Each business day HedgeCo.Net keeps you informed with the top hedge fund industry news, opinion and insight from around the globe. From the latest hedge fund launches, to the impact of regulation, competition, and investor activism - we track the topics and people that make a difference to you.
The Times and Democrat – In a record bailout of a private company, the government on Monday provided a new $150 billion financial-rescue package to troubled insurance giant American International Group, including $40 billion for partial ownership.
The action, announced by the Federal Reserve and the Treasury Department, was taken as it became increasingly clear that an original financial lifeline thrown to AIG in September would be insufficient to stabilize the teetering company. All told, the moves boost aid to the company to more than $150 billion.
Fed officials, however, expressed confidence that the money would be repaid to taxpayers.
The $40 billion infusion comes from the recently enacted $700 billion financial bailout package. The government is buying preferred shares of AIG stock, giving taxpayers an ownership stake in the company. In turn, restrictions will be placed on executive compensation at the firm.
WBT – U.S. stocks appeared headed for a rebound Tuesday as investors awaited the start of a two-day meeting of the Federal Reserve that is widely expected to bring another reduction in interest rates.
The sharp rise in stock market futures contracts Tuesday was to be expected given the extreme volatility that has been the hallmark of Wall Street’s behavior for more than a month. At the same time, the sometimes light volume of futures trading can make it difficult to determine the market’s overall mood. In recent weeks, stock futures have moved solidly in one direction, while actual trading was more moderate after the opening bell.
A higher open would come as casualties from the global crisis piled up Tuesday: Whirlpool Corp. said it will cut about 5,000 jobs by the end of 2009, Iceland said it needs $6 billion and Germany said Pakistan must secure a loan from the International Monetary Fund within a week.
Business Day South Africa – Examiners with the US Federal Reserve have questioned Wall Street counterparties about their exposure to debt and other holdings of Citadel Investment Group, The Wall Street Journal reported at the weekend.
Citadel denied the report.
Citing people familiar with the matter, the j ournal said the Fed questioned the counterparties in at least two instances in recent days.
But Katie Spring, a spokeswoman for Citadel, denied the rumours that the Fed had spoken to the hedge fund’s counterparties specifically about Citadel and possible problems with its debt.
Bloomberg – Credit markets have fallen so far that they are providing a "once in a lifetime opportunity," and investors are still selling.
Prices of loans rated below investment grade declined to a record low 66.1 cents on the dollar, virtually guaranteeing investors get their money back, based on historical recovery rates, according to data compiled by Standard & Poor’s. Yields on corporate bonds show investors expect 5.6 percent of the market will go bust, the highest default rate since the Great Depression, according to Christopher Garman, chief executive officer of debt research firm Garman Research LLC in Orinda, California.
While central banks injected $3 trillion into the global economy, credit markets are tumbling because banks are clamping down on lending, forcing investors to unload assets they bought with borrowed money. The Federal Reserve said Aug. 11 that its quarterly survey shows most "domestic institutions reported having tightened their lending standards and terms."
The Times of Trenton – Stocks prices fell sharply again yesterday, ending the Standard & Poor’s 500 Index below 1,000 for the first time since 2003 on speculation banks and real-estate companies are running short of money as the credit crisis worsens.
Bank of America tumbled 26 percent after cutting its dividend in half and saying it plans to sell $10 billion in common stock to brace for a recession. Morgan Stanley, KeyCorp and JPMorgan Chase slid more than 10 percent as investors shrugged off signs the Federal Reserve will reduce interest rates. General Growth Properties, a mall owner, plunged 42 percent on concern it won’t be able to repay debt.
"We’ve approached the edge of the cliff," Leon Cooperman, 65, who manages $6 billion at hedge fund Omega Advisors, said at the Value Investing Congress in New York. "Do we go over the cliff or begin to recede? History says we recede, but there’s no guarantee.
Washington Post – That is the technical economic term that best sums up a day in which the House of Representatives refuses to pass a $700 billion rescue plan pushed by the White House and congressional leaders from both parties, Wachovia is taken over in a deal that will have the government potentially owning 10 percent of Citigroup, a few European banks fail, the Federal Reserve and other central banks are forced to inject an additional $300 billion into the global banking system, the Dow Jones industrial average plunges 778 points, and investors everywhere rush to the safety of gold and short-term Treasury bills.
The basic problem here is that too many people don’t understand the seriousness of the situation.
Americans fail to understand that they are facing the real prospect of a decade of little or no economic growth because of the bursting of a credit bubble that they helped create and that now threatens to bring down the global financial system.
Washington Post – Central banks in the United States, Europe and Japan will consider taking foreign-denominated assets as collateral in an effort to provide liquidity for battered financial markets, the Nikkei newspaper said on Sunday.
Currently most central banks only accept assets denominated in their home currency as collateral, the paper said. If central banks were to accept assets denominated in other currencies, cash-strapped firms would be able to get funds easier, it said.
Six central banks, including the U.S. Federal Reserve, the Bank of Japan, the European Central Bank, and the Bank of England are discussing a potential rule change, the Nikkei said.
The paper did not quote any sources and no one was immediately available at the Bank of Japan for comment, however BOJ Governor Masaaki Shirakawa said earlier this week the move was under consideration.
Gotham Gazette – The turbulent financial market events of recent days demonstrably signal the end of Wall Street as we know it. More uncertainty lies ahead, on Wall Street but also for the national economy. How is this affecting New York and what will it take to get the economy moving again?
Six months ago, a "disastrous foray into financial wizardry" by banks and lenders led us to the sight of the Federal Reserve giving J.P. Morgan Chase $28 billion to take over Bear Stearns. It was thought that this unprecedented action might calm the panic triggered by the sub-prime lending fiasco.
The bursting of the housing bubble destroyed billions of dollars of equity people held in their homes and started to jeopardize millions of mortgages across the country, prime as well as sub-prime. This mortgage meltdown led the U.S. Treasury Department earlier this month to take over the two quasi-public mortgage giants- Fannie Mae and Freddie Mac, which together hold nearly half of the $12 trillion in outstanding mortgage debt in the U.S.
Reuters Tokyo – Japanese government bond futures soared by their daily limit of 3 full points on Tuesday and 10-year yields hit a five-month low on safe-haven buying in the wake of the collapse of Lehman Brothers.
Global stock markets and crude oil prices plunged on Monday after Lehman, crushed by losses from the U.S. mortgage crisis and unable to find a buyer, sought bankruptcy protection.
"A pretty sharp increase in credit risk and worries about credit seems inevitable," said Naomi Hasegawa, senior fixed income strategist for Mitsubishi UFJ Securities.
Growing expectations that the U.S. Federal Reserve may lower interest rates at a policy meeting later on Tuesday were also giving a lift to JGBs and euroyen futures, Hasegawa said.
Portsmouth Herald News – The Federal Reserve resisted a cut in interest rates Tuesday and then forged a plan to take over American International Group Inc. and rescue the insurance giant from the brink of bankruptcy with an extraordinary $85 billion loan.
The moves, along with a slight rebound on Wall Street, offered some respite after the chaos that shook the financial system Monday when investment house Lehman Brothers declared bankruptcy and the Dow Jones industrials suffered its biggest point drop since the 2001 terrorist attacks.
Investors worried that a failure by AIG, the world’s largest insurer, would set off even more financial turmoil.
The Federal Reserve said in a statement it determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.
It also could "lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said.
"The president supports the agreement announced this evening by the Federal Reserve," said White House spokesman Tony Fratto. "These steps are taken in the interest of promoting stability in financial markets and limiting damage to the broader economy."
TMCnet – Several months ago, economist David Hale had a private meeting with Federal Reserve Chairman Ben Bernanke, who was trying to ward off a recession by lowering interest rates and increasing the money supply in the economy.
The problem with that approach is that the value of the dollar plunged against foreign currencies, causing crude oil prices to skyrocket because oil is pegged to the dollar. It affected food prices, gasoline and family budgets.
"Ben, you are playing a very unique role in world economic history," Hale recalled telling Bernanke, an expert in the Great Depression. "You are the first central bank governor of the United States to preside over a recession with no decline in commodity prices."
Reuters – The Federal Reserve acted on rumors last month and called Credit Suisse Group to see if it had pulled a credit line from Lehman Brothers Holdings Inc, The Wall Street Journal said citing people familiar with the matter.
Credit Suisse told Federal Reserve officials that there was no truth to the rumor and it had no intention of pulling the line of credit, the paper cited the people as saying.
A person familiar with the rumor told the Journal that it was circulating in early July.
Fed officials contacted Credit Suisse last month, but it is unclear whether the move occurred before or after the U.S. Securities and Exchange Commission subpoenaed dozens of hedge funds and financial firms about four Lehman-related rumors, the paper said.
