Rating agencies in line of fire over credit squeeze/Hedge funds suffer August losses/Banks forced to pay out extra $300m interest

Rating agencies in line of fire over credit squeeze
By Michael Mackenzie in New York, Jeremy Grant in Washington and Gillian Tett in London
Copyright The Financial Times Limited 2007
Published: September 10 2007 03:00 | Last updated: September 10 2007 03:00



In recent weeks, the credit squeeze has left bank shares tumbling. But another sector has seen its stocks hit with far less prominence: rating agencies.

Moody's Investor Service has fallen 39 per cent from its high of $72.56 at the end of March. McGraw-Hill, the publisher that owns Standard & Poor's, has lost nearly 32 per cent from a peak of $71.96 in early June. Fimalac, which owns Fitch Ratings, has dropped some 37 per cent from the start of June to €50.35.

The decline partly reflects concerns that a protracted downturn in the structured credit business will crimp revenues. But there is also alarm that agencies may face litigation from disgruntled investors and regulatory action.

Marc Dann, the Ohio attorney-general, said he was "looking at a variety of cases" that could be brought, including against investment banks and credit rating agencies.

Charles McCreevy, European internal market commissioner, also warned last week that "the scope for conflicts of interest to influence ratings must be firmly addressed".

In the US, the Securities and Exchange Commission is reviewing the agencies' policies on rating mortgage-backed securities and collateralised debt obligations. It is also looking at potential conflicts of interest.

George Miller, executive director of the American Securitisation Forum, which represents the structured credit industry, said: "Everyone would agree that there is at least a potential conflict of interest. The issue is how well that is avoided and managed in practice."

Vickie Tillman, executive vice-president of credit market services at S&P, said: "We will have conversations with Mr McCreevy and other regulators and assure them that we manage the perceived conflicts of interest."

Some lawyers are sceptical that suits will succeed, in spite of the Enron and WorldCom bankruptcies, where agencies were criticised.

Ellen Marshall, a partner at Manatt, Phelps and Phillips, said the criticism was a case of some people "trying to point a finger". But it would not withstand legal challenge because the rating agencies "disclose a great deal of information to investors".






Hedge funds suffer August losses
ByJames Mackintosh in London
Copyright The Financial Times Limited 2007
Published: September 9 2007 22:31 | Last updated: September 9 2007 22:31


Some of the grandest names in the hedge fund world suffered last month having failed to anticipate the turmoil in the markets and failing to produce the absolute returns they promise investors.

The list of badly-hit hedge funds in August reads like a Who’s Who of the best-known on Wall Street, according to investors.

They include Paul Tudor Jones, philanthropist and head of Greenwich, Connecticut-based Tudor Investment Corp; his friend and former colleague Louis Bacon of Moore Capital; Bruce Kovner, super-secretive head of Caxton Associates; and Matthew Tewksbury, who bought Wall Street trader Monroe Trout’s hedge fund business and renamed it after himself.

The falls leave many of the biggest hedge funds in the world telling investors they have lost money for the year to date, while some of those that weathered the storm – such as Raymond Dalio’s Bridgewater Pure Alpha fund – have returns this year only just better than cash.

The results are likely to rattle investors who are worried that the hedge industry had one of its worst months in August.

“There’s a big concern about the redemptions in September in the hedge fund industry,” said Arnauldt de Torquat, chief executive of Harmony Asset Management, a London fund of hedge funds that has not faced big redemptions itself.

The difficulties at Tudor are particularly painful for investors because Tudor – founder of the biggest hedge fund charity, the Robin Hood Foundation – profited handsomely from the 1987 market ructions, correctly betting that the market would fall.

Tudor BVI Global, the $6bn fund run by Mr Tudor Jones, tumbled 5.5 per cent in August to leave it down 1.5 per cent for the year, while Raptor, the $6bn Tudor fund run by head of US equities James Pallotta, was down 5.6 per cent in the month and down 9 per cent for the year so far, investors said.

Caxton’s $11bn flagship fund was down 4.8 per cent in August, for a loss of 1.5 per cent this year, while Tewksbury’s $3bn Investment fund fell 8 per cent, more than wiping out all this year’s gains. Moore’s $7bn Global fund fell 5.7 per cent in August, and its $4bn Fixed Income fund was down 4.3 per cent, although both remain up for the year.

Many other big-name managers struggled in August, with Atticus, a New York-based activist and financial specialist, down more than 10 per cent in both its flagship funds as holdings including Barclays and Deutsche Börse were hit hard in the month – although both funds remain up for the year.

Third Point, an aggressive activist run by Dan Loeb, was down 8.3 per cent, leaving it up 6.8 per cent for the year, while in the UK several funds from Lansdowne, GLG and Sloane Robinson had a weak month, investors said.

Jeffrey Gendell, who runs Tontine Associates from Greenwich, Connecticut, produced one of the worst results of all the big name managers with a 7.9 per cent drop in his $1bn Overseas fund – although it is still up 7.6 per cent this year. By contrast, his Financial Partners fund leapt 8.4 per cent in the month, one of the best performances – but remains down 37 per cent for the year, among the worst of all managers.

However, some well-respected managers have done very well. John Paulson of Paulson & Co produced another month of spectacular returns across his funds thanks to aggressive shorts of US subprime mortgages. Philip Falcone’s Harbinger Capital distressed fund gained 3.7 per cent to take its total return for the year to more than 55 per cent.

Big name managers Dan Och of Och-Ziff, Izzy Englander of Millennium Partners and David Tepper of distressed debt specialists also came through the month with gains or slight falls, leaving them securely up for the year. The $6bn Bridgewater Pure Alpha fund was up 0.4 per cent for the month, for a gain of 3.6 per cent this year.


Banks forced to pay out extra $300m interest
By David Oakley in London
Copyright The Financial Times Limited 2007
Published: September 10 2007 03:00 | Last updated: September 10 2007 03:00


The world's leading banks are already paying out an extra $300m in interest rate charges as the credit squeeze takes its toll on the troubled financial sector.

Some $20bn in bank redemptions, which must be refinanced in new bonds or loans, is due this month while about $100bn is due by the end of the year.

The extra cost to banks of borrowing in the debtmarkets will therefore mount into the billions of dollars unless the markets recover.

According to data from Dealogic, 25 banks are together paying out an estimated $300m extra in lending charges on $70bn worth of bonds issued since July, when the markets began to suffer serious bouts of volatility, compared with debt priced before the summer's turbulence.

Willem Sels, head of credit strategy at Dresdner Kleinwort, said: "If you look at the banks, the premium or extra interest you have to pay to issue a bond isabnormally high as people, whether it is pension funds or asset managers, need that extra enticement to buy.

"The uncertainty, the volatility and the low risk appetite means banks have to pay more to get their bonds away."

Dominic White, fund manager at Morley Fund Management, said: "It could get worse for the banks. We have quarterly bank results at the end of the month, and they could be bad, although even if they are, it would at least remove a lot of uncertainty."

Guy Stear, credit strategist at Société Générale, said: "It is a difficult time for the financial sector but it is simply a reflection of the changing credit conditions. We did have very good conditions before the summer. Money was very cheap and now those days appear to be over."

On top of the increasing costs in the bond markets, the banks are having to pay millions in extra charges to borrow in the shorter term money markets, where interbank rates have risen sharply since July.

Leveraged loans, stuck on bank balance sheets as buy-out deals have been delayed, are also eating into profit.

Five banks - Citigroup, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley - are together paying out $65m extra in lending charges on $9bn worth of bonds issued since July.

These can be accurately compared with previous deals because they have the same maturities and structures, priced before the summer.

However, this figure rises to $300m when the other 20 bank bonds are included.

This latter is an estimated figure as these 20 bonds do not have exact like-for-like comparisons issued before the summer.