mr funny
18-03-08, 18:24
Tuesday, March 18, 2008
Who will the bear bite next?
Location cannot contain the contagion of financial ruin
JAMES QUINN
CONTAGION is oblivious to setting. In the world of the high-end Manhattan property market, one big name in a swanky apartment building draws another. In the world of the financial markets, one big downfall tends to pull in another.
So, as Bear Stearns chairman Jimmy Cayne and his wife, Patricia, completed a US$28.4 million ($39 million) deal to buy two apartments in New York's recently refurbished Plaza building last week, it should come as little surprise to learn that designer Tommy Hilfiger and property magnate Harry Macklowe were signing up to be neighbours.
It is the same in the financial markets. So, as investors and analysts last weekend scrambled to understand just how Bear had managed to go from Wall Street's fifth biggest investment bank to needing the support of the Federal Reserve to stay afloat, others began to look at who might be next.
If Bear, with a lending book of US$42 billion and securities of US$176 billion, can collapse, surely it is possible that another bank might suffer the same fate?
Central to the contagion theory now sweeping both sides of the Atlantic is the concern that hedge funds, which played an intrinsic role in Bear's downfall, are manoeuvring to exact similar fates on other leading banks. One American hedge fund manager said the level of concern that another bank could collapse was so real that he was actively considering moving money from the two banks he deals with.
If his views are even in part reflective of the wider community, this week could see dangerous machinations as banks attempt to fund multi-billion-dollar withdrawals from hedge fund clients. It may lack the visual impact of queues stretching outside a high street lender's door but a run on a bank by institutional investors is equally crippling. Bear Stearns can testify to that.
To understand who else might be at risk requires an understanding of how hedge funds interact with banks, through prime brokerage divisions.
Prime brokers — the also-rans of investment banks a decade ago — have grown in stature and importance within the majority of bulge bracket banks.
Essentially acting as the bank's service mechanism to hedge funds, prime brokers tend to be a one-stop shop, providing trading facilities, stock lending and leverage facilities. They also act as conduits for channelling other services from across a bank to hedge funds and so are important revenue generators.
But relationships increasingly flow beyond the traditional prime-broking arrangement, with hedgies using collateralised debt obligations and other complex products. In Bear's case, hedge fund counterparties began to close out such positions and also demanded repayment of cash balances, which were in some cases very sizeable due to the fact that many funds are holding up to 40 per cent of their assets in cash right now due to the volatility in the markets.
The question on investors' lips now is which other prime brokers might be next?
Given that it was the crisis in confidence from hedge funds that triggered Bear's demise — which was then compounded when creditors pulled back on extended loans — can the hedgies provide any clues?
Like so much else in the hedge fund industry, data is sparse. But it is well known that Goldman Sachs and Morgan Stanley are the largest prime brokers, followed by a second tier of UBS, Citigroup, Deutsche and Merrill Lynch. Bear had once been in that second tier, working with 10,000 funds, with US$1.9 trillion in assets.
At this stage, it is difficult to know which of the prime brokers will be identified as most risky by the hedge fund community and which will be seen as the most trustworthy and reliable.
But, as the lesson of Bear Stearns shows — and brokerage Refco before that — when rumours of withdrawals begin, contagion spreads and the doom becomes self-fulfilling.
In the fast-moving, multi-trillion-dollar world of hedge funds, where moving money can be done at the click of a mouse, a run on a bank can occur much faster than it might have done five or 10 years ago.
Even for a once-well-respected prime brokerage such as Bear — whose sell-side analysts were recently ranked as leaders in the field by 280 hedgies in a survey by Alpha magazine — past reputations are not enough to survive.
As the events of the last week have shown, one day you're in and the next you're out.
Investors must now hesitantly watch and wait to find out which bank, if another is to fall, is next. — The Daily Telegraph
Who will the bear bite next?
Location cannot contain the contagion of financial ruin
JAMES QUINN
CONTAGION is oblivious to setting. In the world of the high-end Manhattan property market, one big name in a swanky apartment building draws another. In the world of the financial markets, one big downfall tends to pull in another.
So, as Bear Stearns chairman Jimmy Cayne and his wife, Patricia, completed a US$28.4 million ($39 million) deal to buy two apartments in New York's recently refurbished Plaza building last week, it should come as little surprise to learn that designer Tommy Hilfiger and property magnate Harry Macklowe were signing up to be neighbours.
It is the same in the financial markets. So, as investors and analysts last weekend scrambled to understand just how Bear had managed to go from Wall Street's fifth biggest investment bank to needing the support of the Federal Reserve to stay afloat, others began to look at who might be next.
If Bear, with a lending book of US$42 billion and securities of US$176 billion, can collapse, surely it is possible that another bank might suffer the same fate?
Central to the contagion theory now sweeping both sides of the Atlantic is the concern that hedge funds, which played an intrinsic role in Bear's downfall, are manoeuvring to exact similar fates on other leading banks. One American hedge fund manager said the level of concern that another bank could collapse was so real that he was actively considering moving money from the two banks he deals with.
If his views are even in part reflective of the wider community, this week could see dangerous machinations as banks attempt to fund multi-billion-dollar withdrawals from hedge fund clients. It may lack the visual impact of queues stretching outside a high street lender's door but a run on a bank by institutional investors is equally crippling. Bear Stearns can testify to that.
To understand who else might be at risk requires an understanding of how hedge funds interact with banks, through prime brokerage divisions.
Prime brokers — the also-rans of investment banks a decade ago — have grown in stature and importance within the majority of bulge bracket banks.
Essentially acting as the bank's service mechanism to hedge funds, prime brokers tend to be a one-stop shop, providing trading facilities, stock lending and leverage facilities. They also act as conduits for channelling other services from across a bank to hedge funds and so are important revenue generators.
But relationships increasingly flow beyond the traditional prime-broking arrangement, with hedgies using collateralised debt obligations and other complex products. In Bear's case, hedge fund counterparties began to close out such positions and also demanded repayment of cash balances, which were in some cases very sizeable due to the fact that many funds are holding up to 40 per cent of their assets in cash right now due to the volatility in the markets.
The question on investors' lips now is which other prime brokers might be next?
Given that it was the crisis in confidence from hedge funds that triggered Bear's demise — which was then compounded when creditors pulled back on extended loans — can the hedgies provide any clues?
Like so much else in the hedge fund industry, data is sparse. But it is well known that Goldman Sachs and Morgan Stanley are the largest prime brokers, followed by a second tier of UBS, Citigroup, Deutsche and Merrill Lynch. Bear had once been in that second tier, working with 10,000 funds, with US$1.9 trillion in assets.
At this stage, it is difficult to know which of the prime brokers will be identified as most risky by the hedge fund community and which will be seen as the most trustworthy and reliable.
But, as the lesson of Bear Stearns shows — and brokerage Refco before that — when rumours of withdrawals begin, contagion spreads and the doom becomes self-fulfilling.
In the fast-moving, multi-trillion-dollar world of hedge funds, where moving money can be done at the click of a mouse, a run on a bank can occur much faster than it might have done five or 10 years ago.
Even for a once-well-respected prime brokerage such as Bear — whose sell-side analysts were recently ranked as leaders in the field by 280 hedgies in a survey by Alpha magazine — past reputations are not enough to survive.
As the events of the last week have shown, one day you're in and the next you're out.
Investors must now hesitantly watch and wait to find out which bank, if another is to fall, is next. — The Daily Telegraph