Tuesday, May 15, 2012

Bets, bets and more bets

So most skipped over the story of how Neil Bluhm may be buying out the remnant of the late Don Barden's ownership group down at the Rivers Casino.

Don Barden had a diverse mix of equity ownership, but it was still highly leveraged and in the end the collapse of some Lehman Brothers financing undid his ownership of the enterprise.*  At its nadir Neil Bluhm came into the picture provided the capital to keep the enterprise going, but with Barden and his ownership group becoming a very minority owner.

Who had Don Barden recruited into the original mix?  One of the more interesting players was the Retirement System for the City of Detroit. They originally were not directly equity owners but had this loan guarantee which made them some $$ if their backing was never needed. Of course it didn't work out that way. When all imploded, their loan guarantee cost them money and in return they got a small bit of the equity already well diluted in Don Barden's shell. Just last year the ownership of that group was restructured and the Detroit pension system had to put up $54 million in cash. See: Investor's Double Down on Rivers Casino.

I can't tell from the reporting if the latest machination includes Bluhm buying out the equity of the pension system or not. Below is the picture of how the refinancing/recapitalization worked out. Only a dotted line out to the Detroit Pension folks. Beware the dotted line may be one lesson. Who knows what the Detroit pension funds are holding the remaining casino investment for on their books. If the pension system's equity does get bought out, one thing that likely will result is that they will have to reconcile the value of the asset on their books; likely a small fraction of what they put in at any point. It is a loss that has already not gone unnoticed in Detroit.

Given that it the pension system's investment started as a loan guarantee, it was in a sense a highly leveraged derivative not all that much dissimilar to what has put JP Morgan the news of late. Sort of like they sold a put they never expected to be in the money. They could pocket the up front premia and walk away.  As much as I can tell from the superficial reporting on the JPMorgan fiasco, I think they were selling selling credit default swaps with a presumption they would not be needed and in a nearly idential way the bet turned sour. 

The result is that the pension system's  IRR must be a big negative percentage of their original 'investment' at this point. Will we ever know what their potential % loss was?  Even though the Detroit Pension system has a lot more openness than say the City of Pittsburgh's pension system.. probably not. Speaking of openness, note that the city of Pittsburgh has not put out for public consumption any investment info since 2010.  In Detroit at leastyou can read their monthly or more frequent board minutes.

So what eh? The City of Pittsburgh isn't actually violating any law or regulation in putting out so little information.  Pennsylvania has literally over 3200 individual pension funds out there. ... It remains a big mystery not only why the public knows so little about what the specific investments are in all of them... but why nobody ever cares to ask. I have to bet that if there was a comprehensive look at all the specific investments made by all those plans there may be a few surprises in the details.

* as disclosure I once worked at Lehman Brothers, though I couldnt begin to tell you who put money into casinos. Straight LIBOR derivatives is all I got close to.


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