Menu Close

Thinning The Herd

On April 12 the NY Times published a glowing puff piece about John Devaney, a subprime mortgage hedge fund guy. Recently Devaney has run into a rough patch and was forced to suspend withdrawals from his hedge fund. The Times changed its tune over the weekend, reporting:

You’ve gotta feel for him. John Devaney, United Capital’s chief executive and a one-time master of the mortgage market who has been taking it on the chin lately, has put his yacht up for sale — for $23.5 million According to, he is selling his 142-foot Trinity yacht, dubbed Positive Carry, and his $16.5 million second-home, named Sardy House and the home of the nation’s largest living Christmas tree…

For a little background here are some snippets from the original piece:

Mr. Devaney, 36, has amassed a fortune he estimates at $250 million by becoming a major dealer in asset-backed bonds through his company, United Capital Markets. As the powerfully fickle market has gone through several giddy booms and wrenching shake-ups in the last decade, he and other nimble traders in a small fraternity of investors have been able to profit handsomely by taking advantage of the market’s wide swings.

Asset-backed securities have become an important source of capital for consumer and business debt, generating fortunes on Wall Street. But despite remaining a relative outsider, Mr. Devaney has done very well indeed.


Mr. Devaney said he first realized he could profit from the market’s flaws in 1998, when investors rushed out of risky bonds after the hedge fund Long-Term Capital Management buckled and Russia defaulted on its debts. Unnerved by those crises, many investors dumped bonds backed by aggressive home equity loans made to people with good credit.

“It was just like it is now: ‘Oh! Oh! Another news tidbit of New Century news. Oh, my god!’ ” he said in a mockingly hysterical tone, referring to the mortgage company that has filed for bankruptcy protection.

From the prospectuses for those securities, Mr. Devaney divined that bondholders would get their money back even if 30 percent of the homeowners defaulted on their loans. He bought the bonds for 50 cents on the dollar for himself and for clients.

As the scare faded and it became apparent that homeowners would not default in big numbers, he sold for handsome profits. It was a formula he has used time and again ever since.


He manages a hedge fund that has $620 million in assets and that had an estimated return of 40 percent last year. His nascent investment-banking business recently became the financial partner for a five-million-square-feet condominium project near Boca Raton.Mr. Devaney’s ambitions are big. He hopes eventually to take United Capital public and raise money in a corporate bond offering so he can have a steady source of capital. Last year, the firm traded $29.9 billion in asset-backed securities and earned net income of $90 million.

Lee Wheeler had a response to all this over on’s message boards that, as always, was both insightful, cogent, and pungent. In his own words:

That article had more red flags than one of those old May Day parades in Moscow.

Losing his ass on financial riverboatin’ at a young age? Check.

Hubristic mocking of the notion of risk? Check.

Investing in a giant Boca Raton condo project in the midst of a housing meltdown? Check.

Ostentatious mega-yacht with “cute” girlebull moniker? Check.

Planning to take his gambling operation public to make an even bigger “score”? Check.

Guys like this are a dime a dozen during market environments like we’ve been in. Gamblers and riverboaters are rewarded handsomely, while those who are cautious or “old school” investors underperform.

You can see this in the chart of how “quality” companies (as determined by S&P) have performed vis-a-vis lower-rated companies and also in how junk debt has outperformed higher-quality debt. This has been going on for years and is unsustainable.

Ultimately, folks like Devaney overextend themselves, thinking they are bulletproof, and then cometh the fall. As Buffett writes, “You find out who’s been swimming naked when the tide goes out.”

No surprise to learn he lost big on his first options trade when he started out in finangler riverboatin’. Once a gambler, always a gambler.
I don’t know whether the markits have turned bearish or whether this is just a scary patch. But given the kind of nonsense we’ve been reading about these BSDs over the past few years, who mistake gambling for investing, it’s probably a good time to thin the herd a bit.

Click to enlarge
Attached Image

Join the conversation and have a little fun at If you are a new visitor to the Stool, please register and join in! To post your observations and charts, and snide, but good-natured, comments, click here to register. Be sure to respond to the confirmation email which is sent instantly. If not in your inbox, check your spam filter.


  1. leewhee


    Devaney told Money magazine last spring that “the consumer has to be an idiot to take on these loans, but it [subprime] has been one of our best-performing investments.”

    Kind of shows you where his head’s at.

    Given what has transpired since then, I guess we can say, “Who’s the idiot now?”

    BTW, the home he is trying to sell in Aspen has 16 bedrooms and 18 bathrooms. Devaney also likes to tool around Key Biscayne in a Rolls Royce. So it sounds like he is still doing okey-dokey.

    But if ever there was a BSD’s BSD, it’s Devaney.

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Follow by Email