This video describes how a $20 million investment created a $70 billion company.
The Easy Way To Measure Bitcoin’s Fair Market Value: A Do-It-Yourself Guide
By Ryan Selkis
How do you determine the fair market value of a currency that has appreciated faster than the shares of even the hottest technology stocks? This question has befuddled investors and analysts for years when it comes to Bitcoin. While the methods for valuing digital currencies are rather straightforward, the assumptions that underlie competing valuations vary widely. Don’t rely on Wall Street analysts to think for you. Instead, consider this framework and come up with your own fair market value estimates for bitcoin.
Bitcoin has value because people think it has value.
Your first question might be to ask whether Bitcoin has any value whatsoever. After all, many bitcoin skeptics have knocked the virtual currency for its lack of “intrinsic value”, including world-class investors like Berkshire Hathaway Inc.’s (NYSE:BRK.B
Berkshire Hathaway Inc’s Warren Buffett (who called Bitcoin a “mirage”) and J.P. Morgan Chase & Co.’s (NYSE:JPM
JPMorgan Chase & Co’s Jamie Dimon, and venerated economists like former Federal Reserve Chairman Alan Greenspan and Nobel laureate Paul Krugman (“Bitcoin is evil”). Despite this army of skeptics and a myriad of bad news for the industry so far in 2014, Bitcoin still continues to trade for multiples more than it did one year ago. The Winklevoss twins clearly disagree. See Investopedia’s interview with Tyler Winklevoss.)
How can this be?
Quite simply, Bitcoins have value because a small, but growing group of people believe that the underlying Bitcoin technology has value. In the future, the Bitcoin technology may be used for a wide array of financial services applications from payments, to contracts, to distributed exchanges. Since Bitcoins are the scarce currency units which are required to power these applications, they are valuable. Unlike fiat currencies whose money supplies may be inflated by central banks, there are a finite number of Bitcoins that will ever be released into circulation, making the currency a superior store of value versus other international reserves. Although Bitcoin is not legal tender backed by a particular government, the currency’s value is supported by the individuals and merchants who voluntarily accept Bitcoin for their goods and services.
If we can agree that Bitcoins have a positive expected value (because at least some people believe the underlying technology has the potential to be revolutionary), we can start to make our own estimates about its current fair value.
Bitcoin’s value depends on “transactional” and “reservation” demand.
It is important to note that the total market value of a currency, its “monetary base”, is driven by two things, transactional demand and reservation demand. We can think of Bitcoin’s average daily “float” as the analog of our economy’s M1 money supply – the currency needed to satisfy transactional demand for goods and services. Similarly, we can think of the Bitcoins which are “hoarded” by speculative investors as the currency needed to satisfy reservation demand for secure long-term savings. Combined, Bitcoin’s float and reserves comprise its total monetary base, which is similar to our economy’s M2 money supply (M1+money in savings deposits, money markets, etc).
So the monetary base relies on both consumers and investors who believe that the Bitcoin technology will power a certain volume of economic exchange today and in the future. Speculative investors in particular have shown an extraordinary willingness to buy BTC, leading to a much larger monetary base than would otherwise be expected for a currency with bitcoin’s transactional volume.
And that’s ok! As long as the transactional demand for Bitcoin continues to grow exponentially in the coming years, the balance between Bitcoin’s float and its total monetary base will likely reflect that of other global currencies. (To learn how Bitcoin enters into circulation, read, “What is Bitcoin Mining?”)
Bitcoin’s potential monetary base is one key input we need for our valuation.
Since there is no real difference between a BTC held for commerce and a BTC held for investment, it should be clear that we really only care about Bitcoin’s total monetary base when it comes to valuation.
Theoretically, the fair-market value of one BTC should simply be the dividend of its predicted future monetary base and BTC in circulation, discounted by a “hurdle rate” an investor would require in order to invest in the speculative currency.
So what are some reasonable estimates for bitcoin’s future potential monetary base? Bitcoins are worth about $5.5 billion today, but according to investor and entrepreneur Barry Silbert, they will only begin to thrive as transactional currency once the monetary base grows to $50-100 billion.
More dramatically, analysts at Wedbush Securities recently approximated that the potential aggregate demand for bitcoin could be over $13 trillion, including global foreign currency reserves, money supplies of high-inflation countries, and the market value of all gold held as financial assets.
Let’s assume that in our optimistic case for Bitcoin, the monetary base grows to $1 trillion dollars within ten years, which would represent a fraction of the U.S. dollar’s total money supply and about half the value of the global market for gold. We could then divide this monetary base by the total number of bitcoins expected in circulation by 2024 (thanks to the known mining schedule). With 21 million BTC in circulation, we could see a $50,000 bitcoin with a $1 trillion monetary base!
If we’re comfortable with that assumption, all we need to do is boil down our $50,000 future bitcoin into present dollars.
Bitcoin’s “hurdle rate” is the other key input we need for our valuation.
Here’s where things get tricky: what is an appropriate discount rate to use for bitcoin, a speculative currency that will never generate cash flows?
We need to make certain assumptions about the rate of return required to compensate for the risks associated with holding Bitcoin. Let’s assume that we normally require a 12% return on equity for investments in certain growth stocks, but we believe Bitcoin carries five times the usual risk. We would need to apply a 60% discount rate to our future value estimate for Bitcoin. Due to compounding, that would make our $50,000 BTC in 2024 worth approximately $455 today — not too far off from current price levels.
For further illustration, it might also help to consider how a venture capitalist could determine the net present value of an investment that he never expects to generate positive cash flows during his firm’s investment period (e.g. a high-growth tech company that reinvests 100% of its earnings before it ultimate sells to Google). In the absence of earnings, that VC might look at revenue multiples to determine the company’s terminal value, and then discount that figure by a rate of 40 to 60%.
With Bitcoin, the thinking is the same. Except Bitcoin’s terminal value is actually its future monetary base.
Caveat emptor: Your assumptions make all the difference.
Under the assumptions we used above, Bitcoin may seem as if it is close to fairly priced today.
But what if we think the monetary base will reach $2 trillion in ten years and investors prove willing to settle for annual returns of 30%? Suddenly BTC’s current fair market value skyrockets to $7,250! Conversely, if we think the monetary base will reach just $500 billion in ten years and investors only touch Bitcoin when they expect an 80% annual return, the current fair value would plummet to $70.
The Bottom Line
If you’re a risk-tolerant Bitcoin believer, today’s prices are probably enticing. If you’re a more conservative skeptic, you will likely steer clear of an asset class that looks as if it is in a speculative bubble. But either way, you only need to make two basic assumptions to come up with your own fair market value for Bitcoin: its future monetary base, and your risk-adjusted rate of return. Good luck!
The price of ethereum crashed as low as 10 cents from around $319 in about a second on the GDAX cryptocurrency exchange on Wednesday, a move that is being blamed on a “multimillion dollar market sell” order.
Ethereum is an alternative digital currency to bitcoin and had been trading as high as $352 on Wednesday. It has since rebounded from its flash-crash lows to trade to about $325 on the GDAX exchange. According to industry and price tracking website Coinmarketcap, which takes into account the price on several exchanges, ethereum was trading around $338.
Adam White, the vice president of GDAX which is run by U.S. firm Coinbase, posted on the exchange’s blog, outlining what took place at around 12:30 p.m. PT on Wednesday. According to White, the multimillion dollar market sell order resulted in a number of orders being filled from $317.81 to $224.48.
As the price continued to fall, another 800 stop loss orders and margin funding liquidations caused ethereum to trade as low as 10 cents.
A stop loss order is a trade that is executed automatically once a security — in this case ethereum — hits a particular price. Margin funding is essentially trading with borrowed funds. Liquidation is when these positions are closed automatically in order to prevent further losses. The knock-on selling effect caused the flash crash on GDAX.
The chart below is a screenshot of the GDAX price showing the high and low price.
Many on social media criticized GDAX and alleged there was some sort of illegal activity taking place. GDAX denied this.
“Our initial investigations show no indication of wrongdoing or account takeovers. We understand this event can be frustrating for our customers. Our matching engine operated as intended throughout this event and trading with advanced features like margin always carries inherent risk,” White said in a blog post.
“We are continuing to conduct a thorough investigation and will keep customers updated with any resulting actions.”
White also noted that these trades are final and will not be reversed. The exchange temporarily halted trading of ethereum on Wednesday before restoring the system shortly after.
As well as the issues on GDAX, investor demand at the funding launch for an ethereum-based messaging app called Status clogged the ethereum network, an industry insider told CNBC.
User makes $1 million off $380?
Ethereum traders were outraged by the crash blaming GDAX for not having proper controls, and even accusing whoever put the sell order in of market manipulation.
And it was a painful experience for many. On the social forum Reddit, users complained of losing large sums of money from $3,000 to $9,000.
But it also seemed to be a large money making event for some too. On the trading forum StockTwits, user John DeMasie posted a screenshot of trade history around the time of the flash crash. It showed one person had an order in for just over 3,800 ethereum if the price fell to 10 cents on the GDAX exchange. Theoretically this person would have spent $380 to buy these coins, and when the price shot up above $300 again, the trader would be sitting on over $1 million. CNBC has been unable to verify the screenshot posted by DeMasie.
The ethereum crash comes amid rising interest in the broader cryptocurrency space. Both bitcoin and ethereum have hit record highs recently, and have both seen pullbacks.
Ethereum in particular has been talked up because of the blockchain technology that underpins it. Whereas bitcoin and its blockchain is seen as a payment network, ethereum has been designed to support so-called smart contract applications. A smart contract is a computer program that can automatically execute the terms of a contract when certain conditions are met.
The ethereum blockchain has also got backing from a number of large firms such as Microsoft, which has helped to drive the price higher.
Ethereum is up around 4,100 percent year-to-date, based on the price it was trading at on Thursday morning, according to Coinmarketcap.
WATCH: How practical is it to live on bitcoin in 2017? We tried it for a week
The Comprehensive List of current Cryptocurrencies
What are all the current cryptcurrencies?
Scandal-ridden Wells Fargo just lost its crown as America’s most valuable bank.
Wells Fargo (WFC) stock dropped nearly 4% on Tuesday after the bank announced plans toabandon its sales targets where customers were sold multiple bank products. Employees have said that these unrealistic targets led to a pressure cooker environment that prompted them to create millions of fake accounts. On Thursday, Wells Fargo was fined $185 million and admitted to firing 5,300 employees related to the phony accounts.
Overall, Wells Fargo’s share price is only down 6% since the scandal broke. However, that’s still enough to allow rival JPMorgan Chase (JPM) to surpass Wells Fargo in market value for the first time since early 2013, according to data from FactSet.
Related: 5,300 Wells Fargo employees fired over 2 million phony accounts
Wells Fargo’s market cap dropped to $235 billion on Tuesday. That’s about $4 billion less than JPMorgan’s price tag.
Wells Fargo has been embroiled in turmoil since federal regulators last week said the bank created more than two million phony bank and credit card accounts.
The allegations have tarnished Wells Fargo’s reputation and threatened a key money-maker for the company: the ability to sell customers multiple accounts, also known as “cross-selling.”
Related: Workers tell Wells Fargo horror stories
Responding to the uproar, Wells Fargo said on Tuesday it will stop setting sales goals effective January 1.Employees have told CNNMoney they were under incredible pressure to meet these targets — or risk losing their jobs.
Now Wells Fargo is also facing political repercussions.
A spokesperson for U.S. Senator Richard Shelby, the chairman of the Senate banking committee, confirmed that the powerful committee plans to hold a hearing on the Wells Fargo scandal on September 20 and will invite Wells Fargo CEO John Stumpf to attend.
The decision to hold a hearing comes after Elizabeth Warren and four other Democratic U.S. Senators on Monday called for “immediate” hearings to “fully investigate the matter.”
While Wells Fargo was America’s most valuable commercial bank for years, it still trailed JPMorgan in terms of who controlled more assets. Wells Fargo held nearly $1.7 trillion in assets as of the end of March, compared with more than $2 trillion at industry-leading JPMorgan,according to the Federal Reserve.
Bitcoin values plummeted overnight, dropping by double digits after $65 million worth of the digital currency was lifted from a Hong Kong-based exchange.
The popular Bitcoin exchange Bitfinex revealed this week that 120,000 bitcoins were stolen after hackers breached its system and looted people’s bitcoin wallets.
“We are investigating the breach to determine what happened, but we know that some of our users have had their bitcoins stolen,” the company said in a statement on Tuesday, the Guardian reported. “We are undertaking a review to determine which users have been affected by the breach.”
After announcing the breach, Bitfinex put a hold on trading the currency on its exchange and other transactions, a move that appeared to kick off the spiraling value. In Tokyo on Wednesday, the currency was down 5.5 percent, according to Bloomberg. In the last two days Bitcoin has dropped 13 percent, the media outlet reported.
Related: A Nasdaq for Bitcoin: VICE News interviews the Winklevoss twins about the future of cryptocurrency
The latest hack highlights the continued concern over Bitcoin security. The currency’s transactions are traceable through what is referred to as the blockchain, public information that shows where the coin has changed hands. But it remains challenging to verify who exactly is affiliated with each address.
The most infamous Bitcoin hack took place in 2014 when a hack of the now-bankrupt exchange Mt. Gox resulted in the loss of currency worth more than $400 million.
Despite Bitcoin’s growing popularity — several major retailers now accept it as payment — there is no federal regulation or central bank oversight of the virtual currency. While global regulations are lacking, New York state took steps last year to develop what it called BitLicense framework to regulate bitcoin-related companies, establishing consumer and cyber security protection.
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|Media Contact: Lawton King (202-565-3200)
For Immediate Release: Friday, March 20, 2015
Export-Import Bank Small Business Success: Semi-Bulk Systems of Fenton, Mo.
Washington, D.C. – Semi-Bulk Systems (SBS) is a manufacturer of modular engineered process solutions involving dry ingredient handling and dry and liquid mixing systems for the food, beverage, and paint industries based in Fenton, Mo. As a result of financing support provided by the Export-Import Bank of the U.S. (Ex-Im Bank), the company has witnessed a considerable increase in export sales to global markets.
Founded in 1975, the St. Louis area company began utilizing Ex-Im Bank’s export credit insurance, which empowers companies to increase export sales by limiting their risk of buyer nonpayment. The company employs 30 people in Fenton, Mo.
“Without Ex-Im support, it would be difficult to pursue opportunities and offer products and services to our international customers around the world,” said Charles S. Alack, CEO and COO. “With Ex-Im support, however, our export sales have grown from 10 percent of total sales up to 50 percent.”
“Small businesses in Missouri like SBS that wish to boost their sales abroad and support more good-paying jobs at home have a reliable ally in Ex-Im Bank,” said Ex-Im Bank Chairman and President Fred P. Hochberg. “In FY 2014 alone, Ex-Im Bank supported $83.9 million in Missouri exports, 67 percent of which were small business exports.”
SBS has brokered with World Trade Consult LLC and banked with Cass Lender. A list of brokers facilitating the Bank’s insurance policies can be found on Ex-Im’s web site at http://www.exim.gov/about/whoweare/partners/insurance-brokers.cfm.
For more information about Ex-Im products and services, call 1-800-565-EXIM or visit www.exim.gov.
ABOUT EX-IM BANK:
Ex-Im Bank is an independent federal agency that supports and maintains U.S. jobs by filling gaps in private export financing at no cost to American taxpayers. The Bank provides a variety of financing mechanisms, including working capital guarantees and export credit insurance, to promote the sale of U.S. goods and services abroad. Ninety percent of its transactions directly serve American small businesses.
In fiscal year 2014, Ex-Im Bank approved $20.5 billion in total authorizations. These authorizations supported an estimated $27.5 billion in U.S. export sales, as well as approximately 164,000 American jobs in communities across the country.
Small business exporters can learn how Ex-Im Bank products can empower them to increase foreign sales byclicking here.
Why the Bernie Madoff Case Is So Dangerous for JPMorgan Chase
By John Reeves and Ilan Moscovitz | More Articles
December 14, 2013 | Comments (14)
JPMorgan Chase (NYSE: JPM ) is on the verge of agreeing to a historic settlement with federal authorities over its relationship with Bernie Madoff. The bank may pay fines of up to $2 billion, while also agreeing to a deferred prosecution for violating the Bank Secrecy Act.
An earlier lawsuit against JPMorgan filed by Irving Picard, the court-appointed trustee tasked with recovering Madoff’s clients’ funds, provides a good indication of the charges facing the company. Picard notes that JPMorgan Chase was Madoff’s “primary banker for over 20 years, and was responsible for knowing the business of its customers — in this case very large customers.” Additionally, the lawsuit alleges that JPMorgan “had everything it needed to unmask and stop the fraud — it had unique information from which it could have reached only one plausible conclusion: Madoff was a fraud.”
We believe Picard’s evidence reflects very poorly on JPMorgan. Not only did the bank’s actions possibly violate the law, but its poor due diligence and willingness to profit off Madoff’s dubious activities suggest that the company’s culture is deeply flawed.
We’ve summarized some of the most troubling pieces of evidence from Picard’s lawsuit. We suspect that whatever evidence the FBI uncovered in its investigation was at least as thorough as what you’ll find here.
1. JPMorgan Chase ignored years of red flags in Madoff’s Chase bank account that he used for money laundering and Ponzi scheme payouts.
Banks are required to know the purpose of customer accounts and monitor them for suspicious activities, but JPMorgan Chase never halted or reported the suspicious activity in Madoff’s so-called “703 account.”
- Over a roughly seven-year stretch from 1998 to 2005, the account made $76 billion in payouts to a single customer.
- Madoff made odd repetitive transactions, oftentimes in a single day, frequently using handwritten checks. In 2002, the account made 318 payments of exactly $986,301 to a single customer.
- In December 2001, the account received daily checks of $90 million from that same customer, who was also an important JPMorgan Chase client.
- From 2004 to 2008, the vast majority of international wire transfers went to high- and medium-risk jurisdictions.
- JPMorgan Chase earned an estimated half a billion dollars in fee revenue from Madoff’s account.
2. JPMorgan Chase seems to have violated basic account monitoring and “know your customer” principles.
The activity in Madoff’s account didn’t appear to reflect any “legitimate business purpose.”
- Even though JPMorgan’s algorithms should have identified lots of suspicious activity, its computers almost never issued any alerts. After Madoff was arrested, JPMorgan Chase compliance employees thought the omission odd, asking “Why didn’t the DDA Account (xxxxx1703) alert … ?”
- The only time an account alert was issued, the reviewer couldn’t even find a “know your customer” file for Madoff and stopped looking into the matter.
- For more than 10 years, Madoff’s Client Relationship Manager, Richard Cassa, was the 703 account’s “account sponsor” — the JPMorgan Chase employee responsible for monitoring Madoff’s account and ensuring the bank understood Madoff’s business. From the lawsuit, we learn that he essentially pleaded total incompetence:
When asked about his duties as a client sponsor at his Rule 2004 bankruptcy examination, Cassa responded that he did not even know what a client sponsor was, much less that he was the sponsor for Madoff’s and BLMIS’s [Bernard L. Madoff Investment Securities] accounts. He had received no training regarding his duties as a client sponsor and had taken no action to discharge those duties. When shown a document in which he had recertified that he had performed his duties as a client sponsor, Cassa stated that he did not have any recollection of the duties of a sponsor or of the recertification process.
- When high-level executive Matt Zames questioned whether Madoff was running a Ponzi scheme (see No. 5 below), no one at JPMorgan Chase seems to have investigated Madoff’s big JPMorgan Chase bank account, including Cassa, who knew of Zames’ claim.
- Even after JPMorgan Chase reported Madoff’s Ponzi scheme to British authorities so that the bank could retrieve its own money in October 2008 without alerting any American authorities, JPMorgan Chase allowed Madoff to continue operating his account without any restrictions on it. Madoff was eventually arrested in December 2008.
3. JPMorgan Chase knew at least as far back as 2006 that Bernie Madoff funds were suspicious.
Around 2006, JPMorgan Chase began considering selling its own financial products based on Madoff feeder funds. Before selling these products to investors, JPMorgan Chase had to check out Madoff and the funds that the bank wanted to base its own products on.
- A market risk officer who visited the feeder funds shared his worries,
I do have a few concerns and questions: 1) All trades are generated by Madoff’s black box trading model and executed by Madoff. It’s not clear whether [the feeder fund] has any discretion or control over the autopilot trading program. … 2) Is it possible to get some clarification as to how the fund made money during times of market distress? … how did they manage to get better than 3M T-Bill returns? … For example, from April to September 2002, the S&P 100 Index is down 30%, cash yielded 1%, and the Fund was able to generate over 6% returns.
- After quite a bit of stonewalling about a fund’s relationship with Madoff, a risk employee found that “They have position level transparency once a month with 1 week delay, but don’t run risk analysis and don’t have the know-how of how to do this. … It doesn’t look pretty.”
- Here’s what they knew about Madoff’s auditor, Friehling & Horowitz:
A quick check found that they are not registerred [sic] with the Public Company Accounting Oversight Board, nor are they subject to peer reviews from the American Institute of Certified Public Accountants. Additionally, they have no website to provide background on their organization.
4. Despite its suspicions, JPMorgan Chase went ahead and sold to its customers financial products based on Bernie Madoff feeder funds.
Most of the funds JPMorgan Chase created and sold to investors used borrowed money to magnify the returns from Madoff funds. By March 2007, JPMorgan Chase had $100 million worth of Madoff products it was structuring in the pipeline and was thinking of creating an additional $100 million to $200 million.
The products were to be so profitable that at one point JPMorgan Chase employees calculated that “[b]ased on the overall estimated size of [our Bernie Madoff] strategy, it would take [a] … fraud in the order of $3bn or more … for JPMC to be affected.”
- James Coffman, a credit risk manager, told bankers they needed to do more due diligence on Madoff in order to go above a $100 million limit. So on March 30, Richard Cassa, who was responsible for monitoring Madoff’s bank account, and members of the Risk Management Division spoke with Madoff. Even though the products JPMorgan wanted to create would have led to increased investments in Madoff’s fund, Madoff told them he disliked banks structuring products on his strategy and was not willing to let JPMorgan Chase engage in “full due diligence.”
- Nevertheless, JPMorgan Chase’s Equity Exotics team put together a “Transaction Approval Package.” Noted transaction weaknesses included “investors, sub-Custodians, auditors etc rely solely on Madoff produced statements and have no real way of verifying positions at Madoff itself,” and “[f]raud — given the significant reliance on BLM for verification of assets held, and no real way to confirm those valuations, fraud presents a material risk.”
- In June 2007, Equity Exotics began preparing proposals for another $825 million in investments in the funds — raising the total exposure to $1.32 billion — an amount that the group acknowledged was in “significant excess of both individual as well as aggregate single manager limits.” Coffman anticipated “a major head on collision with the business that wants to do an infinite amount of this activity with much less oversight.”
5. JPMorgan Chase sold more Madoff-based products to customers after ignoring internal warnings that Madoff was running a Ponzi scheme.
- On the day JPMorgan’s Hedge Fund Underwriting Committee met to consider selling another $825 million in Madoff-related products, John Hogan, JPMorgan Chase Investment Bank’s chief risk officer, noted:
For whatever its [sic] worth, I am sitting at lunch with Matt Zames [a high-level trading executive] who just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a [P]onzi scheme-he said if we [G]oogle the guy we can see the articles for ourselves-Pls do that and let us know what you find out.
- Jane Buyers-Russo, head of the Broker/Dealer Group, didn’t seem to make uncovering the truth a major priority: “please have one of the juniors look into this rumor about Madoff that Hogan refers to below.” (The junior analyst found and speculated on an irrelevant news article about a proposed change in SEC regulations.)
- Hogan warned:
Mr. Madoff will not allow us to conduct any due diligence on him directly and we are forced to rely on the diligence of third parties. … I told Bobby [Magee] and Neil [McCormick] we don’t do $1 bio ‘trust me’ deals and we need to do our own due diligence on Madoff or this wasn’t going to happen.
- But after a phone call with Madoff, Hogan agreed to allow $250 million. Here’s how he explained the decision afterwards:
[T]here’s no math or magic around it — you know, a lot of what we do is more art than science, so I would like to tell you that I have prepared a model that told me 250 is the optimum number, but — you know, that’s not the way it works in reality, and so I just use my best judgment to come up with that number.
6. JPMorgan neglected to report Madoff to American law enforcement … even after it told a British financial authority that the bank was retrieving its own Madoff investments because he was a fraud.
- When JPMorgan tried to get its money back from one of Madoff’s dodgy feeder funds, the fund threatened an investment banker that its “Colombian friends” would “cause havoc,” telling him, “we know where to find you.”
- JPMorgan Chase complained to British authorities about the threats and explained that the bank wanted money back because it had long suspected Madoff’s business wasn’t legitimate:
Ultimately, the bank reached the same conclusion it had reached during its initial due diligence efforts in 2006 and 2007; JPMorgan was unable to obtain [look through] transparency at the Feeder Fund level, did not have access to the identities of the counterparties to Madoff’s OTC options, did not fully understand the relationship between the broker-dealer and the investment advisor, and noted the fact that the custodians did not actually hold the assets.
- In an October 2008 Suspicious Activity Report to the British authorities, JPMorgan wrote:
JPMCB’s [JPMorgan Chase Bank] concerns around Madoff Securities are based (1) on the investment performance achieved by its funds which is so consistently and significantly ahead of its peers, year-on-year, even in the prevailing market conditions, as to appear too good to be true — meaning that it probably is; and (2) the lack of transparency around Madoff Securities’ trading techniques, the implementation of its investment strategy and the identity of its OTC option counterparties; and (3) its unwillingness to provide helpful information. As a result, JPMCB has sent out redemption notices in respect of one fund, and is preparing similar notices for two more funds.
- While JPMorgan successfully redeemed all but $35 million of its own investment in Madoff, the bank didn’t close down Madoff’s JPMorgan Chase bank account that he used for laundering funds and operating his Ponzi scheme, nor did it report Madoff to American authorities or law enforcement.
- Employees were urged to keep quiet about why they would no longer offer Madoff feeder funds to prospective investors: “Without disclosing too much, [JPMorgan Chase] got rid of all the Madoff feeder[s].”
7. Following Madoff’s confession, the JPMorgan Chase employees responsible for due diligence weren’t exactly surprised he had been a fraud.
- “Return seems a little too good to be true,” and the fraud “wasn’t completely unexpected but the scale of it is still a shock.”
- “We’ve got a lot wrong this year, but we got this one right at least — I said it looked too good to be true on that call with you in [September]. Despite suspecting it was dodgy I am still shocked to see this happen so suddenly.”
- Others wrote it was “statistically impossible” for Madoff to have produced such consistent returns.
- Michael Cembalest, the chief investment officer at JPMorgan Global Wealth Management, emailed Private Bank customers to inform them that the Private Bank had decided not to invest with Madoff because it had “never been able to reverse engineer how they [made] money” and Madoff’s fund “did not satisfy [their] requirement for administrative oversight.”
- According to the bankruptcy trustee, Cembalest’s email noted a long list of red flags:
(a) Madoff served as his own prime broker, custodian, and investment advisor; (b) Madoff utilized a three-person accounting firm in Rockland County [N.Y.], which was “almost unheard of for a fund of that size”; (c) while Madoff feeder funds were audited by large, well-known accounting firms those audits did not cover BLMIS; (d) the Private Bank’s due diligence team was not allowed to meet Madoff; Madoff did not charge fees for his money management services (essentially leaving billions of dollars on the table); (f) the volatility of Madoff’s returns was only 2.5% over the preceding seventeen years, a period which included some of the most volatile capital markets history; and (g) Madoff’s fund “lost money in only 2 of 214 rolling quarterly periods since 1990.
- Another credit risk officer added, “Perhaps best this never sees the light of day again!!”
Is JPMorgan worthy of our trust?
If Bernie Madoff has taught us anything, it’s that trust is central to the relationship between investors and their financial institutions. Without trust, the whole system falls apart.
In recent months, JPMorgan has seen its trustworthiness called into question by a wide array of investigations and settlements. And the Madoff deal promises to be one of the most damaging of all to the company’s reputation. JPMorgan’s stakeholders should insist that restoring the bank’s reputation becomes the primary goal of the firm in 2014 and beyond.
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EU Banking watchdog warns on Bitcoin
Exclusive: RBS, others quit Dubai Group debt talks – sources
By David French
DUBAI | Mon Jul 9, 2012 11:22am EDT
(Reuters) – Royal Bank of Scotland (RBS.L) and two other banks have abandoned talks on restructuring Dubai Group’s $10 billion debt and threatened to bring unprecedented legal action against the investment vehicle of Dubai’s ruler, sources close to the matter said.
The walkout by RBS, German lender Commerzbank (CBKG.DE) and South Africa’s Standard Bank (SBKJ.J) at the beginning of June could prevent a deal for the entire restructuring just as an initial agreement is about to be circulated to other banks, five sources said.
They said the three banks had walked away and were threatening legal action to demand immediate payment, unprecedented in an emirate where banks have tended to take the best terms on offer due to an opaque legal system and to avoid jeopardizing chances of winning future business.
“We are no longer negotiating. We have asked for our money back or we will go to the courts under the terms of the contracts we signed,” said a banker at one of the lenders, speaking on condition of anonymity.
RBS had been co-chair of the creditor committee representing banks with either little or no security tied to their cash.
All three banks were part of this group of creditors, the largest of three groups negotiating with Dubai Group, a unit of Dubai Holding DUBAH.UL, the personal investment arm of Sheikh Mohammed bin Rashid al-Maktoum.
A spokeswoman for RBS confirmed the part-nationalized British lender had given up its role on the creditor committee, but did not give further details of its position.
“This decision was not taken lightly as RBS has a strong track-record of supporting restructures in the region, but a number of factors beyond our control have led us to consider other options in this case,” she said.
Dubai Group said it didn’t comment on private negotiations but said it “remains fully committed to reaching a consensual agreement with all key stakeholders and believes that this remains an achievable objective.”
Commerzbank declined to comment. Standard Bank did not respond to a request for comment.
A document detailing the terms of a proposed restructuring was signed by the mainly-unsecured creditor committee last Tuesday and was due to be put to all those creditors this week, three sources said.
It is the first time an agreement has been reached between the company and its 44 creditor banks since Dubai Group missed two debt repayments in late 2010, precipitating restructuring talks. Most banks are from the Gulf and Egypt, but they also include France’s Natixis (CNAT.PA).
The government walked away from debt talks in January, dashing any hope creditors had of state support.
The banker said that if the three banks were not repaid, it could force Dubai Group into liquidation and jeopardize the entire restructuring.
But the threat of legal action could also be a sign of frustration among creditors, said Chavan Bhogaita, head of markets strategy at National Bank of Abu Dhabi NBAD.AD, which is not involved in the restructuring.
“We would regard it more as posturing or saber rattling simply aimed at getting more reasonable terms,” he said.
The three banks’ main concern is the proposed 12-year debt repayment extension for unsecured creditors because of the cost it would impose on the banks to extend cash for so long, three sources said. Other restructurings in the region have involved much shorter extensions.
Dubai Group is relying on asset sales to repay its obligations and wants time for values to recover before selling.
It’s mostly financial assets include stakes in Egypt’s EFG Hermes (HRHO.CA), knocked by Middle Eastern turmoil, and Cyprus Popular Bank CPBC.CY, formerly Marfin, whose recapitalization forced Cyprus to seek an international bailout. Dubai Group also has a stake in Borse Dubai, which owns 20.6 percent of the London Stock Exchange.
Trying to go through the courts could prove hard given uncertainties over insolvency law in Dubai. [ID:nL5E8DK630] No Dubai court has dealt with a similar restructuring, despite a number of state-linked entities in the emirate seeking debt help since Dubai World’s $25 billion restructuring request in 2009.
“We could get back nothing or everything,” said the source from one of the three international banks. “But there was no point sitting at the table and thrashing out a term sheet we were never going to sign.”
Among concessions offered to international banks was a chance to opt out of the restructuring after five years and be repaid their capital, but with a penalty fee for an early exit.
Secured lenders get repaid after 3.5 years rather than 12 and two sources said most of them had agreed to the terms. That group of creditors is headed by Mashreq MASB.DU. Natixis, the sole member of a partly-secured creditor group, also signed the term sheet on Tuesday, one added.
Of the $10 billion total debt, $6 billion is owed to banks and the remaining $4 billion is classed as inter-company loans.
A senior banker who is involved in the negotiations and supports the restructuring said that despite the walkout by the three banks, progress had been made.
“There has been more progress in the last two weeks than in the last two years so the hope is they will look at their rationale for leaving and come back into the tent,” he said.
Unlike Dubai World, Dubai Group cannot use Decree 57, a bankruptcy law drawn up in 2009 that can be used by a company to force creditors in line.
RBS has been replaced by Commercial Bank of Qatar COMB.QA as co-chair of the mainly unsecured lender committee. It is also headed by Emirates NBD ENBD.DU, two sources said.
(Additional reporting by Rachna Uppal; Editing by Amran Abocar and Matthew Tostevin)
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For election favor, Obama looks to Merkel, again
Fri, Jun 8 2012
By Noah Barkin and Caren Bohan
BERLIN/WASHINGTON (Reuters) – Last time Barack Obama wanted Angela Merkel’s help getting elected, she rebuffed a seemingly modest request from the junior senator from Illinois to hold a presidential campaign rally at Berlin’s iconic Brandenburg Gate.
Four years on, and the favor the president is asking of the chancellor could hardly be bigger: get thriving Germany to spend Europe out of a slump that is dragging down the global economy and could well sink Obama’s chances of re-election in November.
A year and a day after he awarded Merkel America’s highest civil honor, a seeming token of his high expectations for her cooperation, Obama on Friday again told European leaders they had an “urgent need to act” to resolve a debt crisis that has pitted a buoyant Germany against EU neighbors facing recession.
But Merkel, aware that appearing to bail out spendthrift foreigners can sink her conservatives’ own re-election hopes, shows little sign of being more helpful than when she sniffed that Obama’s plan for a 2008 campaign stop in Berlin was “odd”.
So can the man who nonetheless charmed 200,000 other Germans that day, echoing Berlin’s favorite American John F. Kennedy in a speech given in a city park, now persuade Merkel to heed pleas from her European Union peers for a little more fiscal stimulus?
For the answer, policymakers on both sides of the Atlantic are trying to learn the body language, tune in to the “mood music” of Obama and Merkel’s exchanges and decode the cryptic diplomatic signals between Bundeskanzlerin and White House.
One conclusion sources close to both leaders agree on is that, while the relationship lacks the warmth of Merkel’s with George W. Bush (Obama’s predecessor is still a YouTube hit with him massaging the German leader’s neck), the pair have plenty in common, not least a competitive streak and a somewhat chilly, calculating manner that should not be confused with antipathy.
“He and Merkel are very similar characters to be honest,” one German official said of Obama. “They both need to prove to each other who knows more about any given subject.
“But they have a high regard for each other.”
Obama aides tend to agree, saying he values Merkel’s “directness”, a German trait some of her European diplomatic counterparts find can verge on the rude, and that the White House understands the domestic electoral constraints on her.
The two are both in their way outsiders – the first black U.S. president and Germany’s first woman leader, the one-term senator and the scientist from the communist east.
Aides also say they share an intellectual wariness of the politics of personality, however much they may have played on their uncommon backgrounds for electoral benefit in the past.
Yet as Merkel digs in to defend Germans’ reluctance to spend their way out of Europe’s troubles, and less than five months until America votes, her four years of familiarity with Obama – a longer relationship than most among today’s leaders – and an ability to work together at speed, could be crucial for two leaders who have both been criticized for taking too long to act.
Conceding that Merkel’s team are conscious of intense attention from Washington, one German official familiar with recent exchanges said: “Pressure on Germany is very high.”
Yet a laconic, monosyllabic exchange at the start of last month’s Camp David G8 summit spoke of that no-nonsense spirit in private: Obama greeted the chancellor with just, “Angela.”
Merkel replied: “Mr. President.”
“How have you been?” Obama inquired.
She simply shrugged.
Obama: “Well, you have a few things on your mind.”
One White House official described the wider Merkel-Obama dialogue as pragmatic and efficient: “When they talk, they can pick up where they left off. They also will report back to each other about other relevant meetings or conversations.
“They’re both pragmatists. They get right down to business when they talk and get into detail about trying to solve various problems.”
That means, insiders say, that past frictions – from the unusually public snub over Obama’s Berlin campaign stop to Merkel’s rejection of military action in Libya last year – count for little, or at least less than for more emotional characters.
What matters, both sides say, is an ever more interdependent global economy that can determine national elections worldwide.
“The one startling new facet of the transatlantic relationship is a very deep economic and financial integration,” said Constanze Stelzenmueller, who runs the Berlin office of the German Marshall Fund of the United States, a body whose founders commemorated U.S. aid to Europe after World War Two and which works to promote understanding between the two continents.
“Volatility and contagion risks go both ways. That has not just fiscal and financial implications but political, diplomatic and security consequences. That is the reason for the nervousness of the Obama campaign. They are realizing that what happens in Europe has a major impact on the U.S. economy.”
Merkel, 57, knows that German voters will not reward her Christian Democrats in a parliamentary election due by September 2013 if, to save euro zone partners like Greece or Spain, she “wastes” their money or exposes their savings to inflation – a historic national dread that dates back to the rise of Hitler.
But she is under intense pressure to ease back on demands that other governments make cutting deficits a priority, a view critics say risks creating an austerity driven downward spiral that would hurt Germany’s export-led economy as hard as any.
She is also resisting other measures, some modeled on those that helped pull the United States out of crisis, such as committing more state funds to guarantees for European banks and sovereign borrowers. She fears that may reward irresponsibility.
With 55 percent of U.S. foreign direct investment going into Europe and European sales of America’s big S&P 500 companies totaling $666 billion in 2010, Obama’s interest is clear.
“Europe remains the greatest risk to the U.S. recovery as well as to the global economic outlook. Our economic stake in Europe is huge,” U.S. Treasury Undersecretary Lael Brainard said in April before she toured Europe to discuss the crisis.
Some transatlantic divergence, compared to the Cold War when West Germany could be counted on to march in step with a United States that was protecting it from communism, is down to a more self-assertive German diplomacy seen since social democrat Gerhard Schroeder ousted Merkel’s mentor Helmut Kohl in 1998.
Republican exasperation with Schroeder, who shocked old allies by deriding the U.S. invasion of Iraq, translated into a particularly warm welcome for his nemesis Merkel at the White House – and, explained, aides said, the jocular “back rub” for a surprised chancellor caught on camera at a summit in 2006.
“One can’t say it too loud, especially in Germany, but Merkel had a very good relationship with George Bush,” one German official told Reuters privately. “The relationship with Obama is different. He is much more reserved than Bush was.”
When Obama, 50, took office, six months after his chilly welcome on the campaign trail in Berlin, German officials recall months of frost, when calls from Washington slowed down and Merkel was received in Washington with less than full ceremony.
However, Germany’s strong bounce back from the 2008 global financial crunch provided sweet vindication for Merkel and, officials in Berlin believe, boosted respect for her in a White House which was struggling to get a grip on its own troubles.
Last year, on June 7, 2011, saw a high point in the relationship, when Obama toasted Merkel at a state dinner at the White House and bestowed on her the Medal of Freedom. Some saw that a little like the Nobel Peace Prize awarded to Obama when still in his first year in the job – less a reward for past achievement than a mark of great things now anticipated.
“This was a clear message to Merkel that U.S. expectations of her are high,” said Henning Riecke at the German Council on Foreign Relations in Berlin. “Washington has made clear time and time again that they want more from Germany.”
It may be a sign that the White House senses that flattery is failing to win over Merkel that officials there now say Obama is paying more heed to other European leaders, many of whom, like new French President Francois Hollande and the Italian and Spanish prime ministers, Mario Monti and Mariano Rajoy, share the view that governments must loosen their belts.
At the Group of Eight summit, where aides made sure to tell reporters Obama had spent a full 45 minutes closeted with Merkel, he also made a very public display of giving attention to Hollande during a group photo shoot, while seeming to ignore the German leader who was standing to his other side.
Heather Conley, an expert on Europe at the Center for Strategic and International Studies in Washington, said the German-American body language at Camp David suggested the relationship was entering a “cool period”.
“As we’ve seen the crisis deepen and the president’s frustration grow that Europe cannot get ahead of this crisis, that it cannot resolve it, it just keeps coming back with a greater vengeance,” Conley said. “The president is really going to have to roll up his sleeves in my view and be more involved with European leaders to try to bring about some results.”
Unlike perhaps the up-from-nowhere Democratic candidate that he was back in 2008, Obama has plenty of great-power leverage to bring to bear on Europe’s leaders. But though he won’t be offering any back rubs, he will need all his powers of persuasion to win pre-election favors from Angela Merkel.
(Additional reporting by Stella Dawson in Washington and Andreas Rinke in Berlin; Writing byAlastair Macdonald)
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Spain seeks $125 billion in EU aid for banks
By Ben Rooney @CNNMoneyInvest June 9, 2012: 4:57 PM ET
Spain’s banking system is healthy, but some banks are vulnerable, the IMF says.
NEW YORK (CNNMoney) — Spain has asked the European Union for up to €100 billion ($125 billion) to provide a capital buffer for the nation’s ailing banks, the Eurogroup said Saturday.
“The Eurogroup has been informed that the Spanish authorities will present a formal request shortly and is willing to respond favorably to such a request,” the group said in a statement.
Without specifying the amount sought, Spain’s economy minister, Luis de Guindos, announced the request at a news conference in Madrid. de Guindos said that the amount sought would be enough to guarantee the safety of the banks and signify credibility to the capital markets.
The announcement came in the wake of an International Monetary Fund report issued late Friday saying that several banks in Spain would need to raise capital buffers by a total of €40 billion ($50.1 billion) to withstand another financial shock.
EU officials are eager to resolve the issue before a pivotal election in Greece on June 17, which could present another major turning point in the long-running European debt crisis.
Many details remain to be finalized, de Guindos said in Saturday’s news conference. He said much will depend on the outcome of two independent audits of Spanish banks that are expected to be done later this month. The Eurogroup said in its statement that its aid would be scaled according to the results of the audit.
The money will be loaned to Spain’s bailout fund, which will then inject it into banks that need to raise capital, according to de Guindos.
The loan will be provided on “very favorable terms,” he said, adding that the conditions will only apply to banks and not the government. He stressed that Spain has asked for help with its banks, and that it has not requested a full-blown bailout.
The European Financial Stability Facility could provide some of the capital, said de Guindos. But he added that the bailout fund has not been authorized by all euro area parliaments to grant such a request.
The EFSF has already backed loans for Greece, Ireland and Portugal. It has about €200 billion in available funds, according to some estimates.
The goal is to help the Spanish economy recover by recapitalizing insolvent banks so that those institutions can begin lending to companies and families, said de Guindos.
“We believe this announcement is good news for the Spanish economy and good news for the eurozone,” said de Guindos. “It shows the political willingness of the EU to eliminate the doubts that exist now about the euro.”
The Obama administration, hoping to keep the European crisis from fouling the U.S. economy in an election year, reacted positively to the announcement.
“We welcome Spain’s action to recapitalize its banking system and the commitment by its European partners to provide support,” Treasury Secretary Tim Geithner said in a statement. “These are important for the health of Spain’s economy and as concrete steps on the path to financial union, which is vital to the resilience of the euro area.
The IMF said it subjected Spanish banks to a stress test and found that most large banks are relatively healthy. But the group warned that “several” banks would need to raise buffers under the worst-case scenario.
The €40 billion figure is not a definitive estimate of the banks’ capital needs. The IMF said banks would need to raise more capital depending on restructuring costs and loan adjustments that have yet to take place.
“Going forward, it will be critical to communicate clearly the strategy for providing a credible backstop for capital shortfalls — a backstop that experience shows it is better to overestimate than underestimate,” said Ceyla Pazarbasioglu, deputy director of the IMF’s monetary and capital markets department.
Fitch ratings agency, which slashed Spain’s credit rating Thursday, estimated that recapitalizing the Spanish banking sector could cost up to €100 billion.
The report was released as IMF managing director Christine Lagarde called on global policy makers to come together for the sake of the global economy and “get the job done.”
“There is no mistaking that global risks are on the rise again,” she said in a Friday speech in New York. “The euro area crisis continues to be the most immediate and most pressing threat, and there is the risk that conditions could get worse.”
While the euro crisis is the most immediate concern, she also warned that the U.S. economy could fall of a “fiscal cliff” if the nation’s debt is not put on a sustainable path.
“European banks are at the epicenter of our current worries and naturally should be the priority for repair,” she said. “But this does not mean we should overlook the broader implications of today’s interconnected world.”
Lagarde pointed to the recent disclosure by JPMorgan Chase (JPM,Fortune 500) that the largest U.S. bank by assets had lost at lest $2 billion on risky trades.
“There are still many questions surrounding JPMorgan’s trading loss. Yet, they should be seen as a warning shot over the bow,” she said. “It reveals that too much risk remains.”
Bill Clinton China Interview on PBS
Kenyans use cell phones for everything from buying groceries to paying rent
Jim Craven/ NBC News
Margaret Wambui speaks on her cell phone outside her
By Mary Murray, NBC News
NAIROBI, Kenya – Imagine paying just $20 for a fancy cell phone with a good calling plan. Or how about working with a cell phone company that won’t obligate you to sign one of those tricky multiyear contracts with deceptive pricing plans detailed in tiny print that skyrocket with every added feature? How about calls to anywhere in the country costing less than 3 cents a minute and most international calls costing just a penny more?
Sound too good to be true, especially for American cell phone users? Not in Kenya. I’m on assignment in Kenya and am astonished at how little people pay for cell phone calls.
The phones work, calls are cheap, and the country is using cell phone technology innovative ways – beyond simple telephone calls to personal banking.
In addition to having us beat, cell phone tariffs here are the lowest in Africa.
Competition frees up market
A call over Kenya’s Safaricom network, for example, costs about one-third the price of making a call from anywhere else on the continent.
And those low prices apply to downloading data as well. No one blinks an eye at surfing the web for hours at a time on their phones.
But Kenya wasn’t always so consumer-friendly.
A Canadian businessman told me that just six years ago, he was paying more than $1,000 a month to connect to the Internet via modem in Kenya.
And a photographer told me about how he used to trudge across Nairobi to a five-star hotel to connect a few times a week. “Those days, there was just a handful of cyber cafes and they charged somewhere near the equivalent of $5 an hour, pretty pricey for the average user,” he said.
During those years, hairdresser Janet Muoki said she only carried her cell phone for emergencies. Now she said she calls her brother living in the U.S. and her best friend in South Africa a few times a week.
While cell phone prices have been steadily dropping in Kenya since 2008, last August the government regulator introduced new rules that sparked a fierce price war between carriers. It all started when the Communications Commission of Kenya cut mobile phone termination rates, namely how much mobile operators can charge for connecting your call to another network.
That fee was often blamed for bloating phone bills. Small companies trying to break into the cell phone business characterized the fee as a big-bully tactic of the larger cell phone networks—arguing that the higher the termination fee, the more expensive it becomes to operate their less popular networks.
Jim Craven/ NBC News
Margaret Wambui works with a customer at her
But on July 1 Kenya’s termination rate was slashed again and now you don’t hear consumers complaining. Robert Kabata admitted that he loves seeing the cell phone companies fighting for his business. In the past, making a call was a big deal that required some thought; now he doesn’t think twice before making a call.
To prove his point, Kabata said just that morning he went out to meet a friend. Before he reached their agreed rendezvous point, he sat down on a bench and called his buddy to tell him to walk around the corner.
“I know, it’s decadent,” he admitted with a grin.
Cell phone banking
His wife, Margaret Wambui, makes her living from another modern feature of the Kenyan cell phone – a mobile banking platform called “M-Pesa.” A joint venture between Safaricom and Vodaphone, the “M” stands for mobile and “Pesa” means money in Swahili. Many Kenyans say the mobile-phone-based money service has helped turn their mobile devices into mobile banks.
With the ease of a text message, “M-Pesa” allows millions of Kenyans to buy groceries, pay their rent and utility bills or transfer money without the need to maintain a bank account, visit the bank or even carry cash.
All consumers need to do is register with a national ID card or passport and then they can go to any licensed “M-Pesa” customer booth, like Margaret’s booth next to her women’s clothing boutique, deposit the contents of their paychecks into accounts run from their cell phones or withdraw cash.
These days, Margaret says she earns up to five times more from “M-Pesa” commissions than she does selling women’s clothing and jewelry.
Kenyans also use “M-Pesa” to send money to relatives hundreds of miles away, living in the remotest corners of the country.
All the other person needs is an “M-Pesa” feature on their cell phone too. They then take their phone to an authorized agent, like Margaret, and with a push of a button they pick up their cash.
For giant telecom Vodaphone, which owns the “M-Pesa” property rights, the innovation earned $15.6 million last year for the giant British telecom.
Nationwide, some $11 billion moved over the mobile network in 2011.
“M-Pesa” has transformed the way average Kenyans conduct business. It has been especially innovative for the 90 percent of the population who previously never had a bank account.
Now, about 60 percent of Kenyans rely on “M-Pesa” to shop, pay all their bills and generally move their money around.
No need to lug around credit cards or wads of cash. Who needs to waste time on a long bank line or at an ATM machine? Just a simple cell phone and a PIN number gets you through the day.
Who would argue that Kenyans haven’t re-invented the idea of a “smart” phone?
Blackstone bets on housing recovery, buys 2,000-plus homes-for-rent
By Ilaina Jonas
NEW YORK | Thu Jul 19, 2012 1:48pm EDT
(Reuters) – Blackstone Group LP (BX.N) has spent more than $300 million to purchase over 2,000 foreclosed homes in order to rent and bet on a recovery of the U.S. housing market, the private equity company’s global head of real estate said Wednesday.
“Our bet is over time, vacant homes will fill up and markets will begin to recover,” said Jonathan Gray, senior managing director and global head of real estate. “Our exit will be to sell the individual homes to the renters themselves, or there could be a very large market for public housing REITs.”
Blackstone is one of several hedge fund and private equity firms with plans to raise or those that have raised money to acquire foreclosed homes to rent them out for several years before selling them as the housing recovery takes hold.
“There have been a lot of announced strategies. There have been few people who have actually raised the capital and are executing today,” Gray said while speaking at the CNBC Institutional Investor Delivering Alpha Conference in Manhattan.
“I think they’ll be a relatively small number of us who can get the scale and have kind of organization that can work nationally in the major markets,” he said.
The venture fits into Blackstone’s strategy of buying property at a deep discount to the cost of replacing it.
Asset management firm TCW, which specializes in fixed-income securities and oversees $128 billion in assets, recently launched the TCW Home Place Partners fund, as an opportunity for wealthy investors to invest in the “housing turnaround” by buying foreclosed homes from banks and federal government agencies.
Beazer Homes USA, Inc (BZH.N) in early May announced Beazer Pre-Owned Rental Homes, Inc — founded by the company and which includes an investor group led and arranged by affiliates of private equity firm Kohlberg Kravis Roberts & Co (KKR.N).
The Beazer fund aims to acquire, refurbish and lease recently-constructed, previously owned single-family homes on a large scale in select markets in the United States.
A tall hurdle facing those who want to buy thousands of foreclosed homes is how to manage and maintain them once they have them.
“You have to spend some money to fix it up,” Gray said. “You have to lease it. The real challenge is the execution and having the team.”
Blackstone is looking to work with large apartment operators in the areas it buys homes.
“It will end up being very positive for the U.S. economy,” Gray said. “These homes will get repositioned. People will get affordable housing. I see this as an opportunity to move a fair amount of money. But it won’t be around for ever.”
(This story is refiled to say “Our exit will be to sell the individual homes to the renters themselves, or there could be a very large market for public housing REITs” instead of “… very large market for public housing units.” in the second paragraph)
(Editing by Muralikumar Anantharaman)