Thursday, August 16, 2007

It ain't over yet

Is the Fed out of touch with what is happening in the markets? Bloomberg: Poole Says `Real Economy' Unhurt by Subprime Collapse. Umm... isn't the important question what impact current events will have on the economy going forward? Poole may be looking at lagging indicators. I think Greenspan was much more aware of the role fragile psychology -- i.e., investor, consumer and executive confidence -- plays in the functioning of the economy.

"Bill Poole is a shame. He is shameful!" -- Jim Cramer :-)

Bloomberg: Moody's Warns of Potential LTCM-Scale Fund Collapse
2007-08-16 11:40 (New York)

By John Glover
Aug. 16 (Bloomberg) -- Moody's Investors Service warned that the global credit rout may cause a major hedge fund collapse on the same scale as Long-Term Capital Management LP in 1998.

Hedge funds face potential losses on collateralized debt obligations, securities packaging other assets, Chris Mahoney, vice chairman of Moody's, said on a conference call today. Buyers and sellers of ``risky assets'' are unable to agree on prices, causing the market to seize up, Mahoney said.

``A possible consequence of the repricing of risk assets would be the failure and disorderly liquidation of a hedge fund or other institution of sufficient size as to disrupt markets, as LTCM threatened to do in 1998,'' Mahoney said.

Credit markets started falling in June as two Bear Stearns Cos. hedge funds collapsed because of bad subprime bets. Goldman Sachs Group Inc., the world's most profitable securities firm and second-largest hedge fund manager, was forced to put $2 billion of its own money into one of its hedge funds and waive some fees after the fund lost 28 percent of its value this month.

Basis Capital Fund Management Ltd. yesterday told investors losses at one of its hedge funds may exceed 80 percent as the U.S. subprime mortgage rout prompted creditors to force the Sydney-based company to sell assets.

3 comments:

alex r said...

If investors "lose confidence" in 100% LTV no-doc interest-only mortgages, that to me seems like a *good thing* -- it seems as though they had far too much confidence in such investments a year or two ago. See also this comment on moral hazard. The Fed shouldn't be shoveling money into the market every time Cramer raises his voice. On the other hand, they may need to do something if the market's rediscovery of credit standards leads to significant collateral damage...

On a lighter note, you might enjoy this letter to investors, from "Hedge-Fund Guy".

steve said...

"On the other hand, they may need to do something if the market's rediscovery of credit standards leads to significant collateral damage..."

That's what I have in mind. This situation could go nonlinear if liquidity isn't somehow restored. I agree that imprudent investors should not be protected, though.

Alex R. -- you're not by any chance a Caltech PhD are you? I'm guessing as to what the R stands for ;-)

alex r said...

you're not by any chance a Caltech PhD are you? I'm guessing as to what the R stands for

Well, as a matter of fact, you're probably guessing correctly, as I know a co-author or two of yours pretty well.

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