Wednesday, October 15, 2008

Keeping Ahead of Events


Readers following the musings about the supposed chain of events of what is "really" happening (only history will show, fully), we can add this data point.

The prime brokers may be having some trouble reining in their ... er, off-the-floor trading operations, know as fast-money hedge-funds (not all such funds are fast-money, levered, or even 'hedged', so one has to be thoroughly discriminating).

Collateral calls, which are like asking leveraged hedged funds to ... produce liquidity, *may* only be working so well.

The reason I'm thinking this is because of a comment on CNBC that there may not be enough high-quality collateral in the system. Which is just another way of saying that the hedge fund industry, at least the risky, trading parts of it, are ... undercapitalized. At least, let's hope it is not the clearing banks themselves.


Let us hope that the NY Fed people are hot on this topic, if it is true. We all remember LTCM.

There are no indications of a repeat of that, apart from general worry indicators. However, there could be 100 "little LTCMs", that could add up to something meaningfully large.

What's somewhat reassuring is that there appears to be no obvious trigger point for those funds who have been caught ... er, "slim", to suddenly collapse. Some folks are keyed on the Lehman event/settlement, but that may not be the straw that breaks the camel's back (from what we know about the net settlement, it appears it could be Still, "significant fails" would be a blow to confidence in an environment that feeds on them.

As it stands, we can only speculate on what is "really" going on.

Policy makers have little to call on, except monetizing assets in a hurry (the hurry part is what will be the worst, if so much occurs in that way).

Whatever the case, if there are risks out there, like the ones outlined, the regulators obviously don't want to be responding to events, but to be seen driving them, as much as possible.

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