Friday, November 7, 2008
The Meltdown Of The Hedge Funds - And Its Effect On The Market – Was Foreseeable
The hedge funds are melting down, and dragging the rest of the markets with them. See this and this. As a Wall Street Journal article from today entitled "Hedge Fund Selling Puts New Stress on Market" notes, "Hedge funds are selling billions of dollars of securities to meet demands for cash from their investors and their lenders, contributing to the stock market's nearly 10% drop over the past two days".
Was the meltdown of the hedge funds - and its effect on the market - foreseeable?
Yes.
In a speech given at NYU law school on April 11, 2007, Fed chairman Bernanke rationalized lax oversight of hedge funds, then warned about what is now unfolding:
"Regulatory oversight of hedge funds is relatively light . . . . the light regulatory touch seems largely justified.Stay tuned . . . the full effect of all of the forced selling and defaults by hedge funds hasn't yet been felt.
However, the growing market share of hedge funds has raised concerns about possible systemic risk. . . . many hedge funds are either highly leveraged or hold positions in derivatives or other assets that make their net asset positions very sensitive to changes in asset prices . . . . leverage also increases the risks to the broader financial system. The failure of a highly leveraged fund holding large, concentrated positions could involve the forced liquidation of those positions, possibly at fire-sale prices, thereby imposing heavy losses on counterparties. In the worst scenarios, these counterparty losses could lead to further defaults or threaten systemically important institutions. In addition, market participants that were not creditors or counterparties of the defaulting firm might be harmed indirectly through changes in asset prices, liquidity strains, and increased market uncertainty."
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Wall Street took two actions in 2005 that tell me they were thinking of bankruptcy and the coverup 4 years ago.
ReplyDelete1) They changed the Credit Card Bankruptcy law to make it nearly imopossible to discharge credit card debt in bankruptcy.
2) On 11-10-2005 the Federal Reserve Bank said they would no longer release information on M3 (total) money supply.They knew they would be creating tons of money to paper over their losses.
My brother in law is a global markets guru for a large US bank. I saw him at a wedding a couple of months ago and I asked him about the mess on Wall Street. He blamed it all on the hedge funds. I pressed him a little and he stuck to his original answer. I didn't want to insult the guy, I've done that before. But the answer bothered me because it was a very shallow answer to a serious question. Of course people are selling stock! Does it really matter who? There is no question that air is gushing out of the ballon. The question is who broke the credit bubble and why. The elites always profit from credit panics as power is consolidated into fewer hands. And when the bottom does come , years from now, the general public will be licking the floor and the powerful will be buying assets for pennies on the dollar.
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