http://www.france24.com/en/20080330-free-market-thinking-takes-hit-us-economic-crisis
Ed Yardeni at Yardeni Research said Fed chairman Ben Bernanke "made monetary history" by opening the discount window and "crossed even further over to the dark side of financial socialism" by allowing the firms to pledge illiquid mortgage debt as collateral.
"Comrade Ben is determined that there will be no financial meltdown and no depression while he is in command," Yardeni said. "Given the initial positive reaction in stock prices last week, I suppose this means that on Wall Street, we are all financial socialists now."
Todd Harrison, a former Wall Street trader who writes a blog on the website Minyanville, argues that the Fed is placing its balance sheet at risk by assuming troubled mortgage debt.
"If the economy continues to deteriorate, the Federal Reserve would effectively and eventually become insolvent. It won't go bankrupt -- it will simply print more currency and further dilute the value of the dollar."
But Harrison said the problems would fix themselves if authorities allowed the free market to work.
"Our current conundrum can be traced back to the implosion of the tech bubble," he said. "If we were allowed to take our medicine rather than being injected with artificial drugs, we would already be on the road to recovery."
http://www.banknet360.com/blogs/Item.do?pkId=348&serviceId=2 Roland Arnall, an architect of modern subprime mortgage finance, died yesterday, He was 68. He was a secretive person, reportedly amassing a fortune of $1.5 billion. He was a survivor of the Holocaust, and was a founder of the Simon Weisenthal Center in Los Angeles, which tracked down and brought to justice Nazis worldwide.
But it was his role in subprime mortgage finance that will be his legacy. In 2006, Ameriquest/Argent paid $325 million as part of a predatory-lending settlement with 49 states and the District of Columbia. Ameriquest/Argent was a vapid, aggressive lender, pricing loans to amass tremendous volumes, at one point reaching around $10 billion of loan originations per month.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/30/cchedge130.xml
The credit crunch is exposing the masters of the universe as mere mortals after all, reports Louise Armitstead With their dominance came increasingly displays of hubris and extravagance. Two years ago Albourne Partners, a hedge fund adviser, hired Knebworth and staged Hedgestock - the "alternative conference for the alternative investment industry" - one of the most extravagant and bizarre business meetings ever organised.
There were talks and meetings like any normal business conference, except the grounds were decked out as if it were a 1960s music festival, with the additions of a polo field, laser clay pigeon shooting range, hot-air balloon station and remote-controlled duck racing, while 4,000 delegates were dressed as hippies and danced to a live performance by rock giants The Who.
Meanwhile, London's annual Ark dinner, the industry charity night, became the biggest fund-raising night in the world. Organised by Arpad "Arki" Busson, the multi-millionaire French financier and former boyfriend of supermodel Elle Macpherson, more than 1,000 hedge fund managers and celebrities, including Jemima Khan, Bob Geldof and Liz Hurley, paid up to £50,000 for a table. Last year, a speech by Bill Clinton, a private concert by Prince and an appeal from Madonna helped raise a record of £28m.
Even when the markets turned last year, the hedge funds' high jinks continued. Stephen Partridge-Hicks, the former Citibank debt guru and head of Gordian Knot, one of the big credit hedge funds and so hit first, tackled the crisis by splurging thousands of pounds on a show-stopping party. In October, as his fund tanked, he chartered a plane to fly 150 mates to Morocco where he had hired Marrakech's upmarket Amanjena hotel for a James Bond-themed party. On top of the usual champagne and haute cuisine, Patridge-Hicks staged a James Bond scene - complete with actors, stunts, a real submarine and a fly-by from two Mig jets - starring himself as 007.
At the start of this year, hedge funds had been protected from the full impact of the credit crunch. While private equity houses experienced a sudden severance from lending, investment banks largely kept open for the hedge funds....In recent weeks, this has changed....bank bosses ordered their prime brokerage and repo departments to comb through their books again and slash risk exposure.
Lending lines have been cut, just as the funds needed them most to cope with the volatility....
A new view of hedge funds has been revealed, particularly with regards to borrowing levels. In recent years, leverage in the funds has spiralled. While hedge funds have traditionally used two or three times leverage in their funds, this figure has been multiplied to eight or nine times in many cases - and even more in some.
One prime broker said: "Hedge funds have had it easy. Every man in a pink Cadilac has been able to raise money, start a fund and do really well. Frankly, those who have taken the biggest risks have come off best because markets have been so extraordinarily kind."
The leverage that magnified gains in the rising markets has had the same impact on the way down. Weaker funds were the first victims. But now the squeezing by the lenders has meant that a far bigger number have had no cushion or protection against short-term swings.
[Ron] Beller [of failed hedge fund manager Peloton] wrote to his investors: "Because of their own well-publicised issues, credit providers have been severely tightening terms without regard to the creditworthiness or track record of individual firms, which has . . . made it impossible to meet margin calls."
In the aftermath, others have a different view. One observer says: "The only way to generate 90 per cent returns off AAA-rated bonds is if you are taking too much risk. Simple as that."
Another friend says that he often boasted that Peloton was sailing close to the wind. "I once asked Beller how he would cope if the market suddenly turned and he was forced to mark to market. He said he'd be in trouble but that would never happen."
Focus Capital, the fund that liquidated two weeks ago, was managed by Tim O'Brien and Philippe Bubb, who formerly worked at Pictet & Cie in Geneva. Focus won a EuroHedge industry award after returning more than 100 per cent in 2006. O'Brien and Bubb told investors that they had been the victims of the credit crunch and short selling. But observers disagree: "Focus took large stakes in very small, illiquid companies. In these markets that's a dangerous position to be in."....
Meanwhile, Platinum Grove, the $5.5bn New York-based hedge fund set up by former Long Term Capital Management co-founder Myron Scholes, fell 7 per cent when Japanese prices moved suddenly....
Prime brokers say that the survivors are big funds with diversified portfolios and are not overleveraged. One said: "Over the next few months, there will be a shake-up of hedge funds and the ones that survive will be stronger and more robust - essentially, the new breed of hedge funds that take the sector to the next stage of development."....
One said: "Hedge funds got carried away. Benevolent markets meant that anyone could be a superstar which couldn't be true. The current crisis will quickly show the pretenders and leave behind those that are genuine hedge funds - that can make money whatever the weather."
