TOXIC WASTE

25 April 2007: DJIA 13,089

This market has cojones. New Century filed for Chapter 11 just three weeks ago, and the party goes on. The Dow is up 700 points for April and has gone over 13,000. It’s a good day to be having our monthly ALCO meeting.

In theory, everyone has one – the asset and liability committee. We’re meant to worry about our balance sheet and the mismatches between what we owe and what we’re owed. A vast package of information arrives from our finance department two days before each meeting, which we’re expected to read, mark and inwardly digest. ALCO is serious stuff.

The committee wants to know what I think of our positions. Basically, I’m comfortable with just about everything. We’re tracking the Dow and see no reason to stop. We’re long commodities and probably going longer (suck it up, Amaranth). We are short financials and we don’t like the dollar much, especially against the euro (the Thai Baht is an exceptional exception – we’re already up 9pct. Thank you, Stanley’s buddy). We have used the carry trade for finance but no one is thrilled about it, on the basis that anything this easy is bound to have some unintended consequences, i.e. dropping a ton of (client) money. We’re running down all our Yen and Swissy loans.

Just about everything. I feel we’re missing a trick somewhere. You see all these big guys – like Soros, Paulson, Falcone and Griffin – making market-changing bets, paying themselves billions of dollars and no one batting an eyelid. Look at Bernie Madoff. He is sucking in money left, right and center, even turning down investors (isn’t my money good enough for you, Bernie?), which all adds to the mystique.

That’s where we should be. Right now, we are little more than bottom-feeders. We get the crumbs that drop from the top table and it’s not enough. We have about five billion under management, which is good, but not life-changing. Truth to be told, I could go back to Wall Street and probably make as much money as I do now. That wasn’t the plan. We need to have higher aspirations.

And, maybe, just maybe, I have the answer.

We run some money through a couple of guys who have a commodities and resources shop. They’re not the sort of guys you want to have dinner with – cutlery deployment might be a challenge – but they know commodities. They’ve been talking to me about a really neat concept that could change the whole market paradigm. Really, it’s that big. If it works.

Trouble is, I’m not sure about my partners and their long-term goals. They seem to be happy with where we are now. I don’t want to take this idea to them, have it voted out and then be left to look on as some smarter, hungrier firm picks up the ball and runs with it.

If they don’t like it, I may just have to go solo on the deal. Without me, Curveball is dead anyway and they know it.

Back to ALCO, and one of the things we all agree on is that sub-prime is going to claim a lot of victims. Forget about the homeowners – mostly redneck trailer park trash anyway – it’s fund managers who are beginning to look really dumb. Some of them are even buying into sub-prime lenders. Yes, buying! Those allegedly smart folk at Blackstone and Citadel are buying ‘em up, while others are lending them huge lumps of cash. Even my buddies at Bear are allegedly getting in on the act. Could be time for a rethink of our relationship if that’s really true.

And all this after some gal at the Fed (Ed: Susan Bies, Federal Reserve Governor 2001-2007) said that sub-prime defaults are ‘the beginning of a wave’. The Fed is not normally given to flights of hyperbole, yet the hedge funds think they know better. Us? We’re not touching it. I can guarantee you that ‘toxic’ will become the most used verb on the Street next year.