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Non-Tech : Derivatives: Darth Vader's Revenge
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To: Henry Volquardsen who wrote (340)10/4/1998 5:49:00 PM
From: kahunabear  Read Replies (1) of 2794
 
I understand that you pay interest on borrowed money. I am questioning how the big brokers and money center banks are claiming that their loans to hedge funds are almost fully collateralized with cash and bonds. IMO, it sounds like they are trying to say that there is no leverage or exposure to LTCM investments.

Example - Say I have a million bucks and want to make an investment. Why would I deposit cash in a bank as collateral and then borrow my own money to purchase my investments. I would have to pay interest on my own money. I could have just made the investments without getting a loan.

Perhaps, what they are saying is that the LTCM loans are collateralized with the investments they made. If that is the case, it seems like the banks should be disclosing the amount of leverage that was being employed. Has all of the investor's equity been lost ? Are the banks now assuming the entire risk, if value of these securities continue to fall ?

IMO, it just seems like these press releases are hiding the fact that there may be sizable exposure. I have seen nothing that clarifies who is losing if the value of LTCM investments go down. Is it just shareholder equity or are the losses cutting into the amounts loaned out by the banks ?

BWDIK,
WS
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