Thursday, August 9, 2007

The Return of Hedge Fund Problems

There are several article from Bloomberg I'm going to integrate below.

From Bloomberg:

The European Central Bank, in an unprecedented response to a sudden demand for cash from banks roiled by the subprime mortgage collapse in the U.S., loaned 94.8 billion euros ($130.2 billion) to assuage a credit crunch.

The overnight lending rates banks charge each other jumped to the highest in six years. The so-called London interbank offered rate in dollars rose to 5.86 percent today from 5.35 percent and in euros gained to 4.31 percent from 4.11 percent. Three-month dollar Libor rose to 5.5 percent from 5.38 percent.

The fastest increase in the overnight dollar rate since June 2004 signals that banks are reducing the supply of money as losses triggered by the U.S. mortgage slump spread worldwide. BNP Paribas SA halted withdrawals from three investment funds today and Dutch investment bank NIBC Holding NV said it had lost at least 137 million euros on subprime investments, reversing signs yesterday that credit markets were stabilizing.

``Liquidity in the market has completely dried up as investors aren't recycling their money back because of subprime concerns,'' said Saher Bin Jung, a trader on the commercial paper desk at Commerzbank AG. ``Levels have shot up dramatically since yesterday as issuers are trying to entice investors back.''

1.) Part of the reason for the rally over the last three days has been the perception the subprime problem would be contained. The XLF tracking stock increased from $32.20 to $34.75 -- an increase of 7.91%. The news from BNP and NIBC will probably halt this rally or slow it down.

Here's more on the problem:

BNP Paribas SA, France's biggest bank, halted withdrawals from three investment funds because it couldn't ``fairly'' value their holdings after concern over U.S. subprime mortgage losses roiled credit markets.

The funds had about 2 billion euros ($2.76 billion) of assets on July 27, including 700 million euros in subprime loans rated AA or higher. The Paris-based bank said today that it will stop calculating the net asset value for the funds, Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia.


``The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating,'' BNP Paribas said in the statement.

2.) These are big funds -- 2 billion+ is not chump change. But the manager can't "``fairly'' value their holdings". That means the 2 billion + in total assets may not even be close to accurate. Remember -- Bear Stearns lost 6 billion in 2 funds just a few weeks ago.

3.) The ECB is flooding the market with liquidity. While this is a good thing in the short run because it eases some concerns, it may not be enough. The bottom line is we are seeing announcements of hedge fund/investment losses coming from all over the world. And the pace is snowballing.

4.) "investors aren't recycling their money back because of subprime concerns" Translation: either the ECC can continue to inject liquidity or we're going to have a continued problem in the markets.

5.) In the 1920s, the US banking system collapsed because of runs on the banks. A similar situation is happening with hedge funds right now:

Union Investment, Germany's third-biggest mutual fund manager, stopped withdrawals from one of its funds on Aug. 3 after investors pulled about 10 percent of the assets. Frankfurt Trust, the mutual fund manager of Germany's BHF-Bank, halted redemptions from a fund after clients removed 20 percent of their money since the end of July.