Christine Richard's book

I've recently read CONFIDENCE GAME, the Richard book on Bill Ackman's daring, risky, but ultimately successful bet against the bond insurers' business model. One of the neat revelations in this book is telegraphed in the title of chapter 14, "When Crack Houses Become Collateral."

In 1998, it seems, MBIA, the bond insurance company at the center of Richard's story, bought out Capital Asset Research Management, a company that was in the business of buying "past-due tax bills from cities and counties at a discount and then [trying] to collect on the debts. These tax certificates also gave holders the right to collect interest and penalties and, if the debt went unpaid, to foreclose on the property."

Unfortunately, it soon became clear that Capital Asset had overpaid for the tax certificates. To pretty up the books, rather than writing these assets down and taking a loss, MBIA sold the tax liens to a special purpose vehicle (SPV)'s. The SPV paid MBIA an inflated price for them, having raised that money through the sale of bonds. What was the name of this vehicle? Caulis Negris: somebody's inaccurate and jokey attempt to render the phrase "black hole" into Latin.

Caulis Negris was a shell, it was still MBIA that was on the hook for payments to the bondholders. It turned out that most of the properties on which MBIA, through Black Hole, held tax liens were in the City of Pittsburgh. Richard got a list of all the properties in that city with Caulis Negris liens and looked them over, with the aid of a cabbie. "Almost invariably," she says, "we stopped at the worst property on the block, though sometimes that was a hard call." Some of them had clearly become magnets for drug abusers -- hence the title.

MBIA wanted to write down the value of its Black Hole slowly, so as to avoid any investor apprehension such as might have been instigated by a big single-shot write down. But that was no mere book-keeper's quirk. Its unwillingness to recognize losses "could hold up the redevelopment of entire neighborhoods." Not just one or two isolated blocks either -- Black Hole owned liens on 11,000 Pittsburgh properties.

Her story on this subject ran through Bloomberg News in November 2006. I'll give you a link to it.

Whatever Happened to Solengo?

Solengo Capital, a hedge fund, was the center of a burst of business for copyright lawyers a year ago.

Now, I understand, the fund breaths no more. Its assets have been purchased by another operation, and its founder given the could-mean-anything but really-means-nothing title of "consultant."

Even the most faithful of my readers may need a refresher course, and a couple of links like this one.

The gist: Brian Hunter was the trading not-quite-master mind who put dynamite beneath the floor boards at a futures-oriented hedge fund named Amaranth in 2006. He lost $6 billion of other people's money.

So, with that good old Canadian spirit, he got right back on his horse and created Calgary based Solengo the following year.

Solengo started sending out its marketing brochure as an unsecured Adobe Acrobat document through cyberspace. I can't say how widely, but widely enough so that a couple of alert bloggers got it and posted it. That's when the copyright lawyers got involved, determined to ensure that only those Hunter selected for viewing his brochure, should be allowed to view it.

Given the nature of the internet, the effort was doomed to failure in fact, even despite some successes in court. Anybody with any curiosity in the matter has long since had the brochure on their hard drives.

Flash forward. A Bloomberg story yesterday informs us that Mr. Hunter is now a consultant for a Boston-based operation called Peak Ridge Capital.

Peak Ridge got its start in November, and it appears to have had a good first five months. Judging from the story by Saijel Kishan, the real powers-that-be at Peak Ridge want it to be known that Brian doesn't trade for them, nor does he run the risk management office. He consults. He "devises trading models and strategies," which presumably the actual traders are then free to ignore.

Peak Ridge has "bought the assets" of Solengo, we learn in paragraph five. What did that amount to, I wonder? A desk, a rolodex, and some rolaids?

Another tidbit from the story I have to mention: Kishan refers to Solengo as a "hedge fund firm that Hunter tried to start...." His sources are acknowledging, then, that Solengo never really got underway.

Maybe because they were too busy in fruitless litigation over a brochure, and wasted their trading kitty on legal fees?

So that's what happened to Solengo.

The Forces of Secrecy Gather

My entry one week ago was entitled "A Cheer for Bloomberg News." I want to return to the subject I discussed there, because there's been a new development.

A bit about corporate bankruptcies, though, as filler here. Whether it takes the form of liquidation or re-organization, there is a well establish order of precedence.

Imagine a newly bankrupt corporation as a see-saw with a much heavier weight at one end than at the other. The lighter end, accordingly, is up in the air. The heavy end on the ground.

In terms of the right to receive a payoff, the most senior or best secured debt instruments have first dibs, and after that payments follow in legally defined sequence with the owners of equity sitting on the ground. At some point, moving down the lever/see-saw, the tangible assets of the estate run out. But, if we're assuming that there is some good will for the ongoing enterprise, there is still some value to be distributed. The instruments that represent that point are, accordingly, sometimes called the "fulcrum securities."

A lot of jockeying goes into determining the placement of the teeter-tooter. Some interests don't want their own securities to be too high on the lever. They'd rather get equity in the re-organized company, in the hope of course that it'll prove more valuable. On the other hand, if you have a high position on the lever, and jockey to lower it in search of the fulcrum, you might miscalculate, end up below the fulcrum, and get ... nothing.

It's a very high stakes game. Further, its a game with consequences for the rest of us, because the system is supposed to work in a way that lets a productive corporation re-emerge into the higgle-haggle of the market again ready to serve customers, treat employees fairly, and otherwise embody quaint ideas of productivity. Since the public interest is involved, the process is supposed to have some transparency. Anyone ready to look through the court records (which are available on line through the wonderful PACER system) can figure out who ismaking what motion, and what they have at stake in it.

All that said: in the ongoing Northwest Airlines bankruptcy proceedings, certain Wall Street speculators have tried to operate an "ad hoc committee" to jockey for position without disclosing anything -- or very little -- about their own stakes. They want such information to the "under seal," which means that it won't be on PACER, it won't be available in paper form to somebody asking at the court clerk's desk, and the other parties to the action who do see this information will be sworn to secrecy.

As I observed last week, Bloomberg News and its counsels, to their undying credit, are fighting the good fight here, trying to obtain and make public information about the Northwest Airlines proceedings.

Unfortunately, the forces of secrecy are gathering. Two industry groups that between them represent much of Wall Street have joined in assisting the speculators in their efforts to (a) persuade the bankruptcy judge to reconsider his pro-disclosure ruling, and (b) appeal over his head if they can't.

In a memo they said that such disclosure of "proprietary and highly confidential information" will quite probably "erect a substantial obstacle to the participation of many stakeholders—in particular, those sophisticated stakeholders that are most likely to have the means and the experience to make a positive contribution toward reorganization."

Get that? The speculators want to keep their secrets because keeping secrets helps them win. They should be allowed to keep their secrets because they are so "sophisticated" that they can help the court in its goal of re-organizing.

Um, sorry. No sale. This is sounding a lot like military procurement. The bankruptcy court is like a little Pentagon, the "sophisticated" speculators are like contractors selling it weapons, uniforms, vehicles, or whatever. The greater the transparency, the less the threat that the rest of the country is being ripped off by cronyism, double-dealing, and other earmarks of the sophisticates of every age since record-keeping began.

http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_pauly&sid=alsJTc7wcqFA

Do you, dear reader, want to do something in the service of such transparecy? Okay. Write to judge Allan Gropper, of the U.S. Bankruptcy Court, Southern District of Manhattan. Tell him you approve of the stand he has taken, and he should stick with it, however many Wall Street purchased amicus briefs he receives the other way.