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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: TobagoJack who wrote (95715)	10/21/2012 9:26:05 PM
From: ggersh	Read Replies (4) \| Respond to of 218397

zerohedge.com This should help the cause, of course timing is everything as to what goes round comes around... How I Caused the 1987 Crash Submitted by Bruce Krasting on 10/20/2012 12:37 -0400 I got a chuckle from the biz blogs and TV yesterday with the rehash of the 1987 stock crash. Twenty-five years is a very long time. I’d forgotten most of the events of that day. I was at Drexel, and at that time, Drexel was a powerhouse. The firm had plenty of capital and huge capacity to borrow money to fund positions. Money was rolling in; risk taking was encouraged. I was working with a small group of people on one of the screwier sub-sets of the high yield bond market. It was referred to as LDC debt (Less Developed Country debt). These were the busted bank loans of all of the countries in South America. You might wonder why anyone would spend time mucking around with the debts of Brazil, Mexico, Argentina and Chile. Actually, it was a great business. We were coining money. The key to our (and others) success was the ability to make a price on illiquid assets. If some regional bank needed to sell $25Mn of Brazilian debt, we would make a bid on the phone. If a company were in need of some Mexican debt that would be used in a debt for equity transaction, we would offer the paper to the buyer, even though we did not own it. My old days of currency trading came in handy as some of the paper we traded was denominated in currencies other than the dollar . The fact that I had a “license” to trade currencies gave me the opportunity to speculate pretty freely, and I/we did. The shop that I worked in was no different than any other on Wall Street. We had a “book” of positions. Some were outright specs, others were hedges against commitments we had made. To hold this book together, we required equity (cash). The Crash of 1987 happened on a Monday. But the crash really started the week before. The S&P tanked 9% on the week, Friday was a particularly bad day. The big move in stocks set things in motion over a very nervous weekend. I got the call from the controller’s office on Saturday. It went like this: Controller: Hi, Sorry to bother you, but we have some issues with our bank lenders (It was Bankers Trust that first pulled the plug on street liquidity). They are nervous, and want to cut back our funding lines. You are using a fair bit of capital in your trading book. Can you tell me what all this money is being used for? BK: Sure. We have a matched book of longs and shorts on the prop trading side. We also have some open currency positions. We have an inventory of hedges against open client positions. We also have some naked longs. Controller: Ah, can you be more specific? BK: Sure. We are long Brazil, Mexico and Chile; we are short Ecuador, Peru and Venezuela. We are naked short the USDHK$ and have $60Mn of Cuban bonds in inventory. Controller: You’re shitting me! What is that junk? Is any of this liquid? Can you sell this book of crap? BK: I might be able to run things down a bit. How much time do I have? Controller: Cut it in half by Monday night. And that is how the crash of 87 happened. Sunday night October 19, at the opening in Tokyo the HK$ position was closed off (at a loss of course). I got up at 2am and started the calls to London where there was a market for LDC paper. I was hitting bids on anything I could. The prices for the long assets were getting clobbered. There was no liquidity in the markets I was short. It was about minimizing losses and cutting a book. There was no finesse about it. Of course I was not alone in those early morning hours. Hundreds of players from NYC were on the phone hitting bids on all sorts of squirrely assets. The folks who make markets in London were never dopes. When their phones lit up with Americans looking to lighten up, they voted with their feet. Bids for everything dropped like a stone. By eight o’clock in NY everyone knew that wholesale liquidations were going on, and that stocks were going to get beat to a pulp when the market opened up. I think I stood all of that day. The phones rang and rang. Both buy and sell side clients were panicked. Most were sellers; the buyers went on strike. Prices were dropping without any trading taking place. The brokers were all, “offered without the bid”. It was next to impossible to get trades off. Some where’s around 2pm NY time, the Cuban paper got sold (more losses). There was not much more that could be done. So I sat down and watched the Reuters screen and the Dow tape for the rest of the day. I’d had next to no sleep, drank a ton of coffee and smoked too many cigarettes. I'd sweated all day, and stank. I left before the 4pm close. To me, there are today many similarities to the market conditions that triggered the 87 crash. These two ring a bell: In 87 I bet on Cuban paper. The rumor at the time was that Castro was sick. The thinking was that when he died, the bonds would increase in value. I’d bought the bonds at around 5 cents on the dollar. Exactly the same bet, for the same reason, is being made today: The Hong Kong dollar was pegged to the USD in 1983. Four years later guys like me were betting that the central bank could not hold the peg. Money was flowing into Hong Kong; the central bank was forced to intervene in the market to keep the lid on the HK$. This same trade is popular today: The most important comparison has not yet shown up yet in 2012. In 1987, over the course of a weekend (and many panicky phone calls), market liquidity and the ability to finance off-the-run assets dried up. It started at the bottom of the rung of asset quality, by the end of the day it had spread to the most liquid stocks. On Thursday, October 15, 1987, the farthest thing from my mind was a squeeze on the equity capital I was using to support a book of business. If anything, I was (everyone was) being encouraged to put more money to work. That vaporized in hours. It was one giant “risk off” event. There were no external factors of significance that led to the 87 crash. The market did itself in on that day. All it took was a few calls that said, “I want you to cut back at open”. The repo markets that fund the zillions of assets (good and bad) in 2012 are exponentially larger and more complex than in 1987. If anything, that market is more vulnerable today to the call that says, “Cut it back”. Note: Of course I didn't really start the 87 crash. I was a small cog in a very big wheel. There were thousands of folks who were scrambling on that day. On Monday night, 10/19/87 the Fed (Greenspan) called the heads of the big banks and told them to open the spigots. The Repo markets were flush with cash on Tuesday morning. From my perspective, it was much ado about nothing.

To: TobagoJack who wrote (95715)	10/23/2012 10:50:46 AM
From: elmatador	Read Replies (1) \| Respond to of 218397

HK moves again to halt currency rise sold its own currency for the 2nd time in less than a week to halt the rise of the Hong Kong dollar against the US dollar, selling HK$3.9bn (US$500m) on Tuesday. By Rahul Jacob in Hong Kong Hong Kong’s central bank sold its own currency for the second time in less than a week to halt the rise of the Hong Kong dollar against the US dollar, selling HK$3.9bn (US$500m) on Tuesday. The intervention follows the Hong Kong Monetary Authority’s swapping of HK$4.67bn on October 19 for US dollars, the first time the central bank had made such a move since December 2009.The mechanisms that govern Hong Kong’s currency board, by which the Hong Kong dollar’s exchange rate is linked to the US dollar, mean that the central bank must buy US dollars when the Hong Kong currency pushes up against the upper limits of its trading band of US$1 to HK$7.75. On Tuesday, the Hong Kong dollar was at HK$7.7501, according to Bloomberg. Analysts said that the strong inflow of money into Asian currencies and stock markets has been prompted by increasing investor appetite for emerging markets as they sought better returns. In a recent note to clients, HSBC said that the more “equity-oriented” currencies such as the Indian rupee, the Korean won and the Taiwanese dollar had outperformed as money had flowed into local stock markets. On Monday, ANZ said that it believed “the strong inflow into the HKD money market relates to the recovery of global investors’ appetite towards Hong Kong’s stock market”. The link of the Hong Kong dollar to the US dollar was put in place in 1983 when negotiations about the future of the British colony after 1997 had sparked nervousness in the local business community. In the past couple of years, the fact that the dollar peg allows the local central bank little latitude to curb asset price inflation in the city through raising interest rates, for example, has led to calls from HKMA’s previous chief executive Joseph Yam, to reconsider the currency mechanism. Property prices in Hong Kong are among the highest in the world as local and mainland Chinese investors have rushed to buy apartments in the city as a hedge against inflation. Government officials, however, have stressed that the linked exchange rate serves the city well by giving the financial centre the stability it needs. The lack of convertibility of the Chinese renminbi also makes it an unlikely currency for the Hong Kong dollar to be linked to despite the strong economic ties between China and Hong Kong. ANZ said that it remained confident that the system would stay in place for the foreseeable future. “The intervention suggests that the HKMA will continue to defend the HKD peg,” it said. “The currency reserve is sufficiently strong to defend against not only normal capital flow but also speculative pressure?.?.?.?The HKMA intervention and recent strength of the HKD will probably be temporary and successful.”