Fund Managers Rattled by Rescue Plan’s Rejection (Update1)
By Frederic Tomesco and Sree Vidya Bhaktavatsalam
Sept. 30 (Bloomberg) — “I’ve never lived through something like that,” Stephen Jarislowsky, the 83-year-old chairman of Montreal-based money manager Jarislowsky Fraser Ltd., said yesterday after Wachovia Corp. joined Fannie Mae, American International Group Inc. and Washington Mutual Inc. on the list of financial companies to fail in the past month.
“I don’t even think the ’30s were like that,” he said in a telephone interview. “At least they had a bank holiday and they closed all the banks. These idiots in Washington didn’t do that.”
On the worst day in global financial markets in 21 years, investors who have seen it all were left shaken. After the U.S. House of Representatives voted down a $700 billion rescue package supported by President George W. Bush and leaders of both parties, $1.2 trillion of market value was erased from U.S. stocks.
“I’m more than worried,” said Jarislowsky, who co-founded his firm in 1955 and oversees C$51 billion ($49 billion). “In a market like this, I’m not looking at opportunity. I am looking at preservation of capital. If governments aren’t careful and this mess isn’t solved fast, capitalism as we know it will be wiped out.”
The consensus of fund managers interviewed yesterday was that the Treasury Secretary Henry Paulson and congressional leaders will fashion a compromise that can win legislative approval and prevent a complete collapse of financial markets.
“After the initial surprise, I said to myself that they will sign it by the end of this week,” said Jean-Marie Eveillard, who oversees $35 billion at First Eagle Funds in New York. “Not one congressman wants to be identified as having contributed to an economic and financial catastrophe.”
Eveillard, 68, said he will continue to shun financial stocks while holding on to gold. He has moved as much as 8 percent of his $22 billion First Eagle Global Fund into gold bullion.
Amid partisan wrangling, the House voted down the bailout proposal by a vote of 228 to 205. The legislation would have given Paulson broad authority to buy troubled assets from financial companies to help ease a lending crunch triggered by the decline of the housing market.
Paulson told reporters that lawmakers “need to work as quickly as possible” to reach a deal.
“The markets around the world are under stress,” he said. “Our toolkit is substantial but insufficient” to fix the crisis and legislation is needed.
The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 percent today, the British Bankers’ Association said. The euro interbank offered rate, or Euribor, for one-month loans climbed to record 5.05 percent, the European Banking Federation said. The Libor-OIS spread, a gauge of the scarcity of cash, advanced to a record.
Until yesterday, asset-management stocks had held up better than broader financials. The Standard & Poor’s Supercomposite Asset Management and Custody Bank Index fell 20 percent for the year through Sept. 28, while the Supercomposite Financials Index lost 25 percent. Yesterday, money managers tumbled 25 percent, while financials shed 15 percent.
The decline was led by Bank of New York Mellon Corp., the world’s largest financial custodian, and rival State Street Corp., which both fell 27 percent. Investors were concerned that the mounting credit crisis will cause increased losses in their bond holdings and off-balance funds called conduits.
Impact on Economy
“It’s pretty much a nightmare,” said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages $5 billion in San Antonio.
“I felt my stomach drop” after the Treasury package was rejected, said James Swanson, chief investment strategist at MFS Investment Management, the Boston-based fund unit of Canadian insurer Sun Life Financial Inc.
Swanson, whose firm manages about $200 billion, said not enough had been done to explain to lawmakers that “real jobs,” and not just Wall Street banks, depend on the bailout.
“We’ve already seen the real economy slowing, and the worst case is if that continues and gets worse,” he said.
Yesterday’s plunge may feed on itself as investors decide to pull money from hedge funds, and hedge funds sell securities to raise cash, said Stewart Massey, founding partner of investment-consulting firm Massey Quick & Co. in Morristown, New Jersey.
In some cases, investors have to decide as early as today if they want to pull money from hedge funds at year-end.
“The timing of this market decline will push some folks over the edge,” he said.
Hedge funds have lost about 9.5 percent on average this year and are headed for their worst performance ever, according to data compiled by Chicago-based Hedge Fund Research Inc.
Neil Hennessy remained sanguine.
“Remember that there is only one end to the world, and this isn’t it,” said Hennessy, who oversees more than $2 billion as president of Hennessy Funds in Novato, California.
“We will get through this,” Hennessy said. “Like a large kidney stone, it’s going to pass, but it’s going to hurt.”
To contact the reporters for this story: Frederic Tomesco in Montreal at email@example.com; Sree Vidya Bhaktavatsalam in Boston at firstname.lastname@example.org
Last Updated: September 30, 2008 08:11 EDT