Tuesday, January 15, 2008

Second Curve Capital---a victim of the credit crisis?

Second Curve Capital, a hedge fund focused on financial services stocks and run by the highly regarded Tom Brown, may well be in trouble. The fund has a stable of close and loyal investors, almost all with some links or former links to the financial services industry. There is no public information available on its current condition and no commentary that can be derived from the usual searches. But if Second Curve is troubled, it is truly a sign of just how difficult this market has become and how the collapses in financial services have defied traditional analysis.

What's the cause for alarm? One major reason is that Brown's website of banking commentary, www.bankstocks.com, has not had a comment since December 3 and the sidebar weblog's last comment was on December 7. This has been a regularly functioning website since 2000, and has a significant following in the banking community. That's a sure sign of a distraction for Tom and his team, at a minimum. And then there are his holdings, which tend to be only around 15 to 20 stocks at any one time. Some major ones, almost surely in the top five, have been Capital One(down from the low $70's to 40 in 2007) and First Marblehead(down from the $50's to 14 in '07). Regulatory filings show that in the third quarter Second Curve tripled its position in Indymac Bank at prices in the $20's and today that stock is trading below $5. With the entire financial services industry down significantly combined with Second Curve's predilection for stocks that are off the beaten path, and therefore with less liquidity, it is unlikely that the funds under management are doing well.

Like any hedge fund Second Curve can and does at time short stocks. From reading Tom's comments on bankstocks.com during the year, however, it is clear that his analysis was saying that the impact of the mortgage mess was being overblown. He may at some point be proved right, but will it be a year too late.

Tom Brown is a terrific bank analyst. From the late 80's and into the 90's he was the number one regional bank analyst according to Institutional Investors poll for eight years out of nine. He went on to Tiger Management and then simultaneously started Second Curve and bankstocks.com. He worked hard, did thorough analysis, loved his job and enjoyed sticking up for his positions, sometimes inviting controversy which his hockey player mentality enjoyed.

What can be said, let's pray for rain.

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