Financial, Real Estate, Stock Markets Trends and Current Affairs

Stories from RGE Monitor and around the net related to Banks, Brokers, & Bullsh1+ part 2:

• Carlyle Capital Corp (CCC) defaults on about $16.6 billion of AAA agency debt as widening spreads led to huge losses and margin calls on position leveraged 32 times. Lenders seizing all of its assets--> Carlyle Group's only material financial exposure to CCC is through a $150 million unsecured subordinated revolving credit agreement with CCC.
• Sudden Debt, FT: Almost all structured finance transactions are based on unfunded margin debt--> Margin debt cannot be "restructured" with falling asset prices.
• Brunnermeier/Pedersen (Princeton/NYU), BIS: Under certain conditions, margins are destabilizing and market liquidity and funding liquidity are mutually reinforcing, leading to liquidity spirals.
• Whalen (IRA), Joseph Mason: With prime brokers and hedge funds there is no such thing as a "true sale" or complete risk transfer because the hedge fund has little capital and the prime broker, as a result, ultimately bears all the risk. Same as securitized assets landing back on balance sheet without capital to account for them.
• InvestorsInsight: Hedge Funds are net sellers of credit protection in CDS market, like insurers. Seides: hedge funds sell 32% of all CDS ($14.5 trillion) with only about $2.5 trillion in net assets under management--> watch counterparty risk.
• S&P via FT Alphaville 75% of loans to junk-rated U.S. companies provided by HF/non-banks (about $400bn)--> worst asset class performance in Q4.
• Peloton hedge fund run by former Goldman Sachs partners is liquidating $1.8bn ABS fund that produced 87% gain in 2007. Potential $9bn asset fire sale.
  Strategy: go short subprime paper, go long prime rated paper--> as of Jan 2008 however spreads on both low and prime rated assets widened due to deleveraging (=reverse leveraged bets on good assets). Margin calls triggered decision to unwind.
• FT Alphaville: January 08 worst month for hedge funds since August 1998 LTCM episode--> average fund tracked by the HFRX index lost more than 2% in January, with event-driven funds, which include activists, the worst hit with a 3.39% loss. Equity long-short funds with net long exposure down too.