The buck falls with JPMorgan Chase
'Bear, which on Friday said it lined up emergency financing from the New York Federal Reserve and JPMorgan Chase, has been servicing hedge funds for several decades, since the early days of the industry that has grown to some 10,000 funds with $1.9 trillion in assets.' http://www.guardian.co.uk/feedarticle?id=7386388
The more I think about these figures, the more I realise the enormity of the crisis. In these early days of economic turmoil, the first major crack that has manifested since ‘subprime’ is the failure of hedge funds. This is specifically hedge funds tied back into this more risky subprime lending sector. I never realised before how huge these hedge funds had become.
In a normal market environment, any singular hedge fund failure has little economic effect apart from those personally involved. Even then losses are usually already taken into account. In most situations, the buck simply falls with ‘larger’ investors who just grin and bare it; the best they can.
Unfortunately the market today is far from normal. When economic conditions worsen, (such as mortgagee sales with negative equity) then ultimately it is the hedge funds responsibility to make up for these losses to the ‘wall street’ banks. These are the same wall street banks that secured the money for the subprime loans in the first place.
As loan books associated with subprime become a distinct liability, they are heavily discounted. The hedgefund goes bankrupt in a short period of time, especially at margin call time.
The wall street bankers in turn are likely to wipe their losses on this speculative investment if they can. This effectively passes the buck directly back to their mainstream bank supporters.
In this instance we know the first likely casualty to be the mainstream bank called JPMorgan Chase. We also know that the US FED has come to the rescue. This is a most dangerous precedent that does not bear repeating...