FYI | Jun 23 2008
By Greg Peel
If you’re going to hold a gathering of hedge fund managers, a cynic might suggest Monte Carlo is the ideal location. So it was that hedge fund managers from across the globe made their way to Monaco last week. Many would not have had far to travel, as Monaco is a preferred tax haven for European and British hedge funds in particular.
Bloomberg’s Tim Cahill reports that a survey conducted at the meeting found that 80% of attendees expected the global credit crisis to continue. Nearly a quarter suggested the situation “will deteriorate significantly”.
Hedge fund founder John Paulson, who made a name and a fortune worth billions for himself by shorting the subprime market lat year, believes banks across the globe are currently only one third of the way through what will ultimately be US$1.3 trillion in asset write-downs. So far US$400bn has been written down, and whenever bank spokespersons have painted on a smile and suggested the worst is now behind there are plenty of analysts who have wondered where the “rest” of the exposure is. Right from the get-go, Goldman Sachs said US$600bn, but even that was limited to specific products and not representative of wider implications to all debt instruments.
Citigroup last week offered an assessment which would have had analysts nodding knowingly. Citi is forecasting further “substantial” write-downs of its own positions in the second quarter.
Cahill spoke to many an attendee at the meeting, and these are some of the comments he was offered:
“It’s all bad news on the horizon. The correction is going to be a long one. It’s a recipe for disaster for credit markets”.
“It may be the worst recession since the Great Depression, that’s not impossible. There’s a lot of negatives out there”.
“This is a major, major event, it’s going to take a while to resolve itself. In the last recession [2002-03] the banking industry was healthy, this time it’s very, very sick”.
“We have a lot more wood to chop. I wouldn’t be surprised to see another US$600bn in losses.”
However, there is some good news. Despite the doomsayers in attendance there were others who are primed and ready to start moving into distressed debt, looking for bottom-of-the-barrel bargains. Business school professor Edward Altman noted there has been some US$400bn raised in the US, and a similar amount outside the US, from investors in over 200 hedge funds who are eager to load up on discounted debt and bonds.
This is the sort of self-correction factor the Fed has been looking for ever since it started cutting the cash rate to encourage interbank lending and investment. But additional moves such as opening up discount windows and trying to organise banks into bail-out consortia are the sort of actions that keep the vultures away. Risk-hungry players need a truly free market to operate in, lest the opportunity to profit from distress be compromised. Apart from belief in ongoing weakness, this is one reason the world has seen very little vulture activity to date. Mostly the heroes to date have been sovereign funds, who have since learnt some pretty harsh lessons as beginners. Threatening to introduce stern regulatory measures will also keep the true capitalists on the sidelines until such measures are ratified.
There was another meeting of note last week – of the central banks of the Asian Clearing Union, held in – of all places – Burma. There it was decided that as of next January the central banks will between them accept euros as an alternative for payment settlements alongside the incumbent US dollar reserve currency.
The ACU consists of the central banks of India, Pakistan, Iran, Bangladesh, Sri Lanka, Burma, Bhutan and Nepal. While such a move from the Bhutans of the world are unlikely to have US currency traders quaking in their boots, the decision was yet another nail in the coffin of US dollar reserve currency status.
