Stephen’s Posterous

High Frequency Trading has appeared in the news this year. It is trading securities using supercomputers to make trades in a matter of microseconds, or one-millionth of a second.

Traders in this area generate money by collecting small gains on short-term market gyrations. These traders seek inefficiencies in the market and trade in ways that can make them money.

Market-making, high-frequency firms hope to make money on the difference between how much investors are willing to buy and sell a stock, or the bid-ask spread.

The big players in high frequency are Goldman Sachs Group Inc. and Chicago hedge fund Citadel Investment Group LLC. An innovator in this area is hedge-fund firm Renaissance Technologies LLC.

Getco LLC is a registered market maker with operations in markets around the world. Other high-frequency outfits include firms such as Jane Street Capital LLC, Hudson River Trading LLC, Wolverine Trading LLC and Jump Trading LLC.

High Frequency Trading has drawn interest because it has been hugely successful trading strategy in 2008. The topic made headlines when a former Goldman Sachs employee was charged by federal prosecutors with stealing trade secrets from the firm's high-frequency platform.

High Frequency Trading accounts for more than half of all stock-trading volume in the U.S. and it also generates more revenue for exchanges.

On Flash Orders, a trading firm can keep its order on a certain exchange for up to half a second without matching an existing buy or sell order on another exchange, a move that puts it in a position of poster, rather than responder.

The hope is that another trader who needs to buy or sell quickly steps in on the other side of the trade. This dynamic boosts the chance the flash-order trader will complete the trade on the exchange and get the rebate. Exchanges offer flash orders to keep market share.

Naked access is when brokers allow High Frequency outfits to trade directly on an exchange using a broker's computer-access code. The brokers the traders to interact with the exchange unchecked.

High Frequency provides a constant flow of securities when investors need them, making trading cheaper for everyone. Critics worry that traders could use quick-draw capabilities to drive up prices, selling them back to investors at an inflated level.

Most online brokers that service individual investors and nearly all full-service brokers have servers at the stock-trading platforms to cut buying and selling speed down to milliseconds. This ensures orders are disposed of quickly and efficiently at high speeds, but most brokers are not high-frequency traders.

Read more about High Frequency Trading from The Wall Street Journal.

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The Financial Times reported that Byron Trott, a former Goldman Sachs banker, and frequent financial adviser to Warren Buffett, has raised more than $2bn in capital for his investment firm.

The fundraising success highlights the spotlight that has accompanied Mr. Trott's role as Warren Buffett's preferred and trusted investment banker.

BDT Capital Partners, the venture Mr. Trott founded earlier this year to invest in and advise family-run and entrepreneurial businesses, continues to seek additional commitments. The firm has also begun to add senior dealmakers including Don McLellan, former head of mergers and acquisitions at Motorola.

Mr. Trott worked for Goldman Sachs for 27 years and headed the firm's Chicago office before launching on his own. He has been singled-out repeatedly by Mr. Buffett for his skill in either advising Berkshire or bringing deals to his attention. Berkshire Hathaway holds a modest partnership interest in BDT.

Mr. Trott's departure from Goldman Sachs and BDT's Buffettesque investment strategy has driven speculation that he may be among those Mr. Buffett is considering as his successor as Berkshire's chief investment officer.

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Barnet Frank on the Financial Road Ahead by Avi Salzman, Barrons.com

Rep. Barney Frank (D., Mass.), the chairman of the House Financial Services Committee, has been one of the busiest men in Washington in recent months. So busy, in fact, that when a Barrons.com reporter started a telephone interview with him recently, he dispensed quickly with the formalities.

"Let's go," he said, in an accent that betrays his northern New Jersey roots, before embarking on a wide-ranging interview on whether to nationalize banks, how to rate debt, and how long mark-to-market accounting rules will remain relaxed.

You have talked a lot about the federal government having a systemic risk agency, with the Federal Reserve overseeing it. How would it work?

The Fed took a bit of a roughing up over the AIG bonuses, so it is now unlikely that it would be the Fed alone, though the Fed will have to play a major role. At this point there is more agreement on what than who. It has to have a systemic risk capacity to keep in particular nonbanks from getting overly leveraged.

Are you interested in limiting the size of banks?
 
No. There are always the antitrust laws, but if you look at a typical antitrust law, that doesn't work because no bank is big enough to be that kind of monopoly. By the way the problem seems to be less banks than nonbanks.

I think the problems were with Lehman and AIG and Bear Stearns. What I want to do is to have a systemic risk regulator that keeps any entity from getting so heavily indebted beyond its capacity to pay that it becomes too interconnected to fail.

And who will determine what overleverage is? How much leverage is too much?

A systemic risk regulator [will determine it]. It's in two ways; it's an individual situation and it could also be if too many people get in the same side of the boat it starts to tip over.

Paul Krugman, the liberal economist who just won the Nobel Prize, has talked about banks having to be nationalized to save the system. Is that something that you feel the Obama administration should do?

The president addressed that pretty well. As far as banks being nationalized, which banks? How many? All banks? Ten banks? Three banks? One bank? I mean, of course, I would not rule out a bank being nationalized. It is a tool that might be necessary, but it ought to be a much later resort than now. I don't see any need to do it now.

Some concern has been raised about pension funds investing in hedge funds. Should the government regulate pension investments in hedge funds?

I have limited jurisdiction over that because the pension funds are under Erisa [Employee Retirement Income Security Act], which is in the Education and Labor Committee. They are talking about some kind of safeguards.

I do believe that the hedge funds should be among those entities that are not allowed to get too leveraged, and I believe that they should be required to register with the Securities and Exchange Commission.

And give data on how much leverage they are using?

Well the SEC wouldn't be primarily [overseeing] the leverage thing -- they would be an investor and consumer protection entity. The systemic risk regulator would be looking at leverage with them as with any other entity.

So a systemic risk regulator would have access to the amount of leverage that hedge funds are using.

Any financial entity, yes.

How is the government going to make investors comfortable investing in financial markets? Some investors say that the rules have changed a lot. What's the timetable [on the rule changes]?
 
By the end of the year. I hope by the time Congress adjourns for the year, which may be very late this year. Yes, there is uncertainty now. I do think it's important to provide that kind of stability, and this is a case where regulation is very pro-market because it should give people that assurance.

What reforms do you mean specifically?

The systemic risk regulator, a way to resolve nonbank institutions, a buffing-up of the investor-consumer protection functions at the regular regulators. A change in compensation rules so that people cannot give one-way bonuses and then incentivize excessive risk, and rules that say you can't securitize 100% [of a loan].

You have to retain say 5%, but it still has to be worked out. A fundamental part of the problem was that 100% securitization led to a significant drop in people's focusing on the quality of the loans they made.

Are the credit-rating agencies fundamentally flawed? Does the government need to step in and in what capacity?
 
First of all, the thing to do about rating agencies is to make them less important. If there are enough flaws [with the debt] in the beginning, there is nothing they can do about it. The payment model clearly ought to be changed.

There were biases that grew from the fact that the [corporations] being rated were paying them. I have not myself [figured out] what the best way to do it is -- whether you have investor-paid models or whether there is a government model. Clearly the current system needs to be replaced.

Do you feel that Goldman Sach's (ticker: GS) move [to try to pay back TARP money] is problematic because it could expose other banks in the eyes of investors and the public?
 
No, I am all for it. It is a very good idea. In the first place the notion that 'Oh, if Goldman pays the money back people will know that some institutions are stronger than others' is ridiculous. People already know that. There are all kinds of metrics for deciding which financial institution is strong and which one is weak.

Now do you think that TARP and the PPIP [the government's Public-Private Investment Program to buy up bad assets] will be enough money to get us out of this or are you going to need to have more money?

They are going to have to do the best they can right now. Of course with the PPIP they have gotten the FDIC [Federal Deposit Insurance Corp.] involved as a way to get that going. I do not think there is any prospect of Congress voting more money until and unless people start to see some results.

That is why I am in favor of the TARP money being paid back -- to the extent that you get some substantial repayments of TARP money if you do need more money for some other purpose later on.

As far as mark-to-market accounting reforms, do you think the rules should continue to be relaxed?

Yes. It's indefinite. What is temporary is the discretion that the regulator should show. There are two aspects to mark-to-market. One is the actual valuation, and two is how the regulators react. I do think that at a time like this there is a reason for some administrative and regulatory discretion and that would be temporary.

If things get better then you don't have that same kind of forbearance. As to the mark-to-market rules themselves, they were a little bit too rigid. They didn't differentiate sufficiently it seemed to me between assets held for trading and assets (that were paying assets) that were to be held to maturity. And [the reforms to that are] not going to change.

Are we papering over some of the larger systemic problems in the system by changing or relaxing mark-to-market right now?

I think that's nonsense. It's a straw man. It's not what we are doing in mark-to-market. If you are holding an asset and you plan to hold it until maturity and it is paying as it was supposed to, I don't think you should have to mark it down substantially. The federal home loan banks in a couple of areas were forced to do excessive markdowns. It's not either or -- it's how well you do it.

Do you think that Obama has the right people in charge right now of economic and financial matters?
 
Yes.

Some of the concern is that maybe these guys are too close to some of the people they are regulating. I'm talking about Tim Geithner and Lawrence Summers for instance?
 
I don't think that's true. Who did you think I meant? Frick and Frack?

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Mall owner General Growth Properties Inc. sought bankruptcy protection early Thursday, April 16, 2009, in one of the largest real-estate failures in U.S. history, capping a precarious, months-long effort to juggle the crushing $27 billion debt load it shouldered in past acquisition sprees.

The long-anticipated Chapter 11 filing might wipe out what remains of the Chicago company's stock, but it won't result in mall closures. Many analysts suspect General Growth will survive a lengthy bankruptcy intact, but perhaps smaller after selling properties, without resorting to liquidation. General Growth, which owns and manages more than 200 malls, is the second-largest U.S. mall owner by number of properties behind Simon Property Group Inc.

General Growth's board voted Wednesday, April 15, to make the filing in U.S. Bankruptcy Court in New York after efforts to piece together a plan for an out-of-court restructuring with a growing list of creditors failed to gain traction, according to people familiar with the talks.

The filing includes General Growth, its Rouse Co. subsidiary and most of its malls. It doesn't include General Growth's management company or joint-venture holdings. All told, the filing covers roughly $24 billion of debt, these people say. A General Growth spokesman didn't immediately return messages seeking comment.

What finally forced the bankruptcy filing after months of payment-deadline extensions was General Growth's failure to secure a deal with holders of $2.25 billion of its bonds and other lenders to abstain from demanding immediate payment while the company tried to restructure its balance sheet outside of bankruptcy.

Several holders of past-due bonds notified the company this week that they intended to sue for payment. Meanwhile, additional debts came due on an almost weekly basis.

General Growth has since November negotiated with its lenders for reprieves, sometimes ending up at odds with the likes of Citigroup Inc., Deutsche Bank AG and Goldman Sachs Group and occasionally going for weeks at a time with debts that were past due but not called for payment.

The bankruptcy will have far-reaching implications for the mall industry, including putting pressure on the declining property values of U.S. malls, and mall mortgages, if General Growth dumps property. It also could consolidate power in the mall industry if major players like Simon Property, Westfield Group and Taubman Centers Inc. can come up with the capital to pick up choice pieces.

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Buy me some peanuts and sushi? It doesn’t have quite the ring to it, but that’s what a 21st century ball park will get you. The New York Yankees and their private equity-backed concessionaire have bulked up the food and beverage line-up at the $1.3 billion new Yankee Stadium.

Besides traditional ballpark fare, yes, Cracker Jacks included, concession stands will serve sushi, hot-pressed Cuban sandwiches and garlic fries among other treats. Legends Hospitality, the company founded by CIC Partners, Goldman Sachs, the Yanks and the Dallas Cowboys, led a tour and sampling of the ballpark concessions Wednesday, April 15, 2009.

For Legends it’s all about serving a wide range of ball park fare fresh and hot. The company has spent four months training its staff of about 3,000 in cooking and customer service, according to Senior Vice President Mike Phillips.

Legends should have an opportunity to feast on fans’ appetite for its food. Centerplate, the Yankees’ former concessionaire, took home $70 million in 2007 from its deal with the Bombers. The new stadium features 444 point-of-sale stands, compared with 298 in the old ball park. Phillips declined to comment on projected financial performance but said that, per year, the company expects to sell enough hot dogs that if they were placed end-to-end, they’d stretch 300 miles.

The menu was developed through fan surveys. The Yankees hosted a dress rehearsal two weekends ago with two exhibition games against the Chicago Cubs. Phillips said the garlic fries and cheesesteaks were very popular, and the Farmers Market, where not a single fruit item was deep-fried, also received a lot of attention. Phillips himself couldn’t be pinned down on a favorite item.

“Every single item we serve is excellent,” Phillips said. “We really want to be happy with what we’re selling.”

Carl Provenzano of Carl’s Steaks and Mark Lobel of Lobel’s of New York, said, other than their Stadium offerings, they liked the slider burgers and Wagyu burger, respectively. Right field featured the garlic fries stand, Carl’s and La Esquina Latina. The $6 garlic fries were fairly potent and Carl’s $10.75 cheesesteak was on par with Philadelphia’s Pat’s Steaks.

Left field of the main concourse level offers Johnny Rockets, Brother Jimmy’s BBQ and a Lobel’s of New York butcher stand serving $15 prime beef steak sandwiches.

Brother Jimmy’s served yummy deep-fried pickles with horseradish sauce for $8. Sadly though, the Johnny Rockets staff will not be singing like their diner counterparts for the time being. They did offer up a solid $5 Nathan’s hot dog and $7 milk shake.

Lobel’s sandwiches were made with meat butchered on site behind a glass window for patrons to see. And considering the way last year went, the Yanks have to hope the prime rib is the only thing butchered in the park.

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The government’s capital infusion into banks aimed at getting them lending again has achieved only part of its goal, according to a monthly bank lending survey released by the Treasury Department today.

While the banks gave out more home mortgages in February than in January in 2009, they extended less credit to businesses for such purposes as capital expenditure and acquisitions, the survey shows.

The survey reviewed data reported by 21 banks including Bank of America, JPMorgan Chase & Co., Citigroup Inc., Goldman Sachs Group and Morgan Stanley & Co. It found that the median increase in home mortgage lending from January to February was 35% among the banks, showing that lower mortgage rates had spurred demand for such loans.

But commercial and industrial lending saw a median decrease of 13% for new commitments and a 14% decline for renewal of existing accounts.

“Uncertain economic conditions have resulted in borrowers reducing expenses, paying down debt, and delaying capital expenditure,” the Treasury said in a report. “Also contributing to the lower demand was lower overall merger and acquisition activity.” The survey didn’t break down business lending for different purposes.

Bank of America leads the banks with highest amount of both loan renewal and new commitments, lending $11.7 billion and $10.2 billion, respectively in February. JPMorgan comes in second, with $10.7 billion in loan renewal and $8.9 billion in new lending. Wells Fargo is a solid third, with $9 billion in loan renewal and $4.8 billion in new lending.

By comparison, three other large banks lent much less in February, with $2 billion in new loans for Morgan Stanley, $422 million for Goldman Sachs, and $416 million for Citigroup.

“New loan origination has been substantially limited as the current economic environment makes very few deals viable,” Citigroup said in a report to the Treasury.

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If the Wall Street investment bank was supposedly trampled by the panic of 2008, someone forgot to tell Goldman Sachs. The credit crisis killed off Bear Stearns, Lehman Brothers and ended Merrill Lynch’s independence. Goldman, the last of its peers to go public, has recovered from its fourth-quarter loss to make $1.8bn in the first three months of the year, more than double analysts’ estimates.

And that’s despite some poor numbers in some of its core businesses: incentive fees on hedge funds were virtually non-existent, principal investments recorded a $1.4bn net loss and depressed equity and mergers and acquisitions markets hit investment banking fees and prime brokerage revenue.

In truth, it’s hard not to gander at Goldman’s earnings and conclude the firm, which along with rival Morgan Stanley sought refuge by becoming a bank holding company, is trying to prove the investment bank model it appeared to have dropped is still alive and kicking. For starters, the firm’s black box trading operations provided most of the juice. Second, in an act that seems like biting its thumb to Congress, Goldman set aside more revenue to pay staff, both as a percentage of revenue and on an absolute basis, than last year.

And Goldman executives also appear to have called a halt to shrinking the group’s balance sheet. Sure, assets only rose by 5% since last quarter to $925bn, but that’s a stark change to the deleveraging that has beset the financial sector for a year or more.

Those are some punchy tactics for a firm hoping to convince the Treasury to allow it to pay back the $10bn of taxpayer-funded capital foisted upon it last autumn. But Goldman appears to have the numbers to back it up and to persuade shareholders to stump up for its $5bn stock sale. If Goldman is any evidence, Wall Street isn’t in its coffin just yet.

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Las Vegas Sands Corp.'s chairman and chief executive, Sheldon Adelson, recently rolled the dice with a purchase of company shares, and he may also have tipped his hand regarding the casino company's talks with Chinese investors.

Mr. Adelson bought $37.4 million of the stock in the last two weeks, a move that, because of the nature of securities laws, suggests that the Las Vegas company isn't significantly closer to completing a Macau deal than has already been publicly disclosed.

An insider, after all, is prohibited from trading while in possession of important nonpublic information about a company's prospects. Mr. Adelson and the company had no comment on the stock purchases, a spokesman said.

Las Vegas Sands has said it is talking to two Chinese investment groups about their potential purchase of stakes in casinos and hotels in Macau, China's gambling enclave. Las Vegas Sands has placed some Macau projects on hold because of the world-wide economic slowdown.

An important strategic move in Macau would likely be impossible without private discussions well in advance, said Ben Silverman, director of research at InsiderScore.com, a site that tracks and rates activity by corporate insiders. The legal constraints on insider trading suggest that Mr. Adelson isn't sitting on big news, Mr. Silverman said.

"Either those talks really haven't started or there's nothing imminent," Mr. Silverman said. "The buying signaled to me that everything is very preliminary, that they must not be close to a deal."

Mr. Adelson purchased 12.6 million company shares on the last three trading days in March, according to filings with the Securities and Exchange Commission. Mr. Silverman said the stock purchase, while an incrementally positive sign, amounted to a "drop in the bucket" for Mr. Adelson, who invested about $1 billion in the company during 2008.

Once ranked as one of the world's richest people, Mr. Adelson has seen his fortune wane along with Las Vegas Sands' stock price. After the company went public in a 2004 offering at $29 a share, shares rose to $140 by October 2007. On Tuesday, April 7, however, the shares traded at $4.03 each on the New York Stock Exchange.

In another move with potential strategic significance, Las Vegas Sands recently hired Goldman Sachs Group Inc. to negotiate an amendment from lenders that would allow it to buy back as much as $800 million of its debt. According to its annual report, the company had $10.4 billion in debt at the end of 2008, up from $7.5 billion the previous year, as it pursued its expansion plans in the face of the global recession.

Mr. Adelson has said that the company has no plans to buy back debt and wanted the amendment "solely for the purpose of flexibility."

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Cisco Systems (ticker: CSCO), long a favorite among growth investors, is better known these days as a value investment. Despite worries over the global economy, there's still abundant value in the stock at a recent price of $17.

The company did most of its growing in the early 1990s selling machines, called routers and switches, that connect together personal computers in offices by directing the flow of packets of data. It got even bigger later in the decade as the Internet went mainstream.

Now Cisco would seem to be moving far afield of its networking roots with its $590 million all-stock purchase last month of consumer video camera maker Pure Digital. The company makes the wildly popular "Flip" video cameras, praised for their simplicity and small size. It's sold two million of them since 2007.

The payoff for Cisco is uncertain. But if history is any judge, buying shares of Cisco at just above a market multiple has tended to be a good time to place a bet. At a price-to-earnings multiple of 16.5 times the next four quarters' earnings, Cisco's premium to the Standard & Poor's 500 index is 1.2, well below its premium over the last two decades of 1.5 times, according to Thomson Reuters.

In fact, Cisco is cheap by a few measures. The company had $4 billion in cash on its books and $25.4 billion in investments at the end of the January quarter, and $6 billion in debt. Given that, Cisco trades at about four times the cash on its books, a steal compared to large-cap tech stalwarts such as Microsoft (MSFT), at 9.2 times, or Intel (INTC), at 8.6 times.

While Cisco's sales are expected to fall by roughly 10% in the fiscal year ending in July, there are signs business is stabilizing in its traditional networking market. In a technology rebound, a giant with unparalleled resources such as Cisco is one of the best horses to bet on.

Gone are the days of 50% sales growth at the height of the dot-com bubble, when Cisco held 90%-plus market share of Internet protocol routers and switches. In recent years, as Cisco's growth has slowed, the stock's main value for investors has been as a relative outperformer in a bear market.

What concerns Wall Street these days are two very large initiatives on Cisco's part, the Pure Digital buyout, and Cisco's announcement on March 16 that it will start selling servers this year in competition with Hewlett-Packard (HPQ) and IBM (IBM), each of which resell Cisco routers and switches.

At first blush, both initiatives offer growth at the expense of profit. Cisco's gross profit was 64% of sales last year. In contrast, servers offer a gross profit margin of 20%, and consumer gadgets like the Flip, offer even less. Then, too, Cisco stands to lose an estimated $2 billion annually in router sales through partners HP and IBM, analysts estimate.

But both deals make more sense upon further reflection. Hewlett-Packard has increasingly been selling its own router products in place of Cisco's. So the partnership was already headed for trouble. Relations with IBM are not as fragile as they may seem because Big Blue sells millions of dollars worth of chips to Cisco for routers and switches, so it has an investment in Cisco's continued success.

In both cases, Cisco is trying simply to follow where networking is headed. Where the company once sold machines that sat between computers, corporations today are trying to manage the networks evolving inside of large data-center computer installations.

Cisco can't just sell routers and switches anymore; it must provide the network that's inside all those metal racks of server computers.

As for Pure Digital, Cisco bought the company not just for the device itself, but to gain access to the design and marketing talent on staff at the company, which Cisco needs in a technology market increasingly driven by sales to consumers. "It's really all about creating fantastic consumer experiences, with easy-to-use software, and that's what Pure Digital has done," Charles Carmel, Cisco's vice president of corporate development, tells Barrons.com.

And so Cisco has chosen to bring its expertise directly to those gadgets that would otherwise be "off the grid." Meantime, there are bright spots amid the gloom for Cisco. In a note dated April 5, Goldman Sachs analyst Simona Jankowski argues that consensus earnings estimates are too low for this year and next.

Jankowski believes Cisco is taking share from, among others, Nortel Networks and HP. Cisco's sales will likely trough in the July-ending quarter, she writes.

Selling servers and digital video gadgets represents Cisco's biggest departure from business as usual in the company's 23-year history. While there's little proof either move will pay off, Cisco still has the resources to set the agenda in computer networking and the Internet.

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Backing an oil and gas exploration company has turned into a costly proposition for Kleiner Perkins Caufield & Byers, Goldman Sachs Group Inc. and other investors in Terralliance Technologies Inc.

The Newport Beach, Calif., company, which recently laid off much of its staff, burned through nearly $300 million in equity and then pulled down $150 million in debt from Passport Capital, according to people familiar with Terralliance. The company has been in violation of the terms of the Passport bridge loan since last fall after a $1 billion or more investment from Singapore-based Temasek Holdings fell through, these people say.

Since then, Terralliance has closed its foreign offices and laid off all but about 45 of its more than 125 employees. The most recent layoffs were in mid-March, VentureWire reported last week. Also in March, Terralliance officially terminated the employment of its chief scientist, company founder Erlend Olson, said a person familiar with the company. Olson had previously been chief executive but left that position around September 2008.

The future of Terralliance is unclear as it seeks to prove its petroleum-mapping technology. The company’s acting chief executive and several investors either could not be reached or declined to comment. Details of its situation were pieced together from regulatory filings, a company document reviewed by VentureWire and interviews with people familiar with the company, who asked to remain anonymous.

Terralliance was founded in about 2003 by Olson and others to commercialize technology that uses satellite data to map potential oil and gas deposits.

Olson is a former executive at Pivotal Technologies Inc., which Broadcom Corp. acquired in 2000. Individual investors backed Terralliance until 2004 when it raised $11 million in Series A financing, most of it from Kleiner Perkins, a well-known technology and health-care investor that is looking to make its mark in energy and cleantech investing.

The next year, Terralliance raised a $35.3 million Series B round with Goldman and Kleiner as the main investors. In 2006, the company raised a whopping $250 million from new investors Dubai-based Ithmar Capital and Palo Alto, Calif.-based DAG Ventures with Kleiner and Goldman also participating.

It took Terralliance about a year to spend the $250 million. The company bought up oil and gas leases in places such as Mozambique and Kazakhstan. It purchased satellite data to use in analyzing potential drilling sites and dug test wells. It also bought some Russian jets for a total of more than $20 million.

Terralliance claimed that its mapping technology was more than 90% accurate. Results, however, never approached that and the company failed to find commercial quantities of petroleum. It has since developed a new version of its Direct Hydrocarbon Mapping technology, which could prove more accurate in finding petroleum as well as other natural resources. Terralliance also was developing seismic technology for use in oil and gas exploration.

Meanwhile, running short of cash, Terralliance secured bridge financing from Passport and sought to close a deal with Temasek that would have valued the company at about $3 billion. As part of its due diligence, Temasek insisted on an outside audit of Terralliance, something the company had never completed since getting its first institutional financing. Temasek declined to comment.

The audit began in December 2007 and took about 10 months to finish. When it was done, with oil prices falling, Temasek withdrew, leaving Terralliance to deal with the bridge loan from Passport. Passport, a San Francisco-based investment firm, declined to comment.

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