Fishy Business

[Jcrew]

I had bought some puts a year ago on WCI that expire this week. Anyways, I've been quite frustrated with its recent price movements within the past few months. At its low point around 14, a hedge fund, Basswood Partners, coverted its 1.7 million shares to the equivalent worth of March 07 exp calls with a strike price of 17.5. At the time, it seems like a curious move. Now it seems like an unbelievable prescient move. Since then major players like Gates Fund, Carl Ichan, and Cohen have bought into the company making a run at the heavily short positions.

Anyways this situation made me think of how the Princple-Agent problem can fester itself in the financial world. Bob manages a hedge fund and is buddies with Jack who manages a major mutual fund. Jack is invested in Bob's fund.

Situation A)
Jack tells Bob what moves he is going to make prior to making them costing Jack's fund a slightly higher buy-in price, or lower sell-off price, while making Jack and Bob $$$.

Situation B)
Bob makes a several bad decision in buying into several companies. Tells Jack about it. When it comes time in deciding what companies to buy, Jack has a choice between the companies Bob invested, and companies that are comparable but inside he believes have a slighter greater EV than Bob's group. However Jack's EV is much greater if he decides goes with Bob's group.