The financial turmoil is taking on a new dimension: Banks that lent money to hedge funds and other big risk-takers are asking for some of it back.
Loans from banks and brokerages had allowed hedge funds, which manage some $1.9 trillion in clients' money, to amass many times that amount in investments. But as the value of mortgage-backed bonds and other investments has dropped in recent weeks, the lenders are demanding that borrowers put up more cash or assets.
This is producing a negative cycle that has policy makers deeply worried. When investors rush to dump assets, prices fall and lenders feel compelled to make further demands, or "margin calls," which cause even more selling.
So far, the turbulence touched off last summer hasn't resulted in many big hedge-fund blowups. If that changes, banks and other financial firms could end up holding even more hard-to-sell securities. Already, their troubled investments, especially in securities tied to mortgages, have cost them some $140 billion in write-downs.
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The funds facing the greatest pressure are those that are highly leveraged, meaning they have large borrowings relative to the money entrusted to them. Carlyle Capital managed only $670 million in client money, but used borrowing to boost its portfolio of bonds to $21.7 billion, meaning it was about 32 times leveraged.
Who are these idiot lenders in this deal? Didn't anyone ask about the clients current margin situation? Was there any disclosure in this deal? It's looking more and more like lenders just made loans without even thinking about looking at the client's financial situation at all.
3 comments:
Good question.
"Who are these idiot lenders in this deal?"
"It's looking more and more like lenders just made loans without even thinking about looking at the client's financial situation at all."
um... kinda like they did with mortgages? not exactly shocking.
a little snarky today, bonddad?
With the repeal of 1933 Glass Steagall Act (in 1999), banks and investment companies can be part of the same ownership group, separated only by Chinese walls (LOL). So one arm is lending to the other arm in many cases.
Keep in mind what a loan by a bank is. It is money creation. Money being created for the productive economy is good. Money being created for speculative purposes is what gave us the 1929 crash and depression. History repeats.
The money of course is created out of thin air. It's loss is of no great import so long as the loans can be kept off the book. Basel I in 1988 forced them to move loans off the books due to the high capital requirements, the upcoming Basel II requires them to bring them back, and so we have a capital crunch as the losses have to be replaced by capital that does not exist (enter the Fed and TAF to the rescue). Unless Basel is amended, look for another 1929 in 2009.
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