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I have had 11/13 circled on my calendar for a month. This was a date where Rep. Waxman was to parade the leading lights and big earners of the hedge fund world – Soros, Simmons, Paulson, Falcone and Griffen – in front of the oversight committee.


It was quite a show.


I later described the two hour session as a conversation in a foreign languague between two parties where one side (hedge fund managers) was fluent and the other (Congressmen) were reading a translation dictionary…upside down…with pages missing. It was clear that the House of Reps have no concept of the basic vocabulary, financial terms or any concept that hedge funds are not all the same or that there could be different strategies. However, it also became clear that they knew they were in a hole and stopped digging.


Paulson vs. Paulson


Where it got interesting for me was when Paulson spelled out in plain English that the taxpayer was getting a raw deal with the first TARP allocation. To paraphrase, – whereas in Buffets investment in Goldman he got 10% coupon and 100% warrant coverage – the first capital purchase program as part of the TARP that Treasury Secretary Paulson made “commanded” a 5% coupon and only 15% warrant coverage. In addition, whereas the UK and Switzerland demanded a halt on ordinary dividends and a cap on executive compensation, the US plan had no such restrictions. It appears that US taxpayers could have had a negotiated a better deal.

100% warrant coverage…100% warrant coverage…Ah-ha – I heard much about 100% warrant coverage during the keynote speech at the DealFlow media annual PIPES conference.  The takeaway from this event was that the PIPES market – with the exception of the mega financial deals from sovereign wealth funds and Buffet into banks – is at its lowest level since 2003.  

At its essence, Volatility has not been good for the PIPES market. The illiquid nature of the warrants and 144a rules make the investment very unattractive at this time. It was the view of the experts that 25% of the companies out there would be out of business, restructured or sold in the next 12 months. Issuers need to be flexible and cut any deal they can in this environment…which brings me back to 100% warrant coverage. A deal no issuer would agree to a few years ago, now this is what investors need.

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