Welcome to CanadianHedgeWatch.com
Saturday, July 20, 2024

The last, frantic days of Perot family hedge fund

Date: Monday, April 27, 2009
Author: Gary Jacobson & Brendan Case, Dallas News

To bank employees monitoring the hedge fund's collapse, the e-mailed instructions were emphatic.

"No securities, or cash, FOR ANY REASON are allowed to be sent out from JP Morgan."

At issue that morning last November were the accounts of Parkcentral Global Hub Ltd., a Bermuda-chartered fund run from Plano and Dallas by the Perot family, one of the richest families in the world. J.P. Morgan Chase & Co. was the fund's banker and a trading partner.

Securities markets everywhere were in free fall. And by Nov. 21, Global Hub's assets had almost evaporated down from nearly $2.5 billion months earlier.

Days later, the Perot family shut down the fund and relinquished control to Bermuda liquidators. Court records show there may be about $266 million left for creditors, whose claims total more. J.P. Morgan says it alone is owed more than $700 million, according to a lawsuit in New York State Supreme Court.

Other than brief comments from a Perot spokesman at the time Global Hub closed, the family and its representatives have said nothing about the hedge fund's demise. Family members were the largest investors and suffered the largest losses, spokesman Eddie Reeves said.

It's not known how much of their personal wealth the Perots lost in the fund.

Reeves said the family, contacted for this story, wouldn't make anyone available to answer questions. He declined to respond to written questions about the hedge fund's operations, citing ongoing legal proceedings.

But a detailed account of the last frantic days of Parkcentral Global Hub can be reconstructed from court documents and other sources.

In some respects, the Global Hub story is similar to those of other big investors caught in the market meltdown. In October, Chesapeake Energy Corp.'s chairman and chief executive, Aubrey McClendon, had to sell almost his entire equity stake once worth more than $2 billion in the company to meet margin calls.

In Dallas, Highland Capital Management LP and T. Boone Pickens were forced to close hedge funds.

"Last fall was a real storm," said Richard Sylla, an economist and financial historian at New York University. "You've probably got to go back to the 1930s to find something like last September, October and November."

Shutdowns multiply

It was an especially brutal period for hedge funds, which are lightly regulated investment vehicles usually open only to institutions and sophisticated individuals. Nearly 1,500 closed last year, including 778 in the fourth quarter, according to industry data.

But Parkcentral Global Hub was operated by the family of Ross Perot, the billionaire entrepreneur and two-time U.S. presidential candidate known for straight talk and preaching fiscal responsibility.

Last June, in fact, he launched a Web site, Perot charts.com, that used simple charts and graphs to warn about the risks of the runaway national debt.

"I wanted something Forrest Gump could understand," Perot told The Dallas Morning News at the time.

Five months later, his hedge fund would die because it made too many bad and complicated bets on commercial mortgage-backed securities and interest rates.

The fund owned assets with names such as "Bear Stearns Asset Backed Securities I Trust 2006-H" and engaged in interest rate swaps pegged to the difference between the London interbank offered rate, or LIBOR, and the Municipal Swap Index rate.

Parkcentral Global Hub's master trading agreement with J.P. Morgan allowed just about any kind of financial investment, including "currency swaps, options, caps, collars, floors, credit derivatives, equity derivatives, or any similar transactions." Hedge funds also use borrowed money to try to maximize returns.

Forrest Gump wouldn't have had a chance.

Sharing a name with a street (Park Central) near Perot offices at LBJ Freeway and Central Expressway, Parkcentral Global Hub signed its master trading agreement with J.P. Morgan in March 2002. It marked the Perot family's entry into hedge funds, a trade publication reported. And for the first time, the family began pooling outside money with its own.

Parkcentral Capital Management, an affiliate of Perot Investments, was the fund's general partner and adviser.

Citizens and foreigners

Global Hub was set up with domestic and offshore feeder funds that channeled money into a master fund. The structure, common in the hedge fund industry, allows U.S. citizens, U.S. tax-exempt entities and foreigners to pool investments without adverse U.S. tax effects for foreigners and the tax-exempt.

Operating largely out of public view, Global Hub held $2.468 billion in assets by the end of 2007, according to an affidavit filed by Roderick Forrest, a Bermuda director of Global Hub. Then came 2008.

In September the same month Wall Street investment bank Lehman Brothers filed for bankruptcy and the government bailed out insurance giant American International Group Global Hub lost 13 percent of its value, in part because of commercial mortgage-backed securities, the Bermuda affidavit says.

In October, it lost an additional 26 percent, reducing the fund's net assets to just under $1.5 billion.

Losses continued in early November and accelerated beginning Nov. 12, "as the bottom completely fell out" of the commercial mortgage-backed securities market, the affidavit says.

During the next six trading days, the fund had to post more than $600 million in margin collateral for its banking and brokerage trading partners as the fund's investments swooned. Even then, losses continued, and margin demands overwhelmed the fund's ability to pay, court records show.

In just one day, Nov. 18, the fund lost $300 million.

Global Hub was able to meet margin calls on Nov. 19 barely.

"By this time the company had exhausted its liquidity and its ability to trade was basically at an end," Forrest said in his affidavit, which was filed with the Bermuda supreme court in support of the appointment of liquidators.

On Nov. 20, large margin calls continued. J.P. Morgan alone demanded $125.4 million from Global Hub. The fund told its banking and brokerage counterparties that it couldn't pay.

'We are locked down'

Alarm bells were ringing at J.P. Morgan.

"All accounts on debit and credit alert," an internal J.P. Morgan e-mail sent midafternoon Dallas time said of Parkcentral. It continued: "Regardless of cash nothing moves without HF [hedge fund] Credit approval. ... We are locked down."

About four hours later, David Radunsky, chief operating officer and general counsel of Parkcentral Capital Management and Perot Investments Inc., sent an e-mail to a top credit official at the bank.

The lockdown, he explained, prevented closeout trades on a number of deals and threatened "substantial financial damage to the fund."

"I want to be sure you understand the seriousness of the issue," Radunsky wrote.

The next day, J.P. Morgan had letters delivered to Radunsky in Plano and another Perot official in Dallas, notifying Global Hub that it had failed to transfer the $125 million.

Official notices of default were delivered Nov. 24. The following day, J.P. Morgan notified Global Hub that under the early termination provisions of their agreement, the fund owed the bank more than $700 million.

The bank says it had several derivatives contracts with Global Hub, including the interest rate swaps, which ran until 2022. Early termination of such agreements can result in big payment obligations.

That same day, Nov. 25, Global Hub announced that the fund was shutting down.

"Like other investment funds with similar investments, Parkcentral Global has been impacted dramatically by the unprecedented upheaval of the capital markets in general and the freezing of the credit markets in particular," spokesman Reeves told The News then. "As a result, the fund is no longer viable, and its remaining assets are being liquidated to satisfy creditor responsibilities."

The next day, J.P. Morgan sued Global Hub in New York State Supreme Court, and the court ordered the New York sheriff to seize about $250 million in the fund's cash and securities held by the bank.

On Nov. 27 Thanksgiving Day in the U.S. the Bermuda supreme court appointed liquidators for Global Hub.

Since then, the liquidators and J.P. Morgan have been fighting over the $250 million.

Attorneys for the liquidators say the bank moved the assets from London to New York, without authorization, in a "race" to get to the head of the creditor line.

The bank says it had every right to sequester the assets. A decision could come next month.

Charles Thresh, one of the Bermuda liquidators, said that he was preparing a report for creditors and that it would be inappropriate for him to comment.

If J.P. Morgan prevails, there won't be much left for other creditors, based upon Forrest's affidavit. The only other assets remaining from Global Hub total about $16 million.