2011 July 30 Saturday
Hedge Funds Not Heavily Leveraged?
Did the investment bankers blame the hedge funds in order to shift blame away from themselves? Investment banks are far more leveraged than hedge funds.
NEW YORK — July 27, 2011— The Journal of Financial Economics recently published a paper by Andrew Ang, Chair, Ann F. Kaplan Professor of Business and Chair, Finance and Economics Division at Columbia Business School; Sergiy Gorovyy, PhD candidate, Columbia Business School; and Gregory B. van Inwegen, Head of Quantitative Research/Managing Director for Tailored Portfolio Group of Citi Private Bank, that was the first paper to formally investigate hedge fund leverage using actual hedge fund ratios. Contrary to popular belief, the researchers found that hedge funds, in general, are only modestly leveraged. The average hedge fund leverages its equity by two times. In addition, hedge fund leverage is counter–cyclical to the leverage of the finance sector and large financial intermediaries. During the financial crisis, the leverage of investment banks spiked up to above 40 during the first quarter of 2009. During that time, the average hedge fund leverage was only 1.4, and hedge funds had started to substantially reduce their leverage in 2007 long before the onset of the financial crisis.
Perhaps the bad reputation of hedge funds was put on them as part of an inter-elite fight to shift blame for the financial crisis. Maybe the investment banks have more influence over the crucial TV channels which do so much to mold opinion (PDF format) and hedge fund operators just can't compete. Also, I expect the investment banks pay more for influence in Washington DC. How much of the wealth of the highly influential top 0.1% is invested in hedge funds? Enough for the hedge funds to have powerful protectors?
Half of all lobbyist money comes from one zip code, the banking center in Manhattan.
Of the 16T bailout money, virtually all of it went to bail-out the top 10% players in the Casino. When people quit and are free to speak their mind, is when we should listen closely.
The outgoing chairman of the FDIC, Sheila Blair, made comments that the entire bailout was unnecessary. There was plenty of money in the system for main street. To clear checks and do the nuts and bolts of the economy, there was plenty of money. But, the derivative players and all the counter parties and insurance gambling meant the players were highly leveraged. The bulk of the bailout money went to them, which is theft from producers to the gamblers. It is the biggest heist in the history of mankind.
Blair lays the blame squarely on housing. Yes, Shiela we are in a balance sheet recession, where housing got run up, and then collapsed. The banker’s balance sheets remain out of whack and still need to be bought down despite all the mal-investment done by Obama and his banking masters. http://www.costar.com/News/Article/Outgoing-FDIC-Chair-Sheila-Bair-Says-Goodbye-Real-Estate-Is-To-Blame/130280
There are a number of ways our political structure could have fixed the balance sheets of the banks. 1) They could have given banks a haircut. Basically say you aren’t getting paid for your ledger entries, so too bad. We will force you to refinance the home and mark it to today’s value. 2) We could have used fiscal policy and deficit spent right into labor. Labor then takes their money and spends, paying off their homes. When you pay off a loan, the money disappears off of the banker’s ledger, so it is non inflationary. 3) We could have direct spent by giving tax breaks to homeowners. Spending the money or not draining it via taxes is effectively the same thing.
We have Dumb Dumb politicians caught in a mind job by our banking class. It is sickening to watch and equally sickening to listen to our compliant and idiotic press.
Hedge funds are insurance against the instability of credit money. Credit money is that which comes into being when you take out a loan at the bank. Credit is based on hypothecation and counter parties. For example, if want a loan for your house, then the banker will eye you up and down, and then extend a loan of credit. On his books he has two columns, one is for assets and the other liabilities. Your house is goes on the asset side, and the liability side is the money given to you. The money comes from nothing, it is keyboard entries. You do not get somebody elses savings to buy your house.
When you pay off the bank loan, the liability is drawn down, and eventually you get the house. If you default, the banker gets your house. It's a pretty good deal for typing on a keyboard.
The problem with credit money is that it inflates and deflates lawlessly. We attempt to control it with Glass-Steagall like bills, or Dodd-Frank, or "Hege funds, or derivitives, etc." But, it cannot be controlled, which is why credit money should be scrapped. House bill HR6550 would do that, but I have little faith that our elected representatives can figure it out.
The leverage in the system is all due to the Casino nature of credit money. We constantly argue about money that sources at the Government level, but we never cast our eye on the real problem, which is Credit. Credit money is the tail that wags the dog, and is why we are slipping into neo-feudalism.
The outgoing head of the FDIC, Sheila Blair, said that the entire bailout was unnecessary. As an aside, we should listen when people retire, because they are more likely to tell the truth. The 16T mostly went to pay off the Casino of leverage and counterparties. The money in the system was enough to pay for the nuts and bolts of running an economy. You would still have gotten paid, and been able to function in your daily life. As it is, the 16T gave generational money to a new financial ruling plutocracy.
So, whether or not the leverage was high or not, who cares? The reality is that credit money itself is the problem. The private money masters want you to stay confused while they exercise their money power.
The founders of our country goofed in the final days of the constitutional convention. Thomas Payne was in France, Benjamin Franklin was too old, and Jefferson wasn't there. The rest of the crowd, like today, didn't know what they were doing. They left a back door open for credit masters to sneak in. Hamilton struck first, with his first bank. Our entire history up to now, has been a war over credit.
It will be a real shame if we loose our country because we couldn't fix the final pieces of our founding.
We would be better off with more bankruptcies because the economy is weighted down with too much debt. But Wall Street has purchased far too much influence to let that happen.
Bailing out all the counterparties to AIG was a huge tax on the rest of us. Ditto for propping up home owners with government-granted mortgages after the crash. We should have even lower housing prices and fewer mortgages. Liquidate, liquidate, liquidate. Andrew Mellon had it right.
Another way we could do it, would be to haircut the banks. Basically, their ledgers are out of whack. Because of some penciled in entries (figure of speach), the economy is held hostage.
In a balance sheet recession, the banks balance sheet is run up with a bubble. For example, in the 1920's, people took out loans to buy stocks. Of course the stocks bubbled up as more and more people piled in. When it crashed, there was no way to right the ledgers. We all know now that it caused the Great Depression. The same thing happened in Japan. They borrowed like crazy driving up their stocks and land, then the bubble collapsed. In the U.S. it was the run up in housing that started under Clinton, and got pushed into overdrive with Bush.
People borrow credit money at banks in order to fuel a bubble. Credit money is leveraged, so it can come into being and grow unlawfully. But, on the downside, the bank ledgers remain, and demand to be repaid. The asset side of the ledger has cratered though, and this makes the banker unwilling to loan out more money.
When the banks pull back, that starts to collapse the money supply. No money is like no fuel to a car engine. It starts to sputter and we go into a depression..people loose their jobs.
A haircut would require nationalizing or acquiring the bank for a brief period, and examining their balance sheets. Then we take a big eraser to the ledger. The value on the asset side should be written down to today's market value.
Once that is done, the banks can be reverted back to the private sector. (Personally I would make all private banks 100% reserve, so this scenario never happens again.)
A haircut would be much more humane than liquidate liquidate liquidate. Why? In a liquidation the homeowner, who got gamed and ripped off by the system, has to walk away and relinquish his home to whom? The banker? Not all people who have wealth got it by honest means. In the financial sector, the stealing is rampant, so these types of individuals end up winning by getting the liquidated home at firesale prices?
This is part of the mechanism by which plutocracies arise. During depressions, real assets are demanded to pay off credit ledger entries.