The Wall Street Journal tells us that some less-than-nimble-footed hedge funds wound up not moving their prime brokerage accounts quickly enough out of Lehman to avoid having those assets frozen in the bankruptcy.
Most readers will probably find it hard to work up much sympathy for these Masters of the Universe. Despite the name “prime broker”, only small hedge funds have only one prime broker, Medium to bigger hedgies have two or three, some even more. So even firms caught are not completely stuck, although not being able to trade out of a position is not where anyone ever wants to be.
But these guys are supposed to be the savviest investors, right? The Bear Stearns meltdown made clear that a run on a securiites firm can push it over the edge in a mere two weeks. Lehman’s stock broke through $20 a month after a share offering at $28. That should have been a red flag to anyone with an ounce of self preservation to move their business elsewhere.
From the Wall Street Journal:
The collapse of Lehman Brothers Holdings Inc. is creating a quandary for hedge funds: Who to do business with in a tumultuous prime-brokerage industry.
Late last week, many hedge funds scrambled to shift that business away from Lehman and to other so-called prime brokers, which provide trading and lending services to the funds. But some were caught up in the bank’s move to file for bankruptcy protection on Monday, say lawyers and other industry specialists. As a result, they have found their holdings effectively frozen, with no indication of when they might be able to access them.
Legal experts cautioned that it could be weeks or months before the mess is sorted out, leaving hedge funds unable to unwind positions at a time when many assets are falling sharply in value…
The rush to get away from Lehman has involved some of the world’s biggest hedge funds, including London-based hedge fund GLG Partners LP, in which Lehman owns a stake. In a statement Tuesday, GLG said it had in recent months shifted assets away from Lehman. “The majority of these transfers have already settled, and we expect the remainder to settle shortly,” the statement said. “We believe the residual exposure of the GLG Funds to Lehman will not be material.”
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Any estimates on how much money we’re talking about here? If the sum total is only a few billion (i.e. most hedge funds got out in time) it might not mean much. OTOH, much larger amounts might be enough to create cascading failures among hedge funds unable to remain liquid.
OTOH, this is a great opportunity for some banker with inside knowledge of which hedge funds and assets are frozen to trade against those players knowing they can’t defend themselves. Kind of like kicking a quadraplegic.
Since America has now officially put Romper Room Rules into full effect, why can’t we just bail out thesee poor hedge funds? After all, losers get their feeling hurt and we can’t have that, can we? It’s not good for their self-esteem if they can’t win like all the others.
Things are just warming…like one of the sites I frequent, the posters say…get your popcorn ready, sit back and enjoy the show.
Things are just warming
Exactly. I would like to remind everyone here that after the F/F takeover a large portion of the F/F CDS was suspiciously settled at par. They know something about the F/F debt we don’t, yet.
The US government is toast. The California ongoing budget crisis is a canary in the mine.
“Things are just warming…”
My day job is to draw more eyeballs to the telly.
In the past few days, my job just got a whole lot easier so that now I can spend my time learning what the monkeys have been doing and the ramifications for the rest of us blokes.
My father, a stockbroker, taught me, one man’s loss is another man’s profit.
It’s true that some hedge funds have this problem. But the same hedge funds may have been big buyers of CDS protection on Lehman to hedge this risk. Depending on how it plays out, they might come out of this with a tidy profit.
I’m a hedge fund manager. I’ve never considered myself to be a Master of the Universe and I’ve always try to be savvy. I don’t understand why you are systematically “attacking” the persons working for this industry. You should know that as in any other profession there are “good” and “bad” example.
I was also expecting from a person like you the capacity to be critical enough to understand that some people got stuck with LEH debacle because rules have been changed and not because of their ego/hybris like you are implicitly assuming.
More collateral damage via Krugman:
Worse than ever
http://krugman.blogs.nytimes.com/2008/09/17/worse-than-ever/
You GOT to be kidding me Mr. Hedge Fund Manager – you boys have been getting every break in the book and then some. It only ocurred to you to unwind your positions at the very last minute?
molecool, the issue here is not the unwinding of the positions at the right time, but is more related to objectivity and biased view towards an industry coming from somebody that should be “super-partes”…..
Let me help you: why BofA has bought Merrill on Sunday when they could have bought it at a cheaper price later? … This is one of the many questions you should ask.
Hedge fund managers got stuck with LEH. That’s a fact. But the problem is sitting elsewhere not on their hybris as Yves is asserting
More fallout…why does one have to search the world’s newspapers for news?
AIG fears cause securities trading to halt
Shareholders were left unable to trade popular commodity securities yesterday, due to fears over the future of their backer, AIG.
Banks and brokerages stopped making markets in the Exchange Traded Commodities (ETCs) backed by the troubled insurer and sold by ETF Securities (ETFS). The price of the stocks also plummeted due to the worries over AIG.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/09/17/cnetc117.xml
Hubris! Or is hybris some specialized form of what commeth before a fall…
By the way, people should be a little more nasty to those in your industry as a whole. Due to shenanigans in the financial industry I, my family, and my children will likely paying more taxes to bail out folk’s decisions with no recourse to clawing back your previous gains. As a result, I practice open class warfare and would gladly cut you off in traffic or fail to give the right of way in a grocery store aisle.
Peter S.
Mattthew Dubuque
Please note that the recent Federal suspension (NOT elimination) of the rule prohibiting funds transfers from CB parents to IB subsidiaries helped here.
One reason the rule was suspended was to provide a non-taxpayer funded incentive for B of A to purchase Merrill.
If B of A had NOT purchased Merrill, that IB would have collapsed this week, despite some good faith efforts of Thain to address the toxic waste issue. (Recall their courageous sale of some assets at 22 cents on the dollar.)
Had Merrill collapsed this week, one of the collateral effects would have been an even larger hit to hedge fund clearing operations than the Lehman hit referenced above.
The goal of the Fed is stability. During this ATTEMPT at a hard, forced landing for the global economy, we don’t want the plane to go into a tail spin or lose a wing, crashing the plane and killing all on board.
Hence one more reason for the suspension of the rule, permitting the sale of Merrill to B of A without using taxpayer dollars.
Matthew Dubuque
«Let me help you: why BofA has bought Merrill on Sunday when they could have bought it at a cheaper price later?»
Oh please! That’s absolutely obvious: they are paying 100% with their own stock, and if Merrill and company tank because they cannot honor their obligations and they are bankrupt, the BoA stock tanks too.
BoA are crazy, but they wouldn’t be paying cash. In effect the 30-35% of their stock they have offered (for now) to pay for Merrill is worth rather less than the value it would lose if Merrill went under.
It is all a confidence game: my overvalued stock for your overvalued stock.
I rarely see anyone but a Greek scholar use the spelling hybris. We normally use hubris in the United States. Regardless, please point me to the “attack” in Yves’ post. Other than the use of the phrase Masters of the Universe (which has been around for **decades**), I cannot possibly see an attack in this post.
since this is a government bail-out, will this go to the congress for approval? and if so, can we see the books please? were they cooked? and why give an outgoing CEO 47 million dollars? will a government owned AIG function as a government owned company? and how will it function?
yours truly,
a student trying to understand
Peter,
let me ask you: is it buying a house when you can’t afford it or using HEW to buy a car or selling mortgages to people that don’t understand the contract clauses or keeping the rates at 1% for 1 year the savviest behavior ?
Definitely not. Is hybris, ego.
Has it got something to do with hedge funds? Definitely not, too.
Hence, don’t mix up subjects and be more respectful.
Let me answer:
1. On BofA and MER: the issue here is why suddenly BofA shifted from LEH to MER. Has it got something to do with the previous acquisition, i.e. Countrywide, sponsored by the government? I fully share the view that the Fed goal is stability, but it does question me the sudden change and the criteria followed on the choice made by BofA. Hence, why MER instead of LEH?
2. You are right, I’ve studied Latin and Greek. Regarding the “attacks” you just have to follow the tags/topics “Hedge funds”, read the other posts and appreciate the negative connotation that is systematically given to hedge fund managers.
This is the financials margin call. When an investor makes a bad bet
and gets a margin call, the hedge funds have absolutely no mercy. They
have no problem wiping you out completely. Now it is their turn.
Unfortunately, the government bails some of them out – AIG, and others,
Merrill, find a sugar daddy. Investment banks and hedge funds should
be wiped off the face of the earth. They were a sophisticated scam to
begin with. This is only justice. As you would tell your investors who couldn’t make a margin call, “Nothing personal, this is just business”. Tragically, it is the individual
investor and the public at large who are once again shown no mercy,
by the government.
Hedge funds add no real value to an economy – they don’t add real productivity – they just offer a way for the rich to leech further off the real factors of production.
Remove productive industries and the financial industry is worthless.
We need an economic system that rewards real factors of production, not a means to steal decades off future effort from the ordinary man and stuff it into the pockets of investment bankers and hedge fund managers. Obscene bonuses for no real productive work are exactly that.
A return to a system of barter might not be such a bad idea.
But certainly two sided speculative derivatives trading should be outlawed and all derivatives trading ought to be pinned on one side to a party actively trying to minimise industrial risk.
“…hedge funds should
be wiped off the face of the earth. They were a sophisticated scam to
begin with…”
no comment
Beedge,
1. “Hedge funds add no real value to an economy” …this is a matter of opinion;
2. “We need an economic system that rewards real factors of production”, you are right, but is a political/regulatory issue, nothing to do with hedge fund managers;
3. “Obscene bonuses for no real productive …”. So why institutional and other type of investors keep investing in HFs? Out of what do you think bonuses are paid?
Welcome to the predators bawl.
On a perhaps related note, the administrators of Lehman’s UK (ie European) arm just held a webcast. They said (roughly, among other things): “Lehman significant leverage to certain clients to acquire positions. We expect to liquidiate those positions to realise cash for the estate. We don’t yet know if there will be any residual cash for the clients.”
Ginger Yellow,
it sounds like you are not aware of the concept of “Segregated account” under which the hedge funds operates.
thanks, anyway for the info
Yeah, I’m not too up on the intricacies of hedge funds and prime brokerage (securitisation is my field, for my sins). I just thought it might be relevant.