Warning on another big hedge shock
By Roger Hogan and Alan Deans in New York
One of the co-heads of Merrill Lynch in Australia warned yesterday that the global financial system could experience another major hedge fund-related shock within the next six months.
"I wouldn't be surprised if there's one more major financial accident in the next quarter," Mr Greg Bundy said.
"I see some more difficulties with hedge funds. The trades are pretty obvious: [US] dollar/yen, credit markets in the US and emerging markets."
Merrill Lynch, which played a key role in last month's $US3.5 billion rescue of US hedge fund Long Term Capital Management, yesterday announced its withdrawal from market-making in Australian government and semi-government bonds, and the loss of 37 local jobs.
Worldwide, the investment bank has sacked 3,400 staff, or 5 per cent of its staff, following a third quarter loss of $US164 million compared with a $US502 million profit in the same period last year.
It was the first time in nearly nine years that Merrill had posted a loss and the news highlighted expectations of a grim third quarter reporting period for US investment and money centre banks.
Overnight, BankAmerica Corp, the fifth largest bank in the US, was expected to announce a big hedge fund loss. According to The New York Times, some analysts had estimated the loss at about $US100 million.
Others put BankAmerica's overall exposure to the hedge fund, DE Shaw & Co, as large as $US1 billion, taking the form of either loans or credit lines.
There was speculation yesterday that Prudential Securities was in the process of making staff cuts, but several other firms said they were holding at current numbers.
PaineWebber said it did not plan any sackings, despite posting a 27 per cent slump in third quarter earnings to $US82.9 million.
Donaldson, Lufkin and Jenrette also announced a profit dive, down 79 per cent to $US25.7 million, but said nothing about staff cuts. Lehman Bros, which has been the victim of persistent rumours about deep losses, said that it did not plan any sackings.
Merrill Lynch's loss included a $US288 million charge for severance charges and came after the group recorded a 7.3 per cent drop to $US3.8 billion in revenues.
Chief executive officer Mr David Komansky said the broker expected to make savings of $US500 million annually from cost efficiencies. "Because of uncertainties now apparent in the global economy, we anticipate a much more challenging environment ahead," Mr Komansky said.
The job cuts were the largest Merrill Lynch has made since the aftermath of the 1987 sharemarket crash when it reduced its employee numbers by 18 per cent.
Despite the withdrawal from Australian Government bonds, Mr Bundy said Merrill Lynch was "very keen" on the credit markets in Australia.
The firm would "put more resources" into the area and position itself for growth in bond issuance here by offshore borrowers.
Market uncertainty would persist for a while yet, however. "We expect further deleveraging of hedge funds some time in the first quarter of next year at least. Australia has been a little immune, because its markets are in their infancy," Mr Bundy said.
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