MSNBC- Investment banks are demanding more capital to back loans to hedge funds investing in US subprime mortgage-linked debt, as they try to head off a repeat of the near-collapse of two Bear Stearns hedge funds. The “haircut”, or margin requirement, on financing provided to buy collateralised debt obligations (CDOs) backed by subprime mortgage bonds has been increasing sharply, in many cases doubling, according to hedge funds, bank executives and prime brokers.
CDOs are complex instruments that pool together mortgages and other debts that are sliced into tranches and sold to investors. Analysts say the two biggest dangers to hedge funds investing in hard-to-sell securities such as CDOs are an increase in margin requirements or redemptions.
Bear’s crisis was triggered when its funds failed to meet margin calls, while Florida-based United Capital Asset Management suspended redemptions on its Horizon funds, heavily invested in subprime, last week.
