Hedge funds & Politics

Discussion in 'Wall St. News' started by nutmeg, Oct 21, 2008.

  1. There are several culprits in the recent market crash, but one key source of the problem has hitherto escaped attention: an economic index that can be easily manipulated by hedge funds and whose gyrations have shaken the foundation of Wall Street: the ABX index, launched in 2007 by the Markit Group, a London-based company that specializes in credit derivative pricing and that administers the index.

    The collapse in the American stock markets was a calamity for the campaign of John McCain. In September, McCain was running strongly against Barack Obama. Some polls had him leading Barack Obama by 3 percent before the market broke. By October 7th, Obama had taken the lead across America. What changed in one month? The trigger was the market crash. Who pulled the trigger and why? Who benefited?

    At the heart of the mortgage mess is uncertainty regarding the value of subprime securities held by banks, saving and loans, Fannie Mae, Freddie Mac and a wide range of financial firms across America. However, the impact has spread beyond the value of just those mortgages. A supermarket of financial products has been created using the "raw material" of the mortgages themselves (recall the adage about everything from a pig being used but the squeal?). Mortgages can be packaged into securities called collateralized debt obligations (CDOs) and sold in slices with varying levels of risk. Furthermore, for buyers of these slices who wanted to insure against the debt going bad, Wall Street created a new instrument, called "credit-default swaps" (CDSs).

    The value of all of these "products" pivots on the underlying value of the mortgages themselves.

    Image an inverted pyramid. At the bottom are subprime mortgages and everything above is a type of financial family tree spawned by the mortgages themselves. An inverted pyramid is inherently unstable. A kick at the bottom can collapse the whole structure. And so it has.

    The Role of the ABX Index

    The heart of the mortgage mess is uncertainty regarding the value of subprime securities. The ABX Index is used to determine the value of these securities: it is a benchmark of the market for all the home loans issued to borrowers with weak credit . A collapse of this index leads to these home loans being marked down in value. The advent of the so-called mark-to-market accounting rule requires firms to slash the value of their holdings. This rule has magnified the problem: weakened balance sheets restrain lending, risk-taking, and may ultimately lead to bankruptcy.

    The problem is that it looks like the ABX can be manipulated. The Wall Street Journal has noted that there is criticism "that the ABX is manipulated by hedge funds, or fails to represent the overall subprime or housing market"

    As the ABX subprime mortgage index crashed, so did much of our economy.

    Some investors benefited handsomely. Hedge fund manager John Paulson personally has made billions of dollars over the last two years from the collapse of the subprime mortgage market. How he did this can be found in this superb Wall Street Journal article.

    Who else may have benefited? Indeed, who may have helped precipitate the crisis by taking actions that would weaken the ABX Index? We don't know, but there are some obvious suspects.

    George Soros for one. Soros (the "owner of the Democratic Party" according to Saturday Night Live) is a legendary hedge fund manager who has become a political powerbroker of unrivaled influence within the Democratic Party (see The Shadow Party: How George Soros, Hillary Clinton and Sixties Radicals Seized Control of the Democratic Party) and who has an empire of politically active 527 groups, of which he is the number one donor, by far, in America.

    Soros's hedge fund -- like most hedge funds -- is based overseas and escapes much scrutiny and regulation (more on this later). Word of Paulson's early success got "around in the world of hedge funds" and Soros invited Paulson for lunch, "asking for details of how he laid his bets, with instruments that didn't exist a few years ago"

    Paulson made billions betting against the ABX Index. When you bet against the value of an index it exerts pressure on it -- hastening a decline and thus a decline in the value of the products that are priced using this index.

    Did George Soros profit from such machinations, too? A relative, Peter Soros, directly invested with Paulson. Others also listened to Paulson and went off on their own to independently follow the same strategy and have reaped vast fortunes in doing so. Soros has refused to answer questions from the Wall Street Journal about his now infamous lunch with Paulson .

    This is somewhat surprising silence from a man well known for his loquaciousness. He certainly has not been reticent the last couple of years as he trash-talked down the American economy. As a man whose investment prowess is legendary, his words alone could have harmed the stock market.

    Soros is, after all, the man who famously broke the Bank of England decades ago and made a billion dollars in doing so. George Soros probably has made billions over the last couple of years. Paulson and Soros both shared the "honor" of being the highest earning hedge fund managers last year and will probably do so again this year.

    George Soros, not so incidentally, was a very early and influential backer of Barack Obama. He is a very prescient investor.

    Now how does this play in the election?

    Hedge funds have been a big source of the problems besetting the market. Heavily leveraged, they have had to sell vast quantities of securities to meet margin calls as well as fund withdrawals from investors.

    But could hedge funds such as those run by Mr. Soros also have precipitated the crisis, a crisis that has literally in the span of a few weeks upended the political race for the White House? Short-selling can drive down the market.

    Hedge funds are the biggest practitioners of short-selling. Other big institutional investors, including mutual funds and pensions funds, are barred from the risky practice.

    Hedge fund short-sellers in recent weeks have targeted financial stocks such as the now-defunct Lehman Brothers and Washington Mutual as well as troubled firms such as Morgan Stanley to try to restore the double-digit returns that endeared them to wealthy investors.

    The most dangerous are the hedge funds based overseas, such as the one run by George Soros, that escape scrutiny and a range of regulations

  2. Wow, Soros broke the British Pound and put Thatcher out of office and now he puts Obama in the White House!! Can we say "special place in Hell?"
  3. Frankly, the reason I posted the article is because I'm not quite sure what to make of it.
  4. It doesn't seem very obscure to me, George Soros is a mover and shaker of world politics. He can find the lynch pin and pull it.........
  5. I have been vocal in my belief that 95% of hedge funds are scum.

    Legalized thievery.

    Our regulators are all whimpy limp wristed college overeducated nitwits.

    What we need are street smart wise guys ready to rip the hedge fund scammers a new @sshole when they get out of line.

    Think we'll get that?