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At 06:05 PM 9/25/98 -0400, Bruce wrote:
>The good news is I think the meltdown scenario a lot of people are claiming
>will happen as the derivitives owned by failing hedge funds are unwound is
>greatly exaggerated.
What isn't exaggerated is that there is now a GLOBAL LIQUIDITY crisis
overhanging all world financial markets that was previously underestimated.
Precipitated by margin calls on a series of wildly bullish, excessively
greedy, 'new era' bubble thinking, on highly leveraged investments.
The main initial culprit was inadequately collateralized loans by
'incompetent' emerging market and third world banks. Now it's evident that
even North America's best investment banks also made inadequately
collateralized advances.
It is precisely because this sets up a potential world wide domino reaction
that can threaten the international banking system and global markets, that
the Fed would be concerned.
Seems now even Wall Street's best connected trading genuises didn't
apparently see these most basic of trading risks coming. Excessive greed
gets its just rewards. It's a basic risk reward principle of trading.
Remember the thread here in August .........."Russia - problem - what
problem?" A BIG PROBLEM, as it turns out!
>I find it even more reprehensible that Greenspan and the Fed had to get
>involved to begin with.
Had they NOT been able to refinance and keep it afloat, the assessment was
that the impact could have become even worse, due to the domino affect and
the larger unwinding that would have been required. Kind of like the bailout
of Goldman Sachs in Mexico in 1994. Friends helping friends.
>Some people take this as a sign of how the serious
>the problem is.
The fact that the Fed even sat in the discussions indicates the seriousness
of the situation.
>I have a different view. I take it to mean that John
>Merriwhether of LTCM first went to these banks to bail him out, and they
>told him to go take a long walk off a short pier.
Actually they didn't tell him that. Couldn't, was the assessment. They
refinanced the group with new equity to the tune of a couple of billion with
15 investment banks participating.
>An audit of their books may
>have sent a few people to jail (and should).
Many of the participants are Wall Street firms, their books are already
subject to audit.
The new equity advances were made to minimize the losses of the previous
lenders. If they had told him to take a walk, they would have just lost even
more money. It was a basic investment banking business decision. Only
because of who these guys are and the size of the potential hit did the Fed
even bother to sit in, would be my assessment.
>Great, the
>same people who can't balance their own checkbooks with the House Bank are
>going to solve the hedge fund problem.
That's precisely why MORE GOVERNMENT REGULATION isn't always the best solution.
The free market system just demonstrated that it is very efficient. It
brings down even the so-called best of the best, even "the Master of the
Universe" and his nobel back room geniuses, when they FAIL to employ BASIC
MONEY MANAGEMENT PRINCIPLES.
That's the moral of the story.
It also lets just a little more 'air' out of that market bubble balloon.
AND sharpens up the lenders a whole bunch on future advances, don't you
think? Maybe they'll ask about the leverage to be deployed next time BEFORE
they advance. Maybe they will periodically review the accounts,
notwithstanding the back room geniuses. That's also the moral of the story.
>The good news is I think the solution is pretty simple- TOTALLY BAN all
>leveraged investments in emerging markets.
>Comments welcome.
>Bruce
Not a good solution. Bad for economic stability and growth. The capitalist
free market system works very well. Shouldn't have to overreact and advocate
quasi-socialist financial policies to address simple incompetence in
financial management. The market will punish the incompetent. It will punish
both the lenders and hedge funds when necessary.
A TOTAL BAN on leverage in emerging markets seems very extreme and unnecessary.
Banking 101 and trading 101, would be a better starting place.
Michael Paauwe
mpaauwe@xxxxxxxxxx
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