Wednesday, November 27, 2013


Well, there are two, actually.  No not the weather which continues to do great damage to what reputation Al Gore has left, but from the IMF and, as carried in both the NYT and the WSJ today the growth of Business Development Companies and the public investment in the same.

What are these you ask?  Ah, dear reader these are investment vehicles designed to get around the prohibition of the direct investment in high yield paper created by hedge funds by the public as a result of the Investment Act of 1940…yes, 1940.  Little is known of this Act and what is none of it is good.  I ran afoul of it some 30-odd years ago and the trauma lasted for weeks but we "found a way."  In short one can invest in Blackstone (the example given) but not in the funds created by the Company which cuts down on the yield received as one must deal through an intermediary.  But if Blackstone creates a Business Development Company and contracts to manage the same, that's a whole different story.

Now our old friend from THE Ohio State University, Steven Davidoff's piece in the Times today is pretty good as is the WSJ story for those interested although I can't understand why Prof. Davidoff keeps writing dumb sentences such as, "…the mainstay has been mezzanine debt and collateralized loan obligations(pools of leveraged loans)…" which of course have nothing to do with one another thereby forcing one to ask oneself whether this guy REALLY knows what he's talking about or is he just blowing smoke.  Anyway, he continues to point out for some curious reason Congress loves this stuff and continues to help in the explosive growth of this kind of investing in all possible ways.

I think he's right to wonder.  Dodd/Frank, the 2800 page upchuck, is in the end really about the elimination of risk from the system, but here comes congress promoting the sale of highly risky paper in its own right which is also subject to substantial outside risk (a rise in interest rates perhaps?) to yield whores.  Any of this sound familiar? What we have here are CMOs by another name.  What hell is the point of spending 3 1/2 years and a billion dollars to shut one door while another is be constructed 10 feet away?  When some of this stuff starts going bad--and it will--who picks up the bill on this one?  May I suggest that it's about time to recognize that the folks playing in this arena have greater amature status that an Alabama quarterback.  In this and in other aspects of the game a rethink might be called for.  And speaking of that, it appears that the IMF has gone through the process in a manner with which I agree which will be a good read in a day or so (tomorrow is Thanksgiving) for it will be the first time in history in which I have agreed with the IMF on anything.  May all of you enjoy this, the greatest American holiday of them all tomorrow.  Don't eat too much.

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