Several banks that have provided a large amount of leverage to their hedge funds clients are re-evaluating the value of their collateral, according to sources familiar with the situation. If the banks determine that the assets collateralizing the loans they have made to hedge funds are not as valuable as previously thought, they may reduce the leverage available for hedge fund clients to make investments and force hedge funds to sell assets to provide additional collateral.
The second look at hedge fund collateral has been prompted, in part, by recent events at Bear Stears and this morning’s announcement by BNP Paribas that it could not calculate the value of assets in three hedge funds. This comes amidst spreading fears that collateralized debt obligations held by many hedge funds may be worth far less than their internal models have indicated. Because many CDOs trade thinly, if at all, it can be impossible to determine their market values. Hedge funds and banks have relied instead on financial modeling to value the CDOs.
Hedge funds that have relied on CDOs to collateralize their margin borrowing could face a credit squeeze if lenders downgrade the value they attach to CDOs. With BNP Paribas calling a valuation of the value of their debt holdings impossible, some on Wall Street are arguing that many CDOs should be considered as having zero value for collateral purposes. If banks adopt this position, some hedge funds would face steep margin calls, forcing them to sell these assets. This in turn could result in a deluge of debt products in a thinly traded market, pushing their values even lower.
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I love listening to people who don’t know what they are talking about wax poetic about said topics. And to do so with such a pungently smug sense of their own worth. Nice work, Carney.
Like I’ve said, we report. You deride.
We’re just reporting what we’re hearing from the folks in risk management.
By all means, please feel free to expand on what you think the situation is if you think we’ve got it wrong. That’s what comments are for!
Or, you know, you can smugly wane and whine apoetically about something you want us to believe you understand but, for some reason or another, can’t manage to type.
I despise people who post unnecessarily harsh criticisms of generally entertaining individuals – and in particular, those who do so anonymously.
why is this an entry… we all know this
are you just trying to write something that will be quoted in the popular press?
What need is there to type it? One guy writing overly long and florid expositions on the obvious is enough, no?
this is the popular press as far as i’m concerned!
Don’t forget the self-congratulation inherent in every Carney post, Anonymous. Or the pathetic, thin-skin responses to any sort of criticism.
What I see as the situation here is that the value of the collateral (cdos, etc) is in question, but if the collateral is sold to meet margin calls it is going to further depress the values (if any) of said collateral resulting in a viscious cycle of depressed values.
The question then is what is the best way to hash this out? Is it lassaize faire – to let it hit the fan and with losses for most if not all parties? Or is there a better way(s) to unwind this situation, and if so, what would that process look like? Should the banks/margin providers/etc come together to decide on a standard method of valuing and dealing with this quesitonable collateral?
I know I’ve asked many a question to which I do not have the answer, but since so many stand to lose (make) so much money, I am (perhaps incorrectly) that there is enough incentive and enough cognitive horsepower out there to find the answers.
I think Carney is doing a good job. When a French bank says it can’t value financial instruments it means that allegedly smart people have created something they don’t know that much about. (Who knew Frankenstein’s monster would kill? Did Dr. Frankenstein’s VaR model predict the murderous rampage of his creation??)
Wait a minute…Liz is on the line….gotta go.
Wow, sounds like there a bunch of pissed off bankers/hedgies out there today.
(Salient point, are you fucking serious?)
SP can’t be serious, since he can’t spell “laissez”, understand what it means, nor form a coherent sentence.
This does demonstrate why you don’t want to lever off of synthetic instruments that can experience a crisis of confidence as a class unrelated to their long-term underlying value. Now we just wait for the guns to yell at me for “just not getting it”. Who knew that they were so good at re-enacting John Meriweather?
okay but arent these bnp funds basically money market funds, not hedge funds? because if so, Carney and DB have definitely been a little off base here all day
Hi all….Just a quick note to say “thanks!” to all the current financial crisis participants for taking the heat (and ink) off of me and the Nobels this time!
And, hey, if we’d have stayed in those positions they’d be profitable by now.
Sorry…had to rub it in a little.
I will tell you what is going on. The music stopped, some US banks/funds are sitting in the chairs, but most foreign investors have no chair and are standing up holding worthless collateralized dog shit.
To address the concerns of PO’d:
The funds were “investment funds” and certainly not traditional money market funds. Both in terms of the investment period and in terms of the assets they held, they were markedly different from most things that are called money market funds. We are calling them hedge funds but you can call them whatever you’d like.
My apologies for coming off a bit testy in the comment above. I have a low tolerance for people who make know it all sounds without demonstrating that they know anything at all.
BB – maybe it’s just the old quant/EE/control systems guy in me that’s really talking here, but these things have always made me nervous.
When the positive trend is in play, everyone wins. But at the ends of the S curve, it’s huge challenge to determine when to get on or off the ride because you’re surfing at the edge of system instability. One bad input or perturbation and if the system can’t be dampened rationally, it will tend to start tear itself apart.
Calgary….
God Damn, what the fuck are you guys talking about. Is that physics or something…
we need to report this so I can press my GS , BSC shorts even more !!!!!
Synthetic CDOs are SOUND I tell you!
Yo Einstein – Bad Haircut + No Conditioner = The Frizzies.
Einstein, you can safely ignore Calgary. He’s talking gibberish.
Carney, fair enough.
Real hedge funds are getting enough bad press without having anything that fails now labeled a hedge fund just because it holds similar assets. These are, as you say, traditional investment funds, they are using Euribor 3M as a benchmark. Its confusing (I will stop short of saying sensationalist) when you call them hedge funds is all.
The bad press point is fair enough. Too many things do get called hedge funds these days.
Well, I was a massive bear on GS and had my Sept 170 puts in place on the books….but…. then I figured the banks of the world would help out, so I bail out with a 22% gain and GS STARTS TO FALL YET AGAIN, the fuckers. I mean that affectionately, of course.
anon @3:10 – I can safely assure you that the logic and methods used to design control systems so that people don’t get killed (literally, as in dead) in industrial process operations apply quite well to market modeling. When you are trained to model in that kind of hyper-conservative world, it is easier to eyeball weak spots in more “liberal/freeflowing” environments like the marketplace. If anything, you become more sensitive to areas where risk and stability can’t be wholly quantified, contained or managed.
Of course, your mileage may vary.
Calgary: Yeah engineers make far superior traders than both the liberal arts and the physics/applied math guys. Huge difference in understanding of behavior near discontinuities when you’ve blown up a few lab benches in your EE course due to badly handled system poles rather than just doing paper proofs of the system. The video game traders are even worse, since they can’t even come close to doing the math. Last night’s monster post was hilarious when the guns went nuts on me. I have this aversion to blowing up a fund – I guess we’re both not real men!
I’m loving gold going south now too. The gold bugs are even more annoying than the poseur traders who don’t even understand how they’re reliving Hunter and Meriwether.
Calgary -
Familiar at all with Ogata’s System Dynamics? This was ME though, so more spring/damper than EE I’m sure. Just want to know if this engineer’s education will amount to something in the wonderful world of finance.
BB, the market is not a servo.
way too funny
4:15 they’re all systems that use the exact same math to model and solve. The specific domain of the components doesn’t matter to the math, but it does help to know how the math translates into physical behaviors.
now it’s the math that is personified? why can’t the fund manager admit they shorted vol at or near historic lows because that is how he/she developed their model?
BB — literally the case! Pretty much every shop uses one of two purchased risk-models (Barra or Northfield) for US equities. Ownership-by-other-statarbs is not one of the model risk factors!
im an idiot
Wreck: an engineering education is a good base for building, period. unless you plan on going into theatre or social work. expect that you will get flak for being too pragmatic (a.k.a. party pooper – but expect that for life in general).