Tuesday, July 24, 2007

The Hedges Are Melting, Run

Counterpunch: Two columns of black smoke can still be seen rising over the New York skyline.


Not quite. The plumes of smoke are all that's left of two major hedge funds which blew up just weeks ago leaving nothing behind but a few smoldering embers and a mound of black soot.

The compiled assets of the Bear Sterns High-Grade Structured Credit Strategies Fund--nearly $20 billion--have vanished into the miasma of cyber-space soon be joined by $1.4 trillion of other, equally worthless, Collateralized Debt Obligations (CDO).

If you look closely, you'll see the mangled bodies of the CDOs, the CDSs (Credit Default Swaps), the RMBS (Residential Mortgage Backed Securities) and the other shaky debt-instruments being pulled from the wreckage and tossed on the bonfire.

Is this how it all ends? Will the sudden spike in subprime defaults send all the funds in "Hedgistan" crashing to earth?

No one knows--yet.

According to Bloomberg News, Bear Sterns announced last week that there's "little value left" in one of its funds and "no value left" in the other.

Nothing, nada, zippo.

(Psssst, its Stearns, not Sterns.)

-------Run for the hills, the hedges are melting, the hedges are melting.

"Hedgistan" has melted previously – with "the collapse of the Long Term Capital Management (LTCM) hedge fund in 1998. LTCM also followed “sound practices”—its valuation and pricing model was designed by Nobel laureates—but an unexpected shift in currency market valuations led to the collapse of the fund, necessitating a $3 billion bailout organised by the then Federal Reserve Board chairman Alan Greenspan in order to prevent a meltdown of the financial system."

Bear Stearns Cos. is getting a taste of its own medicine.

"It was Bear Stearns, the biggest broker to hedge funds, that nine years ago declined to join 14 other investment banks in the bailout of Long-Term Capital Management LP. Then last week, as New York-based Bear Stearns pleaded for help to rescue two of its hedge funds teetering on the brink of collapse, many of the same firms refused to come to its aid.

Merrill Lynch & Co., which pumped $300 million into LTCM, said no and seized $850 million of bonds held as collateral for loans it had made to the funds. Lehman Brothers Holdings Inc., JPMorgan Chase & Co. and Cantor Fitzgerald LP also pulled out, leaving Bear Stearns to sort through the wreckage of bad bets on subprime mortgage bonds and collateralized debt obligations."

Counterpunch: "…a cloud has settled-in over downtown Manhattan where gloomy-looking men in pinstriped suits are waiting for the other shoe to drop."

These suits have seen this before and there are men/women waiting to buy both shoes as soon as they drop, just as they did in 1998, i.e. United Capital Markets Holdings Inc.'s John Devaney.

Hedge funds are private investment partnerships mostly designed for the wealthy and institutions such as pensions and endowments. There are 6,597 hedge fund firms. Hedge funds took in record inflows of money this year – so unless the entire $1+ trillion hedge fund industry goes broke this is just another doom and gloom wolf cry.

Assets managed by hedge funds globally more than doubled in the past five years to almost $1.6 trillion as of the first quarter, according to Hedge Fund Research.

Even if the bubble bursts, never fear. The Wall Street boys, always in search of big money, will find a way to turn bubbles into a lot of loot, or is that loot a lot of bubbles?

I wonder if this Counterpunch sort of economic meltdown article is meant to frighten Joe Blow. Regardless, with the new economic world order Joe Blow is still moving to the back of the bus, swearing his po' underprivileged social status is because of Tyrone and José. (Although there are Joe Blows who read just enough to blame Masons, Illuminati, shape-shifting lizards, the Pope, Templars, secret societies, Bushco, or all of the above.)

No comments:

Content © 2005-2020 by Kate/A.