Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [81]
Beller, Grant, and a third partner had around $117 million11 of their own money plus the previous year’s fees invested in the ABS fund; Beller’s individual loss is said to be $60 million. Beller may not have learned his lesson. He reportedly believes that the Peloton ABS fund failed because the prices were only temporarily depressed when his bankers made margin calls and pulled their credit lines. The reality is that the delinquencies of the loans backing the poorly structured assets in the home equity indexes ensure prices will not recover to the lofty levels at which Beller put on his trades. Peloton’s long positions were partially hedged with short positions in lower quality mortgages. 12 It seemed to me the damage to “higher rated” tranches had yet to be acknowledged by a market that was still in denial. Investors seemed to avoid fundamental analysis at the time Peloton put on its original trades. BlackRock Inc. and Man Group PLC among others also lost money on their investment in the fund.
The $1.6 billion Peloton Multi-strategy fund had contributed $500 million in investor money to launch the Peloton ABS fund. Investors’ assets were frozen and Peloton Partners wound down the fund. It is estimated that within the month of February 2008, investors in the Multi-strategy fund lost half of their capital. Beller and Grant wrote a letter to investors during the last week of February 2008 bemoaning the fact that their creditors had “severely” tightened their terms “without regard to the creditworthiness or track record.”13 In early March, a week after the Peloton ABS fund collapsed, Peloton Partners put its offices in London’s Soho district on the market.
As Benjamin Graham observed, the market is not there to instruct you. The market isn’t trying to teach you something when prices rise or fall (or when spreads widen or narrow) relative to where they were historically. You can stuff all of that information into a model (or your head) if you want to, but manipulating market numbers—if that is all you are doing—will not tell you anything about value. It is up to you to analyze the fundamental value and compare it with the market. Peloton Partners was not alone in skimping on fundamental analysis, but Peloton was not as well connected as the Carlyle Group, which had a fund of its own rounding Dead Man’s Curve.
Washington-based Carlyle Group is the world’s second largest private equity firm, and the most well-connected. As of March 13, 2008, it managed $81 billion in 60 venture capital funds.14 Louis V. Gerstner Jr., former CEO of IBM, chairs the group founded by Dan D’Aniello, William E. Conway, also chairman of United Defense Industries; and David Rubenstein, former policy advisor to former President Jimmy Carter. The Carlyle Group’s employees past and present include former President George H. W. Bush; his former Secretary of State James Baker (also President Ronald Reagan’s Chief of Staff and later his Secretary of the Treasury); former Carlyle head (until 2003) Frank Carlucci, President Reagan’s CIA director and defense secretary; former British Prime Minister John Major, Ken Kresa; former CEO of defense contractor Northrup Grumann; and Louis Giuliano, former CEO to military and oil electronics supplier ITT Industries. One of Carlyle’s investors is Shafig bin Laden, one of Osama’s many brothers. Shafig was one of the honored guests at a Washington-held Carlyle conference on September 11, 2001, the day his brother’s Al Qaeda terrorists hijacked U.S. passenger airliners and piloted them into the Pentagon and the World Trade Center.1516
Carlyle Capital Corporation Ltd. (Carlyle