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Article from NYTimes.

Japanese companies have made a string of deals in the United States this year, but the pact announced on Monday is one for the record books.

The agreement by SoftBank to take control of Sprint Nextel is the biggest deal by a Japanese company in the United States since at least 1980, according to Thomson Reuters, which values the deal at $23.3 billion.

That far exceeds the next-largest deal, the $9.8 billion stake that NTT DoCoMo, SoftBank’s rival, took in AT&T Wireless in 2000.

The SoftBank deal is also worth more than some recent takeovers, including Takeda Pharmaceutical’s 2008 purchase of Millennium Pharmaceuticals for $8.1 billion. It also tops the $7.8 billion agreement the Mitsubishi UFJ Financial Group struck with Morgan Stanley in the depths of the financial crisis in 2008, according to Thomson Reuters data.

It also ranks as the biggest foreign deal involving an investment in an American company so far this year, according to Thomson Reuters.

The deal on Monday is a welcome development for the financial advisers involved, in a year starved for deal activity.

The agreement has lifted Citigroup, an adviser to Sprint, to sixth from seventh place in the Thomson Reuters global league table this year. Sprint’s other advisers, UBS and Rothschild, each moved up one spot as well.

One of SoftBank’s advisers, the Raine Group, entered this year’s league table in 30th place after the deal. (The deal is the group’s biggest, according to Thomson Reuters.) The Mizuho Financial Group, another SoftBank adviser, rose to 17th place from 22nd.

For American consumers, SoftBank is set to be the latest Japanese company to make its mark on daily life in this country.

In 1989, the Mitsubishi Estate Company made headlines with a deal to buy a 51 percent stake in the Rockefeller Group in New York. (The stake eventually grew to 100 percent, after Rockefeller went through bankruptcy.)

Craig Moffett, an analyst with Sanford C. Bernstein, drew a comparison to that deal last week, when Sprint confirmed it was in talks with SoftBank.

“This is tantamount to Japanese buyers buying Rockefeller Center,” he said.

The year 1989 was also when the Japanese electronics giant Sony took a foothold in Hollywood. Its roughly $4.7 billion purchase of Columbia Pictures Entertainment was a blockbuster at the time.

SoftBank’s shares fell 5.3 percent in Tokyo on Monday, with investors concerned over the company’s ability to turn around the ailing Sprint.

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Article from NYTimes.

“Hedge funds, the golden children of finance, are having a very rough year.

For one, they are not making money the way they used to. Returns for a number of funds, including those of star managers like John A. Paulson, have fallen by as much as half this year. And that poor performance comes just as these investment partnerships are coming under increased regulatory scrutiny.

Yet the money keeps pouring in, even for Mr. Paulson.

This year alone, more than $70 billion in new money has gone to hedge funds, mostly from pensions and endowments. A recent study by the industry tracker Preqin found that 80 percent of investors were mulling new allocations to hedge funds, and 38 percent of investors were planning to add to existing ones.

One bad year for hedge funds can be written off. But most investors rarely enjoy a bounty of returns even over the long run. The average hedge fund investor earned about 6 percent annually from 1980 to 2008 — a hair above the 5.6 percent return they would have made just holding Treasury securities, according to a study published this year in The Journal of Financial Economics.

So why would large investors pay hedge funds billions of dollars in fees over the years for poor returns? The answer highlights the financial problems at the country’s largest pensions.

As waves of workers prepare to retire, pensions find themselves in a race against time. Short of what they need by an estimated $1 trillion, according to the Pew Center on the States, public pensions are seeking outsize returns for their investments to make up the gap. And with interest rates hovering near zero and stock markets gyrating, the pensions and others are increasingly convinced that hedge funds are the only avenue to pursue.

“Even with the short-term ups and downs, at the moment there is not a credible alternative with the same risk profile for pensions,” said Robert F. De Rito, head of financial risk management at APG Asset Management US, one of the largest hedge fund investors in the world.

 

 

 

 

Hedge funds, once on the investing fringes, have become a mainstay for big investors, amassing huge amounts of capital and accumulating more of the risk in the financial system. The impact of this latest gold rush into hedge funds is unclear. Some argue that the hedge fund industry’s exponential growth — it has quadrupled in size over the last 10 years — has depressed returns. Others, meanwhile, wonder whether the bonanza in one of the most lightly regulated corners of the investment universe will have broader, less clear implications.

“I worry that institutions are betting on an asset class that is not well understood,” said William N. Goetzmann, a professor of finance at the Yale School of Management. “We know that the real long-term source of performance is not picking someone good at beating the market, it’s taking risks on meat and potato assets like stocks and bonds.”

The growth has been fueled in part by more sophisticated marketing — most funds now have employees whose job is to manage relationships with investors and to seek out new ones, jobs that were uncommon a decade ago. And there is still a mystique: funds that have had at least one spectacular year have excelled at raising and keeping money.

Despite the appeal of a blowout year, however, performance tends to peter out after investors jump into a hot new fund. Yet even with the lackluster returns of late, many investors have resigned themselves to sticking with hedge funds. The financial crisis taught them that even more important than making money was not losing the money you had.

Reflecting that perspective, hedge funds have started to change how they sell themselves. For decades, funds have marketed themselves as “absolute return” vehicles, meaning that they make money no matter the market conditions. But as more and more money crowds into them, the terminology has started to change. Now, managers and marketers increasingly speak of “relative returns,” or performance that simply beats the market.

“In general, they’re probably not going to have the blowout returns of the ‘80s and ‘90s,” said Francis Frecentese, who oversees hedge fund investments for the private bank at Citigroup. “But hedge funds are still a good relative return for investors and worth having in the portfolio.”

Gauging by the inflows, pensions seem to agree.

This year, major pensions in New Jersey and Texas lifted the cap on hedge fund investing by billions of dollars. The head of New York City’s pension recently said its hedge fund investments could go as high as $4 billion, a roughly tenfold increase from current levels. Illinois added another $450 million to its portfolio last month, which already managed about $1.5 billion in hedge fund investments.

About 60 percent of hedge funds’ total $2 trillion in assets comes from institutions like pensions, a big shift from the early days when hedge funds were the province of ultra-wealthy individuals.

As the investor base has changed, hedge funds themselves have grown into more institutional businesses. The biggest firms have vast marketing, compliance and legal teams. They hire top-notch accounting firms to run audits, and their technology infrastructure rivals that of major banks.

They make money even off mediocre returns. A manager overseeing $10 billion, for instance, earns $200 million in management fees simply for promising to invest the assets. Investment returns of 15 percent, or $1.5 billion, would translate into another $300 million in earnings for the hedge fund.

By contrast, a mutual fund that invests in the shares of large companies charges less than half a percent in management fees, or less than $50 million.

Psychology plays a meaningful role in hedge fund investing. Investors often pile into the hottest funds, even well after their best years are behind them.

This year’s must-have manager is John A. Thaler — despite having closed his fund to new investors last year in the face of a flood of money. While little known outside Wall Street, Mr. Thaler and his stock-picking prowess have been the talk of the hedge fund world. A former star portfolio manager at Shumway Capital Partners, Mr. Thaler developed a reputation early on as an astute analyst of media and technology companies.

His hedge fund, JAT Capital, had done well since its founding in 2007, and this year, as returns climbed to 40 percent amid the market upheaval, investors clamored to gain entry.

Then, last month, two of his biggest holdings, Netflix and Green Mountain Coffee Roasters, took a bath. His fund fell by nearly 15 percent in a few short weeks, a reminder that even high-flying managers can quickly fall back to earth.

But few hedge fund managers have risen and fallen so quickly and so publicly as Mr. Paulson, the billionaire founder of the industry giant Paulson & Company.

He made his name after earning billions of dollars in 2007 and 2008 with a prescient bet against the subprime mortgage market. Afterward, investors clamored to get money into the fund, and by the start of 2011 assets had swelled to $38 billion.

This year, Mr. Paulson has lost gobs of money on an incorrect call that the United States economy would recover. One of his major funds was down nearly 50 percent, while others fell more than 30 percent. Investors who poured money into Mr. Paulson’s hedge fund after his subprime bet have given back gains from 2009 and 2010, according to an investor analysis.

But last month, when investors had the opportunity to flee the fund that had suffered the worst losses, most instead chose to stick around. Some even put more money into Mr. Paulson’s funds, despite losing almost half of their holdings this year.”

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Here is an article from Dealbook at NY Times.

The Treasury Department expects to recover all but $42 billion of the $370 billion it has lent to ailing companies since the financial crisis began last year, with the portion lent to banks actually showing a slight profit, according to a new Treasury report, Jackie Calmes writes in The New York Times.

The new assessment of the $700 billion bailout program, provided by two Treasury officials on Sunday ahead of a report to Congress on Monday, is vastly improved from the Obama administration’s estimates last summer of $341 billion in potential losses from the Troubled Asset Relief Program. That figure anticipated more financial troubles requiring intervention.

The officials said the government could ultimately lose $100 billion more from the bailout program in new loans to banks, aid to troubled homeowners and credit to small businesses.

Still, the new estimates would lower the administration’s deficit forecast for this fiscal year, which began in October, to about $1.3 trillion, from $1.5 trillion.

The report could tamp down some of the public anger directed against both parties over the bailouts. Congressional leaders are already planning to use some of the program’s money for economic stimulus and job creation.

Of course, the government’s potential losses extend beyond the Treasury program. The Federal Reserve, for example, still holds a trillion-dollar portfolio of mortgage-backed securities whose market value is unknown.

The improved picture of the Treasury program is the result of higher-than-expected returns on the loans and the fact that, as the financial sector has recovered from its free fall last year, the government has not had to use much more of its $700 billion in lending authority this year, according to the Treasury officials, who declined to be identified as discussing the report before it was presented to Congress.

Last week, Bank of America became the latest big bank to say that it was raising private capital and would soon repay its $45 billion bailout loan. Once that payment is made, Citigroup will be the last big bank tethered to the state.

The estimated $42 billion in losses is a net figure that accounts for some profits to offset the losses. The Treasury officials said the government had lost about $60 billion, roughly half to Chrysler and General Motors and the other half to the insurance giant American International Group.”

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Putting cash into unhealthy business has long been understood as a bad deal. With the Bailout programs and the TARP initiative, some might have thought that the problem was solved – think again. Poor business remain poor business.

Here are some good quotes taken from NY Times.

“The results of the bank stress tests have been trickling out for days, from Washington and from Wall Street, and the leaks seem to confirm what many bankers feel in their bones: despite all those bailouts, some of the nation’s largest banks still need more money.

But that does not necessarily mean the banks will get that money from the government. The findings, to be released Thursday by the Obama administration, suggest that the rescue money that Congress has already approved will be enough to fill the gaps. If so, the big bailouts for the banks may be over.But hopes that the tests will be a turning point in this financial crisis electrified Wall Street on Wednesday and some overseas markets the next day. Financial shares soared, lifting the broader American stock market to its highest level in four months. The Dow Jones industrial average rose 101.63, or 1.2 percent, to close at 8,512.28 Wednesday, while Japan’s Nikkei index rose more than 4 percent by midday Thursday.”

Good news indeed, but…

“After news this week that Bank of America and Citigroup would be required to bolster their finances again, word came Wednesday that regulators had determined that Wells Fargo and GMAC, the deeply troubled financial arm of General Motors, would need to do so as well. But regulators decided that American Express, Capital One, Bank of New York Mellon, Goldman Sachs, JPMorgan Chase and MetLife would not need to take action. The official word is due at 5 p.m. Thursday.

The results so far seem to suggest that the 19 institutions that underwent these exams will need less than $100 billion in additional equity to cope with a deep recession, far less than some investors had feared. The question now is, where will banks get that capital?”

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Other helpful sources on this issue can be found here: Huffington Post, Barrons Blogs, Wall Street Journal, Seeking Alpha, 24/7 WallStreet

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