Chicago Tribune

Bonds Shine as Safe Havens Amid United, GM Woes
by Bill Barnhart – Market Report - May 12, 2005

Speculation and rumor were the principal factors in the GM story this week.

Fears that hedge funds, private investment pools, had placed a losing bet on GM swept financial markets and sent anxious investors to a safe haven in treasuries.

Janet Tavakoli, president of Tavakoli Structured Finance in Chicago, explained the errant bet this way:

Traders apparently had purchased GM bonds to collect their high yield, and sold short (sold borrowed GM shares) or bought “put” options (granting the right to sell GM shares).

Unfortunately for this strategy, financier Kirk Kerkorian last week disclosed his intention to increase his stake in GM to nearly 9 percent, boosting its shares.

A day later, Standard & Poor’s downgraded GM and Ford Motor debt to “junk” status, sending the bonds lower.

Rumors erupted that hedge funds were caught in the ensuing squeeze. It looked like a classis misstep by financial wizards, Tavakoli said.

“I was surprised that the market moved in response to a downgrading,’ she said. “We’ve known and anticipated it for months.”

Likewise, “Kerkorian’s move or a move by anyone looking to scarf up shares of GM shouldn’t be news, either. So why you would short equity to hedge your long-bond position is unfathomable.”

Last week, Federal Reserve Board Chairman Alan Greenspan warned about the dangers of hedge funds using borrowed money to make risky bets.

“I don’t like to be Chicken Little, yet I do agree with Alan Greenspan that there are systemic risks that are pretty ugly,” Tavakoli said.

Such ugliness translates into rosy scenarios for Treasuries and low interest rates.

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Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct professor of derivatives at the University of Chicago's Graduate School of Business. She is the author of: Credit Derivatives & Synthetic Structures (John Wiley & Sons, 1998, 2001), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, 2008).

Janet Tavakoli's book on the global financial meltdown is Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street (Wiley 2009).

Clients of Tavakoli Structured Finance have the benefit of proprietary consultation, which is not available in any other paid or public forum. Clients also commission proprietary research and analysis.

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