Today’s headlines run in two contrary directions – both illustrated in salmon color on the front page of the Financial Times.
At the top of the page “Investors flock to Blackstone.” At the bottom they flee Bear Stearns (NYSE:BSC). In between the two stories is the world economy as we have come to know it.
Blackstone is perhaps the world’s most famous private equity firm. The company has made the news lately because its founders and insiders have decided to sell. We have commented on how remarkable this is before. But we will do so again; the thing is remarkable enough to merit more than a few comments.
Blackstone’s modus operandi – and even its existence – argues that the common view of how modern markets function is a fraud. The market is supposed to know more than anyone. The price it decrees is supposed to take all known information into account. No individual or group is supposed to be able to beat it. Economists won Nobel Prizes for demonstrating this view. The US Supreme Court ruled that it was correct. And the SEC puts you in jail if you tamper with it.
Nevertheless, Blackstone’s insiders and bigheads find companies that Mr. Market has misjudged or overlooked. Private equity, they call it, to distinguish it from the work of the public markets. They do their magic to their acquisitions (often borrowing money against the assets and paying it to themselves)…and then sell back to the same investing public that misjudged them in the first place. The Blackstone hotshots have been so successful at this that now other investors want a piece of the action; and so canny are the private equiteers that they now offer to sell it to them.
On the surface, it makes no sense. Why would the smartest investors on the planet want to share their gains with the unwashed multitudes? If they can make so much money in private equity why would they want to go public? The only reasonable answer is the obvious one: The Masters of the Universe believe their own shares are overpriced.
Even more remarkable, here are the same schleps whom Blackstone commonly outsmarts lining up to be suckered again. Today’s FT tells us that the IPO is already six times oversubscribed, despite Senate action that threatens to double the firm’s tax bill beginning in 2012. The poor boobs think they are going to put one over on Blackstone. For isn’t that the real nature of this transaction? The world’s most successful insiders are on one side of the table; the world’s most naïve public market investors are on the other. Who’s going to get the better end of the bargain?
We will leave that question to your imagination, dear reader, and let our tired old eyes wander down to the bottom of the page, where we find a different storyline.
“Crisis at Bear Stearns…hits market for subprime securities,” begins the tale. While lower-middle class householders lose a grip on their houses, it is at least amusing to see that the people who funded subprime mortgages are taking losses too. But anyone who would buy into Bear’s “High-Grade Structured Credit Strategies Enhanced Leverage Fund,” deserves what he gets, in our opinion. An investor might as well put a sign on his back saying “I am carrying $500 in small bills,” and take a walk through a bad neighborhood. In the case at hand, the fund was begun only 10 months ago. In scarcely more time than it takes to bring a baby from conception to the baptismal font, its young quants managed to lose 20% of their investors’ money. And now, creditors are taking assets…and the fund faces collapse.
Not only that…Bear is being forced to unload positions at fire sale prices. Over $1 billion worth of mortgage-backed securities are being dumped onto a skittish market.
“The real fear has to do with just how many other funds…could be in trouble,” said a Wall Street portfolio manager.
The crisis at Bear is just another pin in a world of bubbles. There are plenty of others. Sooner or later (as we keep saying, and saying, and saying) bubbles and pins will come together in a dramatic display.
Markets and Money