Hedge Funds The Next Leg Down?

Breakingviews.com is collecting names for the U.S. government’s $700-billion bailout plan — send suggestions to [e-mail]. The U.S. Treasury likes “Troubled Asset Relief Program,” or TARP. Breakingviews.com says one of its readers has suggested “Secured Housing Investment Trust.”

U.S. taxpayers are on the hook for an estimated $1 trillion to bail out the U.S. financial sector, says a leading economist. Now might be a good time to consider emigrating from the U.S?

A key barometer of financial distress, overnight interbank offer rates (LIBOR), eased slightly today but is still noticeably above levels of a week ago. The TED spread, which compares three-month Treasury yields and three-month Libor, traded at 2.28% today, down from last week’s record above 3% (a TED spread below 0.90% is the norm).

“The next stage will be a run on thousands of highly leveraged hedge funds. After a brief lock-up period, investors in such funds can redeem their investments on a quarterly basis; thus a bank-like run on hedge funds is highly possible,” says an economist who predicted the crisis two years ago.

“As the recession gets worse, corporate bankruptcies will increase, as will the default rate on corporate bonds. This, in turn, will reverberate in the market for credit default swaps [insurance policies against debt defaults] …Depending on the distribution of those losses, such an event might still break one or two of the big [providers] in this heavily concentrated market.” Wolfgang Münchau in the Financial Times of London, Sept. 21

Comments

[investor88:]

Excellent article highlighting another stress point in the financial structure ie the the next leg down triggered by hedge funds. Of course there are other well known stress points like falling house prices, addition usd500bn bank write off, reduction in consumer spending causing a recession. Increasingly we can see more leg downs rather than leg up.

2008 Sep 23 08:57 AM

[lonie:]

As most know or should know ,that any government program projected cost is never what is stated . I wager this proposed 700 billion bailout will turn out to be nearer 7 trillion before all the 550 + trillion of so called toxic debt is cleared up .
As a tax payer i am fed up with bailing out every damned scheme that comes up in the world . Argentina,Mexico and many others.
Bah,Humbug !

2008 Sep 23 09:28 AM

[Larry House:]

Folks, Paulson and Bernanke do not have enough fingers to plug all the holes in this dike. Don't get caught in the flood when the dam breaks.

2008 Sep 23 10:42 AM

[helplessobs...:]

I wonder why hedge funds are never hedged?

2008 Sep 23 11:05 AM

[notsosmart:]

thehedge funds should all fail.who needsthem to manipulate the markets based on some computer formula to make the rich richer?

2008 Sep 23 11:31 AM

[whidbey:]

The wolves in the bushes at the edge of the camp are known to us all, but what we don't know is when a hungry wolf will lunge. CDS exist and they will likely be triggered by the non-performance of a whole host of things we know will probably happen sometime in the future. There are unlimited CDS as far as can be told, but no one knows for sure, and there is no record anywhere except maybe at the BIS which says it guesses.

Personally I see shadows of the corporation collapse gathering quickly. Corporations depend on a cash balance of sales and expenses to avoid bankruptcy. I am seeing clients where the slow down has bitten hard and the cuts have been avoided by special sales, intense advance selling at discounts, or asking suppliers for discounts for orders. It is stressful and when it grows employment will fall. We have every reason to expect these wolves to attack since it has been shown today that our leaders will respond to threats with money. Throw money at the problems. How much have you got to give? None, it will be printed and spent and we will have the inflation wolf snapping at our butts. It is really much more serious that we are being told. I expect the blood bath soon. The wolves are picking us off slowly and deliberately.

2008 Sep 23 05:30 PM

[Old Trader:]

helplessobserver,

Actually, some are....according the original definition of "hedge fund", the ones that pursue an "absolute return" strategy, are in fact, "hedge funds". The "problem" with that strategy is that it lags the market when the bull is rampant. Moral of the story?...Don't be a pig.

2008 Sep 24 01:06 AM