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." 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. 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. 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. gjacobson@dallasnews.com