Watching Timothy Geithner.

He’s a decent poker player. He likely understands probabilities. He could use some help with bet sizing. He could use some work with sales. I’ve given him my opinion on a thing or two. He may make a decent cameo for the movie cc: theConsigliere et all

In 2006 Cerberus Capital Management took a controlling 51 percent stake in lender GMAC from General Motors Corp for $7.4 billion.

In 2007, at the height of the credit bubble, Cerberus bought 80.1% of Chrysler from Daimler. Along with their co-investors, they ultimately invested $7.4 billion in Chrysler—a sum they now value at 1.4 billion, or 19 cents on the dollar.

In the interest of your informed scrutiny, the rundown on Cerberus execs: Former US Treasury Secretary John Snow is chairman; Steve Feinberg is president; and former Vice President Dan Quayle runs one of it’s international units.

In December of last year, Cerberus halted requests for redemptions in two of it’s funds — Cerberus Partners LP and Cerberus International LP — to avert having to sell the funds assets at “fire sale” prices. At the time, they intended to pay 20% of year-end withdrawals in cash and suspend the remaining redemptions for up to 12 months.

Since December, Cerberus has faced a slew of redemption requests from investors. Citing weak market conditions, they have not returned any cash. In an effort to restructure the funds, investors were asked if they’d move their holdings into a new fund that would have longer lock ups, but lower fees.

In response, clients representing a large portion of the funds — as much as 60% or 70% of total assets — have requested to withdraw.

Last week, traders in London and Frankfurt were abuzz with talk of a major hedge fund defaulting. Given recent reports of large redemption requests, speculation quickly turned to Cerberus. On September 1st, spokesman Tim Price stated,

“There is absolutely no truth to the speculation.”

On the same day, the Financial Times reported That COO of Cerberus, Mark Neporent, “stressed that those redemption requests totaled less than 20% of Cerberus’s $24.3bn in assets under management and would not constrain its ability to operate it’s private equity and hedge funds businesses.” Neporent is quoted as saying, “We still have lots and lots of money in our core business. We have ample liquidity to do what we want to do.”

All of this takes me back to the public markets. Warning signs indicate impending stress–especially in the financials. Any rally in equities last week remain unconfirmed by the credit market, where spreads have widened. When I hear the statement, “We have ample liquidity,” I am reminded of so many fallen financial giants whose similar words echoed in their demise.

I can’t help but wonder if Cerberus — or someone else for that matter — is indeed facing a liquidity crisis.

If someone is in danger of default, it is likely due to leverage. Are they over-leveraged? If so, who are the counter-parties to their risk?

Cerberus Capital is named after the Roman mythological three-headed dog that guarded the gates of the underworld–also known as Hades. Ironically, Cerberus Capital, or some other potentially over-leveraged entity, may be a monster of more epic proportions than anyone realizes.

Cerberus

Federal Reserve Bank of Kansas City president Thomas M. Hoenig is out over the wires making some comments. Hoenig is one of the more hawkish (anti-inflation) members of the Fed. Next year, he will rotate in as a voting member of the FOMC.

In recent comments from Jackson Hole, Wyoming, he spoke of the need for the Fed to focus on the right timing for it’s exit strategy.

Today, he speaks to the record amount of debt we are holding, and the huge pressure on the Fed to keep rates low. Speaking to this pressure, he warns:

“As we become more confident that we are at the bottom of the recession and are moving into recovery, we must become more resolute in systematically reducing our balance sheet and raising interest rates.”

Most importantly, Hoenig said large banks are still too highly leveraged and that he expects proposals to force them to raise more capital are:

“Wishful thinking and will not be achieved.”

Leverage is useful when applied at the right time — when the probability of growth is high. When applied at the wrong time or when not reigned in at the right time,  you run the risk of no longer being able to service or restructure the debt–gambler’s ruin.

If large banks are too highly leveraged and proposals to force them to raise more capital cannot be achieved, the risk of gambler’s ruin shifts.

To an inevitability.

Cerberus Capital is denying default rumors. Denial is sometimes a delay tactic.

Rumors are just that–but often where there is smoke, there is fire.

The Financial Times is reporting that Cerberus Capital Management may prohibit investors from withdrawing money for 3 years from two multibillion dollar funds.

If there is no risk of default, why, pray tell, are you prohibiting investors from withdrawls?

Credit spreads have widened in the US, and widened even more over the pond.

There may be more to this story than meets the eye.

My spies are on the case.

Number nine, number nine
Industry allows financial imbalance
-The Beatles, Revolution 9

As mentioned in a prior post, the S&P topped on October 11, 2007. In March of this year, it found support at 666. The March low was 666 days from the October high.

The Panic of 1907, was chiefly caused by a rescission of market liquidity.

The high in 1906 to the low in 1907 lasted 666 days. Markets run in cycles and the cycles don’t change.

The only thing that changes in the markets are the players.

The Panic of 1907