Wednesday, December 3, 2008

For Better, Not Worse

The Marital Estate, circa 2006
FPC Partnership Values  
• FPC 1 $ 50,000,000
• FPC 2 $ 25,000,000
• FPC 3 $ 12,000,000
Citigroup Restricted Stock Units $ 10,000,000
Income Beneficiary Trust $ 10,000,000
Real Estate $ 48,000,000
Art $ 60,000,000
Jewelry $ 3,250,000
Cash $ 15,000,000
  $ 233,250,000
For Better, Not Worse
The End of a Marriage and a Fund

by Alexandra Lebenthal

Mimi really couldn’t stand his face anymore but he didn’t even recognize hers. A marriage over, a fund blown up and a fairy tale ended.

Mimi and John Cutter had always been the center of attention. Since the late 80s, they were in their early twenties and met at Pedro’s, made famous by “The Preppy Handbook.”

He was moving up the ranks at Salomon Brothers and she worked for Mary Boone and knew all the hot artists like Salle, Schnabel and Basquiat.
After three years of dating and dinner downtown at places like Batons and Odeon they worked their way uptown to a lavish wedding at the Plaza. Vera Wang had just opened and Mimi, always a trendsetter, was one of the first people to buy a dress there.

John Jr “JJ” and Smith were born in ‘92 and ‘94.

John stayed at Salomon even after it was acquired by Sandy in 1998. A protégé of Ranieri and Meriwether, his skill in mortgage backed securities was highly valued. He’d always longed to run his own show however, and so (the week before Annabella Maria was born) in 2003, he launched his own fund “Flying Point Capital,” named after the beach in Watermill.
A Plaza wedding ... Flying Point Beach Southampton
Needless to say Mimi didn’t see him much in those first few months but she had her favorite baby nurse for a year along with the boys’ nannies to help.

Flying Point (FPC) took off and quickly became one of the hottest new funds around. FPC was a long short fund that specialized in big macro calls. By 2005 assets had reached $5 billion (the fee structure of “2% and 20%” — 2% management fee and 20% of the performance). In 04-06 his annual results were 64%, 44% and 43% resulting in total cumulative fees of almost $3 billion and assets under management (AUM) of $12 billion. John compensated his 20 employees handsomely but his own comp was a significant percentage of the fees. What they didn’t spend or put into limited other investments, he plowed back into the fund.

Looking south on Hudson Street in Tribeca.
Tribeca was the hip place for hedge fund owners and they bought a former artist’s loft on North Moore and Franklin. Mimi threw herself into the renovation. John didn’t seem to care much, which irritated her. After all, she entertained for his business associates a great deal.

With price being no issue and her art background she went to all the auctions and of course Art Basel in Miami in December. Her trophy purchase was an Andy Warhol Liz (the most recent of which sold for $23 million). To fully showcase that and the rest of their art collection she convinced John they should buy the loft next door. (Anyway, Mimi had heard someone was thinking of buying the place and tearing it down and didn’t want the noise and aggravation.)

Tribeca was also a place of urban renewal with causes and benefits that kept them as busy downtown as they were uptown. Mimi’s taste in clothing tended toward the ‘avant guarde’ --designs that stood out and made the photographers leap like fish out of a pond to catch a dragon fly. She in turn loved seeing the cameras go up as soon as she walked in and felt a rush as she turned and posed for each one. She thought very little of spending $10,000 on a dress but was also perfectly happy to borrow from a designer when offered. John was used to seeing new garment bags appear in the bedroom weekly. She had always maintained a great figure and loved wearing dresses that showed her attributes off - made all the better by the few “improvements” she had been adding each year from lips to breasts to tummy and most recently to cheek implants.

"Mimi’s taste in clothing tended toward the ‘avant guarde’ -- designs that stood out and made the photographers leap like fish out of a pond at a dragon fly."
Sometimes John accompanied her to the galas and charity balls, but more often than not she went alone. He didn’t really enjoy staying out all night after a long day at work. If it was a “command performance”, evidenced by Mimi’s pouting lip (which he still could recognize with the collagen injections), or if she couldn’t find a walker for the evening, he begrudgingly went. At least he found that from time to time some form of business came out of those nights (usually not matched by the large checks he was often himself writing). Invariably, however, he’d end up by the men’s room on the phone talking overseas where markets in Asia were already opening. It bugged Mimi to no end that his empty seat at the table meant that whoever was seated on either side of him was left with only one dinner partner for long stretches of the evening.

Being driven home in the Mercedes after these events Mimi was usually seething about it in while John was oblivious, deeply involved with his Blackberry. Mimi’s regular schedule would be out four nights a week with as much as two events each night. Between the nights out and John’s frequent business trips, they both spent more time with other people than with one another (or with their kids, for that matter). He became more than “close” with FPC’s marketing director, and Mimi became more than “close” with her handsome “art consultant.”

In late 2006 after 22 years of marriage it was over - at least the relationship part. Now it was the high priced divorce attorneys who became the people that the two spent most of their time with. Mimi knew that after so many years of marriage she was entitled to a big payout, and that she would of course have the kids (even though JJ and Smith were away at Boarding school now); and thus would also get money to pay for their care.

She knew generally how much FPC had generated over the last several years and that there were still Restricted Stock Units from Citi which had another two years to vest. She also knew that John had a $10 million trust from and added that into her calculations. Then there was the art and real estate.

In short, Mimi wanted what was hers and wanted it to be over, but she was prepared to wait as long as she needed to. John caustically remarked to anyone around him more than once that he didn’t recall her doing much else than spending his money. He too was prepared to wait just as long as she was to reach a settlement - or go to court if need be.

As 2007 unfolded though, other, bigger, more decisive issues were on his mind. John had already taken larger bets in his fund, expanding further into riskier sectors of the market and increasing his leverage. When the carnage started in the summer, John started taking hits. However, FPC still ended ‘07 with a small gain due to the first part of the year , although he was definitely uneasy about what was to come.

The most appropriate word for what did finally arrive was: Decimation. John was always a risk-taker. That was his strong card, but he got punished for it this time around.

Leverage dried up. Then mid summer, he went in too early to buy up distressed mortgages thinking he was hedged, but then everything blew up when his longs went down and his shorts went up. Investors in FPC started pulling out when their lock ups expired. Even before the last notification date of the year on October 31 John had already lost 42% of his assets from withdrawals and expected another big chunk from pension funds and endowments that needed liquidity.

With his fund now down 60% for the year, John halted redemptions and was facing lawsuits from investors. His only option -- as it was with the other eighty or more funds that have liquidated this past year --- would be to give investors back whatever assets remained and then hopefully start a new fund with new investors.

Back to the Marriage. As 2008 comes to a close the divorce has yet to be settled. Needless to say, the current state of Flying Point Capital and the climate on Wall Street will affect the final outcome. While Mimi was prepared to wait she certainly never dreamed that so much money would be lost so quickly; nor did she imagine that events unfolding in the markets would affect her. There were a few opthers things she never realized also. For example, she was never aware that the trust from which John earned income was actually set up for the benefit of other family members. He only participated in the income generated. Therefore,in the calculating a final settlement, that $10 million was pre-marital assets and cannot be counted. Also, while Mimi knew how much FPC had generated in fees, it is less relevant today because much of it stayed in the Fund.

Divorce proceedings started well before John’s FPC blew up will be valued at whatever its state is today. Whatever the final tally, that value is now certainly a far cry from the net worth of $233 million tabulated in 2006, as listed at the start of this article.

Additionally, John’s Restricted Stock Units from Citi are now worth only a fraction of what they had once been worth. Had Mimi agreed to a settlement even in late 2007 with the Citi stock at close to 50, the value would have been worth $10 million. Today those shares are worth about $1.4 million.

Furthermore, most of their joint assets are relatively illiquid, so things will have to be sold to meet any settlement agreement, and as Mimi well knows the value of their artwork in a declining market, while still handsome, has declined significantly. She saw the results of the fall auctions and knows that with the meager bonus numbers expected on Wall Street this winter, trend is very likely to continue. Auction house guarantees are now a thing of the past. Real Estate too, of course is in the same boat.

Whatever Mimi’s spousal and child support turns out to be, chances are that much of it will end when and if she remarries. Also, it might just end if a boyfriend moves in with her. Child Support can often be reduced by as much as 1/3 when the kids go to college, and the boys are close to college now. They also will “emancipate” at age 21 (in New York State at least) at which point the support she receives for them will be eliminated entirely. Annabella Maria is only 5 so Mimi can at least count on that for another 16 years.

Net worth once estimated in the hundreds of millions, will now, without doubt, be significantly much more modest. When John and Mimi Cutter do settle, that lifestyle she has embraced so singlemindedly will change drastically. Access to financial advisors has already changed as they were all John’s contacts and related to his business. Frankly, they shut her out the day divorce papers were served. She will now need someone to help watch over her finances in a way she never had to before.

In the midst of the continuing body count of jobs lost and houses in foreclosure, Mimi and John’s extravagant lifestyle is beginning to seem like a world that never really existed. The idea of buying a second apartment at a cost of more than the total annual income of entire towns in parts of America just to showcase one’s art or to prevent the irritation of a neighboring renovation, seems so overly indulgent as to border on silly. Sadder still is that twenty good years in the lives of two people amounted to a bubble inflated life devoid any real sense of values, let alone love and partnership.
Alexandra Lebenthal learned from her Father Jim Lebenthal and Grandmother before that about the basics of finances and investments. Today she is the CEO of Lebenthal & Co., LLC and its wealth management division Alexandra & James Co.