Hedging our bets

Apparently, hedge funds are so toxic in Alameda that just throwing the word around is enough to qualify as in depth criticism of the Alameda Point Revitalization initiative. The question at Alameda Point is whether or not there will be money to build the projects, and it seems that Hedge Fund money is unacceptable, unlike traditional multinational investment money like Lehman Brothers.

D.E. Shaw, the financial partner involved in the Alameda Point Revitalization project, has routinely been one of the top performing hedge funds over the last tumultuous years, and hasn’t gone under, threatened bankruptcy, etc. No bailout here. So the undefined attack on the source of the money seems strange.

Which brings us to the latest gaffe from Action Alameda (and trust me, they have been gaffe-a-rific over the last couple of weeks). This is the website that defines news as “anything that anybody doesn’t want somebody to know.” Now that’s laugh out loud funny!

Their lead weekend head line was “DE Shaw Real Estate Deal in Florida in Foreclosure” running under the “Save Our City! Alameda” which apparently is their “we’re just making stuff up” category. The story is that D.E. Shaw is a financial backer of Metro Development (one of many backers) and that Metro has over 9,000 homes in foreclosure. But a cursory Google search on the issue shows this isn’t true. (But what is truth when you can quote out of context). From Tampa Bay Online story on the issue:

Metro was rolling in money. The company had revolving lines of credit from five different banks to the tune of $175 million, and it had just formed a joint venture with D.E. Shaw Co., one of the world’s largest hedge funds, that backed the Lennar and M/I deals with $250 million.

….

While the projects purchased with the Shaw backing are still solvent, everything else Metro touched has fallen apart.

The Shaw projects are not in foreclosure. But just like when Action Alameda/Save Our City! Alameda write about the Oak Knoll project, they leave out key, important information that actually makes the story the exact opposite of what it is.

Good stuff…Action Alameda is giving the Alameda Daily Noose a run for it’s money these days.

17 comments for “Hedging our bets

  1. Edmundo Delmundo
    October 5, 2009 at 9:14 am

    Yes! DE Shaw is a well respected, well run and profitable enterprise. What people are failing to realize is that they are a financial resource to the developer (in our case SunCal) but they are not involved in the day-to-day operation of SunCal’s business.

    Do they have a stake? Of course!
    Do they have oversight? Absolutely!

    Has real estate development ever been a slam dunk investment? No..there is plenty of risk involved in a major, multi-decade development effort. Sure – there are plenty of projects seeking bankruptcy protection over the past couple of years. It’s called the mortgage meltdown and if banks aren’t going to lend, then you’ve got to find someone who will. That’s where the hedge funds have been serving our economy for the past year. I seriously doubt that DE Shaw’s entire portfolio is going into the red. It’s likely that less than 10% of their investments are sideways.

    Let’s not forget that if you assume a high level of long term financial risk you ought to be rewarded for it.

  2. October 5, 2009 at 12:18 pm

    DE Shaw might make alot of money…but I’m not sure the way that they make it is what we want in Alameda.

    Definition……Hedge Fund

    A fund, usually used by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Hedge funds are exempt from many of the rules and regulations governing other mutual funds, which allows them to accomplish aggressive investing goals. They are restricted by law to no more than 100 investors per fund, and as a result most hedge funds set extremely high minimum investment amounts, ranging anywhere from $250,000 to over $1 million. As with traditional mutual funds, investors in hedge funds pay a management fee; however, hedge funds also collect a percentage of the profits (usually 20%).

  3. HE
    October 5, 2009 at 2:16 pm

    Yes! DE Shaw is a well respected, well run and profitable enterprise. What people are failing to realize is that they are a financial resource to the developer (in our case SunCal) but they are not involved in the day-to-day operation of SunCal’s business.

    Do they have a stake? Of course!
    Do they have oversight? Absolutely!

    Has real estate development ever been a slam dunk investment? No..there is plenty of risk involved in a major, multi-decade development effort. Sure – there are plenty of projects seeking bankruptcy protection over the past couple of years. It’s called the mortgage meltdown and if banks aren’t going to lend, then you’ve got to find someone who will. That’s where the hedge funds have been serving our economy for the past year. I seriously doubt that DE Shaw’s entire portfolio is going into the red. It’s likely that less than 10% of their investments are sideways.

    Let’s not forget that if you assume a high level of long term financial risk you ought to be rewarded for it.

  4. Michael Krueger
    October 5, 2009 at 2:18 pm

    I have to admit that the term “hedge fund” does not give me the warm fuzzies, but it’s hard to imagine any viable plan for Alameda Point that does not involve some kind of backing from one or more wealthy investors willing to take big risks in hopes of big returns.

    J.E.A., what sort of financial backing would you consider acceptable for this project? Would you favor a non-profit arrangement such as a public trust, even if it meant paying higher taxes? If we Alamedans collectively find hedge funds and other forms of private investment distasteful, are we, the city’s taxpayers, prepared to bear all of the risk ourselves?

  5. Edmundo Delmundo
    October 5, 2009 at 2:29 pm

    ???

    I fail to see how having 100 high net worth investors comitting financial backing to Alameda Point is an issue.

    Do your homework on DE Shaw – they’ve got a long track record and a good one.

  6. Sam
    October 5, 2009 at 2:41 pm

    It’s my impression that hedge funds reap bigger financial returns than other types of investors. They do so on the back of somebody–here, Alamedans. Denying or shying away from this fact doesn’t make it not so. If voters are fine with a them taking these huge returns with little guarantees in return, so be it.

  7. Michael Krueger
    October 5, 2009 at 3:43 pm

    All big returns are not necessarily “on the back of somebody”…normally, the returns are big when the risks are high, just as the returns are low when the risks are low.

    Alameda Point is certainly a risky project, so it’s natural for investors to expect high returns if it pays off. If you want to attract investors who are willing to settle for lower returns, you’re going to have to lower the risk, and in this case it would mean putting more risk on the taxpayers. While it’s tempting to contemplate reaping a big, fat return on our taxpayer dollars, we must also consider the flip side: the potential of raising taxes to pay for a huge public investment gone bad.

    I’m not suggesting the City should roll over for SunCal or any other developer, but on the other hand, if the City makes too many demands for guarantees, it will increase the risks to the point that no developer on Earth will agree to the deal. Finding the right balance won’t be easy, but one has to be realistic about what is and is not possible.

  8. October 5, 2009 at 4:41 pm

    Edmundo, I would suggest you do your homework on DE Shaw and just not look at how much money the investors make…..Yes, they are getting rich but at what costs to others…..short sales, leverage, program trading, derivatives, etc…Fortune magazine once described them as “the most intriguing and mysterious force on Wall Street” Now, you may take that as a compliment but I read it as “mysterious” being just above not ethical.

    Michael, Yes, I would be willing to pay higher taxes if I thought the plan for the Point was a good one. I don’t think it is.

  9. Michael Krueger
    October 5, 2009 at 5:43 pm

    J.E.A., I appreciate the self-consistency of your position. What I find humorous are the seemingly earnest pleas for a public solution like a land trust from individuals who have been very outspoken in their opposition to taxation.

    I would not be opposed to some sort of public solution in principle, but as a practical matter, I’m highly skeptical that a super-majority of the electorate would be willing to pay the higher taxes that would be required to preserve, redevelop, or otherwise re-purpose Alameda Point without private funds, no matter how fantastic the plan sounded. I could be wrong, of course, but consider the results of the last school parcel tax vote.

  10. October 5, 2009 at 7:38 pm

    Michael,
    You know what I find humorous?…..the idea that you might actually know anything about me….So, let me fill you in. I’m as left as they come. What I find distasteful is that the Democrats of this town act just like Republicans…..they have sold their souls for the almighty dollar instead of what is best for Alameda (No, I do not mean anyone is being paid off). The SunCal plan has so many holes in it…….it looks like a piece of Swiss cheese. Do you really think a small town like Alameda has the ability to write a contract with someone like DE Shaw/ SunCal and come out a winner? Why don’t we put this whole thing on hold for a time and fix the problems we have now in town….ie….filling all the empty business spaces at Wind River….filling all the stores at South Shore….etc

  11. Jon Spangler
    October 5, 2009 at 9:37 pm

    JEA asks “Why don’t we put this whole thing on hold for a time and fix the problems we have now in town….ie….filling all the empty business spaces at Wind River….filling all the stores at South Shore….etc?”

    Redeveloping Alameda point is, indeed, the best “fix” for “the problems we now have in town” that you mention. The successful “peace conversion” of the former base is a high priority for me, and the plan that Peter Calthorpe has developed for SunCal is an exemplary model of sustainable, appropriate-density, mixed-use development.

    Where do you suggest that the City of Alameda get the $700 million to replace the failing infrastructure (streets, roads, power grid, sewers, etc.) at AP, not to mention paying to detoxify the land and military buildings beyond the basic standards the US Navy will fund?
    The City of Alameda does not have any funding mechanisms available to it that come close to taking on these financial burdens, and I am certain that the taxpayers of Alameda would not support a $1 billion bond issue for Alameda point, even if it were legally and financially possible to float one that big…

    The City does not lose complete control over the redevelopment of AP even if the initiative passes. There is the complete EIR and all the mitigations (paid for by SunCal) that it will identify. plus the normal design review process at the Planning Board, and the Disposition & Development Agreement (DDA) that must be negotiated between the City and SunCal. (And the City has negotiated several of these satisfactorily with prior developers.) And I believe that SunCal is negotiating in good faith with the City on many fronts, and will continue to do so.

  12. David Hart
    October 6, 2009 at 7:19 am

    Jon Soangler:

    WRT bonds and financing, you do not know what you are talking about.

    Taking apart your third paragraph above, the city does indeed have such a funding mechanisms available (it’s called tax increment financing, aka redevelopment debt) and explicitly plans to use it for a least a few hundred million dollars and very likely much more.

    In a nutshell, the city forgoes the bulk of the general fund property taxes generated from the area; these funds are siphoned off by the TID and used for debt service on the bonds above (et al). It has the effect of draining city coffers because the revenue collected from new area is extremely limited while the responsibilities of government are the same as for the rest of the city. This is the key, essential problem with the Suncal plan’s financing scheme.

    You are right about 1 thing though, the taxpayers likely wouldn’t support such debt. Fortunately for Suncal, their consent is not required. All it takes to issue that debt it 3 councilmembers’ votes, and it is clear that Suncal has those votes secured.

    This is not the first time I have exhorted you to to learn the workings of the financing scheme in this and other blogs. I suggest so again.

  13. John Knox White
    October 6, 2009 at 8:31 am

    Dave,

    Not to nitpick, but as you know, TID bonds are issued after ground has been broken and based on expected tax collection from proposed plans that are underway. Which means that the Redevelopment money available is directly related to the assumed property value in the future.

    The total amount of Redevelopment money available for the SunCal project is nowhere near the $700+ needed to repair infrastructure. I believe that the maximum amount available through redevelopment, based on the assumptions of the current plan is $180-220 million (but I haven’t double checked my memory).

    Maybe I’m missing it, but I don’t think your post actually corrects what Jon said, which is that the City doesn’t have the financial capacity to do the needed infrastructure upgrades for any development at the Point.

    We all agree on one point, I don’t think Alamedans are going to vote for a 30-year annual parcel tax of $1100 to support the infrastructure needs at the Point.

  14. David Hart
    October 6, 2009 at 8:38 am

    If not a parcel tax, then how do you propose the city replenish the general fund after forgoing the property tax revenues from the point? The new area will require ongoing administration but will not be contributing nearly its share to the general fund.

  15. William Smith
    October 7, 2009 at 9:24 pm

    I don’t think any of us can comment definitively on whether or not the D.E. Shaw hedge fund is a good deal for the City unless we know the terms of the agreement between D.E. Shaw and SunCal. The agreement, however, is secret.

    I have seen it posted that D.E. Shaw can replace SunCal at will should it be dissatisfied with SunCal’s performance. Can anyone confirm or refute this hearsay?

    As a successful hedge fund I would expect D.E. Shaw to exert more control over its investments than banks, whose foreclosure practices have shown that they have previously taken a hands off approach to managing their real estate investments.

    The innovative Alameda Point Initiative may well have had some, even considerable, input from D.E. Shaw. The Inititiative was drafted shortly after D.E. Shaw funded SunCal. Renewed Hope’s substitution of the phrase SunCal/Shaw Hedge Fund for the term “Revitalization” substitutes a factual phrase conveying information about the principals behind the Initiative for a judgemental or visionary term.

    Who played what role in drafting the Initiative isn’t nearly as important a consideration as what the Initiative does. All the comments above on financing mechanisms were, to me, much more relevant.

  16. Jayne Smythe
    October 13, 2009 at 6:39 pm

    Okay, so now Mayor Johnson is saying she don’t like the initiative. Check it out on Don Roberts’.

    “Like many, I was initially enthusiastic about the SunCal initiative”, Mayor Johnson explained, “But, it is now a question of fairness – what voters expected versus what we are now told in the initiative. After thorough review of the measure, I believe that the SunCal initiative will have devastating financial impacts on the City.”

  17. M.I.
    October 20, 2009 at 2:55 pm

    I read John’s post early but I missed this thread of comments as they occurred. To me this is one of the better threads which have occurred on the subject up through Bill Smith’s on October 7, even though there are opposing voices . Thank you all. In the last month there has been A LOT of mention of hedge funds virtually as a pejorative, but little if any attempt to discuss what they are , how they work and what the risks are, including in the Renewed HOPE Report which was ushered in with the reberanding Bill refers to above, which I think was not helpful. But I do agree with you last sentence of your post Bill..

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