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KTAK - U.S. lawmakers and President George W. Bush eased pressure on financial markets on Tuesday by starting work to revive a $700 billion bailout plan to stem a credit crisis that has spread beyond Wall Street to claim more European banks.
U.S. stocks roared back — a day after their worst sell-off in 21 years — and the dollar rallied as investors bet Washington would manage to salvage a package to stabilize the financial sector after Monday’s shock defeat on Capitol Hill.
The Standard & Poor’s 500 index shot up by more than 5 percent, the biggest one-day gain for that measure of the broad market in six years.
The relief rally came as the White House, Treasury Secretary Henry Paulson and the two candidates hoping to succeed Bush as president, Republican John McCain and Democrat Barack Obama, reaffirmed their support for a bailout plan. Congressional leaders started talks to relaunch the package this week.
Reuters - Leveraged loan prices fell on Wednesday as hedge funds facing redemptions and forced to cover short equity positions sold loans, traders told Reuters Loan Pricing Corp.
Leveraged loans have declined over the past week amid a rout in global markets that has led to the bankruptcy of Lehman Brothers and a $700 billion U.S. government plan to bail out the financial sector.
The loan credit default swap index, the Markit LCDX10, traded around 93.70-to-93.90 cents on the dollar on Wednesday, down about a point from Tuesday’s close. It hit a low of 93.60-to-93.80 cents on the dollar earlier in the day.
TXU Corp’s leveraged buyout loan was among several that traded down. Its term loan B2 fell to 86.75-to-87.25 cents on the dollar from 87-to-87.5 cents on the dollar on Tuesday afternoon.
Politico.com - Even as the storied financial names vanish — Lehman Brothers, Merrill Lynch and Bear Stearns — they’re being quietly replaced by less familiar ones: Cerberus Capital Management, Citadel Investment Group, SAC Capital Partners and the other biggest hedge funds and private equity shops in the world.
The consensus in Washington is that the Wall Street meltdown means an inevitable resurgence of regulatory authority over the financial sector. But what it may actually portend is just the opposite: the emergence of an almost entirely unregulated financial sector that replaces investment banks that were more rigorously regulated.
It has now become very clear to market insiders that the $2.1 trillion hedge fund industry is larger in terms of capital than the remnants of the investment banking sector.
Interactive Investor - Investors are cheering the temporary ban on shorting financial stocks which came into play on Friday morning.
The Financial Services Authority introduced the four-month freeze on profiteering from falling share prices after the markets closed last night in a bid to stem the chaos in the financial sector. The new rules, which cover 29 shares, prevent investors from taking out new short positions or adding to existing ones in all publically listed financial firms.
Investors currently shorting more than 0.25% of a financial company’s shares have until Tuesday to either close their position or declare it to the regulator.
Short-sellers have been blamed for sending share prices in the financial sector plummeting in recent weeks with HBOS the latest victim of speculators looking to make a quick buck from its demise.
Hector Sants, chief executive of the Financial Services Authority, says: "While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets. As a result, we have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector."
Seeking Alpha - Some analysts say a big-picture trend presently unfolding involves hedge funds and other players unwinding bets on commodities/foreign currencies and plowing the proceeds into U.S. financial and other stocks. They are doing this for valuation reasons and as a haven against weakening economies overseas.
There is some evidence that it at least partly reflects hedge funds scrambling to raise cash to meet redemption requests. Financial stocks have risen for sure, but that likely reflects hedge funds buying back short positions to generate cash, not to go long because they think the fundamentals are turning.
I remain somewhat skeptical of the thesis that the U.S. economy is close to coming out of the downturn, and so the places to shift into are U.S. stocks and the U.S. dollar. When one looks at the problems the U.S. has, especially in its financial sector, they would seem to have the potential to inflict more pain on the economy than we have seen to date.
Reuters - Hedge fund manager Jim Chanos, who makes money betting that companies’ stock prices will fall, said financial stocks have probably seen the worst and his fund has fewer short positions now than it did in the past.
"We have probably seen the worst in the financials," Chanos said on cable television channel CNBC. He also said that he has fewer short positions on financials now than he has had in the past, largely because much of the bad news is known about financial sector stocks.
Instead, Chanos, whose roughly $5 billion hedge fund Kynikos Associates often has between 40 and 60 short positions, said he is concentrating more on shorting some companies involved in the commodities area. "We would short companies that might depend on cement prices or steel prices going up," Chanos said, declining to reveal the companies he has shorted.
MSN MoneyCentral - Paulson & Co, a prominent New York hedge fund, will weigh buying shares or convertible bonds in banks and other financial institutions that need capital, the Financial Times reported on its website on Sunday.
John Paulson, its founder, remained bearish on the economy and the financial sector, but would consider taking positions in the sector as prices fall to his target levels, the paper reported, citing two unnamed investors who were on a Paulson conference call for clients last week.
Paulson is to launch its Recovery fund on October 1, the paper said.
Reuters - Switzerland plans to ease the tax burden for hedge funds and private equity funds and soften regulations for investment funds in a first step to boost its standing among other financial centres.
The goal is to get the tax burden for hedge funds and private equity funds in line with taxes of 15 to 20 percent in competing centres like London or New York, the chairman of the Swiss Bankers Association Urs Roth told journalists on Friday.
Peter Siegenthaler from the Federal Finance Administration said up until now taxation varied widely due to different application of local, state and federal tax rules, putting Switzerland at a disadvantage with other financial centres competing for the growing hedge fund industry.
The Federal Tax Administration will ask tax collectors to clarify tax-related problems linked to performance fees and carried interest, to make the Swiss tax environment "competitive", the joint committee of Swiss financial sector associations and the government said in a statement.
West Palm Beach (HedgeCo.net)- The Hang Seng Index posted its biggest single-day loss in a month, as investors fretted about the recurring subprime credit crisis in the United States and its impact on regional banks and other financials.
"It’s a very bad day for financial markets across Asia. What’s happening to Fannie Mae and Freddie Mac is a clear indication of more troubles ahead in the mortgage market. What the U.S. Treasury is doing smacks of political desperation rather than genuine concern for the financial markets," said Benjamin Collett, head of hedge fund sales trading at Daiwa Securities SMBC Co. in Hong Kong.
The U.S. Treasury also announced plans to rescue Fannie Mae and Freddie Mac, further fuelling fears that the subprime crisis may have intensified.
"While Chinese banks are sound and have very little exposure to subprime, the market is trading very short term and the selloff in the financial sector is just an extension of the overall market moves." Collet said.
The Hang Seng Index lost 3.8 percent, closing at the lowest since March 20.
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Financial Times- John Paulson, the US hedge fund manager who made a fortune for his investors by anticipating the debacle in subprime mortgages, said on Wednesday it was too early to look for bargains in the financial sector and predicted the worst was yet to come for the UK housing market.
Mr Paulson, who founded Paulson & Co 14 years ago and has $33bn in funds under management, said he was “preparing to switch” to long positions on distressed mortgages and banks, but added that such a change could be months – or even a couple of years – away.
He said financial companies could wind up losing as much as $1,300bn in the credit crisis.
Reuters- The credit crisis is not over, and losses in the financial sector are set to be around $1.3 trillion, according to star hedge fund manager John Paulson, who says he remains short credit.
In its twice-yearly report in April, the International Monetary Fund had said total potential losses on both subprime and other loans as a result of the credit crisis could reach $945 billion. Paulson, who earned $3.7 billion in 2007 according to Alpha Magazine by going short the subprime sector during the U.S. mortgage meltdown, also said a deterioration in consumer spending was set to drive the U.S. economy into recession this year.