Minyan Mailbag: The Elmer Hedge
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.
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.
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.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter