Hedge Fund Blowups Highlight Systemic Risk From Risky Bets, Leverage.
Location: Blogs Bob O'Brien's Sanity Check Blog
Posted by: bobo 9/20/2006 4:48 AM
It's in all the NY papers. Amaranth, a large CT hedge fund, is going down for the count due to a disastrous bet on natural gas prices rising.
Motherrock, a smaller fund, vaporised earlier this month for similar reasons.
I note that the murmuring is starting among the Wall Street banks, not over how disappointed they are at having invested their clients' money in these stinkers, but rather at the level of exposure they face due to the likely 4X leverage Amaranth employs.
Which brings up two observations. First, you can bet that if Amaranth had taken a bad bet on a single stock, the fund and their bankers would be kicking that stock in the throat to keep the price depressed, and avoid this sort of conflagration. You can do that with a company like OSTK or NFI, but you can't with a market as big as natural gas. The exposure of the Wall Street banks is only now being hinted at, and as with Refco, we probably won't hear the full story for years.
The second is that hedge funds, by definition, employ leverage. Lots of leverage. Which means someone has to lend them the money to make their outsized, and sometimes foolhardy and risky bets. When they implode, those someones are left holding massive liabilities - which the young turks who approved all the lending, and who got and spent their wildly inflated bonuses, don't much care about. It's all about getting the money, today. Tomorrow is another day, with different problems.
Note that the SEC is scrambling to re-instate some of its safeguards that were contained in its registration rule for hedge funds - which was shot down. Which safeguards do you think those are? The safe harbor provisions that protect the hedge funds and their management? Isn't it funny that everyone scrambles when hedge funds lose a few billion, but when tens of billions are drained out of your and my pockets, they're too busy to answer the phone - we are just malcontents pissy over our stocks not going up.
The NCANS Reg SHO comment letter is now up at the SEC site. As are letters from other "baloney" scammers like Congressman Jim Ryun, the AG of Utah, the UT State Securities regulator (great read), and an anonymous investor who nicely summarizes the SEC's litany of failure and shoddy behavior.
As the comments pile up, NFI has been getting kicked in the teeth even as its peers are soaring, and nobody bats an eye. Greenberg is back to bashing the company, the bashers are working a full shift on Yahoo, the company is generating record profits, and the SEC doesn't have the time to ask why it's been on the Reg SHO list for coming up on two full years, with a 13 day break over a year ago. Just too busy. So everyone that bought it at $60, and $50, and $40, and $30, and is wondering why the bad guys seem to be able to do whatever they feel like in spite of stellar company performance - guess what? The SEC isn't going to enforce any of the laws designed to keep this from happening. Just won't. But they will do 24-hour crisis sessions when one of Cohen's boys screws the pooch on a massive wrong way wager in NG.
Nice system, huh?
Where's the special prosecutor? What ever happened with Aguirre? Why can the SEC and DTCC lie about Reg SHO's efficacy, to us and to Congress, and nobody does anything?
I warned about the dangerous use of leverage to make stupid, out-sized bets a few years ago in this blog. I further warned about hedge fund opacity being a ticking time bomb. I also argued that there was no way that SHO was doing anything but helping the bad guys rape and pillage. I stated categorically that the SEC was in bed with the crooks running interference for them, and was an active participant in the looting of America, as well as in setting up a scenario where Wall Street was so beholden to the larger aggressive hedge funds that their failure could cause a bomb blast should they take one to the jaw.
That's why the stocks they target stay depressed, no matter what the company's fundamentals. The bankers own those bad bets just as the hedge funds do - likely at 10X or greater leverage. Goldman can't keep natural gas artificially supported, but it sure has the juice to keep OSTK down via creating artificial shares in perpetuity. Why wouldn't they? Who's going to do anything about it?
And that is the lay of the ugly land on Wed, September 20. Business as usual on Wall Street.
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Speaking of which, HedgeWorld had the expected article on the SHO comment letters today, wherein they cited Shapiro's, and net nut James Brownfield, whose incoherent Chewbaca rant was cited for many paragraphs, replete with non sequitors, incorrect statements, misleading torturing of the data...you name it.
The final paragraph of the article was my own personal favorite.
"A spokesman at the New York Stock Exchange, Brendan Intindola, said Wednesday [Sept. 20] that from that exchange's point of view, SHO is working, "in the relevant metric, which is reducing the number of fails." As for the test of the uptick rule, it is "still a pilot, so there has been no definitive conclusion reached."
Now, given that we just posted the FOIA data for the NYSE, and it shows, conclusively, that there is no drop in the number of fails as of the last date we got info for.
So, is that an improvement? Is that working?
Is it against the law for the representative of a publicly traded company to make provably false and misleading statements?
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