekend reads – The PIMCO edition

Jenn Ablan likes to tell me that people are always writing about PIMCO and Bill Gross, the long reigning “king of bonds.” And when you think of it there’s a lot of truth to that assertion.

Gross’ mammoth $263 billion Total Return Fund gets endless coverage because–by its very size–it really is the bond market. It’s one reason why so much ink is spilled whenever the Total Return Fund has a month where investors pull more money out of the fund than put in.  And it’s why there’s so much analysis of what Gross & Co. are doing with Treasuries and mortgage-backed securities–and whether they are using lots of leverage and derivatives to boost exposures.

Then again, it’s hard to ignore Gross & Co. since the bond king and his co-partner and heir apparent, Mohamed El-Erian are on TV virtually everyday offering their views on just about anything doing with the economy.

And so this Sunday’s business section of The New York Times treats us to another big PIMCO story, but this one focusing more on El-Erian than Gross. The main thrust of Geraldine Fabrikant’s story is whether the bond market’s “new leading man” is up to the job of running PIMCO, which has more than $1.7 trillion in assets, and whether he has the same trader mentality as Gross.

It’s an interesting conceit for a story, especially for an investment firm like PIMCO, which is so identified with its founder Gross. It’s hard imagining what PIMCO will be like after Gross–much in the same way it’s hard imagining the giant hedge fund SAC Capital without its namesake and founder Steven A. Cohen, controversy and all.

I’m glad so see The New York Times start wondering what PIMCO will look like after Bill. It’s an important story given how many public pensions and individual retirement plans are invested in PIMCO funds. But ironically, Jenn (and I) began tackling this very same issue back in February in a Reuters Special Report, “Twilight of the Bond King.” And as many UF readers know, Jenn has been covering Bill and PIMCO for more than a decade and she’s certainly not done.

So by all means read the NYT’s take on PIMCO, Gross and El-Erian. But keep coming back here, @reuters and @jennablan for the continuing, ground-breaking coverage on all things PIMCO.

Jenn Ablan likes to tell me that people are always writing about PIMCO and Bill Gross, the long reigning "king of bonds." And when you think of it there's a lot of truth to that assertion. Join Discussion

Daniel Loeb goes long Chesapeake bonds; leaves activism to others

Daniel Loeb, who runs $8.7 billion at his hedge fund Third Point, has been an opportunistic buyer in the bonds of Chesapeake Energy, the embattled natural gas producer, according to sources familiar with the matter.

But Loeb, known to rattle the cages of companies for years (see: war with Yahoo), isn’t piggybacking on Carl Icahn’s or O. Mason Hawkins’s activist role in Chesapeake, demanding changes in management or the overhaul of its business practices.  Indeed, all the elements are there for a veteran agitator like Loeb, as Chesapeake has been embroiled in scandal over a controversial investment program involving CEO Aubrey McClendon.

But the New York-based hedge fund manager, who told his investors in June that Chesapeake is now his fund’s fourth largest position, could simply be making a straight investment play and leaving the rest to Icahn and Hawkins. Imagine that?

“If you are investing in Chesapeake right now, you are investing because you think the assets are worth more than the market value of the outstanding debt and equity of the company,” said Dan Fuss, vice chairman and portfolio manager at Loomis Sayles, which holds $172 billion in assets under management.

“These are now asset plays, not a quarter-by-quarter earnings play.”

Like Loeb, Fuss likes Chesapeake bonds better than the stock.

For their part, Chesapeake’s shares have sunk more than 25 percent this year, though after it hit rock-bottom in May the stock has climbed in value and is hovering around $17.

Hedge fund manager Daniel Loeb, who has been rattling the cages of companies for years, is betting on a rebound in bonds issued by embattled natural gas company Chesapeake. Join Discussion

Outrage isn’t asleep it’s just gone underground

By Matthew Goldstein and Jennifer Ablan

Where is the outrage? A year ago, the Occupy Wall Street movement was just getting started, with mass demonstrations across the nation against corporate malfeasance and greed.

But now it’s been crickets and we don’t mean the game. There’s been no marching on Wall Street nor on the steps of Capitol Hill since the latest revelations of bad behavior in the financial sector. The populist uproar has been rather sedate in the face of the deepening scandal that big banks rigged Libor–a benchmark lending rate; JPMorgan Chase’s mounting losses from disastrous credit bets and a possible cover-up attempt; and the disappearance of customer funds from Iowa futures broker PFGBest, discovered after its founder tried to commit suicide and left a note outlining a 20-year fraud.

But the lack of populist rage doesn’t mean there’s a lack of concern about these and other scandals. We think that’s a misreading of the temperature of the American people. And if Wall Street thinks the average person doesn’t care about the nearly $6 billion trading loss at JPMorgan Chase, or the alleged Libor manipulation scandal , then the street is badly misjudging things.

As documented in “Banks behave badly redux: Is it killing confidence?” earlier this week, the spate of Wall Street horror stories is having a real impact on the markets. Interest by individual investors in stocks is way down and isn’t showing signs of coming back any time soon. Retail investors are showing their disgust by walking away—something we first noted a year ago in our story on The Madness of Wall Street.

In some ways it’s a quiet protest investors are showing and in some ways maybe more damaging than protests in the street. Maybe there is no outrage because investors and the public have come to believe they don’t expect much better behavior from Wall Street. In other words, the new norm is to expect the worst of the street.

Where is the outrage? A year ago, the Occupy Wall Street movement was just getting started, with mass demonstrations across the nation against corporate malfeasance and greed. Join Discussion