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2008 Redux?

by ARGeezer Mon Mar 29th, 2021 at 05:39:41 PM EST

Ponzis Go Boom!!!

The SPAC market is in the process of detonating and it will take the Ponzi Sector with it.

(SPAC = Special Purpose Acquisition Company. All the cool guys and gals have one.)

By Harris "Kuppy" Kupperman, founder of Praetorian Capital, Adventures in Capitalism:

For the past few years, I have been critical of the Ponzi Sector. To me, these are businesses that sell a dollar for 80 cents and hope to make it up in volume. Just because Amazon (AMZN - USA) ran at a loss early on, doesn't mean that all businesses will inflect at scale. In fact, many of the Ponzi Sector companies seem to have declining economics at scale--largely the result of intense competition with other Ponzi companies who also have negligible costs of capital.

I recently wrote about how interest rates are on the rise. If capital will have a cost to it, I suspect that the funding shuts off to the Ponzi Sector--buying unprofitable revenue growth becomes less attractive if you have other options. Besides, when you can no longer use presumed negative interest rates in your DCF, these businesses have no value. I believe the top is now finally in for the Ponzi Sector and a multi-year sector rotation is starting. However, interest rates are only a small piece of the puzzle.

Conventional wisdom says that the internet bubble blew up due to increasing interest rates. This may partly be true, but bubbles are irrational--rates shouldn't matter--it is the psychology that matters.


I believe two primary forces were at play that finally broke the internet bubble; equity supply and taxes. Look at a deal calendar from the second half of 1999. The number of speculative IPOs went exponential. Most IPOs unlock and allow restricted shareholders to sell roughly 180 days from the IPO. Is it any surprise that things got wobbly in March of 2020 and then collapsed in the months after that? Line up the un-lock window with the IPOs. It was a crescendo of supply--even excluding stock option exercises and secondary offerings. The supply simply overwhelmed the number of crazed retail investors buying worthless internet schemes.

Back in 2000, I used to joke that in a scenario where a company wanted to raise equity capital, but insiders wanted to sell, they'd both dump shares on the market--but the insiders would get out first. What do you think that did to share prices as both parties fought for the few available bids?

However, the proximate cause of the internet bubble's collapse was when people got their tax bills in March and had to sell stocks to pay their taxes in April. What's the scariest thing in finance? It's when you owe a fixed tax bill from the prior year, yet your portfolio starts declining. You start selling fast to stop the mismatch. Trust me, I've been there. Tax time is pushed back a bit this year, but it is coming.

Kuppperman makes some valuable observations about the timing of such collapses.
Let's look back at the internet bubble. A VC firm would IPO 4 million shares at $20, the stock would open at $50 and end the day at $100. Everyone chased it to get in. Then the brokers would upgrade it and the CEO would go on TV. With a 4 million share float, it was easy to manipulate the shares higher. Often, the newly IPO'd company would level out well north of $100 a few weeks later. It was a virtuous cycle and everyone played the game.

What was left unsaid was that there were another 46 million shares held by management and VCs and these shares would hit the market 180 days later. At first, the market absorbed the new supply so no one showed concern--then the market choked. I wrote about this when talking about the QS unlock. This process is about to repeat, but now with the odd nuances of SPACs.

A typical SPAC deal involves a few hundred million dollars raised for the SPAC trust--this is the only real float. Then a few hundred million more is raised for the PIPE--these guys are buying at $10 because they plan to flip for a gain as soon as the registration statement becomes effective--which is often a few weeks after the deal closes. When a company merges with a SPAC, billions in newly printed shares are given to the former owners--those shares start to unlock a few months later in various tranches. Finally, the promoters behind the SPAC get to sell.

When you look at a pre-merger deal trading at a big premium to the $10 trust value, you're looking at an iceberg. There might be ten or twenty restricted shares for every free trading share--all of these guys desperately want out. It's a game theory exercise--how do you find enough bag-holders without destroying the price? Hence, part of why the current price is determined by an artificially restricted float and the unlocks come in tranches. As restricted shares come unlocked, the promoters lose control of the float and the house of cards collapses.

Deregulation contributes to this fiasco:

The Firm Behind The $30 Billion Firesale Shaking Financial Markets Disclosed Almost Nothing  Antoine Gara - Forbes

Up until recently, the website of Archegos Capital Management, the firm behind a reported $30 billion financial firesale that is battering stocks worldwide, contained a giant image of Central Park. The vista displayed on Archegos' webpage was a fitting homage to the views of its offices atop a Manhattan skyscraper on 57th street, until the site was taken down as the firm gets liquidated.

Archegos was a giant in U.S. financial markets, apparently holding tens of billions of dollars in securities, including massive exposures to companies like ViacomCBS, Discovery Communications and Baidu. It traded with Wall Street's largest brokerages, and was headquartered at an expensive address housing many powerhouse investment firms. But when it came to routine financial disclosures, Archegos was virtually non-existent.

EDGAR is the sunlight in U.S. financial markets. Companies must disclose material information in filings uploaded to the site. Corporate insiders and large investment funds report their holdings and any changes to their positioning. Most all public capital raises are documented on EDGAR, and all sorts of entities reveal themselves on it. EDGAR is an informational treasure trove.

Exceptions, exceptions, exceptions!
That is, except when it comes to Archegos and its founder and co-CEO Sung Kook (Bill) Hwang. Forbes could not find a single filing from Archegos, despite its whale-sized positioning that banks like Goldman Sachs and Morgan Stanley now are in the process of unwinding. It would have been good to know about Hwang and the seemingly breathtaking risks he and his firm were taking.
In 2012, the Securities and Exchange Commission, brought an insider trading and market manipulation case against Hwang and his Tiger Asia. The firm and its founder agreed to pay $44 million in total fines and penalties. Tiger Asia Management, the management company, admitted to breaking the law. The SEC's probe effectively put Tiger Asia out of business.

So in 2013, Hwang converted the firm into a "family office," set up to manage his private wealth. The family office, Archegos Capital Management, appears to be massive, not just in size and scope, but also in risk appetite. However, its status as a family office exempts it from the Securities and Exchange Commission's reporting requirements for investments.

"Family Office" sounds so innocuous. What harm could come from exempting them from onerous reporting requirements?

Losses confront Credit Suisse with another crisis.
Credit Suisse was in the middle of yet another international financial debacle on Monday after the Swiss bank warned that it faced "highly significant" losses from loans it made to a troubled New York hedge fund, Archegos Capital Management, to finance the hedge fund's trades.
Credit Suisse, based in Zurich, said it could not say how big the losses would be from the Archegos trades because it is still in the process of selling the assets. Archegos is a family office that manages the wealth of Bill Hwang, a former hedge fund manager at Tiger Asia Management who was found guilty of wire fraud in 2012.

The losses could be "material to our first quarter results," Credit Suisse said in a statement. The bank's shares plunged nearly 17 percent in Zurich trading Monday.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 29th, 2021 at 06:30:45 PM EST
Same NYT article, further down:
"The Japanese bank Nomura also warned on Monday of losses from transactions with a client in the United States that it did not name, but was widely reported to be Archegos. Nomura said the client owed it $2 billion, and it was still evaluating what the overall losses might be. Nomura's shares fell 16 percent in Tokyo trading."

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 29th, 2021 at 06:33:16 PM EST
[ Parent ]
Why is it that it seems that it is always non-US banks that buy into the New Yorker hedge fund hype and get stung for billions? If I recall, Deutsche Bank got caught out last time. It seems that staid European banks working off narrow margins in their home markets want to sex up their results with some "profitable" foreign trades and always get stung. Something to do with massive banker bonuses for short term trading gains which incentivise individual risk taking at the expense of the company and home economy as a whole. The Irish banks are currently chaffing at government restrictions on banker bonuses and salaries as they want to be able to attract and reward "talent".

With talented people like these, who needs bumbling bureaucrats?

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Mar 29th, 2021 at 07:12:00 PM EST
DB and CS both have a reputation to maintain, so that's why it's usually them.

The more time I spend exploring the financial world, the more obvious it becomes that the rewards are heavily slanted towards outrageous gambling stunts. So inevitably it's almost exclusively populated by chancers, crooks, and opportunists, decorated by the thinnest possible veneer of economic seriousness.

With the possible exception of sociopathic zombie cannibals, they are literally the worst people in the world to be handed control over the planetary economy.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Mar 29th, 2021 at 11:38:02 PM EST
[ Parent ]
I had actually started a post on regulation last night, but I lost it when I shut down the computer. It does not seem to actually be a Labor of Hercules to design a regulatory system with better incentives. Lots of low hanging fruit.

For starters the Fed has plenary regulatory powers over banks. It can pull the banking license of any bank at any time for reason. But even more insidious, as the Fed is the creator of all fiat money it can and does set the terms for which that money is made available. At present those terms are VERY favorable. To guard against insolvency the Fed has stuffed banks with excess reserves. Better yet it pays a tenth of a percent interest on those reserves the banks keep on deposit with the Fed. Free interest bearing money!

For starters the Fed could stop paying interest on that money to any who have questionable lending and escalate from there. The riskier an institution's financial activities are the higher the interest rate the Fed could charge for new money. This is ultimately a matter  of political will, so the Fed would need to be under pressure from Congress and the Administration.

But there is more! The Fed could demand that certain incentives and disincentives be put in place for corporate officers. The risk officer's bonuses could be based on the accuracy of their forecasts. Loan officers could have their compensation based on a salary plus a calculation of both the profitable and unprofitable loans they approved with claw-backs from previous years in case of really large losses, including from their retirement funds. Then they would become concerned with  the life of the loan.

It would be instructive to see what compensation practices actually are for financial institutions at present.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Mar 30th, 2021 at 03:22:52 PM EST
[ Parent ]
A problem might be that the fed and other regulators have little to no control over the consumer confidence factor.
by asdf on Tue Mar 30th, 2021 at 06:33:26 PM EST
[ Parent ]
Risk Officers are responsible to forecast that within limits and to ensure appropriate hedging. Supposedly.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Mar 30th, 2021 at 09:52:42 PM EST
[ Parent ]
And that is what reserves are for.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Mar 30th, 2021 at 09:53:59 PM EST
[ Parent ]
SPACs look to India for next wave of acquisition targets, says Nomura

"SPAC-led transactions are expected to increase in the coming years in India," Utpal Oza, head of funding banking for India at Nomura, mentioned in a cellphone interview. "Wherever you've got businesses which have caught the fancy of international investors especially in sectors such as renewables, tech or e-commerce, where the corporate structure enables it to be merged quite easily, you will see SPAC activity."

A blank-check company is a shell company that raises money from public traders with the objective of buying a business inside two years. These offers -- some sponsored by the wealthy and well-known together with Hong Kong billionaire Richard Li and ex-Credit Suisse chief Tidjane Thiam -- have raised greater than $66 billion within the US alone simply this year, in accordance to knowledge compiled by Bloomberg.

'Sapere aude'
by Oui (Oui) on Mon Mar 29th, 2021 at 07:55:13 PM EST
I believe two primary forces were at play that finally broke the internet bubble; equity supply and taxes.

He's leaving out a big input on each of these.  First, a big reason the equity supply dried up was that the players saw that, with the coming of Y2K and the end of work on that project (which frankly was about the only value-producing IT work going on in 1998 and 1999, New Economy shit shoveling notwithstanding), the merry-go-round was about to stop, and it was time to bug out and leave someone else holding the bag.  It was so obvious what had been happening that one of the tech mags in Seattle had a cartoon with a room full of suits listening to a sales pitch from a scruffy kid in a t-shirt who says, "I'm gonna create a website about my cat," and they all start throwing bags of money at him.

That leads us to the tax side.  While there were still a lot of marks out there who still believed the BS and were desperate to buy in because the markets could only go up, there was a critical mass of buyers looking at their 1999 tax liability.  They were looking at a big tax hit, figured there would be a market correction in 2000, and figured if they bought immediately and rode the correction, they could get some decent set-offs.  When the market corrected and stabilized in February, they looked like geniuses.  Then came March, and April, and the bloodbath that was the rest of the year.

Fast forward to 2008.  This was in fact a long con.  By Thanksgiving 2006 (I started spotting the cracks in the wall in December 2005, but whatever.), the players knew they needed to be looking for an exit as the regulators were forced to wake up because the amount of money betting against the market was becoming obvious.  They threw a bunch of internal patsies under the bus to give the regulators someone to chew on and then went looking for marks to either buy their crap positions outright or counterparty a hedge position.  They found a lot of small and medium schmucks and one very big one that apparently had not gotten the memo, AIG.  They spent 2007 covering themselves at the expense of their marks, and then in 2008, it hit the fan.  And believe it or not, there was a tax side then as well, just a different one.  All those mortgages were held in REIT tax shelters, and there was a question what effect foreclosing would have on taxes.  That was the real reason for the foreclosure moratorium.  They need not have worried.  In 2012 Obama's IRS said, "Ah, never mind," and off we charged toward the next bubble.

by rifek on Mon Mar 29th, 2021 at 10:32:16 PM EST
I actually saw the LA Real Estate bust coming even before 2005, but, having sat out the '80s bull market, by then I was aware of the problem of timing. The market could stay irrational a very long time. But the job market came to my rescue. It dried up. I was an independent consultant working for architects and engineers mostly on Los Angeles Unified School technology upgrades and in July I was informed that there was no new work available until AFTER Jan 1. My house had tripled in value so the decision to retire early and move to a lower priced real estate market was easy. We were sold and gone by New Year's Eve.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Mar 30th, 2021 at 02:49:17 PM EST
[ Parent ]
Even /ArchBull Jim Cramer too?

Market could be in trouble thanks to massive stock glut, Jim Cramer says

Between the IPOs and the big SPAC attack and the big secondaries, we're being flooded with stock right now, so the market's going to struggle until Wall Street turns off the spigot," the "Mad Money" host said Monday. "Unfortunately, there's no sign of that happening yet, so you have to keep being careful."

With more than 100 initial public offerings so far this year, first-quarter fundraising in U.S. markets has reached a record, Cramer said. Several new IPOs are in the pipeline this week. High-profile companies such as cryptocurrency exchange Coinbase and trading app Robinhood also plan to go public soon.

The market has also seen rising interest in companies choosing to go public through special purpose acquisition companies, widely known as SPACs. This year has seen more SPAC offerings executed than in all of 2020, Cramer noted.

"You can tell that there's too much supply because many of these deals have started to fizzle," Cramer said. "These special purpose acquisition companies just keep coming, even though the whole SPAC ecosystem's falling apart.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 31st, 2021 at 01:43:36 AM EST
Nothing to do with millions of baby boomers sitting around all day looking at their 401k balances and trying to guess the next Amazon or Tesla.
by asdf on Wed Mar 31st, 2021 at 06:46:56 PM EST
[ Parent ]
If they are baby boomers they should have made those guesses 10-20 years ago. Retirement is NOT the time to be taking big risks.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 31st, 2021 at 09:14:43 PM EST
[ Parent ]
U.S. SEC official warns Wall Street of risks associated with ["]blank-check companies["] like .... WeWork??
"We encourage stakeholders to consider the risks, complexities, and challenges related to SPAC mergers, including careful consideration of whether the target company has a clear, comprehensive plan to be prepared to be a public company," [Chief accountant Paul Munter] said in a statement.
ooo burn
Investors have sued eight companies that combined with SPACs in the first quarter of 2021, according to data compiled by Stanford University. Some of the lawsuits allege the SPACs and their sponsors, who reap huge paydays once a SPAC combines with its target, hid weaknesses ahead of the transactions.
The $9B PIPE caper
by Cat on Wed Mar 31st, 2021 at 10:30:53 PM EST
PIPEs, aka Private Investment in Public Equity. A vehicle for Private Equity companies, such as BlackRock, often to offer 'sweetners' to deals that yield large windfalls to the executives. A glorified brown paper bag full of money. A rose by any other name would smell the same.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Apr 1st, 2021 at 02:55:47 PM EST
[ Parent ]

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