Obviously, the short squeeze and GM tender followed by the downgrade, was a Black Swan event when put together, back to back, get whacked on short GM position and then get whacked on the bonds on the downgrade. Leverage is part of the game. These hedge fund managers are just players in the game. "Don't hate the player, hate the game" This was not an "airplane trade" as you describe as to most players, it was measured and cloned by several firms. Stuff happens. If you own a house, there was probably extreme leverage used to purchase. So much, that you only put up 5-15% down. I am sure these fund managers used a lot less leverage. If you lose your job and default on your "highly leveraged" mortgage, are you a bad guy? What about your car loan? Similarly, if some scheme is orchestrated for a tender offer and a short squeeze and gun at shorts to spike GM and then, suddenly the S&P downgrades the bonds right after, is this fund manager a bad guy? With so many planes in the air, there are going to be crashes.
Back to reality - how bad is this? Or is it just some idiot talking big numbers and a silly headline?
Don't get me wrong, I love the bear side of the market. But what is the size of the average hedge fund? $40 million? Triple that. Now assume that hedge fund lost every penny on this GM arb that CNBC is peddling. That's a $120 million loss. That, by itself, is not enough to send the Dow down 10 points.
Have you actually taken the time to consider your points here. I will address you one last time, then you can post whatever you like, and have the final word. Trading so large and taking on leveraged risk so as to cause systemic risk is irresponsible and wrong. Perhaps develop a few original thoughts and you won't have to regurgitate someone elses! An airplane trade is taking excessive risk, or, in this case, using excessive leverage. Leveraging your house is not even close to leveraging yourself in the market. DOES YOUR HOUSE GET MARKED TO THE MARKET DAILY? DO YOU HAVE TO PUT UP MORE MONEY IF YOU ARE UPSIDE DOWN ON YOUR EQUITY? NO......this was about the dumbest analogy I have ever read. A review of some ecomics texts might be in order, so that you may understand the difference between default risk of an individual and the systemic risk that a large fund potentially poses! There is a difference. You may have the final word!
Suckers. (<== the Hedge Fund) If you wanna play you gotta pay. This is the new wild wild west. Kill or be killed. ozzy
Strategy wise, it was nothing unusual, many funds seem to have these one - long credit risk via equty tranche of iTraxx, short credit risk via mezzanine tranches. The shit has been flying since the early april - equity tranches are trading down close to 20bps, while mezies are much tighter, due to correlation skew (in essense, mkt sees some gap risk common to the auto/parts industry). It hit the fan this morning. GLG unwound, don't know the size (correlation desk thinks it's in the range of 300-500). Couple other US-based places are apparently looking for an exit too. Nothing near the LTCM-scale, though.
Speaking of black swan events... you can be sure it wasn't Taleb! -- maybe Nicky Leeson's back in the game??