A few interesting items to pass along today.
The first is an interesting interview with an anonymous hedge fund manager (via JL). It’s a longish interview, but a good insider’s view on everything from the credit crunch to the downfall of Bear Stearns to the hedge fund business itself. A highlight:
Bear is not a commercial bank, it’s an investment bank: it doesn’t have these capital adequacy rules, it’s not regulated by the Fed, and Bear, if your average bank had a capital adequacy rate supporting 10:1 leverage, Bear is more like 30:1. And that is one of the reasons confidence evaporated so quickly: people looked at the balance sheet and realized that if assets have to be written down even a small amount, Bear can be insolvent. And that creates a panic.In reality I don’t think they had a solvency issue, but when the capital cushion is so small it creates instability.
The other investment banks are also levered in the 30:1 range, including Lehman/Merrill/Goldman. Bear was, in many ways, more vulnerable to a run on the bank, so to speak. But we’re not through the woods yet and bigger banks may fail.
That’s a good segue into two good articles on the cover of today’s WSJ. The first tells the story of Merrill’s misadventures in the CDO world. The second discusses LIBOR, the London Interbank Offered Rate, which is a benchmark rate banks charge each other for loans. The spread of LIBOR over U.S. Treasuries has been a remarkable barometer of market panic. That indicator, well, indicates that the worldwide financial system is still in trouble.
And as the WSJ article notes, there are those that think this rate (which is based on data self-reported by banks themselves) may be understated….