if you are a hedge fund, push “3”

A lot of times, my work life takes on something of the hue of Sancho Panza. I research lending patterns, seeking to rearrange the flows of capital in the world, perched from a black office chair in the second floor office of a refurbished building on Geer Street in northeast Central Durham. There have been easier dreams. Perhaps, trying to teach pre-algebra to a band of hungry 8th graders in spring. But then something happens that can change all of that. Our story begins last fall, when I downloaded some deposit data on a large midwestern bank – called Seventh 2nd Bank (7/2). And I did the same for a small North Carolina bank that they were acquiring – call them 2nd Best Bank (SBB). This was some great data! I mean, just a beautiful spreadsheet. The numbers on SBB were damning.Nobody much liked 7/2, but the problem was clearly on the side of SBB. SBB wouldn’t talk. We met with 7/2. We met in a big hotel room with one of 7/2’s corporate lawyers. “We don’t like your lending practices,” we said, “and we don’t want you to come to North Carolina.””And we want you to agree to bring some branches to low income and minority neighborhoods. There are only 2 in the entire state!” The lawyer, who just flew in from Ohio, offered this response:”We don’t put branches just anywhere. But we do have a bus that sweeps through low income neighborhoods. Each bus has a megaphone. The megaphone shouts out advice on how to save money. We sign people up for bank accounts in branches in other parts of town. They can drive over if they want their money back.”For a moment, no one said anything. The lawyer smiled. His cheeks moved, but his eyes were still. “Did I show you my class ring?” –So, we went ahead and submitted our comments to the Federal Reserve. It was quiet. For months, we heard nothing. -On Tuesday, I got a call.”Hey, this is Steven Dovebeart from Investor Strategies. Can I have a copy of your report, the one that made Seventh Second decide to delay?”Er, I thought, report? He was a fast talker. “Right, hey buddy, you won! Right? You caught them. Don’t you know?””No, I don’t know.””Yeah, last night, announced to the SEC.”–By mid afternoon, we were getting hourly phone calls from hedge funds. that would be a lot when you consider how difficult it is to navigate our website. What went down is that we appear to have made comments that provoked the Federal Reserve to delay approving the acquisition of SBB bank. Now that it is Thursday, I think I understand why people say that there is a lot of insider trading going on. These analyst guys call up, don’t identify themselves, and try to pull out information. For example, I got this call from the 212 (NYC) area code this morning:”This is…Alexander, Alex, right. You know, I’m a big community activist. And, I want to go to your protest against SBB tomorrow. You are still going to have that protest, right?””Alright! We’re gonna roll. Yes. Your name is Alex? Alex, can I give you directions to the protest? From…””Yes, you mean you are going to have it? Perfect. That’s all I wanted to know, nothing’s off.” Then the line goes dead.–Another type comes from a distinctly pissed off shareholder.”This is Eli Jones from Alliance Capital Management, and I am calling about 7/2 Bank.”Eli offers that if he thought I knew much, he would just hire me. But he doesn’t, so he won’t. He does want to ask a question, though.”My first question,” he says, “is ‘Why do you hate 7/2?'””Eli, thanks for your call. Did I say we hate anybody? “”You know, you can’t just tell a bank what to do. Do you know that? What do you guys want? Branches? Like, how many, 10? 12? You know, those things cost money.””Eli, we just submitted some comments. Isn’t that part of the process? Gee, it looks like things aren’t working out for old SBB? What is up with those shares, Eli? Down $4 in one day? Are you long on both, or just 7/2?”Thinking about it now, it really is one of those things where some CEO should have thought about how to handle risk. If you consider that their price was about four dollars higher on Monday, then its a loss of $130 million. Today, the calls are going something like this:”This is Leonard, from ABC Capital Markets. We’re just calling to try to find out some kind of illegal insider information to talk with you. “So, what did the Federal Reserve tell you?”These questions are clever. They assume that we are hearing things from the regulators. “Leonard,” I say, “they don’t tell me anything. I can tell you what I have been telling all the other hedge funds. We are going to have our protest tomorrow. Would you like to lend us some shares for the meeting?”They usually think that is some gem of information. Of course, its also in press releases. But the media aren’t calling, heck, except for a few Charlotte reporters. I have to scroll through stories on “Simon and American Idol are Back” to find a contact for a newsroom. Most of them are still catching up on the idea that there is a sale of SBB to 7/2 in the first place.


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