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Minyan Mailbag: The Elmer Hedge

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Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.

John,

I wanted to bring to your attention this Reuters article suggesting hedge funds are getting Greenspan's warning on leverage.

Fed Heads forcefeed risk-taking into the markets with Printing Press speeches and "considerable period" and "measured pace" language and then pretend like they didn't create the moral hazard. Bianco's comment that the text of this is close to what preceded LTCM is interesting. I defer to your opinion Mr. Succo on that given your intimate knowledge with LTCM, though I do remember it like it was yesterday, being called into the Boardroom at CSFB with MD's in a state of pure panic.

Minyan JB

JB,

The convertible bond market is dis-functional: there are not even real markets being made, indications only. A $4 billion fund out of London was recently liquidated, probably the first of many. We are getting calls from CB hedge funds to see if we will buy their entire book. Recent quotes of negative returns of down 8% for the year are at least 50% low with everyone still trying to get out. Leverage is high as these funds are trying to meet redemptions. The convertible bond market (a third of which is junk, maybe more after General Motors (GM) and Ford (F) yesterday) is $600 billion worldwide and is (was) entirely controlled by hedge funds.

This is a great example of a popped bubble that may spread to other hedge funds: investors losing at these funds may be forced to redeem from other funds that currently are not experiencing losses.

LTCM is back in business, but I hear that they are not using the egregious leverage as they did before, only half-egregious. So I think there are not any hedge funds using that level of leverage anymore, just many more using "fairly high" leverage.

And there is leverage in almost every area of the system, from consumers, to pension funds (we know even state pensions have issued bonds and put the money in stocks), to the government itself (maybe the worst offender in history?).

Mr. Greenspan should have had the courage to raise margin requirements after gushing the system with liquidity to stem the 1987 crash and should have been more mindful of the relationship between liquidity and speculation over the last several years. His lectures now are disingenuous.

Regards,
Prof. Succo

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