After the announcement late last night that Carlyle Capital could not come to an agreement with its creditors and that its assets would be seized as soon as possible, futures were down sharply as a result. Since March 12, the company has defaulted on approximately $16.6 billion of its indebtedness, with the remaining indebtedness is expected soon to go into default.
But interestingly enough, this instance of banks seizing assets of a hedge fund unable to meet margin calls might be the unintended consequence of the Fed’s recent announcement a couple of days ago to allow banks to swap mortgage-backed (most of which is essentially worthless) debt for Treasuries. Via Robert Peston of the BBC:
In fact, it’s arguable that the banks’ seizure of Carlyle’s $20bn-odd in assets has actually been encouraged by the Fed’s mortgages-for-Treasuries offer. Because the Fed’s new lending emergency lending facility allows the banks to swap mortgage-backed debt for Treasury Bills in a way that Carlyle could not do.
So it would be rational for the banks to take Carlyle’s assets and exchange them for top-quality, liquid US government bonds, rather than leave loans in place to a business, Carlyle, whose assets remained highly illiquid.
If that’s the case, there will be some very scared people in hedge-fund land today. Hedge funds that have borrowed from banks against the security of mortgage-backed debt could be about to see their assets sucked into the banking system and their businesses vanish.
It’s not unusual for policy-makers to come up with a seemingly rational and well-considered plans, plans that in the end actually hurt more than they help. I wonder if the Fed foresaw this possibility? For some reason, I highly doubt it.
Take a look at this guy in knee-length light pink shorts, knee-high socks, a striped shirt and tie and a jacket flung casually over his shoulder. I guess that’s your typical business person in Bermuda. I couldn’t really see myself wearing such an outfit, even though it would feel nice in the mucky heat of a Georgia summer. I’m not really a trend setter and I try to stay in line with the grain, not go against it, so if people started to wear these types of outfits, then I would probably tentatively follow suit (what a pun).
Yet more on hedge funds and the people who run them and the academics who study them, this time from The New Yorker. Continue reading ‘Above-Market Returns on the Cheap’
Continuing on with my fascination of the surge in attention on hedge funds and private equity, Knowledge@Wharton published an article recently about a study that has attempted to document the impact the effect of hedge funds upon the stock of the companies in which they have invested. It’s an interesting article, but they now require you register (it’s free). Here’s a snippet of one of their conclusions: Continue reading ‘Impact of Hedge Funds on Target Companies’ Share Prices’
Bloomberg reports, “Lake Shore Asset Management Ltd., a hedge fund firm run by a former chairman of the Chicago Mercantile Exchange, had its assets frozen by a federal court after regulators said it overstated its holdings.”
I am guessing that stories such as these will continue on for a couple more years until there is another huge financial crisis. Then our lawmakers will go on a crusade to score political points and pass overly restrictive legislation that ends up hurting investors and businesses more than helping protect investors.
But it is difficult to argue with Geoffrey Aronow, the former head of enforcement at the CFTC. “Whether it’s conscious or not, everyone is more attuned to concerns to what’s going on with hedge funds.”
Bloomberg reports that no one has come to help Bear Stearns rescue two of its hedge funds:
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.
Bear Stearns is using $3.2 billion of its own to salvage the situation. All I can say is that Bear Stearns made a huge mistake when they refused to follow the crowd in bailing out LTCM nine years ago. It came back to bite them in the ass.
