Call before its too late Thursday, March 06, 2008
This is not a reference to speaking to friends or parents, but to the growing panic among prime brokers and lenders worried about the viability of some of their hedge fund clients, prompting them to raise their margin requirements on clients and the assets they hold in their portfolios.
Designed to protect the lenders by increasing the deposit they hold against default and to protect against shortfalls in the value of collateral, these margin calls are actually tipping funds into closure. The hedge funds haven't the cash on hand to pay the margin calls and the assets they do hold are proving illiquid i.e. not easily converted into cash to settle the margin calls.
This is the worst outcome for lenders but lenders can lessen the impact on themselves if they are one of the earliest/quickest lenders to seize assets. Unfortunately, concern about being caught out actually encourages early intervention on the part of lenders.
Three high profile casualties in a week
FT Alphaville reported that US mortgage lender Thornburg has filed a material default notice with the SEC. Thornburg's share price crashed on Tuesday after speculation over margin calls hit the press. The lender defaulted on a reverse repurchase agreement with JPMorgan on 28th February, after the bank made a $28m margin call
Carlyle Unit Fails to Meet Some Margin Calls
The company said it received margin calls from seven financing groups that totalled $37m and it was not able to meet four of those requests.
FT Alphaville reported Peloton Partners, the stricken London hedge fund manager, told investors Wednesday that its flagship $2bn fund was worthless and that it did not know how much would be left of its remaining $1.6bn fund after banks seized and sold some of its assets. In a conference call Ron Beller, co-founder, set out reasons for the collapse.
“The last few days have created a market environment where the repo counterparties’ margin prices for our AAA-rated U.S. government agency floating-rate capped securities issued by Fannie Mae and Freddie Mac are not representative of the underlying recoverable value of these securities,” Carlyle Capital Corporation said.
Such collapses have a wider impact though since the market knows that the portfolios have to be sold and the anticipated increase in supply forces down prices. Hence the fund is selling into a falling market, exacerbating losses.
Labels: Hedge Funds