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Growing Unease as British Mutual Funds Block the Exit Doors

99 points by jstreebin 10y ago

twinkletwinkle 10y ago
Am I misunderstanding this line: "So far, the numbers are small enough. Of the 35 billion pounds, or $45 billion, invested in these funds, just under £20 billion has been affected." What? More than half? And that's considered insignificantly small?
- aab0 10y ago
  "These types of direct property funds — where the fund itself owns the building or property outright — represent a small piece of the mutual fund world. Yet they have accounted for a growing share of investment in commercial real estate in Britain in recent years. According to a recent Bank of England report, these funds have about $46 billion in assets under management, representing 7 percent of investment in the British market." http://www.nytimes.com/2016/07/07/business/dealbook/3-more-property-funds-halt-withdrawals-after-brexit-vote.html http://www.nytimes.com/2016/07/07/business/dealbook/3-more-p... the linked article. So it seems this is maybe 3 percent of the overall British mutual fund market, and a fairly exotic part.
  - TheOtherHobbes 10y ago
    Where "exotic" = "high risk". These funds are far less liquid than most, because they're structured to offer a small amount of floating capital to cover normal withdrawals, and a much larger pool of highly illiquid capital trapped in high-value commercial properties which can take months or years to sell. So these are among the riskiest of all funds. They're a very niche interest for experienced investors. Historically they've offered much higher returns than the market average, but clearly that's over now. The situation isn't quite analogous to a bank run, because these funds are very peripheral and not structural. But a bank run isn't impossible. The UK desperately needs a renegotiated trade agreement with the EU to clarify the UK's position - and that's not going to happen any time soon. As one US investor said, no one in their right mind is going to go anywhere near the British economy until this is settled.
    - eru 10y ago
      Hmm, it seems like a closed (and perhaps exchanged traded) fund holding the same assets would be superior to this kind of property fund? If you want out, someone else has to take the property off you. Might as well do that via the exchanges, instead of letting some fund managers do it. Or what am I missing?
      - Ntrails 10y ago
        Superior in what sense? When you invest in a fund with liquidity constraints you get paid in higher returns (an "illiquidity premium"). This was known by investors going in. ETFs don't just magically make everything liquid without costs
        eru 10y ago
        Exactly. The ETFs just make the liquidity issues public on the market. For the fund, you'd be paying some managers to buy and sell stuff whenever enough people/money leaves or enters the fund.
    - spoonie 10y ago
      They're a very niche interest for experienced investors. Experienced investors who are crowding for the doors based on the ups & downs of the market? Sounds pretty amateur to me.
- foota 10y ago
  It's possible that the first part is a typo and should be trillion?
  - towlejunior 10y ago
    Total global wealth is $250 trillion. British mutual funds can't be one-fifth of it, no matter how well invested.
    - foota 10y ago
      Thanks for the reality check. aab0 seems to have the right of it, they cite a different article that goes into more detail about the funds in question http://www.nytimes.com/2016/07/07/business/dealbook/3-more-property-funds-halt-withdrawals-after-brexit-vote.html?ref=dealbook http://www.nytimes.com/2016/07/07/business/dealbook/3-more-p... edit: I'm still wrong, but it seems British mutual funds are an appreciable fraction of total global wealth (https://en.wikipedia.org/wiki/List_of_institutional_investors_in_the_United_Kingdom#Mutual_funds https://en.wikipedia.org/wiki/List_of_institutional_investor...) double ninja edit: that's not right. I don't really understand what the figures on that page are supposed to represent... anyone want to try clearing it up for me?
      - zhte415 10y ago
        I will clear it up for you: The numbers on that page are meaningless and misleading. Firstly, the AUM column in the table doesn't represent anything. It overstates their _global_ AUM by 2 to 20 times for the companies I checked. Secondly, this is by no means an exhaustive list of institutional investors in the UK. There are, well, I don't know but there are a huge number of small nameless investors sitting in the UK investing private funds globally, that are not and never will be on this list and whose assets will never be known, only estimated.
    - eru 10y ago
      Interesting. Where is that number from? I can imagine it comes with a ton of caveats. I don't think it's easy to put eg a value on towns or entire countries. (It's a shame we no longer see trades in sovereignty to observe prices from, eg like the Louisiana or Alaska purchase. But the wealth is still there.)
- bravo22 10y ago
  I think the article meant the overall numbers are insignificant, as opposed to it being insignificant as a percentage of the actual funds.
  - Bud 10y ago
    That makes no sense. Tens of billions of pounds is significant by any standard. Has to be an error here.
    - whatok 10y ago
      It's relatively insignificant when compared against the rest of the mutual fund complex.
ape4 10y ago
Does the fine print say they are allowed to do this?
- JanSolo 10y ago
  The article mentions that the managers are allowed to block withdrawals under 'exceptional circumstances' to protect those with a longer term investment outlook.
  - enjo 10y ago
    The book/movie "The Big Short" dramatizes this really nicely.
    - theoh 10y ago
      In that case the fund manager was portrayed as receiving threats of legal action when he refused to allow people to leave -- there was absolutely no explanatory context which allowed the audience to decide whether his actions represented merely a whim of the fund manager or a legally valid option. Edit: My comment refers to the film.
      - the_watcher 10y ago
        You're speaking solely about the film. The book goes into great detail about this.
      - tanderson92 10y ago
        That is not true. In fact the book was very clear how this occurred; I would have to rewatch but I believe the movie also hints at this. I thought the book's discussion of side pocketing was one of the most revealing parts of book: Lewis did an excellent job at explaining the recourses available to money managers. Here's two short paragraphs from page 145 (of my copy, anyway) of The Big Short: ================= > One night, as Burry was complaining to his wife about the complete absence of long-term perspective in the financial markets, a thought struck him: His agreement with his investors gave him the right to keep their money if he had invested it "in securities for which there is no public market or that are not freely tradable." It was left to the manager to decide if there was a public market for a security. If Michael Burry thought there wasn't--for instance, if he thought a market was temporarily not functioning or somehow fraudulent--he was permitted to "side-pocket" an investment. That is, he could tell his investors that they couldn't have their money back until the bet he'd made with it had run its natural course. And so he did what seemed to him the only proper and logical thing to do: He side-pocketed his credit default swaps. The long list of investors eager to get their money back from him--a list that included his founding backer, Gotham Capital--received the news from him in a terse letter: He was locking up between 50 and 55 percent of their money. Burry followed this letter with his quarterly report, which he hoped might make everyone feel a bit better. ... > Immediately, his partners at Gotham Capital threatened to sue him. They soon were joined by others, who began to organize themselves into a legal fighting force. What distinguished Gotham was that their leaders flew out from New York to San Jose and tried to bully Burry into giving them back the $100 million they had invested with him. In January 2006 Gotham's creator, Joel Greenblatt, had gone on television to promote a book and, when asked to name his favorite "value investors," had extolled the virtues of a rare talent named Mike Burry. Ten months later he traveled three thousand miles with his partner, John Petry, to tell Mike Burry he was a liar and to pressure him into abandoning the bet Burry viewed as the single shrewdest of his career. "If there was one moment I might have caved, that was it," said Burry. "Joel was like a godfather to me -a partner in my firm, the guy that 'discovered' me and backed me before anyone outside my family did. I respected him and looked up to him." Now, as Greenblatt told him no judge in any court of law would side with his decision to side pocket what was clearly a tradable security, whatever feelings Mike Burry had for him vanished. When Greenblatt asked to see a list of the subprime mortgage bonds Burry had bet against, Burry refused. From Greenblatt's point of view, he had given this guy $100 million and the guy was not only refusing to give it back but to even talk to him. And Greenblatt had a point. It was wildly unconventional to side-pocket an investment for which there was obviously a market. There was clearly some low price at which Michael Burry might bail out of his bet against the subprime mortgage bond market. To some meaningful number of his investors, it looked as if Burry simply did not want to accept the judgment of the marketplace: He'd made a bad bet and was failing to accept his loss. But to Burry, the judgment of the marketplace was fraudulent, and Joel Greenblatt didn't know what he was talking about. "It became clear to me that they still didn't understand the [credit default swap] positions," he said.
carsongross 10y ago
Reminiscent of the 2007 BNP Paribas suspensions that were some of the first indications of systemic failure: http://www.nytimes.com/2007/08/09/business/worldbusiness/09iht-09bnp.7054054.html http://www.nytimes.com/2007/08/09/business/worldbusiness/09i... We are due for another credit heart attack. Private debt is too large (see Steve Keen's work) and there is no stomach for fixing it. Most economists don't recognize that that's the problem.
- tosseraccount 10y ago
  "The Big Short" Scion Fund managers restricted withdrawals, too. [ http://www.nytimes.com/2007/03/09/business/09insider.html http://www.nytimes.com/2007/03/09/business/09insider.html ] Either way, chaos created opportunity and Scion investors might feel lucky that they were locked in the castle. The subprime mortgage market finally imploded causing the Great Recession. If you are confident of credit crisis, perhaps you can do your own shorting.
  - carsongross 10y ago
    I'm fairly confident of one but, of course, timing is difficult and carry costs of short positions are high (they nearly killed Scion) so I prefer to simply wait out the market.
bubbleRefuge 10y ago
“At some point you have to wonder what happens if all these investors decide to go home.” Asset prices decline. Interest rates become attractive. New investors come in. Money under the mattress doesn't give much of a return.
- eru 10y ago
  Unless the central bank doesn't print enough money, and we end in a deflation. Then money under the mattress gives real returns at no nominal risk.
- branchless 10y ago
  And people in the UK get to have a reason to work again as land prices fall back in line with local wages. Hooray. Speculators: go home. Of course we still need to put our parasitic banking industry into line but it's a start.
  - justin66 10y ago
    > Speculators: go home. I imagine they know how to go short as well as long.
    - branchless 10y ago
      Really? I think most land speculators are pretty unsophisticated. How are they going to go short? Short UK house builders? Already dropped. Hedge GBP? Already dropped. Most are holding the baby now.
cesarb 10y ago
I believe every fund has a clause like that in their rules, at least all the ones I've seen so far do: in case of exceptional lack of liquidity, or so many requests to get out of the fund that it would compromise the liquidity, the administrator is allowed to temporarily forbid getting out of the fund. What these funds do is sort of similar to statistical multiplexing. They keep part of their assets as liquid stuff like cash or easy-to-sell government bonds, and the rest is longer-term stuff that takes more time and effort to convert into cash. Normally, requests to get out of the fund can use only the more liquid part, which will be gradually replenished from the less-liquid part. If there are too many people trying to get out at the same time, however, the more liquid part can get depleted, and were it not for that rule, the fund would be forced to sell the less liquid part at a loss, to the detriment of the remaining holders.
- roymurdock 10y ago
  You're basically describing a bank run, or a run on any institution whose business it is to make investments in relatively illiquid assets, earn a return, and pay its investors a share of that return. The model relies on steady inflows and outflows.
  - robzyb 10y ago
    > You're basically describing a bank run [...] A bank run is a very special case, and while it might have similarities, it pays to be cautious when drawing comparisons. Bank runs are special because of the fractional reserve banking system. (Usually its at this point that someone launches into a tirade vaguely conspiracy-theory-ish about fractional reserve banking system, and complains that money is debt, but I grok it)
    - MichaelApproved 10y ago
      Fractional reserve banking is a banking system in which only a fraction of bank deposits are backed by actual cash on hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties. Meaning, rather than let the cash sit in a vault, the bank is allowed to loan that money out to other people. If everyone wanted their money back, the bank would not be able to fulfill the request until they have recalled all those loans or perhaps sold the loans to other banks.
vocatus_gate 10y ago
Not to be the token cryptocurrency shill in the thread, but Bitcoin and its derivatives are very useful in situations like this. It's impossible to stop or otherwise block Bitcoin transfers, so it enables, for better or worse, unrestricted capital movement.
- JeremyBanks 10y ago
  Even if your BitCoin are held by an investment vehicle..?
- united893 10y ago
  Not true. These are hedge funds managing complex instruments, not just regular bank accounts. Your bitcoin wallet doesn't allow shorting for example. Equivalent instruments built on blockchain technology would suffer from similar issues.
  - drcross 10y ago
    >These are hedge funds managing complex instruments. How come it's only when it comes to matters of finance that people tell me things are too complex for me to understand, yet I am well capable of understanding the most convoluted of machinery and systems. My only conclusion is that they are needlessly complicated on purpose.
    - daveguy 10y ago
      Complex meaning not able to be liquidated with a single bitcoin or any other currency transaction. This is a specific asset that the fund administrators are not allowing to be liquidated. If you used bitcoin to buy these assets they would still be held outside of the bitcoin system. Just like when you use dollars/pounds/etc to buy the asset the wealth is no longer held in dollars/pounds/etc. They would be at least one step removed from the currency regardless. You couldn't liquidate immediately even if you bought into the mutual fund with bitcoin. The mutual fund would never be held in pure bitcoin because there are multiple assets -- other stocks, bonds, etc (e.g. complex). Complex as in not simple. Not complex as in you wouldn't understand.
tvladeck 10y ago
This seems to me very analogous to preventing a run on banks. Traditionally retail banks would invest their depositors' savings in real estate by financing mortgages. Indeed - in England many banks are still called "building societies". Depositors are in principle able to get their money back at any time, but this is possible only because a small fraction will want to at any one time. But when there's a "run on the banks" in a financial crisis, banks can't satisfy the withdrawal demands of every depositor simultaneously - except through distressed sales that only exacerbate the problem. Governments sometimes step in to call a "bank holiday" until the panic subsides. The situation, down to the main class of assets held (real estate) and the liquidity promised to creditors, seems to be pretty much exactly the same as at the retail level. That being the case, this seems to be the prudent move.
- eric_the_read 10y ago
  My understanding is that the British building society is more akin to a credit union, being owned by its members, than a bank. Is that not the case?
  - tvladeck 10y ago
    I was more speaking to the origin of the term (as in, a society of people pooling their money to build buildings); not how it's used today. You may very well be correct and that would make sense.
    - alblue 10y ago
      Many building societies became banks over the last couple of decades. However, some are still mutually owned, such as the Narionwide and the Co-op.
- gozur88 10y ago
  >This seems to me very analogous to preventing a run on banks. Traditionally retail banks would invest their depositors' savings in real estate by financing mortgages. Indeed - in England many banks are still called "building societies". That's not really how banking works in a fractional reserve system. The money banks lend to borrowers is created as part of the loan transaction, and in theory the bank retains enough money to pay off all depositors in the event of a bank run.
ChuckMcM 10y ago
Locking the doors is always a risky proposition. On the one hand it avoids fire sales, on the other it makes other investors nervous. Great scene in "its a wonderful life" when their was a run on the Bailey Building and Loan where George Bailey (James Stewart) explains the "60 days" rule. And the people who "sold their shares" for 50 cents on the dollar to the evil banker across the street.
- taneq 10y ago
  I was thinking of the scene in Mary Poppins regarding the tuppence: https://youtu.be/lfP8__wl-_4 https://youtu.be/lfP8__wl-_4
the_watcher 10y ago
Correct me if I am wrong, but isn't the "extreme circumstances" clause the same one used by Michael Burry prior to the 2008 crash (detailed in The Big Short)? I don't think it's only British funds with this kind of language. It seems like standard boilerplate a lawyer would insert into the documents as a catch-all for anything unexpected (and misuse of it would be addressed with litigation)
- cesarb 10y ago
  > I don't think it's only British funds with this kind of language. It seems like standard boilerplate a lawyer would insert into the documents as a catch-all for anything unexpected (and misuse of it would be addressed with litigation) Yes, this kind of clause can be found elsewhere. The ones I'm most familiar with are Brazilian funds, and randomly picking one from a major bank, the rest of the rule for it is: if the fund stays closed for more than 5 days, the manager has 15 days to do a vote among the holders, which can then replace the manager, reopen the fund, keep it closed, pay in assets instead of cash, split the fund, or even liquidate it. So any misuse of this clause would probably lead at least to the manager losing control over the fund.
WalterBright 10y ago
I suspect that what will eventually happen with Brexit is Britain will negotiate enough free trade deals that it will remain part of the EU in all but name.
- discardorama 10y ago
  Problem is: if they want free trade with EU, they must accept free movement of labor; which was the main underlying problem which caused people to vote for Brexit. If they adopt free labor movement, the Brexit would have been for vain, and most Brexit supporters won't go for it.
  - brc 10y ago
    You can negotiate plenty of labor movement just with some simple qualifications, like not having a criminal history, being an eu citizen for 5+ years, no access to welfare for 3 years, things like that. I think most brexit supporters would go for that. The opposition is not to immigration in general from what I understand, but to uncontrolled immigration with which the UK parliament has no control. Modern visa granting can be done electronically like the U.S. ESTA and could easily be achieved with little disruption. It could also prove a handy earner for a small fee. I think it is misrepresenting the majority of brexit supporters to say they don't want any immigration. All the ones I talked to just wanted to have a say, and the EU did not give them that.
socialist_coder 10y ago
The Brexit will never happen, for 2 reasons. 1) The EU is not allowing the UK any unofficial negotiations, so they have no idea how any of these economic negotiations will go. The UK government is scared to pull the trigger and no one in power wants to be the one to do it. 2) The UK needs free trade with the EU. If they want free trade, they also have to agree to free movement of labor. Stopping free movement of the labor was one of the core reasons the Brexit passed.
- Houshalter 10y ago
  But if they don't go through with it, the voters will be pissed that they are breaking promises and anti democratic, etc, and vote them out. It's my understanding that conservatives are over represented in Parliament in the UK. You can have free trade without limitless immigration. Many countries do. I don't know where you get that idea.
  - yongjik 10y ago
    I'm sure UK can have free trade with Japan without any immigration. Good luck arranging that (free trade w/o immigration) with the rest of EU.
    - Houshalter 10y ago
      I believe the EU has free trade deals with Australia and Canada, without unrestricted immigration. Those are both former UK colonies that are similar to the UK. I'm not sure why you believe the EU is anti-trade. In fact promoting free trade seems to be it's main purpose.
      - yongjik 10y ago
        Label it whatever you want, but I believe the EU is anti-(trade with UK without freedom of movement) because they publicly said so. http://www.bbc.com/news/world-europe-36659900 http://www.bbc.com/news/world-europe-36659900 > "Any agreement, which will be concluded with the UK as a third country, will have to be based on a balance of rights and obligations. Access to the single market requires acceptance of all four freedoms." Are you saying that they're bluffing? (Well, that's possible, I guess.)
retrogradeorbit 10y ago
A bit of light relief on this subject from South Park: https://www.youtube.com/watch?v=-DT7bX-B1Mg https://www.youtube.com/watch?v=-DT7bX-B1Mg

99 points by jstreebin 10y ago

Am I misunderstanding this line: "So far, the numbers are small enough. Of the 35 billion pounds, or $45 billion, invested in these funds, just under £20 billion has been affected." What? More than half? And that's considered insignificantly small?

aab0 10y ago
"These types of direct property funds — where the fund itself owns the building or property outright — represent a small piece of the mutual fund world. Yet they have accounted for a growing share of investment in commercial real estate in Britain in recent years. According to a recent Bank of England report, these funds have about $46 billion in assets under management, representing 7 percent of investment in the British market." http://www.nytimes.com/2016/07/07/business/dealbook/3-more-property-funds-halt-withdrawals-after-brexit-vote.html http://www.nytimes.com/2016/07/07/business/dealbook/3-more-p... the linked article. So it seems this is maybe 3 percent of the overall British mutual fund market, and a fairly exotic part.
- TheOtherHobbes 10y ago
  Where "exotic" = "high risk". These funds are far less liquid than most, because they're structured to offer a small amount of floating capital to cover normal withdrawals, and a much larger pool of highly illiquid capital trapped in high-value commercial properties which can take months or years to sell. So these are among the riskiest of all funds. They're a very niche interest for experienced investors. Historically they've offered much higher returns than the market average, but clearly that's over now. The situation isn't quite analogous to a bank run, because these funds are very peripheral and not structural. But a bank run isn't impossible. The UK desperately needs a renegotiated trade agreement with the EU to clarify the UK's position - and that's not going to happen any time soon. As one US investor said, no one in their right mind is going to go anywhere near the British economy until this is settled.
  - eru 10y ago
    Hmm, it seems like a closed (and perhaps exchanged traded) fund holding the same assets would be superior to this kind of property fund? If you want out, someone else has to take the property off you. Might as well do that via the exchanges, instead of letting some fund managers do it. Or what am I missing?
    - Ntrails 10y ago
      Superior in what sense? When you invest in a fund with liquidity constraints you get paid in higher returns (an "illiquidity premium"). This was known by investors going in. ETFs don't just magically make everything liquid without costs
      - eru 10y ago
        Exactly. The ETFs just make the liquidity issues public on the market. For the fund, you'd be paying some managers to buy and sell stuff whenever enough people/money leaves or enters the fund.
  - spoonie 10y ago
    They're a very niche interest for experienced investors. Experienced investors who are crowding for the doors based on the ups & downs of the market? Sounds pretty amateur to me.
foota 10y ago
It's possible that the first part is a typo and should be trillion?
- towlejunior 10y ago
  Total global wealth is $250 trillion. British mutual funds can't be one-fifth of it, no matter how well invested.
  - foota 10y ago
    Thanks for the reality check. aab0 seems to have the right of it, they cite a different article that goes into more detail about the funds in question http://www.nytimes.com/2016/07/07/business/dealbook/3-more-property-funds-halt-withdrawals-after-brexit-vote.html?ref=dealbook http://www.nytimes.com/2016/07/07/business/dealbook/3-more-p... edit: I'm still wrong, but it seems British mutual funds are an appreciable fraction of total global wealth (https://en.wikipedia.org/wiki/List_of_institutional_investors_in_the_United_Kingdom#Mutual_funds https://en.wikipedia.org/wiki/List_of_institutional_investor...) double ninja edit: that's not right. I don't really understand what the figures on that page are supposed to represent... anyone want to try clearing it up for me?
    - zhte415 10y ago
      I will clear it up for you: The numbers on that page are meaningless and misleading. Firstly, the AUM column in the table doesn't represent anything. It overstates their _global_ AUM by 2 to 20 times for the companies I checked. Secondly, this is by no means an exhaustive list of institutional investors in the UK. There are, well, I don't know but there are a huge number of small nameless investors sitting in the UK investing private funds globally, that are not and never will be on this list and whose assets will never be known, only estimated.
  - eru 10y ago
    Interesting. Where is that number from? I can imagine it comes with a ton of caveats. I don't think it's easy to put eg a value on towns or entire countries. (It's a shame we no longer see trades in sovereignty to observe prices from, eg like the Louisiana or Alaska purchase. But the wealth is still there.)
bravo22 10y ago
I think the article meant the overall numbers are insignificant, as opposed to it being insignificant as a percentage of the actual funds.
- Bud 10y ago
  That makes no sense. Tens of billions of pounds is significant by any standard. Has to be an error here.
  - whatok 10y ago
    It's relatively insignificant when compared against the rest of the mutual fund complex.

ape4 10y ago

Does the fine print say they are allowed to do this?

JanSolo 10y ago
The article mentions that the managers are allowed to block withdrawals under 'exceptional circumstances' to protect those with a longer term investment outlook.
- enjo 10y ago
  The book/movie "The Big Short" dramatizes this really nicely.
  - theoh 10y ago
    In that case the fund manager was portrayed as receiving threats of legal action when he refused to allow people to leave -- there was absolutely no explanatory context which allowed the audience to decide whether his actions represented merely a whim of the fund manager or a legally valid option. Edit: My comment refers to the film.
    - the_watcher 10y ago
      You're speaking solely about the film. The book goes into great detail about this.
    - tanderson92 10y ago
      That is not true. In fact the book was very clear how this occurred; I would have to rewatch but I believe the movie also hints at this. I thought the book's discussion of side pocketing was one of the most revealing parts of book: Lewis did an excellent job at explaining the recourses available to money managers. Here's two short paragraphs from page 145 (of my copy, anyway) of The Big Short: ================= > One night, as Burry was complaining to his wife about the complete absence of long-term perspective in the financial markets, a thought struck him: His agreement with his investors gave him the right to keep their money if he had invested it "in securities for which there is no public market or that are not freely tradable." It was left to the manager to decide if there was a public market for a security. If Michael Burry thought there wasn't--for instance, if he thought a market was temporarily not functioning or somehow fraudulent--he was permitted to "side-pocket" an investment. That is, he could tell his investors that they couldn't have their money back until the bet he'd made with it had run its natural course. And so he did what seemed to him the only proper and logical thing to do: He side-pocketed his credit default swaps. The long list of investors eager to get their money back from him--a list that included his founding backer, Gotham Capital--received the news from him in a terse letter: He was locking up between 50 and 55 percent of their money. Burry followed this letter with his quarterly report, which he hoped might make everyone feel a bit better. ... > Immediately, his partners at Gotham Capital threatened to sue him. They soon were joined by others, who began to organize themselves into a legal fighting force. What distinguished Gotham was that their leaders flew out from New York to San Jose and tried to bully Burry into giving them back the $100 million they had invested with him. In January 2006 Gotham's creator, Joel Greenblatt, had gone on television to promote a book and, when asked to name his favorite "value investors," had extolled the virtues of a rare talent named Mike Burry. Ten months later he traveled three thousand miles with his partner, John Petry, to tell Mike Burry he was a liar and to pressure him into abandoning the bet Burry viewed as the single shrewdest of his career. "If there was one moment I might have caved, that was it," said Burry. "Joel was like a godfather to me -a partner in my firm, the guy that 'discovered' me and backed me before anyone outside my family did. I respected him and looked up to him." Now, as Greenblatt told him no judge in any court of law would side with his decision to side pocket what was clearly a tradable security, whatever feelings Mike Burry had for him vanished. When Greenblatt asked to see a list of the subprime mortgage bonds Burry had bet against, Burry refused. From Greenblatt's point of view, he had given this guy $100 million and the guy was not only refusing to give it back but to even talk to him. And Greenblatt had a point. It was wildly unconventional to side-pocket an investment for which there was obviously a market. There was clearly some low price at which Michael Burry might bail out of his bet against the subprime mortgage bond market. To some meaningful number of his investors, it looked as if Burry simply did not want to accept the judgment of the marketplace: He'd made a bad bet and was failing to accept his loss. But to Burry, the judgment of the marketplace was fraudulent, and Joel Greenblatt didn't know what he was talking about. "It became clear to me that they still didn't understand the [credit default swap] positions," he said.

carsongross 10y ago

Reminiscent of the 2007 BNP Paribas suspensions that were some of the first indications of systemic failure: http://www.nytimes.com/2007/08/09/business/worldbusiness/09iht-09bnp.7054054.html http://www.nytimes.com/2007/08/09/business/worldbusiness/09i... We are due for another credit heart attack. Private debt is too large (see Steve Keen's work) and there is no stomach for fixing it. Most economists don't recognize that that's the problem.

tosseraccount 10y ago
"The Big Short" Scion Fund managers restricted withdrawals, too. [ http://www.nytimes.com/2007/03/09/business/09insider.html http://www.nytimes.com/2007/03/09/business/09insider.html ] Either way, chaos created opportunity and Scion investors might feel lucky that they were locked in the castle. The subprime mortgage market finally imploded causing the Great Recession. If you are confident of credit crisis, perhaps you can do your own shorting.
- carsongross 10y ago
  I'm fairly confident of one but, of course, timing is difficult and carry costs of short positions are high (they nearly killed Scion) so I prefer to simply wait out the market.

bubbleRefuge 10y ago

“At some point you have to wonder what happens if all these investors decide to go home.” Asset prices decline. Interest rates become attractive. New investors come in. Money under the mattress doesn't give much of a return.

eru 10y ago
Unless the central bank doesn't print enough money, and we end in a deflation. Then money under the mattress gives real returns at no nominal risk.
branchless 10y ago
And people in the UK get to have a reason to work again as land prices fall back in line with local wages. Hooray. Speculators: go home. Of course we still need to put our parasitic banking industry into line but it's a start.
- justin66 10y ago
  > Speculators: go home. I imagine they know how to go short as well as long.
  - branchless 10y ago
    Really? I think most land speculators are pretty unsophisticated. How are they going to go short? Short UK house builders? Already dropped. Hedge GBP? Already dropped. Most are holding the baby now.

cesarb 10y ago

I believe every fund has a clause like that in their rules, at least all the ones I've seen so far do: in case of exceptional lack of liquidity, or so many requests to get out of the fund that it would compromise the liquidity, the administrator is allowed to temporarily forbid getting out of the fund. What these funds do is sort of similar to statistical multiplexing. They keep part of their assets as liquid stuff like cash or easy-to-sell government bonds, and the rest is longer-term stuff that takes more time and effort to convert into cash. Normally, requests to get out of the fund can use only the more liquid part, which will be gradually replenished from the less-liquid part. If there are too many people trying to get out at the same time, however, the more liquid part can get depleted, and were it not for that rule, the fund would be forced to sell the less liquid part at a loss, to the detriment of the remaining holders.

roymurdock 10y ago
You're basically describing a bank run, or a run on any institution whose business it is to make investments in relatively illiquid assets, earn a return, and pay its investors a share of that return. The model relies on steady inflows and outflows.
- robzyb 10y ago
  > You're basically describing a bank run [...] A bank run is a very special case, and while it might have similarities, it pays to be cautious when drawing comparisons. Bank runs are special because of the fractional reserve banking system. (Usually its at this point that someone launches into a tirade vaguely conspiracy-theory-ish about fractional reserve banking system, and complains that money is debt, but I grok it)
  - MichaelApproved 10y ago
    Fractional reserve banking is a banking system in which only a fraction of bank deposits are backed by actual cash on hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties. Meaning, rather than let the cash sit in a vault, the bank is allowed to loan that money out to other people. If everyone wanted their money back, the bank would not be able to fulfill the request until they have recalled all those loans or perhaps sold the loans to other banks.

vocatus_gate 10y ago

Not to be the token cryptocurrency shill in the thread, but Bitcoin and its derivatives are very useful in situations like this. It's impossible to stop or otherwise block Bitcoin transfers, so it enables, for better or worse, unrestricted capital movement.

JeremyBanks 10y ago
Even if your BitCoin are held by an investment vehicle..?
united893 10y ago
Not true. These are hedge funds managing complex instruments, not just regular bank accounts. Your bitcoin wallet doesn't allow shorting for example. Equivalent instruments built on blockchain technology would suffer from similar issues.
- drcross 10y ago
  >These are hedge funds managing complex instruments. How come it's only when it comes to matters of finance that people tell me things are too complex for me to understand, yet I am well capable of understanding the most convoluted of machinery and systems. My only conclusion is that they are needlessly complicated on purpose.
  - daveguy 10y ago
    Complex meaning not able to be liquidated with a single bitcoin or any other currency transaction. This is a specific asset that the fund administrators are not allowing to be liquidated. If you used bitcoin to buy these assets they would still be held outside of the bitcoin system. Just like when you use dollars/pounds/etc to buy the asset the wealth is no longer held in dollars/pounds/etc. They would be at least one step removed from the currency regardless. You couldn't liquidate immediately even if you bought into the mutual fund with bitcoin. The mutual fund would never be held in pure bitcoin because there are multiple assets -- other stocks, bonds, etc (e.g. complex). Complex as in not simple. Not complex as in you wouldn't understand.

tvladeck 10y ago

This seems to me very analogous to preventing a run on banks. Traditionally retail banks would invest their depositors' savings in real estate by financing mortgages. Indeed - in England many banks are still called "building societies". Depositors are in principle able to get their money back at any time, but this is possible only because a small fraction will want to at any one time. But when there's a "run on the banks" in a financial crisis, banks can't satisfy the withdrawal demands of every depositor simultaneously - except through distressed sales that only exacerbate the problem. Governments sometimes step in to call a "bank holiday" until the panic subsides. The situation, down to the main class of assets held (real estate) and the liquidity promised to creditors, seems to be pretty much exactly the same as at the retail level. That being the case, this seems to be the prudent move.

eric_the_read 10y ago
My understanding is that the British building society is more akin to a credit union, being owned by its members, than a bank. Is that not the case?
- tvladeck 10y ago
  I was more speaking to the origin of the term (as in, a society of people pooling their money to build buildings); not how it's used today. You may very well be correct and that would make sense.
  - alblue 10y ago
    Many building societies became banks over the last couple of decades. However, some are still mutually owned, such as the Narionwide and the Co-op.
gozur88 10y ago
>This seems to me very analogous to preventing a run on banks. Traditionally retail banks would invest their depositors' savings in real estate by financing mortgages. Indeed - in England many banks are still called "building societies". That's not really how banking works in a fractional reserve system. The money banks lend to borrowers is created as part of the loan transaction, and in theory the bank retains enough money to pay off all depositors in the event of a bank run.

ChuckMcM 10y ago

Locking the doors is always a risky proposition. On the one hand it avoids fire sales, on the other it makes other investors nervous. Great scene in "its a wonderful life" when their was a run on the Bailey Building and Loan where George Bailey (James Stewart) explains the "60 days" rule. And the people who "sold their shares" for 50 cents on the dollar to the evil banker across the street.

taneq 10y ago
I was thinking of the scene in Mary Poppins regarding the tuppence: https://youtu.be/lfP8__wl-_4 https://youtu.be/lfP8__wl-_4

the_watcher 10y ago

Correct me if I am wrong, but isn't the "extreme circumstances" clause the same one used by Michael Burry prior to the 2008 crash (detailed in The Big Short)? I don't think it's only British funds with this kind of language. It seems like standard boilerplate a lawyer would insert into the documents as a catch-all for anything unexpected (and misuse of it would be addressed with litigation)

cesarb 10y ago
> I don't think it's only British funds with this kind of language. It seems like standard boilerplate a lawyer would insert into the documents as a catch-all for anything unexpected (and misuse of it would be addressed with litigation) Yes, this kind of clause can be found elsewhere. The ones I'm most familiar with are Brazilian funds, and randomly picking one from a major bank, the rest of the rule for it is: if the fund stays closed for more than 5 days, the manager has 15 days to do a vote among the holders, which can then replace the manager, reopen the fund, keep it closed, pay in assets instead of cash, split the fund, or even liquidate it. So any misuse of this clause would probably lead at least to the manager losing control over the fund.

WalterBright 10y ago

I suspect that what will eventually happen with Brexit is Britain will negotiate enough free trade deals that it will remain part of the EU in all but name.

discardorama 10y ago
Problem is: if they want free trade with EU, they must accept free movement of labor; which was the main underlying problem which caused people to vote for Brexit. If they adopt free labor movement, the Brexit would have been for vain, and most Brexit supporters won't go for it.
- brc 10y ago
  You can negotiate plenty of labor movement just with some simple qualifications, like not having a criminal history, being an eu citizen for 5+ years, no access to welfare for 3 years, things like that. I think most brexit supporters would go for that. The opposition is not to immigration in general from what I understand, but to uncontrolled immigration with which the UK parliament has no control. Modern visa granting can be done electronically like the U.S. ESTA and could easily be achieved with little disruption. It could also prove a handy earner for a small fee. I think it is misrepresenting the majority of brexit supporters to say they don't want any immigration. All the ones I talked to just wanted to have a say, and the EU did not give them that.

socialist_coder 10y ago

The Brexit will never happen, for 2 reasons. 1) The EU is not allowing the UK any unofficial negotiations, so they have no idea how any of these economic negotiations will go. The UK government is scared to pull the trigger and no one in power wants to be the one to do it. 2) The UK needs free trade with the EU. If they want free trade, they also have to agree to free movement of labor. Stopping free movement of the labor was one of the core reasons the Brexit passed.

Houshalter 10y ago
But if they don't go through with it, the voters will be pissed that they are breaking promises and anti democratic, etc, and vote them out. It's my understanding that conservatives are over represented in Parliament in the UK. You can have free trade without limitless immigration. Many countries do. I don't know where you get that idea.
- yongjik 10y ago
  I'm sure UK can have free trade with Japan without any immigration. Good luck arranging that (free trade w/o immigration) with the rest of EU.
  - Houshalter 10y ago
    I believe the EU has free trade deals with Australia and Canada, without unrestricted immigration. Those are both former UK colonies that are similar to the UK. I'm not sure why you believe the EU is anti-trade. In fact promoting free trade seems to be it's main purpose.
    - yongjik 10y ago
      Label it whatever you want, but I believe the EU is anti-(trade with UK without freedom of movement) because they publicly said so. http://www.bbc.com/news/world-europe-36659900 http://www.bbc.com/news/world-europe-36659900 > "Any agreement, which will be concluded with the UK as a third country, will have to be based on a balance of rights and obligations. Access to the single market requires acceptance of all four freedoms." Are you saying that they're bluffing? (Well, that's possible, I guess.)

retrogradeorbit 10y ago

A bit of light relief on this subject from South Park: https://www.youtube.com/watch?v=-DT7bX-B1Mg https://www.youtube.com/watch?v=-DT7bX-B1Mg