Hedge Fund Watch
| Sun Sep. 28, 2008 9:30 PM PDT
HEDGE FUND WATCH....The end of the third quarter is nearly upon us, and hedge fund managers are feeling nervous:
Even as Washington reached a tentative agreement on Sunday over what may become the largest financial bailout in American history, new worries were building inside the nearly $2 trillion world of hedge funds. After years of explosive growth, losses are mounting — and so are concerns that some investors will head for the exits.
....The big worry is that a spate of hurried sales could unleash a vicious circle within the hedge fund industry, with the sales leading to more losses, and those losses leading to more withdrawals, and so on. A big test will come on Tuesday, when many funds are scheduled to accept withdrawal requests for the end of the year.
"Everybody's watching for redemptions," said James McKee, director of hedge fund research at Callan Associates, a consulting firm in San Francisco. "And there could be a cascading effect, where redemptions cause other redemptions."
The article says optimistically that "No one expects a wholesale flight from hedge funds." But no one ever does, do they?
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Comments
It looks like the bailout package is not a sure thing to pass the House. If it doesn't, we'll all be economic experts because no one will have the slightest idea in what direction we might be headed. And the more I think about it, the same is probably true, in the long run, (but as Keynes said: "In the long run, we're all dead.") if the bailout does pass. But the bailout should cause temporary relief to the credit markets. And, in this day and age, a little relief is a good thing, Martha. Come Monday....
Kevin,
I seem to remember you discussing Obama's "core principles" in regard to a bailout bill and how you were sure he wouldn't support a bill in which those principles were not included. Could you maybe briefly remind us of those principles and where in the legislation they can be found?
If you can't find them in the bill, you might try looking under the bus.
They can offset any potential losses by shorting themselves.
Alternatively, if there is a run on their mortgage backed securities they can just call in all of their internet porn contracts and collect the outstanding sports gambling debt owed to them. Let the market take care of it.
Mitch Guthman: Could you maybe briefly remind us of those principles and where in the legislation they can be found?
The short list of places those principles can be found in the proposed bill includes sections 104, 106, 109, 110, 116, 119, 121, 124, 134, and 302. WTF is your problem?
The short list of places those principles can be found in the proposed bill includes sections 104, 106, 109, 110, 116, 119, 121, 124, 134, and 302. WTF is your problem?
The fact that all of them are written in such a way as to be totally avoidable? We get no equity unless a deal is over 100M. Not per company, per *deal*. Since the people making the deals aren't morons, they will all be under 100M. Limits on executive compensation? Ha. Doesn't apply to pay. Doesn't apply to current contracts. The tranches? Also a formality. They can get it right away unless Congress vetoes.
It's the Paulson bill, all everything on top is just pretense. The Democrats got totally rolled.
tavella -- My original post was the in response to the connection between Obama's original principles and their connection to the legislation. You appear to have other axes to grind. Fine. But try and get your facts straight first.
You obviously either didn't read, or didn't understand, the legislation. As one example, to your point about "deals", see, e.g.:The Secretary shall establish de minimis exceptions to the requirements of this subsection, based on the size of the cumulative transactions of troubled assets purchased from any one financial institution for the duration of the program, at not more than $100,000,000.Is that clear enough, or do you require further simplification?
has407,
Yes, you are right. There is "language," of a sort, expressing all of Sen. Obama's core principles (and mine, too) in the bill. I plead guilty to hyperbolism. I got carried away. I admit the "core principles" are there but, if you will read the bill more closely, I think you will find that they lack funding, specificity and enforcement mechanisms. In short, I say they are mere fig leafs included only to fool the rubes.
I would also like to dispute your implied claim that the "core principles" of Obama's will be enacted along with the bailout for the banks. While technically true, the claim is actually quite disingenuous. You will notice, for example, that while the sections calling for the transfers of monies from our government's treasury are quite detailed and specific, those sections embodying Obama's "core principles" are vague and require no concrete action on anyone's part. You will also notice that the Democratic leadership provided money for the banks but the provisions you cite establish only aspirational goals. There is no money in the bill for anyone or anything except the bailout of the bankers.
For example, Section 109 titled "Foreclosure Mitigation Efforts" sounds really good. It requires the "developing of plans" and asks the Secretary to "encourage servicers of mortgages to modify loans through Hope for Homeowners and other programs." There are, however, no specific goals; no obligations of any kind are placed on the banks or the Treasury. The bill merely restates existing administrative directives of the Bush administration on this subject. There is not so much as one thin dime appropriated for the purpose of saving people's homes. Neither is there anything else that might provide immediate concrete relief, such as a legally enforceable moratorium on residential foreclosures or allowing bankruptcy courts to restructure residential mortgages. Nope, nothing like that.
No, it's very clear that there is nothing requiring the Treasury to bail out homeowners like it's bailing out the banks. Lots and lots of pretty language, laudable goals being expressed, but it's a pretty good bet that there will be years of meetings, there will be limitless conferences, and there will be many hearings but no money to save people's homes.
Another impressive sounding, but ultimately purely aspirational, provision is the section on executive compensation. The only tangible requirement addressing corporate governance also has a built in loophole big enough for any investment banker worth his salt to highball the City of New Orleans through: It is limited to banks that engage in direct sales to the Treasury. That's right, it's that easy to circumvent. Here again, bankers get the money; we get the vague promise of future actions. Do you really think that's a fair deal?
But I admit that this going round and round gets us nowhere. It looks like it's a done deal now, so let's see how it plays out. Let's agree to disagree about the meaning of the language in the provisions you cite. I've made no secret of my strong doubts about Obama. I think he is unprincipled, a chancer. A talker, not a leader. Now, maybe Obama's the real deal. I hope so since he's almost certainly going to be the next president. Maybe both the Bush and Obama administrations will act in good faith to achieve those high aspirations embodied in this bill. Maybe I'm wrong and Obama, Reed and Pelosi aren't playing us for chumps. In the fullness of time we will know who was right and who was a fool. Perhaps we should just leave it at that and await events.
has407,
Sorry, spoke too soon. One more small nit to pick. Than we can let events play out and see who's right both about the bill and about Barrack Obama. I think you are mistaken in your criticism of tavella. The provision you cite is probably not an anti-circumvention provision since it is tucked in with stuff regarding exercise, pricing and, possibility, position limits for the warrants or bonds which the Treasury get in exchange for the toxic waste. I think it relates to structuring position limits. But I'm not sure. It would not seem to address the concerns that tavella and others have raised regarding efforts to circumvent limits on executive compensation and other things.
There are several other very broad anti-circumvention provisions in the bill, but they don't appear to address and probably would not prevent the use of the mechanisms outlined by tavella and others. More broadly, the point which tavella seems to be making is that the bill has very limited protections against collusive behavior by Treasury and the financial sector. This is especially significant because all of the anti-circumvention provisions give the Secretary of the Treasury very broad but essentially unreviewable discretionary authority to act if he wants but in no way obliges him to make even a good faith effort to prevent the circumvention of the corporate governance requirements or what might be more broadly termed "consumer or taxpayer protection provisions". Likewise, the Secretary's decisions to use or not use his anti-circumvention powers or the more general issue of collusive (non-fraudulent) behavior do not seem to be covered by the Inspector General/ auditing provisions. The implicit assumption appears to be that the check on collusion will be Congressional oversight. And we all know how well that's been working out.
Given the lateness of the hour, I'm not really in a position to do any really deep thinking about this but it does appear that for some reason the judicial review provisions don't apply to any of the means of gaming this system which tavella and others, including me, have suggested. The other problem with the judicial enforcement/review provisions is a technical one related to standing. Without going into excruciatingly boring detail (and subject to further review and analysis) it does appear that mere taxpayers can't actually trigger court review of anything. (This is in keeping with existing law).
My impression is that these anti-circumvention provisions are mostly just flowery language and are not reviewable under even under existing frameworks for judicial review of administrative actions like, say, the APA. (I'm very unsure about this because I'm not sure what, if anything in this bill is covered by APA. Administrative law is not my strong suit, to say the least. But I would be interested in hearing from somebody who knows administrative law).
I asked this before and nobody responded. I can understand the public policy reasons for bailing out the banks, but what is the public policy justification for bailing out hedge funds? In the long run hedge funds don't add anything to the society. They are just gambling devises for rich people.
I would caution everyone who is assessing the current situation and the current proposed bailout to recognize that there will be many twists and turns over the next couple of years regarding our understanding of the situation and our planned response.
More to the point, whatever bailout is ultimately passed this week can be amended, again and again, over the next couple of years. The best aspect of the current proposal, in comparison to the initial proposal by Paulsen, is that it has a built-in process for monitoring and for taking corrective actions.
This was once called democratic-republican governance.
More answers today to Kevin Drum's question of a month ago: Fortis and B&B.
Personally, I suspect that Mr. Drum was working towards a meme that European financial regulation is better than American, but wisely held off. But maybe I am too cynical.
I think the issues are thus:
1) Yes, there may be a bit of a panic mode here. But, based upon the news this weekend and today, it may be somewhat justified.
2) The Dems in Congress did construct at least something resembling a decent bill. Sometimes we have to take what we can get.
3) There is only 3 months until the new, hopefully Obama, administration takes over. This bill may simply be the "best we can do" at the moment and simply a stop-gap measure to prevent complete meltdown between now and January. At that point, cramdowns and other stronger regulatory and enforcement measures can be taken that were being objected to by the House Republicans and the Bush administration.
The worst thing to have happened over the last ten years to help precipitate this crisis was Greenspan arranging to bail out Long-Term Capital Management back in 1998. Had LTCM been allowed to fail, there would have been considerable pain, but all the institutions who are crumbling now might have learned two valuable lessons: reaping short-term gains on a sea of over-leveraged investments is risky, and if you screw up doing it, you're on your own. Sure, it's always other people's money they're gambling, but they might have at least sought some other, less dangerous, way to rip off the economy.
Slanted Tom, I believe you will find lists posted at Global Economic Analysis and DailyKos after those votes happen. A movement is building to "primary" anyone who votes for the bailout.
This wanton waste of taxpayer dollars on the banking and auto industry will not go unpunished. The People seem to have finally had enough.
Submitted by low-tech cyclist (not verified) on Mon Sep. 29, 2008 7:52 AM PDT.
I've got the same question Ron Byers does. What's the downside to the rest of us if a bunch of big hedge funds go bust?
Hedge funds aren't just for rich people, a lot of retirement funds have been dabbling with them as well. There may also be the side effect, in that leveraged bets in the hedge funds cause all sorts of problems for counterparties when they implode. Perhaps a hedgefund implosion can cause a systemwide meltdown?
It is interesting to see
Submitted by Anonymous (not verified) on Wed Feb. 18, 2009 10:03 PM PST.
It is interesting to see this article after all of the recent turmoil and the introduction of the Hedge Fund Transparency Act. Start up hedge fund managers want to know how to start a hedge fund.
