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Pastimes : The Justa & Lars Honors Bob Brinker Investment Club -- Ignore unavailable to you. Want to Upgrade?

To: Kirk © who wrote (1224)	9/27/1998 11:18:00 PM
From: Joseph G.	Respond to of 15132

The quote you give is basically correct, except their peak exposure earlier this year was a factor of two (at least) larger. The spread, however, would have increased if the interest rates went higher, which would be extremely negative for their position. You may recall Orange Co., CA fiasco on a similar position, though much less leveraged, when interest rates went up in 1994-5. Their miscalculation was that the spread increased a little even though rates declined. They most definitely did not bet on rates increasing. Since they had highly hedged positions in top quality fixed income instruments their lenders allowed them very low collateral (like 2%). However, to put things in perspective, unsophisticated retail customers are allowed up to 10:1 leverage on unhedged treasuries, and futures trades can trade on 3 to 5% margins unhedged ... <<I'd also like to know how many other hedge fund positions are in danger of collapsing....>> I'm sure they themselves would like to know too. -g-