Cascade failure in financial community

[David Farber <dave () farber net>]

________________________________________
From: Dave Wilson [dave () wilson net]
Sent: Tuesday, March 11, 2008 2:05 AM
To: David Farber
Subject: Cascade failure in financial community

Bloomberg has a telling piece on how banks are increasingly freaking out
because everybody has begun to suspect that nobody really has a handle
on what reality is in the financial industry. There's currently a kind
of cascade failure happening throughout the financial community, spurred
both by extraordinary levels of borrowed money that was used to
speculate (it's like those mortgages that were issued for 110% of the
value of the house, except that type of "investment" has, unbeknownst to
most people, actually been taking place in pretty much every investment
sphere you can think of); if those speculative investments go South,
investors have to come up with lots of cash, fast, (this is known as a
margin call) meaning they wind up selling everything they own to raise
cash, which then depresses the value of the stuff the investors had to
sell (as well as similar stuff owned by others) since suddenly there's a
lack of scarcity combined with a suspicion on the part of would-be
buyers that perhaps this stuff is being dumped for reasons other than a
need for quick cash...

I don't want to go over the top here, but this same series of events --
speculating with borrowed money, frantic attempts to raise cash to make
margin calls at the start of an otherwise modest downturn in the
business cycle, and ultimately a dearth of cash available for the entire
economy -- is exactly what happened in the Great Depression. Now, I
would not argue that we're going to have an equivalent event, if only
because we have a much better understanding of what it takes to address
those sorts of issues, but I don't think there's any question that this
is going to be excruciating...


Hedge Funds Reel From Margin Calls Even on Treasuries (Update1)

By Tom Cahill and Katherine Burton

March 10 (Bloomberg) -- The hedge-fund industry is reeling from its
worst crisis in a decade as banks are now demanding more money pledged
to support outstanding loans even when the investment is backed by the
full faith and credit of the United States.

Since Feb. 15, at least six hedge funds, totaling more than $5.4
billion, have been forced to liquidate or sell holdings because their
lenders -- staggered by almost $190 billion of asset writedowns and
credit losses caused by the collapse of the subprime-mortgage market --
raised borrowing rates by as much as 10-fold with new claims for extra
collateral.

While lenders are most unsettled by credit consisting of real estate and
consumer debt, bankers are now attempting to raise the rates they charge
on Treasuries, considered the world's safest securities, because of the
price fluctuations in the bond market.

``If you have leverage, you're stuffed,'' said Alex Allen
<http://search.bloomberg.com/search?q=Alex+Allen&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>,
chief investment officer of London-based Eddington Capital Management
Ltd., which has $195 million invested in hedge funds for clients. He
likens the crisis to a bank panic turned upside down with bankers, not
depositors, concerned they won't get their money back.


***SNIP****


Entire article here:

http://tinyurl.com/3278cn



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