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Strategies & Market Trends : Value Investing
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To: Spekulatius who wrote (30179)2/28/2008 2:15:22 AM
From: Spekulatius  Read Replies (1) of 78705
 
has anyone watched the ALLCO finance disaster from down under?
Allco finance was an "hard asset" manager similar to Macquarie, B&B, BAM and others. The difference appears to be that their accounting was not good. the results for stockholders are not pretty:

finance.yahoo.com

It appears to me that those "hard asset managers are running a risky business. Sure just running assets for others is not a high risk but the reality is not that straightforward. In order to keep growing they constantly purchase new "hard assets" on their own account, bundle them and then resell or IPO (and keep a stub). If this money recycling food chain breaks down, they will sit on those assets just like the banks sit on some of their leveraged buyout or CDO loans. If something goes wrong with a spinoff, these assets may go back to the owner just like SIV go back to the banks.

The whole game seems risky because those companies constantly run a lot of leverage. this business is dependent on cheap money, because they earn their money on the difference between the cash flow of the assets they hold and the interest on the debt they pay. If the cost of capital goes up they will be squeezed and that seems to be happening in Australia where interest rates are not going down because the economy is booming. Well, those hard assets are better than CDO^2 of course but i nevertheless suspect a vulnerability.
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