I bought a load of August Puts in BSC...I think this is just starting and smart money will sell it off. Holding a bag full of illiquid securities is BAD! Others aren't dumb, they know what they have...selling that much in bunk CDOs into the market will start a rapid-fire explosion in the market. Getting more and more interesting. ARM loans haven't even started resetting in bulk.
This is a hell of a bet. If they don't do it, they auction, and how many hf's go out, leaving prime broker Bear holding the bag? Instead, they use a ton of capital to hold the fort. What's the first lesson you learn as a trader? "First loss is your best loss." They broke the First Commandmant. They are not protecting their capital. Anything our of left field capsizes the ship.
It amazing that LTCM was 3.6 billion. We have spent the last decade printing money like it is confetti. No wonder we havent had a recession.
On Bloomberg a commentator said they don't think that Bear would take out those loans unless they saw an exit strategy. I don't think they do and I think they're trying to save face. I'm also wondering what their bond rating will be by taking out 15% of their market cap in debt...might not help them much. There will be more impact than we're lead to believe because they're not the first and won't be the last to suffer from the CDO mess and the next ones will just add to the pain that Bear is already suffering. More bad Bonds aren't going to help Bear sell these later.
If this thing blows up, it is the investors in hedge funds that will be left holding the bag. The HF managers did what they should have, they filled their own pockets with ridiculous fees on highly leveraged illiquid bets. And then they will start all over again when this mess clears up. THIS IS THE GRAIL OF TRADING/INVESTING.
I'm not following this one that closely, but it may be a one way bet for them -- i.e. if they don't step up they take a major hit anyway.
Pointing out the obvious: The problem here is that the investors in these hedge funds don't have a big enough bag. The fund was so highly leveraged, and has lost so much money that if it liquidates today, the investors will be out their entire investment and the fund will still come up short. At least, thats what the banks that supplied leverage to the fund are afraid of. What's happening now is that they are all maneuvering to make sure that they don't get stuck with the excess risk above and beyond the total capital loss of the fund's investors. Martin
Maybe the whole scenario will end like this: Leverage? A mere 4000% Mark D Lay, the fund manager currently under fire with allegedly losing the Ohio Bureau of Workersâ Compensation $216m of its $225m investment. That is a really, really bad return. Indicted on charges of conspiracy and fraud, Mr Lay apparently blew through the fundâs pre-set limit of 150 per cent for borrowing - to the tune of 4,500 per cent. The Colombus Dispatch reports that Mr Lay is the latest person charged in a two-year investigation, which also drew in âCoingateâ, the Thomas Noe investment scandal. Mr Lay showed a mastery of understatement in September 2004, when confronted about the fundâs underperformance, the value of which by then had slumped to $57m. He admitted that the fund was overleveraged, but while knowing that it in fact exceeded 4,500 per cent, contend US attorneys, he instead told board executives he had only borrowed 900 per cent of the fundâs assets. 900 per cent? Well thatâs okay then. http://www.dispatch.com/dispatch/co..._ART_06-15-07_A1_0L718OK.html?type=rss&cat=21
Squirm b*stards! Hedge fund investors are normally people who can afford to lose the odd million. I just like seeing the banks in a tricky position, pardon the pun.