It has been almost one year since the subprime problems first surfaced last July as two Bear Stearns hedge funds acknowledged that they had lost virtually all of their funds. It was the beginning of a slow drip of disturbing information regarding the extent financial institutions, primarily investment banks, were affected by subprime holdings.
While it was the collapse of a couple of hedge funds that introduced us to the problem, it was the investment banks that had the greatest exposure. So much so that the Federal Reserve had to open its lending window to these institutions for the first time in 80 some odd years and arrange the bailout of Bear Stearns. And while hedge funds continue to be watched with suspicion, it is the banks who have had to book billions of dollars of losses due to this exposure.
And recently we have seen an interesting reversal of fortune; hedge funds providing capital to investment banks. Besides the obvious question of where does this money originate in the first place, this is a strange twist. During a panel at the Managed Funds Association Forum conference in Chicago on sound practices for hedge funds, a small hedge fund manager asked the panel consisting of representatives from large institutional hedge funds whether they were concerned with the credit risk of their investment bank prime brokers. “They won’t open up their books to us, they are going to sovereign funds overseas because they don’t want to open their books,” the manager said. The panelists agreed with this assessment and one panelist acknowledged that they are starting to look at the investment banks as a credit risk.
Later Bob von Halle, managing partner with cash management firm Horizon Cash Management, said that in the last year Horizon’s ability to sweep margin accounts, reducing the risk of holding excess capital at prime brokers has been of growing importance to customers.
In the last two months numerous Congressional committees have shone a light on speculators in the commodities markets looking to affix blame for skyrocketing energy and food prices. Yet it seems to us that there still has not been a thorough investigation and analysis into the subprime mess. Perhaps there isn’t an easily identifiable scapegoat.
Comments (1)
It has always required an act of faith to embrace the concept that there exist among us certain Supermen that are above the need for the market protections that the rest of us get. Hedge funds, pension plans, banks, insurance companies etc. And yet, when the entity veneer is peeled away, guess what. They are US. Major investors in hedge funds could well be institutions to which we have entrusted our savings. Pension plans, almost be definition, are alter egos of you and me. Banks bet with our deposits while insurers bet with our premiums. Why should our money be put at greater risk when we entrust it to someone else than if we handled it ourselves?
Posted by Philip McBride Johnson | July 1, 2008 11:13 AM
Posted on July 1, 2008 11:13