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Failed Deals on Wall Street

Posted by Larry Doyle on December 16, 2009 12:38 PM |

Just how healthy are our markets? With the major market equity averages up 20% on the year and 50% off the March lows, clearly the rebound has been extraordinary. Are we in the early stages of a new bull market? Are the fundamentals of our economy truly recovering? What about the housing market? Are the issues embedded in that sector of our economy fully reflected in market levels? Will the market accept deals that do not have the implicit or explicit backing of Uncle Sam?

I appreciate that a number of my questions are challenging. I also appreciate that our economy has significant hurdles. However I ask these questions to bring attention to the fact that our markets remain far from healthy. Why do I make this assessment.

Let’s review a recent story from American Banker, Ellington Mortgage Bond Pool’s IPO Fails:

Ellington Financial LLC, run by Michael Vranos’ $2.5 billion hedge fund firm, shelved its $208 million initial public offering as investors refused to finance its plan to buy mortgage-backed bonds without a government guarantee.

Ellington Financial’s retreat brought to six the total of share offerings for funds established to buy real estate assets that have been shelved since Oct. 29.

The fund, which has returned 42% this year, was asking investors to pay 6.1% more than the value of its net assets, based on the midpoint IPO price of $26.

What is Ellington? Perhaps the most highly regarded mortgage hedge fund on Wall Street. Who is Mike Vranos? Aside from running Ellington, Vranos is widely regarded as the top mortgage hedge fund manager in the industry.
Why did this deal fail to attract interest? Just as six other deals failed, investors have little appetite to purchase mortgage-related assets that do not have the backing of Uncle Sam.

If that is not a statement on what investors think about our domestic housing market and the equity market’s pricing of non-governmental supported deals, then I do not know what is. I view these failed transactions as a precursor to what may occur in our markets as the Fed withdraws stimulus and support for housing specifically and the markets in general in 2010.

As much as we may think the markets are adjusting and the economy is rebounding, these failed deals are a clear indication that investors have become addicted to Uncle Sam’s support. For those who cherish free markets and true capitalism, we remain a very long way from home.


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