Sunday, April 06, 2008

Wilbur Ross to the rescue

One of the key sectors of Wall Street that rarely gets decent coverage by the media is distressed debt. Whenever Wall Street gets really deep into trouble, bond prices get pounded down, even for solid companies, but especially for so-so companies. That is when the distressed debt sector kicks into high gear. Liquidity demands force investors to dump bonds without regard to their true economic value. Distressed debt investors such as Wilbur Ross then "swoop in" and pick up great deals for almost literally pennies on the dollar. Although these guys get painted as "opportunity investors", "bottom fishers", "vultures", and a host of unprintable names, they do serve a very valuable economic function by stepping in to provide some degree of liquidity when everybody else is running for the exit. They effectively set the bottom for the markets.

The real point, is that the entrance of guys like Wilbur Ross is a fairly good sign that a real bottom may be at hand for a significant number of distressed assets.

Read a little about this in a New York Times article by Louise Story entitled "Investors Stalk the Wounded of Wall Street." As the article tells us:

... W. L. Ross & Company, recently spent $2.6 billion for two mortgage servicers and a bond insurance company. He said he planned to buy more as hedge funds and other investors sell at bargain prices.

Some deep-pocketed investors are following his lead. Wealthy individuals, endowments and pension funds are giving the vultures billions of dollars to invest.

Last year, as the mortgage crisis erupted and then ripped through the credit markets, about $21 billion flowed into hedge funds that specialize in distressed investments -- just over $1 out of every $10 flowed into those loosely regulated investment vehicles, according to Hedge Fund Research.

"There are a lot of dead carcasses on the road, and the vultures are out sniffing," said Andy Kessler, a former hedge fund manager. "This is the cycle of Wall Street. When bubbles crash, you get the value guys who come in and say, 'This thing is cheap.'  "

-- Jack Krupansky

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