There was an interesting comment today on Minyanville by Mr. Practical about hedge funds, manufactured money, and Fannie Mae. From Mr. P. ….

There’s Money Out There

Some have been saying there’s money out there to invest. If there wasn’t, where is all the money that buys these deals from companies issuing stock coming from?

The real answer is it’s being manufactured by hedge funds.

The hedge fund industry is going through a correction for sure. Those that don’t run the risk properly have been paying the price. But there are really good ones, those that do run risk properly and are growing in capital and access to leverage.

Let’s take a recent deal like Fannie Mae (FNM). Hedge funds know the company needs to raise capital and is thus willing to pay an egregious cost to get it done. When the broker-dealer comes to call for FNM it’s with a derivative structure called a mandatory. It’s a little more complicated than this, but essentially the mandatory is stock (convertible into) paying a very high dividend. The hedge fund is able to buy this derivative at a price yielding much more than the common stock, which it then shorts in the open market as an almost perfect hedge.They get a great return for very little risk. This is all at the expense of the current diluted common stock shareholders. Hedge funds borrow the money to do this. This is the one area where credit creation is being accomplished: the hedge fund is willing to borrow because of the great return and the broker-dealer is willing (and able) to lend because of the great collateral (no risk).

One gets the feeling that the powers are getting stock prices up so companies can raise capital by selling stock to hedge funds who sell it to the general public first.

Fannie Mae Gets Married

Speaking of Fannie Mae, this news flash just came in on my Bloomberg terminal. Fannie Mae just got married. Freddie Mac was the best man. The groom may surprise you but here it is in living color.

click on chart for sharper image

Keith Taylor was the photographer. Thanks Keith.

Mike “Mish” Shedlock
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