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Bloomberg - It has been a year of record misery: the largest bankruptcy, bank failure and Ponzi scheme in U.S. history; $720 billion in writedowns and losses by financial institutions; $30.1 trillion in market valuation wiped out.
The biggest loss and the hardest thing to recover, though, may be something that can’t be precisely measured — confidence in the markets and the firms that rely on them.
“The wholesale funding model lost its credibility,” said David Hendler, senior analyst at New York-based CreditSights Inc. “That started the semi-nationalization of funding in the financial markets. It’s a real chink in the armor of capitalism as supposedly the best process for allocating capital. The government is now deciding who gets access to capital.”
Minneapolis Star Tribune - Like most market watchers, last year’s participants in the Star Tribune Investor Roundtable failed to predict that 2008 would be a year of stomach-churning stock market declines, failed financial institutions, multibillion-dollar bailouts and credit markets as frozen as a Minnesota lake in January.
"I think everybody in the room knew there was more leverage, more speculation, more betting on the economy, but it amazes me that it got to this level," said Phil Dow, director of equity strategy at RBC Wealth Management.
But what the group of Twin Cities investment professionals did foresee a year ago was a period of unprecedented stock market volatility. The VIX index, a gauge of market swings, reached a record high this fall.
Bloomberg - The financial crisis is imposing heavy burdens on the hedge-fund industry, and the strain has become more visible. By the end of last week, about 100 hedge funds imposed restrictions on withdrawals. Many funds have become financial roach motels: Investors can put their money in, but they can’t get it out.
Deregulation has taken a lot of blame for this financial crisis, but an interesting footnote is that the lightly regulated hedge-fund industry has stayed healthy enough to avoid the bailout game.
But are rising redemptions a sign that hedge funds may need a handout, too?
It’s small wonder that some funds have decided to put the brakes on. Morgan Stanley estimates that redemption requests are running at 15 percent to 30 percent of total hedge-fund assets.
Reuters - General Motors Corp and Chrysler LLC are considering accepting a pre-arranged bankruptcy as the last-resort price of getting a multi billion dollar government bailout, Bloomberg reported, citing a person familiar with internal discussions.
In response to automakers’ bailout plea, staff for three members of Congress have asked restructuring experts if a pre-arranged bankruptcy — negotiated with workers, creditors and lenders — could be used to reorganize the sector without liquidation, Bloomberg said.
General Motors and Chrysler could not be immediately reached for comment by Reuters.
Industry executives and analysts say the immediate carnage from a bankruptcy of General Motors Corp, Ford Motor Co or Chrysler would spread throughout an industry that is bleeding cash in a global slowdown.
Newark Star-Ledger - Managers of New Jersey’s embattled pension fund, criticized by lawmakers for bailing out a struggling BlackRock hedge fund in October, secretly gave two other hedge funds the same deal, records from the state investment council show.
The Canyon Special Opportunities Fund and GoldenTree Credit Opportunities Fund were each awarded $49.5 million in state funds on the same day the controversial $49.5 million bailout of a BlackRock Inc. fund took place, according to a memo released by the investment council this week.
The cash infusions were a shade below the $50 million threshold that triggers public scrutiny. The BlackRock deal riled prominent Statehouse lawmakers. So does the new revelation that there was not just one such deal, but three.
Bloomberg - It used to be that we searched for economic icebergs in Asia. Now we are on the lookout for Icelands.
Last week, Iceland became the first developed economy to seek aid from the International Monetary Fund since 1976. It needed a $2.1 billion bailout after investors realized it wasn’t running an economy, but a hedge fund.
While Ukraine, Belarus, Hungary and Pakistan are also lined up at the IMF’s door, Iceland’s woes are getting special attention. The thought that even a western European economy that once had an AA rating could implode are bringing back uncomfortable memories about Asia’s crisis a decade ago.
The question zooming around markets is this: If the worst- case scenario plays out and the crisis continues, could Asia experience another 1997? Equally important, will investors know it when they see it?
Watch the banks, say analysts such as Mark Matthews of Merrill Lynch & Co. in Hong Kong. “Bank shares are the canary in the coalmine,” he says.
Bloomberg - Five straight quarters of losses and a 70 percent slide in its stock this year haven’t stopped Merrill Lynch & Co. from allocating about $6.7 billion to pay bonuses.
Goldman Sachs Group Inc. and Morgan Stanley, both still on track for profitable years, have set aside about $13 billion for bonuses after three quarters, down 28 percent from a year ago. Even some employees at Lehman Brothers Holdings Inc., which declared the biggest bankruptcy in U.S. history last month, will get the same bonus they received a year ago.
The worst financial crisis since the Great Depression, a $700 billion taxpayer bailout, public outcry over excessive pay and the demise of three of the biggest securities firms won’t deter Wall Street from offering year-end rewards to employees on top of their salaries, compensation experts say.
Boston Globe - Hedge funds usually thrive when markets turn volatile. But even these fast-money investors are struggling to cope with the wild swings in the markets, raising concern that some may not survive.
Even before the Bush administration proposed its vast bailout for financial institutions, the hedge funds - those secretive, sometimes volatile investment vehicles for the rich - were on course for their worst year on record. The average fund is down nearly 5 percent so far this year.
One major hedge fund investor said he had started to buy Morgan Stanley at $23 on Wednesday, convinced the rumors of Morgan Stanley’s demise were unfounded. But as the stock began to plummet, he canceled his trade and watched with amazement as the stock sank to a low of $12 on Thursday.
USA Today - Markets braced for Wednesday night’s scheduled expiration of the ban on short sales of more than 900 financial stocks, as investment analysts and advisers gave differing predictions on the potential impact.
The emergency ban is set to expire just before midnight, 13 trading days after the Securities and Exchange Commission imposed it with the aim of halting trading the agency said appeared to be "contributing to the recent, sudden price declines in the securities of financial institutions unrelated to true price valuation."
The expiration is timed to take effect three trading days after President Bush signed the $700 billion financial system bailout approved by Congress last week. Although the SEC retained authority to extend the ban through Oct. 17, the agency announced no changes Tuesday.
The ban has temporarily halted a legal practice in which traders borrow shares and sell them in the hope of profiting by replacing the borrowed shares with equivalents bought later in the market at a lower price. But it’s illegal to spread rumors or misinformation about a company in a bid to drive down its share price while short selling that firm’s stock.
Slate - The Wall Street bailout is alive again. In an effort to make the $700 billion bailout palatable, the architects of the law have larded it up with all sorts of goodies, such as increasing the levels of deposit insurance, sparing some taxpayers the ravages of the Alternative Minimum Tax, and extending tax breaks for alternative energy. Henry Paulson’s three-page sprig has sprouted into a 451-page Christmas tree.
What’s most interesting about the Emergency Economic Stabilization Act of 2008 is just how much it reads like a prospectus for a hedge fund. In the past, hedge funds—secretive pools of capital—were open only to qualified (read: rich) investors.
But with the stroke of a pen, President Bush will soon make all American citizens investors in the world’s biggest fund—and a democratic one at that. Taxpayers won’t just be the investors. We’ll own the management company, too. Best of all? For at least a few months, we’ll have the former CEO of Goldman Sachs run our investment for a very small fee. Call it the "Universal Hedge Fund."
Boston Globe - Hedge funds usually thrive when markets turn volatile. But even these fast-money investors are struggling to cope with the wild swings in the markets, raising concern that some may not survive.
Even before the Bush administration proposed its vast bailout for financial institutions, the hedge funds - those secretive, sometimes volatile investment vehicles for the rich - were on course for their worst year on record. The average fund is down nearly 5 percent so far this year.
One major hedge fund investor said he had started to buy Morgan Stanley at $23 on Wednesday, convinced the rumors of Morgan Stanley’s demise were unfounded. But as the stock began to plummet, he canceled his trade and watched with amazement as the stock sank to a low of $12 on Thursday.
New York Times - Frazzled traders and money managers spent an angst-filled weekend struggling to fathom the sweeping bailout the Bush administration proposed for financial institutions in the United States and what it will mean for the world’s markets.
At big banks, staff members rushed to update trading records before the opening bell sounded on Monday morning in New York. Quants, those math-loving traders who use complex computer models to hunt out investments, tinkered with algorithms.
Some hedge fund managers, unsure where the markets will go or what the government will do, sought safety in cash. Securities lawyers sorted through new rules from the Securities and Exchange Commission that will require such funds to disclose their bearish bets on financial companies.
And in between, everyone tried to catch up on some sleep.
But after the Dow Jones industrial average cartwheeled a dizzying 1,023 points in 24 hours on Thursday and Friday, ending the week virtually where it began, just about the only thing people seemed to agree on was that this ride was not over.