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The Crash of the King of Liquidity

Key Biscayne’s high-flying hedge fund operator, John Devaney, once called “The King of Liquidity,” has crashed and burned.

I’ve been gawking at the Devaney hedge fund wreck for a long time. The festive charitable giving to needy causes (inoculation from scrutiny by the mainstream press). The entertaining of then Senate majority leader Bill Frist and other luminaries. The mysteries of making a few hundred million trading asset backed securities formed from junk aka “the ownership society.”

That turns out to be one of the signature phenomenon of the current market cycle that shows no signs of bottoming yet: what an excruciatingly long time it is taking to play out.

A year ago, the media began reporting the troubles afflicting the Key Biscayne hedge fund king: “A Miami-based hedge fund titan with a taste for the high life is getting a harsh lesson in humility as his fund racks up losses in the bond-market rout. … The fund’s portfolios are now said to be worth around $460 million, down from about $620 million.”  (New York Post, August 2, 2007)

But according to The Miami Herald, “On Thursday, Devaney said the fund had lost about 90 percent of its value by September 2007.” (Miami Herald, July 11, 2008)

So, which was it?  A year ago, was Devaney lying or not?

Investors are suddenly realizing that down markets are an especially bad time to question whether there is any difference between fraud, theft, and a worthless investment portfolio with John Devaney.

With hedge funds, there is no penalty for misrepresentation unless it is outright fraud and theft. The US Congress and White House have repeatedly blocked efforts to hold hedge funds to the same degree of accountability as other fiduciary agents.

Most mutual fund owners don’t have a clue how John Devaney made enough millions to hang Matisses on the walls of his Key Biscayne home. But they should, because what John Devaney does (did) along with 10,000 hedge funds is shaking the foundations of the world financial system.

It is no surprise that hedge fund risk is manifesting in the collapsed fortunes of a Miami trader. The political origins of the housing boom–that many hedge funds fed from– are right here, twined like a golden thread in the chain of campaign contributions links builders, lobbyists land speculators and Wall Street– still freely circulating and immune to criticism by the media.

If you are looking for particular scoundrels, start with key McCain economic advisor former Senator Phil Gramm, now vice chairman of the Swiss bank UBS, who helped speed the deregulation of the financial industries and who just lashed out at Americans as “a nation of whiners”.

That clunker dropped at the same moment Miami production homebuilders, like beleagured Lennar, and lobbyists like Sergio Pino and Rodney Barreto–Miami’s local power brokers– are begging for government bailouts of their own cratering investments in land outside the Urban Development Boundary.

“Help us, help us,” they cry, expecting their pockets to be lined by insider deals from big infrastructure “economic rescue plans”, including new zoning changes to put more sprawl in western suburbs edging the Everglades.

Never mind that the last tranche of buyers flushed out like dove, long ago, or, that critics used to be called “elitists”, who complained about the costs of unsustainable growth. You don’t hear that, anymore. But you also don’t hear the history of what happened, or, most any other relevant news except iterations of the spin machine.

Look no further of reason for investors shunning the US dollar.

Yesterday, the Herald reported: “Devaney himself has lost more than $100 million, he said. His losses amount to about half his net worth, he added. But he still has a 126-foot yacht, the Dorothy Ann — a present to his mother — moored behind his Key Biscayne home.” Devaney will never be forced out of his home like those foreclosed from ranch-style American dream homes sold by Lennar or Pino or Barreto.

Like Pino or Barreto, Devaney’s assets are happily shielded by laws and regulations they condemn when it comes to the accumulation of wealth in free markets, like inserting platted subdivisions in wetlands or polluting public lands with stormwater runoff into the Everglades.

It’s just the case that the pockets of wealth are drying down, like Everglades ponding in dry season. In a perverse way, that makes it easier for observers to see what is in them, or, what is just pretending to be there.

ALAN FARAGO lives in south Florida. He can be reached at: afarago@bellsouth.net

 

 

 

 

 

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Alan Farago is president of Friends of the Everglades and can be reached at afarago@bellsouth.net

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