Hedge fund horsemen of the apocalypse

Date: Tuesday, September 23, 2008
Author: David Randall, Busrep.co.za

London - There is nothing like a bit of good publicity to drum up business, and last week hedge fund managers linked to the short-selling of Lehman Brothers and HBOS into oblivion had the kind of coverage even their money can't buy.

"Vulture capitalists" (D Telegraph), "Beasts who can tear firms apart" (Mirror), "The hedge fund hyenas" (D Express), and "Greedy pig US billionaire helped bring HBOS to its knees" (Mirror again). What to the rest of us would be actionable is to them a 22-carat endorsement. After all, if you're a predator, you don't want people to think you've gone all compassionate.

What they prey on are vulnerable companies and their shares. Their weapons, besides a ferocious intelligence and detailed research, include the one deployed so devastatingly last week: short-selling.

Judging a firm's share price to be due to fall, they will borrow shares from an institution, sell them to a third party, and rely on the prices diving by the time they must buy shares to return them to the institution by settlement.

Their trades have the ability to move shares in the direction they desire, and, as last week, even bring companies to their knees. The consequences don't concern them; the profits do.

Four of the men said to be involved in last week's turmoil are among the Premiership players of share dealing. They have corny nicknames (Philip Falcone as "The Midas of Misery", and Simon Cawkwell "Evil Knievil"); extravagant habits (Falcone recently paid £24 million in cash for Bob Guccione's 27-room New York mansion, while the 25-stone Cawkwell is a high-spending wine buyer); and they write books with creepy titles. Cawkwell's is Bear Essentials, David Einhorn's Fooling Some of the People All of the Time.

 But there is one fundamental difference between these men and the Premiership footballers: they are far, far richer.

Crispin Odey, for instance, and his wife Nichola Pease, known as the Posh and Becks of finance, are worth almost three times the Beckhams' £125 million, thanks in part to bonuses such as the £28 million he paid himself earlier this year. Falcone, who grew up the youngest child of nine in a single-parent family, is reputed to have earned £950 million last year alone.

Several have interesting connections. Odey, for instance, is brother-in-law to the Barclays Bank boss John Varley and was once married to Rupert Murdoch's daughter Prudence. His present wife is Britain's 20th richest woman.

What they all have is commercial cojones. Cawkwell once lost £3 million betting against the share price of the office firm Regus. And Falcone, in his early days, once lost everything on a company called AAB. He recovered and is said to have made £280 million backing HBOS shares to fall, and made even more betting the US housing industry would crumple. Fellow American Einhorn, 37, boss of Greenlight Capital, is alleged to have been one of the prime movers behind the fall of Lehmans (making a reported £1.7 billion), and the rocking of US mortgage institutions Fannie Mae and Freddie Mac.

But critics say the scale on which they bet creates the very vulnerability they claim to have spotted. They reject this. Cawkwell says: "If a man running a bank can't finance his business, he is the one to blame, not me." Jacob Marley could not have put it better.