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Jim McConnon wrote:
> No citizen money in the bailout. I don't think that any of this was criminal
> or immoral. It was high stakes poker on Wall St. with very experienced
> players getting a bloody nose.
Jim:
I'd agree with your assessment. As I have said a few times, there are very
little regulations that are applicable here. Many of the products traded by
hedge funds are not traded on regulated exchanges and there are little or no
regulations in most of the cash markets that cover these situations.
Another complicating matter is the nature of the markets and the incestuousness
of many of the traders in these markets. One reason why a firm would be
interested in investing money [making the firm's capital at risk] in a fund or
making markets to a fund [which would mean the firm has counterparty risk if the
fund failed], is because funds like this deal in markets where the firms can
make money several ways: First, the firm can make markets to the fund on exotic
products that have better spread profit potential; two, the firm also runs a
'book' in many of the same markets the fund trades actively and so that
department of the firm gets 'inside information' from from the fund, allowing
the firm's traders to position themselves to ride the same profit wave as the
fund; and third, the firm assumes the fund managers are experts in their field
and by investing, the firm can accrue profits from the investment, since the
managers are not available to be hired.
It is the second matter that is truly dangerous here. The world of fund managers
is rather small and many talk to each other about the same trade, day after day.
You can bet that there were many funds besides LTC that positioned themselves
with those instruments. And if part of the risk was counterparty risk [meaning
risk from non-payment or non-delivery by a counterparty, ala Russian banks or
Asian banks], you can bet the funds that have those positions have the same
counterparty risk and problem as well, since dealing with those counterparties
is done both because of the profit potential.
This in itself would cause Greenspan to be interested, even if the firms
individually were not initially interested. Greenspan knows that many firms may
face the same problems--in fact, he probably knows better than most firms. As I
said, the real decision makers of a firm probably won't know about their own
problems until the balance sheet is already in dire trouble, and that is the
true danger here: You have to pray that the Fed is able to put out a fire when
it's discovered, and one day, it may come too late for a very large financial
institution.
Good trading to all.
Best,
Tim Morge
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