I have to admit that I have some degree of admiration for John Devaney -- the brash fund manager from United Capital Markets Holding rode the housing boom to unprecedented heights, only to watch his castle turn out to be made of sand as the market imploded. The New York Times carried a story on Devaney's (deserved? unfortunate?) fate Thursday morning, and it appears that his well-known Horizon Strategies fund is finally done and gone:
... on Wednesday Mr. Devaney, who made and then lost a fortune trading mortgage investments, finally called it quits. He shut his hedge fund, and told his investors that all their money was gone too. "I’m devastated, I’m totally devastated," Mr. Devaney said by telephone from Aspen, Colo. "I feel horrible that I’ve lost my own money and that so many people who saw the skills I have and trusted in us have now been hurt."
Deutsche Bank, apparently, finally did him in with a $90 million margin call, the Times reported. And like many things in life, his mortgage bond fund arrived with a roar and left with a whimper; so, too, for the man that seemed nearly ready-made for ridicule by market observers. What I always liked about Devaney was his willingness to do things differently; in the shadow world of hedge funds, his ego liked the press spotlight. Which opened him up to ridicule, even if in truth he really wasn't all that different from his more publicity-shy counterparts. That said, Devaney's perma-bullish take on the mortgage bond market proved to be his undoing. I recalled in an earlier story how Devaney, who sponsored a lavish dinner party at February's American Securitation Forum annual conference, was telling market participants then that he was throwing himself headlong back into mortgage bonds -- for him, every day was a good day to buy. He wasn't alone, either. Nearly everyone that picked the earlier part of this year as The Time to get back into RMBS has been burned. And badly. A recent letter from Devaney (warning: in .doc format) in mid-June to investors at his broker-dealer business, which yet survives, provides some insight into the mindset:
... I am at this time very optimistic about telling people that have money to buy right now. I have been for much of my career one that has run into a burning building when others are fleeing. Providing liquidity to those that are forced to sell has been very lucrative over the past 15 years. There are now 10 investors that are forced to sell vs 1 buyer - this has caused a very real disconnect between current trading levels and the fundamentals. This difference in one word is "arbitrage."
His assessment of the likely total carnage in the structured finance industry, however, is much more sobering and doesn't quite gell with his assessment of "buy now." He writes:
... the 500 billion of losses so reported by banks and insurance companies likely will go to 1 trillion of reported losses. The hedge funds/mutual funds/money managers are really not reporting losses and that bucket likely is another 500 billion. There likely is 1.5 trillion of losses that will be realized one way or another from the structure [sic] finance market collapse.
The Times story also notes:
Mr. Devaney thinks the mortgage crisis is nowhere near its end and expects regional banks and insurance companies to face big losses on mortgage bonds.
A guy who spent his career running into burning buildings is finally finding out what happens when the building collapses; but in Devaney's case, he knows nothing else but to keep doing what he's always done -- keep on running towards a fire. Respect him or despise him, or perhaps both, thus goes the conundrum that is John Devaney.