Thursday, June 21, 2007

Hedge Fund Meltdown

Bear Stearns two hedge funds are in real trouble. Here is a quote from the Wall Street Journal. "Two big hedge funds at Bear Stearns Cos. were close to being shut down last night as a rescue plan developed over several days fell apart in a drama that could have wide-ranging consequences for Wall Street and investors.”

The interesting words are “rescue plan developed over several days fell apart." It looks like quite a few people outside of the firm knew about this as early as last Friday. So if outside firms were let in on the financial problem, it must have been obvious that something was wrong probably as early as the middle of May internally.

There are three players cited; Merrill Lynch, Bank of America Corp and Goldman Sachs Group. The interesting party is Merrill Lynch, which owns approximately half of Blackrock, one of the world's largest publicly traded investment management companies, with more than $1 trillion in assets under management. As a footnote, a new IPO called Blackstone came out today, I wonder if there was confusion in China over the translation of Blackrock Vs Blackstone?

“Merrill Lynch & Co., one of the hedge funds' lenders, said it would move to seize collateral -- much of it mortgage-backed debt -- from the two funds and sell it,. . . . . . managers worked with a handful of other key lenders, including Goldman Sachs Group Inc. and Bank of America Corp., to pay off the funds' $9 billion in loans. . . . “ Quote WSJ.com

The peculiar thing about seizing these assets is that trying to sell them is going to make things worse. The two funds together had about 1.5 billion of investor capital and probably 10 times that in bank loans. What is pretty clear at this time is that the investor’s equity has taken a hell of a hit. Merrill said that it sold 850 million in mortgage related securities, yesterday. . Looks like they did OK at the auction or maybe they didn’t sell the real dogs.

The "Names" are going to want whats left of their seed money back and they have to give 3 months notice. So, April means a June withdrawal, and June means a September 1 withdrawal. These two funds are toast, but it’s going to take a while. Look’s like there is 15 to 20 billion to unwind here.

Before we had the question, who was funding this real estate bubble? I think it could be the hedge funds. A fund could gather several big investors “Names” and then borrow 10 times the amount in the kitty. The people who loaned the hedge fund money, aren’t really saying much yet, but they have the biggest share of the pie to lose. This might involve a lot of retirement money.

We may see one to four new hedge funds hit the dust next week. Remember this isn’t something that just happened; the ones that drop in the coming week, have been hanging on by their fingernails for months now.

Things are really starting to unwind. The two that went down this week, sold the good stuff first and that didn’t fix it. Merrill stepped in and sold the crap and it kind of went OK. Maybe Merrill figured that what ever price they get today is going to be higher than when the next one hits. Maybe they know something that we don't, and it could be in their portfolio.

3 comments:

Numpty McHoon said...

Jim of San Marcos sez:
Before we had the question, who was funding this real estate bubble? I think it could be the hedge funds. A fund could gather several big investors “Names” and then borrow 10 times the amount in the kitty. The people who loaned the hedge fund money, aren’t really saying much yet, but they have the biggest share of the pie to lose. This might involve a lot of retirement money.

I guess greed really is good.

Jim of San Marcos sez:
The peculiar thing about seizing these assets is that trying to sell them is going to make things worse.

In the back of my mind, as well as anyone else over a certain age {cough} 40 {cough} is the way people (over-) reacted that resulted in panic buying, the result of which caused the Great Depression.

Few businessmen today appear even one iota sharper than the businessman of that era. With all the tools at their disposal, they still cannot predict with certainty, by flooding a market with sexed up junk, what the chain of events would be. (A cynic might say "oh yes they did.")

Disaster or heavy loss (industry-wide) has not yet come to pass. My drivel about doom and gloom and suspicious parallels to a long long time ago are mere conjecture, perhaps from reading too many well informed blogs late at night.

Businessmen of today might be better at their business than I give them credit, and in the end it's all just been one big thrill ride. Oh ye of little faith.

I really really hope so.

But then this appears [NYT] where the Supremes effectively absolve the "engineers" behind flimflam financial scams of liability from malpractice (screw you shareholders, you want returns? I got your Enron and WorldCom right here).

HAND!

Bobo said...

Someone should start a hedgefund implode-o-meter and start counting them drop.

Jim in San Marcos said...

Hi Bobo
If things start popping, that blog might only last 10 working days.

Bankers refer to equity tranches as toxic waste and now you hear references to them as radioactive waste.

I think that the people that provided seed money to these funds are queuing up to get their money out.