Hedge Funds The Next Leg Down?

Date: Tuesday, September 23, 2008
Author: Seeking Alpha.com

Breakingviews.com is collecting names for the U.S. government’s $700-billion bailout plan — send suggestions to newseditor@breakingviews.com. The U.S. Treasury likes “Troubled Asset Relief Program,” or TARP. Breakingviews.com says one of its readers has suggested “Secured Housing Investment Trust.”

U.S. taxpayers are on the hook for an estimated $1 trillion to bail out the U.S. financial sector, says a leading economist. Now might be a good time to consider emigrating from the U.S?

A key barometer of financial distress, overnight interbank offer rates (LIBOR), eased slightly today but is still noticeably above levels of a week ago. The TED spread, which compares three-month Treasury yields and three-month Libor, traded at 2.28% today, down from last week’s record above 3% (a TED spread below 0.90% is the norm).

“The next stage will be a run on thousands of highly leveraged hedge funds. After a brief lock-up period, investors in such funds can redeem their investments on a quarterly basis; thus a bank-like run on hedge funds is highly possible,” says an economist who predicted the crisis two years ago.

“As the recession gets worse, corporate bankruptcies will increase, as will the default rate on corporate bonds. This, in turn, will reverberate in the market for credit default swaps [insurance policies against debt defaults] …Depending on the distribution of those losses, such an event might still break one or two of the big [providers] in this heavily concentrated market.” Wolfgang Münchau in the Financial Times of London, Sept. 21