$1.5 billion is just a drop in the world economy's bucket.
But when to hedge funds lose enough that investors start to withdrawl money from healthy funds? We could have a run on them in a few months if this keeps up. Notice the could. Its supposed to be sophisticated investors... but the same was true of 1929... (yikes).
At least the managers stopped the pain while a little was left.
"Sowood's name came from ``South Woodside Avenue,'' the street in Wellesley, a suburb of Boston, where Larson lived when he started at Harvard Management."
Speaking of which, it seems that Harvard's endowment was a large part of those investors taking the 50% haircut.
From the above Bloomberg article link:
" Larson, 49, opened Sowood in 2004 and early investors included his previous employer, Harvard, which put in $500 million. He joined the university's investment unit, Harvard Management Co. of Boston, in 1991 from the finance division of Cargill Inc., the largest U.S. agricultural company. He started at Cargill in 1979 as an economic analyst.
At Harvard, Larson managed foreign stocks and a commodities portfolio and ran about $3 billion of the endowment of the Cambridge, Massachusetts, university. He earned $17.3 million in 2003, a year when Harvard paid more than $100 million to internal money managers, raising the ire of alumni.
Harvard's $30 billion endowment, the largest for a university, was to increase its allocation to Sowood's hedge fund and a separate private-equity fund this year, according to a December statement from Sowood. The private-equity fund was spun off this month as Boston-based Denham Capital Management LP.
John Longbrake, a university spokesman, declined to comment. Mohamed El-Erian, CEO of Harvard Management, didn't immediately return phone calls.
Higher Returns Sought
El-Erian said in the December statement that splitting the hedge-fund and private-equity businesses would boost returns for both. The Harvard fund was the sole initial investor in the Sowood private-equity fund, whose assets increased 10-fold in two years to $2.3 billion as of December. "
Sowood went from a 10 percent loss for the year ( as of last week when their problems first broke ) to the losses reported today. I don't think they are the only hedge fund that suffered that fate.... the numbers from ABX , CMBX , ITRAXX et al give you an idea of the magnitude of pain that's been inflicted..... now we just have to wait and see who has been torched since the June swoon ! We should know by mid August... which will be the deadline for giving notice for 9/30 redemptions .
Sorry OT but I could use some knowledgeable help... ya know, from someone smarter than me
I received this reply to a post I made...
yes, obviously! we won't see anything like the rtc again. the fasbi regulations have worked pretty well to keep the lending industry under control. whatever the fallout is from the recent batch of subprime lending, it will contained to a few niche players like new century, but the big lenders are plenty stable. and the mbs holders are so large and diversified that the this will be a blip on their screen.
I think the guy's wrong, but am not good with terms like "fasbi". Can anyone help me out with a succint, biting rebuttal? TIA!
CR:
Slightly off topic (well we are talking about implosions) but some time ago you tracked the effect of the RE boom on real estate related employment in California, especially the number of real estate agents. Do you have any data on the impact of the ever widening bust on the employment of agents here.
People are missing a key point here. Sowood got bailed out, and fast, by another hedge fund. That indicates to me that the hedgies are not/have not invested in lockstep and that what we may well see here is a consolidation where the better buy the failures. From the debt market's point of view, as long as folks believe there are enough of the better to cover for the failures, this is actually a good sign...well a good sign in a bad situation...um, you know what I mean. From the equity markets point of view, whatever is good for the debt markets is good news.
Danny, I read your site stating that "cheap money and credit" from the US has been flooding the world. The opposite is happening. China,etc. are flooding the US with credit, while we have all the DEBT. You may want to look at the BEA's site to see the net investment position of the USA and you will see that it is at an alltime low. We owe eachother and the world more than ever before and we have less net overseas investments than ever before.
banker,
i would agree that having the larger fish eat the smaller fish generally a good idea but i have another take on the equity market side of things. one trade that has been fraught with danger (and has been crushed) in recent times has been the long debt / short equity trade. the biggest scare in this trade is the buyout, where the debt gets blasted and the equity soars. now that spreads have widened significantly, and deals are hard to finance, i would think that this kind of trade could be a very good one indeed. consider a crappy company like gm. i dont know what its debt is trading for at the moment, but lets guess at say 9%. if you short the stock and use the proceeds to long the debt you have a carry trade yielding about 14% a year. your risk in this trade, (ex the buyout risk, which used to be huge but probably has nearly vanished) is that the economy starts jammin' to the upside and gm starts selling lots and lots of pickups and suv's. i've never been paid for macro investing, but i would think a large portfolio of similar ideas might work very well in this environment. i wonder if the folks at citadel saw in this large portfolio, a chance to put on this kind of trade?
d
Lets not forget that the 1929 crash was two sharp declines in the DOW over a few days and then a very protracted downside run. In retrospect, it was a decline that took 18 months or so and 20 some years to recover. The decline was fueled by the fear of loosing even more money. The capitulation was secured by no credit, no leverage, no favors. Cash was king. Save some cash!
What makes me think twice is the speed at which the unwind is happening (in spite of the great current DOW numbers). Decliners are well ahead of advancers and the market folks must now be in need of some churn fees instead of cyclical rotation fees.
The fact the Cramer is now providing verbal diarrhea is testament to some now wide spread ignorance of the depth of the issues at hand.
Did anyone see the credit spreads again today? 8.6%? when the stated inflation is a mere 2.3%. Quite the risk premium.
Economic cycles are just that; cycles. What I see is the contraction of some cycles not the evolution of cycles.
in re MTG
one idea that i always found somewhat bizarre is that you could use the balance sheet of a company rated say a-, to write insurance policies which in the aggregate should they be exercised upon would put in out of business, to enhance the credit of the thing they were insuring to aaa....
Corporate Bond Risk Surges by Record as Subprime Losses Spread
By Hamish Risk
July 30 (Bloomberg) -- The risk of owning corporate bonds surged by a record as losses on U.S. subprime mortgages at Germany's IKB Deutsche Industriebank AG triggered concerns of global market contagion.
Contracts on 10 million euros ($13.8 million) of debt included in the iTraxx Crossover Series 7 Index of 50 European companies increased as much as 60,000 euros to 504,000 euros, according to JPMorgan Chase & Co. The CDX North American Investment-Grade Index rose $16,000 to $97,000, Deutsche Bank AG prices show.
Investors are fleeing corporate credit in the fastest selloff in seven years, Barclays Capital said today. The rout that began in mid-June when two Bear Stearns Cos. hedge funds almost collapsed spread worldwide as Blackstone Group LP stepped in last week to support Sydney-based Basis Capital Fund Management Ltd. and ABN Amro Holding NV's co-owned Absolute Capital Group Ltd. froze investor accounts...........
It's pure fear,'' said Gary Jenkins, a partner at London-based hedge fund Synapse Investment Management, which manages $650 million of debt assets.It's fear of the unknown, fear of hedge funds unwinding, fear of knock-on effects of the subprime meltdown.''
Barley,
I know. This is really bad. I still believe (although some have scoffed) that this will end up worse than LTCM.
This needs FED attention NOW.
We go from No Risk to All Risk almost overnight in bond markets.
Investors are realizing that many hedge funds are potentially intelligent leverage plays, but leverage plays nonetheless. And that means RISK! The scary part is that the operator doesn't participate in the losses.
The hedgies are going to get squeezed from both sides...the creditors and the investors.
Dustdevil,
Joe sixpack might read about it in a small section on page 7 of his local newspaper.
Read the book "When Genius Failed" in this book Robert Rubin (former Treasury Secretary of Clinton Admin) said,
"The whole world doesnt know how close we were to financial calamity"
This was 1998 did you even hear about it? That's the point, most didn't, especially Joe Sixpack.
That's the way it HAS to be because often times it is covered up, I mean fixed before calamity.
This is what the FED will hide behind for rate cuts,
"Delivering a speech to the National Bureau of Economic Research, the Fed chief said "changes in energy [and food] prices should have relatively little influence on 'core' inflation, that is, inflation excluding the prices of food and energy."
That is damn funny, but I was serious. When is this going to be on the front page? Is this going to be on the front page, or lead any national/local news programs before it "happens", as it were?
Right now, we have the news anchors saying: "The markets took a slight dip last week... But they were fighting back today. The economy is great because the DJIA avg. is still above the avg. and strong! We should be in 15K range here in the next month and you can spend, spend, spend! smile-wink
Banker- "People are missing a key point here. Sowood got bailed out, and fast, by another hedge fund. That indicates to me that the hedgies are not/have not invested in lockstep and that what we may well see here is a consolidation..."
Hey, everybody. Banker is making an excellent point here.
All of you had better damned well hope and pray that they didn't invest in lockstep because, if they did, your only alternative investment will be solvent, gun oil, and ammunition.
Dustdevil: "So when does this get reflected in the "news" that Joe Sixpack reads?
As soon as he opens his mail or email or answers the phone and gets the message that his cash-back refi fell through due to inability to fund the loan. I think that's about the time.
Regarding leverage question , since they had at one point 12 -15 billion in positions ( assuming 3 billion of investor funds ) , leverage appears to have 4x or 5x... As per 7/31/ 07 NYT story entitled "Hedge Fund forced to Sell Its Portfolio ' by Jenny Anderso
Let me try this again, because some of you aren't getting what I am trying to say (perhaps because I said it badly )
There isn't enough equity in these hedge funds to create a huge issue by itself. The huge issue can come up due to leverage, both the volume and the demand nature of the loans. If the lenders fear they are under water, look-out. If they feel that this deal demonstrates some downside protection, the several/many hedge funds can lose half their equity value and it won't be big enough to damage the markets.
The speed of this bailout, and the fact that it came from another hedgie could be a powerful signal.
There's enough equity in hedge funds to create a problem. Enough to create a universal rush to the exits.
It's certainly possible to con the public to keep this afloat a little longer, and keep the dumb money in the market. The Citadel move may do that. I find the spin amusing - one large hedgie picks up distressed assets and that's reason to celebrate?
Likely anyone that believes the spin will get creamed as positions unwind.
"This analysis indicates that it is now unprofitable to run a subprime business, and it will remain so for the near future. Even originators currently in good shape will be running down their capital for months to come, and most of those without deep pockets are likely to be acquired or exit the business. It should be noted that the first round of bankruptcies stemmed from lenders lack of capital to meet EPDs. The second round of bankruptcies will come form originators capital being eaten away."
If the investor pull his money from a hedge fund it would create problems. This market is getting it's medicine from hedge funds and I don't care if you call it the inhaler or the viagra - but this market is in serious need of support to keep it alive/up.
Banker: Could you elaborate where you see a "bailout" and "downside protection"? In my understanding that would assume that the market value of sowood assets would be so low as to wipe out their equity. Which would imply that Citadel overpaid, which would be a bad deal for them.
Or do you mean that they just spared them from a fire sale? In that case, I doubt it is a very comforting idea to trust in hedge funds to act as a kind of creditor to other hedge funds. And as they took on the assets, they still overpaid, did they not? In that case, what do you think is their motivation?
What is needed is confidance that if people stay put they can ride out the storm.
Banker seems to be saying that people will feel more confidant when failing funds are bailed out by other funds. Naturally in such circumstances to maintain confidance failing funds will be seen to be bailed out by other funds.
For me to feel confidant about all of this i need to understand HTF the current demand for houses can be supported without the same level of insane willingness to lend to the challenged borrower.
At this stage momentum for catastrophe is just building and building.
Its a bit like the Terminator movies. At some point (eastern standard time) this thing will have become self propelling and be totally unstoppable.
just curious if everyone remembered this take out of a mtg broker by a PE firm, Lone Star? wonder if this will still close in the 3rd qtr. if not, more hedge funds have exposure. if it does, then what is the exposure to PE?
This new Marathon fund already managed to invest into AHM debt. Maybe it's a negative money fund? Investors are supposed to not put money in but short it instead? It's very innovative.... Hmm.. Maybe I want to open that kind of fund myself, like "Black Hole Investment Trust".
Asides from those comparatively cunning and quite well off Japanese when has there been any recent cases of deflation?
Can any body really believe that the price of milk and eggs and groceries and oil are going to fall? As if the poorer farmer unable to get oil and fertilisers to enrich his soil has so much milk to get rid of he has to cut prices?? It aint going to happen surely?
Question (rhetorical): When a hedge fund collapses after several good years, what happens to those 2 + 20 fees the managers got durring the good years?
With apx $1.7 Trillion invested in hedge funds, the probability that all of it is being run by guys (and gals) who are better than average is absurdly low, either that or Greenwich Ct. is Lake Woebegone. The good returns whihc have allowed the 2 + 20 and the absurd pay checks for hedge fund managers in recent years really just comes down to the use of leverage in a bull market. No need to be brilliant, just take a S&P index fund, leverage it 10 to one, then rake off 20% of the gains as the market moves up. So what if you hit a bump in the road and the fund goes to $0 in year three, if you were up 75% in each of the first two years, as a manager, you are set for life. Oh, and that huge paycheck you got, it only gets taxed at 15%, unlike stupid old regular folks who actually work for a living.
Anyone know where (even what country) one might find Sowood?
OK--the letter to investors has a Boston address.
$1.5 billion is just a drop in the world economy's bucket.
But when to hedge funds lose enough that investors start to withdrawl money from healthy funds? We could have a run on them in a few months if this keeps up. Notice the could. Its supposed to be sophisticated investors... but the same was true of 1929... (yikes).
At least the managers stopped the pain while a little was left.
Got popcorn?
Neil
According to an article on Bloomberg about the Sowood meltdown, it was named after a street in Boston.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a8dqghrHvaNA&refer=home
"Sowood's name came from ``South Woodside Avenue,'' the street in Wellesley, a suburb of Boston, where Larson lived when he started at Harvard Management."
Ben Bernanke said the total losses from the mortgage problems would be $100b. Anyone counting yet?
Speaking of which, it seems that Harvard's endowment was a large part of those investors taking the 50% haircut.
From the above Bloomberg article link:
" Larson, 49, opened Sowood in 2004 and early investors included his previous employer, Harvard, which put in $500 million. He joined the university's investment unit, Harvard Management Co. of Boston, in 1991 from the finance division of Cargill Inc., the largest U.S. agricultural company. He started at Cargill in 1979 as an economic analyst.
At Harvard, Larson managed foreign stocks and a commodities portfolio and ran about $3 billion of the endowment of the Cambridge, Massachusetts, university. He earned $17.3 million in 2003, a year when Harvard paid more than $100 million to internal money managers, raising the ire of alumni.
Harvard's $30 billion endowment, the largest for a university, was to increase its allocation to Sowood's hedge fund and a separate private-equity fund this year, according to a December statement from Sowood. The private-equity fund was spun off this month as Boston-based Denham Capital Management LP.
John Longbrake, a university spokesman, declined to comment. Mohamed El-Erian, CEO of Harvard Management, didn't immediately return phone calls.
Higher Returns Sought
El-Erian said in the December statement that splitting the hedge-fund and private-equity businesses would boost returns for both. The Harvard fund was the sole initial investor in the Sowood private-equity fund, whose assets increased 10-fold in two years to $2.3 billion as of December. "
Sowood went from a 10 percent loss for the year ( as of last week when their problems first broke ) to the losses reported today. I don't think they are the only hedge fund that suffered that fate.... the numbers from ABX , CMBX , ITRAXX et al give you an idea of the magnitude of pain that's been inflicted..... now we just have to wait and see who has been torched since the June swoon ! We should know by mid August... which will be the deadline for giving notice for 9/30 redemptions .
Sorry OT but I could use some knowledgeable help... ya know, from someone smarter than me
I received this reply to a post I made...
yes, obviously! we won't see anything like the rtc again. the fasbi regulations have worked pretty well to keep the lending industry under control. whatever the fallout is from the recent batch of subprime lending, it will contained to a few niche players like new century, but the big lenders are plenty stable. and the mbs holders are so large and diversified that the this will be a blip on their screen.
I think the guy's wrong, but am not good with terms like "fasbi". Can anyone help me out with a succint, biting rebuttal? TIA!
succint, succinct.... whatever...
So Harvard puts in 1.5% of its entire endowment in toxic waste and loses at least half. Frickin brilliant.
We need a hedge-fund-implodometer
JBR,
When the tide goes out we will see who is wearing their pants.
The blows keep coming in. No knockout yet, but they each take a toll.
(boxing metaphor)
Keep it clean gentlemen, no hitting below the belt...
This explains the Harvard connection. Nothing like sticking it to the old alma mater to make a buck, eh?
JBR, you've got yourself someone who has overheard the grownups talking.
FASB (Financial Accounting Standards Board) is pronounced "fasbee."
Does anyone have any idea how much leverage was used in this fund?
I am getting more nervous by the day watching this story unfold.
hehe... May have to use that.
Also thanks to sloooowwwwwmotion for the pants idea! I need to hone my biting wit... Reading here helps!
CR:
Slightly off topic (well we are talking about implosions) but some time ago you tracked the effect of the RE boom on real estate related employment in California, especially the number of real estate agents. Do you have any data on the impact of the ever widening bust on the employment of agents here.
As always, thanks for your excellent work.
"Can anyone help me out with a succint, biting rebuttal? TIA!"
Tell him I said he was full of crap.
Tell him I said he was full of crap
LOL.
Yeah... my initial reaction was "you have no f-ing idea what you're talking about moron!" But I thought I'd try to un-yahoo it a bit...
Strap on your seatbealt. This won't be pretty. This is only the beginning. Many more hedge funds to face meltdown.
Danny
http://housingtsunami.com/blog/
Prescott Bush, you can get the real estate agent data here.
The rate of growth in the number of brokers / agents has slowed. But the number is still climbing.
Best Wishes.
Another week another couple of hedge funds lose half their value.
Its just losing the shock value anymore.
First small wave of the Tsunami is hitting.
People are missing a key point here. Sowood got bailed out, and fast, by another hedge fund. That indicates to me that the hedgies are not/have not invested in lockstep and that what we may well see here is a consolidation where the better buy the failures. From the debt market's point of view, as long as folks believe there are enough of the better to cover for the failures, this is actually a good sign...well a good sign in a bad situation...um, you know what I mean.
From the equity markets point of view, whatever is good for the debt markets is good news.
Two ways to soak up excess liquidity.
Price increases take money out of the pockets of people who have something they need to buy.
Price decreases take money out of the pockets of people who have something they need to sell.
Danny, I read your site stating that "cheap money and credit" from the US has been flooding the world. The opposite is happening. China,etc. are flooding the US with credit, while we have all the DEBT. You may want to look at the BEA's site to see the net investment position of the USA and you will see that it is at an alltime low. We owe eachother and the world more than ever before and we have less net overseas investments than ever before.
banker,
i would agree that having the larger fish eat the smaller fish generally a good idea but i have another take on the equity market side of things. one trade that has been fraught with danger (and has been crushed) in recent times has been the long debt / short equity trade. the biggest scare in this trade is the buyout, where the debt gets blasted and the equity soars. now that spreads have widened significantly, and deals are hard to finance, i would think that this kind of trade could be a very good one indeed. consider a crappy company like gm. i dont know what its debt is trading for at the moment, but lets guess at say 9%. if you short the stock and use the proceeds to long the debt you have a carry trade yielding about 14% a year. your risk in this trade, (ex the buyout risk, which used to be huge but probably has nearly vanished) is that the economy starts jammin' to the upside and gm starts selling lots and lots of pickups and suv's. i've never been paid for macro investing, but i would think a large portfolio of similar ideas might work very well in this environment. i wonder if the folks at citadel saw in this large portfolio, a chance to put on this kind of trade?
d
"sloooowwwwwmotion" and "1929"
Lets not forget that the 1929 crash was two sharp declines in the DOW over a few days and then a very protracted downside run. In retrospect, it was a decline that took 18 months or so and 20 some years to recover. The decline was fueled by the fear of loosing even more money. The capitulation was secured by no credit, no leverage, no favors. Cash was king. Save some cash!
What makes me think twice is the speed at which the unwind is happening (in spite of the great current DOW numbers). Decliners are well ahead of advancers and the market folks must now be in need of some churn fees instead of cyclical rotation fees.
The fact the Cramer is now providing verbal diarrhea is testament to some now wide spread ignorance of the depth of the issues at hand.
Did anyone see the credit spreads again today? 8.6%? when the stated inflation is a mere 2.3%. Quite the risk premium.
Economic cycles are just that; cycles. What I see is the contraction of some cycles not the evolution of cycles.
"People are missing a key point here. Sowood got bailed out, and fast, by another hedge fund. "
I think it would depend on the discount.
Banker, Are you missing the falling knife problem? Who's to say the Sowood bailout will be the smart money?
in re MTG
one idea that i always found somewhat bizarre is that you could use the balance sheet of a company rated say a-, to write insurance policies which in the aggregate should they be exercised upon would put in out of business, to enhance the credit of the thing they were insuring to aaa....
Bill,
When in doubt look in Edgar:
Search Results
Losing half your value is "bailed out"? Exactly which bank do you work for, Banker?
Banker said,
"this is actually a good sign"
You can put lipstick on a pig if you want to. LOL
last updated 7:44pm edt. "fastest selloff in seven years"..."fear"
http://www.bloomberg.com/apps/news?pid=20601087&sid=a4CHnE.bPy6s&refer=home
Corporate Bond Risk Surges by Record as Subprime Losses Spread
By Hamish Risk
July 30 (Bloomberg) -- The risk of owning corporate bonds surged by a record as losses on U.S. subprime mortgages at Germany's IKB Deutsche Industriebank AG triggered concerns of global market contagion.
Contracts on 10 million euros ($13.8 million) of debt included in the iTraxx Crossover Series 7 Index of 50 European companies increased as much as 60,000 euros to 504,000 euros, according to JPMorgan Chase & Co. The CDX North American Investment-Grade Index rose $16,000 to $97,000, Deutsche Bank AG prices show.
Investors are fleeing corporate credit in the fastest selloff in seven years, Barclays Capital said today. The rout that began in mid-June when two Bear Stearns Cos. hedge funds almost collapsed spread worldwide as Blackstone Group LP stepped in last week to support Sydney-based Basis Capital Fund Management Ltd. and ABN Amro Holding NV's co-owned Absolute Capital Group Ltd. froze investor accounts...........
It's pure fear,'' said Gary Jenkins, a partner at London-based hedge fund Synapse Investment Management, which manages $650 million of debt assets.It's fear of the unknown, fear of hedge funds unwinding, fear of knock-on effects of the subprime meltdown.''
Barley,
I know. This is really bad. I still believe (although some have scoffed) that this will end up worse than LTCM.
This needs FED attention NOW.
We go from No Risk to All Risk almost overnight in bond markets.
So when does this get reflected in the "news" that Joe Sixpack reads?
ABX was weird today, the lower tranches went up and the highest tranches went down.
More Lenders Feeling Pain From Defaults - NY Times
More Lenders Feeling Pain From Defaults
Investors are realizing that many hedge funds are potentially intelligent leverage plays, but leverage plays nonetheless. And that means RISK! The scary part is that the operator doesn't participate in the losses.
The hedgies are going to get squeezed from both sides...the creditors and the investors.
Dustdevil,
Joe sixpack might read about it in a small section on page 7 of his local newspaper.
Read the book "When Genius Failed" in this book Robert Rubin (former Treasury Secretary of Clinton Admin) said,
"The whole world doesnt know how close we were to financial calamity"
This was 1998 did you even hear about it? That's the point, most didn't, especially Joe Sixpack.
That's the way it HAS to be because often times it is covered up, I mean fixed before calamity.
JBR: Can anyone help me out with a succint, biting rebuttal?
succinct biting rebuttal, IMO
"So when does this get reflected in the "news" that Joe Sixpack reads?"
Monster Truck, Bigguns and Bow Hunter? Never.
This is what the FED will hide behind for rate cuts,
"Delivering a speech to the National Bureau of Economic Research, the Fed chief said "changes in energy [and food] prices should have relatively little influence on 'core' inflation, that is, inflation excluding the prices of food and energy."
Inflation "contained" LOL
"So when does this get reflected in the "news" that Joe Sixpack reads?"
Monster Truck, Bigguns and Bow Hunter? Never.
barely | 07.30.07 - 11:15 pm | #
LMFAO Well said barely
LMAO
Inflation - Contained
Credit crisis - Contained
Mortgage Mess - COntained
How many containers can the FED juggle?
Oh I think were mistaken it is actually CON-tained
I think AHM is working late tonight, past their normal quitting time of 10:30P. If anyone wants to call and see how they're doing...
Shareholder Inquiries:
Mary M. Feder
Vice President & Investor Relations Director
American Home Mortgage Investment Corp.
(631)622-6469
{We need a hedge-fund-implodometer
Alternate Reality}
SCORECARD: DEBT DILEMMAS
WSJ.com
"Monster Truck, Bigguns and Bow Hunter? Never.
barely | 07.30.07 - 11:15 pm |"
That is damn funny, but I was serious. When is this going to be on the front page? Is this going to be on the front page, or lead any national/local news programs before it "happens", as it were?
Right now, we have the news anchors saying: "The markets took a slight dip last week... But they were fighting back today. The economy is great because the DJIA avg. is still above the avg. and strong! We should be in 15K range here in the next month and you can spend, spend, spend! smile-wink
We discussed it tis morning. It will happen this Friday.
Good Luck, everyone.
Banker- "People are missing a key point here. Sowood got bailed out, and fast, by another hedge fund. That indicates to me that the hedgies are not/have not invested in lockstep and that what we may well see here is a consolidation..."
Hey, everybody. Banker is making an excellent point here.
All of you had better damned well hope and pray that they didn't invest in lockstep because, if they did, your only alternative investment will be solvent, gun oil, and ammunition.
solvent - check
gun oil - check
ammo - check, check, check (no such thing as too much ammo, just too few targets).
dr digits
Dustdevil: "So when does this get reflected in the "news" that Joe Sixpack reads?
As soon as he opens his mail or email or answers the phone and gets the message that his cash-back refi fell through due to inability to fund the loan. I think that's about the time.
ikkei flat? Stealth recession. Sneak up and clobber everyone in the AM.
Bear, Lehman, Merrill, Goldman Traded as Junk, Derivatives Show
http://www.bloomberg.com/apps/news?pid=20601087&sid=afHmD6FZ2Wpw&refer=home
Only the fastest most stealthy cats will survive in China - 7.6% food inflation.
Expired
Banker is just making the Countrywide argument; "we'll get stronger as everyone else falls". Look where that's going...
Oooh, banker-spin: People are missing a key point here. Sowood got bailed out, and fast, by another hedge fund.
Yeah, that worked out well for Bear Stearns. And those newly acquired assets are worth...
Not just Bear Stearns. Were we not just discussing that little matter of MGIC's $516M "impairment" due to C-BASS?
MGIC and Radian both invested $0.5B each = over US$1 Billion dollars combined.
So the two losers are merging together to improve their: losses? de-leveraging? synergistic negative networth? I don't know what....
I love this quote from Radian:
S.A. Ibrahim, Chief Executive Officer noted, "While this action clearly reflects the continuing credit challenges in today's mortgage market, we are moving forward, as planned, with our proposed merger with MGIC, which we expect to close late in the current quarter, or early in the next."
Regarding leverage question , since they had at one point 12 -15 billion in positions ( assuming 3 billion of investor funds ) , leverage appears to have 4x or 5x... As per 7/31/ 07 NYT story entitled "Hedge Fund forced to Sell Its Portfolio ' by Jenny Anderso
That is damn funny, but I was serious. When is this going to be on the front page?
They'll read about it when their sports team's stadium name changes... again.
Let me try this again, because some of you aren't getting what I am trying to say (perhaps because I said it badly
)
There isn't enough equity in these hedge funds to create a huge issue by itself. The huge issue can come up due to leverage, both the volume and the demand nature of the loans. If the lenders fear they are under water, look-out. If they feel that this deal demonstrates some downside protection, the several/many hedge funds can lose half their equity value and it won't be big enough to damage the markets.
The speed of this bailout, and the fact that it came from another hedgie could be a powerful signal.
There's enough equity in hedge funds to create a problem. Enough to create a universal rush to the exits.
It's certainly possible to con the public to keep this afloat a little longer, and keep the dumb money in the market. The Citadel move may do that. I find the spin amusing - one large hedgie picks up distressed assets and that's reason to celebrate?
Likely anyone that believes the spin will get creamed as positions unwind.
Found this whilst googling :
http://www.eimgroup.com/jahia/webdav/site/eim/shared/Sub%20Prime%20Mortgages%20May%202007%20(4).pdf
"This analysis indicates that it is now unprofitable to run a subprime business, and it will remain so for the near future. Even originators currently in good shape will be running down their capital for months to come, and most of those without deep pockets are likely to be acquired or exit the business. It should be noted that the first round of bankruptcies stemmed from lenders lack of capital to meet EPDs. The second round of bankruptcies will come form originators capital being eaten away."
Banker,
If the investor pull his money from a hedge fund it would create problems. This market is getting it's medicine from hedge funds and I don't care if you call it the inhaler or the viagra - but this market is in serious need of support to keep it alive/up.
Europe is going crazy. The Yen is stable.
All is right with the world.
As long as the Yen stays worthless in relation to the dollar, nothing is going to stop the United States Financial Industry.
Banker: Could you elaborate where you see a "bailout" and "downside protection"? In my understanding that would assume that the market value of sowood assets would be so low as to wipe out their equity. Which would imply that Citadel overpaid, which would be a bad deal for them.
Or do you mean that they just spared them from a fire sale? In that case, I doubt it is a very comforting idea to trust in hedge funds to act as a kind of creditor to other hedge funds. And as they took on the assets, they still overpaid, did they not? In that case, what do you think is their motivation?
A few billion of losses is nothing.
What is needed is confidance that if people stay put they can ride out the storm.
Banker seems to be saying that people will feel more confidant when failing funds are bailed out by other funds. Naturally in such circumstances to maintain confidance failing funds will be seen to be bailed out by other funds.
For me to feel confidant about all of this i need to understand HTF the current demand for houses can be supported without the same level of insane willingness to lend to the challenged borrower.
At this stage momentum for catastrophe is just building and building.
Its a bit like the Terminator movies. At some point (eastern standard time) this thing will have become self propelling and be totally unstoppable.
just curious if everyone remembered this take out of a mtg broker by a PE firm, Lone Star? wonder if this will still close in the 3rd qtr. if not, more hedge funds have exposure. if it does, then what is the exposure to PE?
Business & Financial News, Breaking US & International News | Reuters.com
Dustdevil, the front page, like employment stats, is very much a trailing indicator.
J6P won't see anything about the problem until he already knows about it himself.
crazy ?:
Marathon plans new fund to buy distressed mortgage assets - MarketWatch
Yes, I think inflation is contained. Deflation is not contained.
This new Marathon fund already managed to invest into AHM debt. Maybe it's a negative money fund? Investors are supposed to not put money in but short it instead? It's very innovative.... Hmm.. Maybe I want to open that kind of fund myself, like "Black Hole Investment Trust".
Sorry, Banker, but there is no reason to assume the predator hedge fund is any smarter than the prey.
"crazy?"
Marathon makes sense in the context that without action there will be catastrophe.
theroxylandr said,
"Yes, I think inflation is contained. Deflation is not contained".
All kidding aside this is what will end up being the real problem (deflation). I agree with theroxylandr.
The speed of this bailout, and the fact that it came from another hedgie could be a powerful signal.
I agree, banker. But the signal I receive is that Citadel is trying to hide some bad investments and protect their fantasy marks.
Still doesn't change the fact that when the cheaters are forced to mark it will reveal a giant shortfall.
Asides from those comparatively cunning and quite well off Japanese when has there been any recent cases of deflation?
Can any body really believe that the price of milk and eggs and groceries and oil are going to fall? As if the poorer farmer unable to get oil and fertilisers to enrich his soil has so much milk to get rid of he has to cut prices?? It aint going to happen surely?
Question (rhetorical): When a hedge fund collapses after several good years, what happens to those 2 + 20 fees the managers got durring the good years?
With apx $1.7 Trillion invested in hedge funds, the probability that all of it is being run by guys (and gals) who are better than average is absurdly low, either that or Greenwich Ct. is Lake Woebegone. The good returns whihc have allowed the 2 + 20 and the absurd pay checks for hedge fund managers in recent years really just comes down to the use of leverage in a bull market. No need to be brilliant, just take a S&P index fund, leverage it 10 to one, then rake off 20% of the gains as the market moves up. So what if you hit a bump in the road and the fund goes to $0 in year three, if you were up 75% in each of the first two years, as a manager, you are set for life. Oh, and that huge paycheck you got, it only gets taxed at 15%, unlike stupid old regular folks who actually work for a living.