Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [129]
17 Office of Federal Housing Enterprise Oversight, Report of the Special Examination of Freddie Mac, December 2003, 134-135.
18 Everquest IPO. Everquest’s managers would get an annualized base fee of 1.75 percent of the company’s net assets up to $2 billion decreasing on a sliding scale until they reached only 1 percent on net assets over $4 billion. If Everquest returned more than 8 percent, as computed by the managers that stood to benefit, the managers would get 25 percent of the upside, and that seemed high by industry standards for a fund that managed assets originally transferred by funds already managed by BSAM. Cioffi later said Everquest’s employees had an asset management agreement with BSAM and Stone Tower and that asset management fees that BSAM received for managing Everquest were rebated back to the hedge funds.
19 Everquest IPO,”Table of Contents.” ii.
20 Matthew Goldstein: “The Everquest IPO: Buyer Beware,” revised title “Bear Stearns’ Subprime IPO,” BusinessWeek, 11 May 2007. The article quoted me as saying there was moral hazard with BSAM providing the valuations and surveillance on the CDO equity, and why would a customer want to buy “if it is trying to get CDO equity off of its balance sheet, incur the costs of securitization, and sell the risk without arm’s length valuation.” I had been clear that the assets were coming from the hedge funds, not Bear Stearns’s balance sheet, but the quote seemed to imply otherwise, and elsewhere in the article, it implied the assets were coming from Bear Stearns, instead of the hedge funds managed by BSAM, an affiliate of Bear Stearns, although the conflicts with the assets coming from the BSAM managed hedge funds seemed worse.
21 Jody Shenn, “Bear Stearns Funds to Transfer Subprime-Mortgage Risk with IPO,” Bloomberg News, 11 May 2007.
22 Cioffi had said he was “short sub prime thru the ABS CDS market . . . the 2006 vintage exposure the market value totals only about $70M, against which I have shorted $340M Baa2 and Baa3 sub prime names thru the single name ABS CDS market. We determined these to be the weakest of the 2006 deals.”The Everquest IPO states: “The hedges will not cover all our exposure to RMBS held by our CDOs that are backed primarily by sub-prime residential mortgage loans” (p. 55).
23 Kurdas, Chidem, Levered Bear Funds: A Peek into the Black Box,” HedgeWorld, 26 June 2007.
24 Matthew Goldstein, “Bear’s Big Loss Arouses SEC Interest,” BusinessWeek, 25 June, 2007.
25 Kate Kelly and Serena Ng, “Bear Stearns Bails out Fund with Capital Injection,” Wall Street Journal, 23 June 2007.
26 Kate Kelly, and Serena Ng, “The Sure Bet Turns Bad,” Wall Street Journal, 7 June 2007.
27 Kate Kelly and Serena Ng, “Bear Stearns Bails out Fund with Capital Injection.”
28 Janet Tavakoli, Credit Derivatives & Synthetic Structures (New York: John Wiley & Sons, 1998). I wrote about Askin’s problems: “The investment banks were eager to extend financing because they wanted to get rid of the “nuclear waste” tranches of collateralized mortgage obligations (“CMO’s”). Once the risky piece was sold, investment banks could underwrite more transactions and book attractive underwriting fees. When liquidity for these instruments dried up, risk managers started asking tough questions, but much too late
29 Laura Jereski, “Wall Street Firms Profited by Ravaging Askin’s Holdings,” Wall Street Journal, 22 April 1996. In 1995, Askin settled charges with the SEC that he mismarked bonds at misled investors. He paid a $50,000 fine and agreed to a two-year ban from association