First up is this note from the Wall Street Journal on how margin debt on the New York Stock Exchange has hit a whopping all-time record of $353 billion. Question: Why did the stock market rally by nearly 300 points Thursday on sluggish retail sales? Answer: When folks are playing around with so much cheap debt care of America's creditors (or is that suckers?) like China and the rest, it's time to party on the proletariat. Better yet, new instruments are coming online that lever things up even more:
Investors are borrowing record sums of money to finance trades on the New York Stock Exchange, according to data due out from the Big Board today.The second is from the New York Times and concerns private equity bigwig Henry Kravis of Kohlberg Kravis Roberts trying to forestall lawmaker's attempts to raise the tax rate on private equity firms from 15% to 35%. It's an interesting political-economic fight for private equity does have considerable lobbying heft and contribute large sums to Democrats as well. Can Congress dilute the contents of the private equity punch bowl? Here is an excerpt on the ongoing battle:NYSE officials attribute the trend to recent regulatory changes effectively allowing both small and big investors to take on more leverage, or borrowed money, from their brokers. So-called margin debt, a broad measure of leverage, jumped 11% to $353 billion at NYSE in May, up from nearly $318 billion in April.
Wall Street has had a love affair with leverage in recent years, typified by hedge funds and private-equity firms that make use of it to buy companies and stocks and bonds...
"I wouldn't necessarily say that leverage equates to risk," said Grace Vogel, executive vice president for member regulation at NYSE. "We feel that the amount of margin being collected by the firms is appropriate, given the strategies in [their customers'] portfolios."
Under the financial industry's old rules, investors who wanted both to buy shares in a company and use so-called options contracts on that stock to guard against an unexpected drop in the value of those shares would have to put up separate collateral for both the stock and the option. If the shares dropped in value, the customer might get a margin call, or request for additional collateral, from a broker to cover the price of the shares, even if the value of the option had increased.
Under a pilot program that the NYSE launched with eight brokerage firms in April, brokers can assess the portfolio as a whole. So if one part of the portfolio goes down but the other part goes up, the investor won't necessarily get a margin call. The upshot for investors is they don't have to tie up as much money on one particularly investment, allowing them to borrow more to make other investments if they want to.
Doug Engmann, a managing director at Fimat USA, one of the brokerages participating in the program, says the change has reduced some of his customers' financing costs by 80%. He estimates reductions of 25% to 50% are the norm.
"This type of financing is not for everyone, just sophisticated, options-trading customers at this point," said Mr. Engmann. "As the industry gets used to it in the next few years, I suspect we'll see it used more widely."
Henry R. Kravis, the billionaire founder of the corporate buyout movement, was working the hallways of Capitol Hill, hoping to kill legislation that would raise his taxes and those of other investment fund executives.While known to powerful people in Washington through longstanding personal and social ties, Mr. Kravis is an unfamiliar figure in many suites of Congress and typically leaves the glad-handing of lobbying to lesser functionaries.
Meeting two weeks ago with Representative Sander M. Levin, a senior Democrat who is proposing to more than double the amount of tax that Mr. Kravis now pays, the buyout titan mustered his best arguments. He said that firms like Kohlberg Kravis Roberts play a central role in the economy, participants recalled, citing the example of how his firm had produced many jobs in Mr. Levin’s home state when it turned around a troubled electricity company in Michigan. He asserted that the lower tax rate benefited all Americans. And he said that an increase in tax rates would harm American competitiveness abroad.
Mr. Levin and his staff were unswayed. One aide asked Mr. Kravis to explain whether the measure would hurt workers and middle-income families by lowering the returns for pension funds that invest in Kohlberg Kravis funds, two aides at the meeting recalled. They said Mr. Kravis agreed with an answer by a partner that the proposal would not hurt returns, and the meeting ended soon afterward.
(An adviser to Kohlberg Kravis on Tuesday described the meeting slightly differently and said that Mr. Kravis said he believed the legislation could have an adverse effect on pension fund returns.)
On the eve of Congressional hearings, managers of private equity firms and hedge funds, who for years remained aloof to Washington’s concerns about their growing financial power, have been caught flat-footed. Fighting a fierce lobbying battle over one of the most contentious and consequential tax proposals in the last decade, they have quickly assembled a huge lobbying machine, formed alliances with other industries, and quietly worked the hallways of Congress.
In recent weeks, lawmakers have had visits from industry leaders including Stephen A. Schwartzman, the head of the Blackstone Group, and David M. Rubenstein, a senior executive and co-founder of the Carlyle Group who served in the Carter administration as a domestic policy adviser.
But Mr. Kravis’s encounter illustrated the difficulties that private equity firm executives and their lobbyists face as lawmakers question their sky-high salaries and tax brackets that are lower than those of many less-affluent Americans. And it foreshadowed an uphill political battle, even as the industry pulls out the stops to wage an intense lobbying campaign...
The private equity firms have formed alliances with other industries, like real estate, energy and venture capital, and retained a battery of lobbyists with strong connections in both parties. They have showered presidential and Congressional campaigns with millions of dollars in contributions. Industry executives are also counting on the support of powerful Democratic lawmakers who happen to rely on Wall Street as a major source of political contributions. They include Senators Charles E. Schumer of New York and Christopher Dodd of Connecticut, and Representative Rahm Emanuel of Illinois. They have not taken a public position on the bills.
“This is pure politics,” he said. “This is about the A.F.L.-C.I.O.’s longstanding policy objective of ending the beneficial tax treatment of risk versus the treatment of wages from work...”
Lastly, here's a story from the Miami Herald how American venture capitalists don't seem to venture out so much outside the land of the free. In this instance at least, I urge these casino capitalists to bring their roulette tables to lands beyond America's shores where they may actually do some good:
The world may be rushing toward globalization, but venture capitalists are not. A survey of 528 venture funds found that while about half were investing abroad, most were simply ''dabbling'' -- holding small international stakes.
In the United States, just 46 percent of venture capital firms invest overseas and two-thirds of those said they had less than 5 percent of their capital committed abroad.
The results are part of Global Trends in Venture Capital, a report released today by the National Venture Capital Association and Deloitte & Touche.
''The adage that venture capital is a local business still rings true,'' sad Mark Heesen, president of the National Venture Capital Association.
The study also found foreign deal-making is highly concentrated. Of the U.S. firms planning to invest abroad, 69 percent said they would put their money in either China, India or Canada...
The focus on Asia may have blinded U.S. funds to the potential of places like Latin America and Eastern Europe, said Heesen. ''I keep thinking every year that we will see larger numbers in Latin America, and that hasn't happened,'' he said. ``It's a huge potential market, particularly Brazil.''
Despite Florida's reputation as the gateway to Latin America, local venture funds rarely look south for deals, said Ravi Ugale, managing director of Palm Beach County's Crossbow Ventures, which has $175 million under management.
''During the bubble days there were some large institutional investors looking at Latin America,'' he said. But now it's more common to find Latin funds investing in the United States than the other way around, he said...
But the study also found that even fund managers focused on their own backyard are hoping to get an international kick.
According to the survey, about 88 percent of U.S. funds own a stake in companies with international operations.
Despite the perception that capital has gone global, the study underscores how much venture capitalists value hands-on management and being involved in the day-to-day operations of their companies, said Mark Jensen, the national managing partner of Deloitte's Venture Capital Services.
''Venture capital is a contact sport,'' he said.
