HEDGE FUND NEWS
@ Tue 28 August 2007 : GMT

FINTAG COMMENT

Back to reality.

We look at depression hitting Greenwich, CT, the new war on terror (Mastercards) and the media obsessing about hedge funds being down when we haven't even reached the end of the month. Bear Stearns is picked at like a rotting carcass and I am struggling to get that six pack I always wanted [Editor: A touch of Rich Marin's perhaps?]

The markets are stable as they wait for the next signal.

Hedge Fund managers continue to battle with less leverage but despite the mid month volatility are still alive and kicking.

GREENWICH NEWS

Fed May Kill Bond Rally With Switch From Inflation (bloomberg)
The rally in 30-year Treasury bonds, the most profitable U.S. government securities in the past 15 months, may become a casualty of the Federal Reserve's efforts to ease a widening credit crunch. Yields on so-called long bonds will increase because Fed Chairman Ben S. Bernanke may lower borrowing costs and cause consumer prices to rise at a faster pace, said Brian Carlin, head of fixed-income trading at JPMorgan Private Bank...

Sentinel moved $135m before collapse (nakedshorts)
The mystery over just what went on at Sentinel Management Group Inc earlier this month just got a little more mysterious. The company's books show more than $135 million being moved Aug. 13—the day Sentinel told clients that it was suspending redemptions in a letter later described by the US Securities and Exchange Commission as “false and misleading”—to an account later hurriedly sold, with the proceeds distributed to Sentinel's futures brokerage clients...

Britons lost at least $50m in debacle (guardian)
British investors are among the big losers from a disastrous Bear Stearns hedge fund which was allegedly wrongly marketed by the Wall Street bank as a "safe, high-quality" investment, according to a lawyer representing furious punters...

China fears inflation could spark unrest (bbc)
At the Chunxiu Road Vegetable Market in central Beijing, shoppers and stallholders are grumbling about the price of food. Pork laid out on plastic slabs has increased from about 7 yuan (92 cents, 46 pence) a jin (500 grams) last year to 11 or 12 yuan now. Food price increases this year have led to a sharp rise in the consumer price index, the main gauge of inflation which jumped to 5.6% in July, its highest level in 10 years. In a country where inflation and social unrest are historically linked, that statistic cannot be ignored by China's leaders...

Hedge Fund Numbers in Japan Grow as Stocks Languish (bloomberg)The number of hedge funds in Japan has tripled, to 270, in five years. Assets have more than doubled, to $36 billion, in the period. Investors are seeking returns better than Japanese stocks, which have underperformed global shares over the past three years...

Japan's Loss of Alpha? (hedge-fund-hote)
Latest talk in Asia has it that the allocation arm of the region's most prestigous prime broker has redeemed all of its exposure to Japan hedge funds. Who would have thought that! The same institution had managed accounts with negotiated lower fees and capacity with several big name Japan hedge fund specialists back in 2002/03 - a time when Japan was not yet the "ninki-mono" or popular investment vehicle on the global investment block...

A third of UK's biggest businesses pay no tax (ft)
Almost a third of the UK's 700 biggest businesses paid no corporation tax in the 2005-06 financial year while another 30 per cent paid less than £10m each, an official study has found. Of the tax paid by these businesses, two-thirds came from just three industries - banking, insurance and oil and gas - while the alcohol, tobacco, car and real estate sectors contributed only a few hundred million pounds...

GLG hedge fund is latest market casualty (ft)
GLG European Long-Short fund, one of GLG's biggest hedge funds with more than $2bn (£1bn) in assets, fell 4.4 per cent in value in the first 10 days of August, making it one of the latest casualties of the recent turmoil in financial markets. The fund, launched in 2000, had risen 13.7 per cent from January to the end of last month, against an in-crease in the MSCI Europe index of 4 per cent...

Smarten Up, MBA Students, or Else! (wsj)
According to the Associated Press, the Illinois State University College of Business is instituting a “business casual” dress code. Forbidden under the new guidelines: T-shirts, sweat pants and wrinkled clothing. Those who repeatedly transgress will be treated like common spitball hurlers, thrown from class and flunked on assignments. According to one ISU official, the change is aimed at increasing “overall professionalism” at the school...

SAC Capital falls 6% while few hedge funds gain (financialnews-us)
SAC Capital, the world's most expensive hedge fund manager, joined the majority of hedge funds that lost money in early August, with its multi-strategy fund falling 6%. Investors estimated fewer than three hedge funds in 20 had made a profit in the first two weeks of the month. The losses challenge the claim that hedge funds can make money regardless of market conditions... [Editor: We haven't reached the end of August yet!!!]

State Street hit by off-balance sheet concerns (financialnews-us)
State Street Corporation has been hit by concerns over the size of its credit lines to off-balance sheet vehicles in the wake of moves by owners of similar funds to step in with debt financing when the commercial paper market seized up...

Deutsche Bank hedge fund leader to join Greenwich firm (financialnews-us)

Ten key operational risks for hedge funds (financeasia)

US home sales decline yet further (bbc)

TIFFANY

Wall Street-on-Sea feels the chill amid talk of shake-out (guardian)
Only the fittest investment houses will remain when market volatility subsides

Sandwiched between fine art galleries, cigar stores and designer fashion boutiques, the Subway barber shop on Greenwich Avenue clips short, smart "business cuts" for a clientele of hedge fund managers. Business has been slow lately and the clients seem slightly tetchy.

"Overall, we haven't had so many of them coming in as usual," says hairdresser Antonio Merolla, who adds that the moneyed financiers are good tippers during better times. "The few that I've spoken to have shown concern and are a little, shall we say, uptight."

The affluent waterside enclave of Greenwich is 30 miles east of New York and has been America's hedge fund capital since the September 11 attacks made Manhattan less appealing. Nicknamed "Wall Street-on-Sea" or "Upper Hedgistan", the town is home to more than 380 firms managing $100bn. Battered by this summer's market volatility, the usual mood of easy confidence has acquired a certain chilly edge.

Over a spectacular decade, hedge funds have spawned staggering wealth. Greenwich is dotted with sprawling mansions: a $14.8m estate owned by SAC Capital's Stevie Cohen stretches over 32,000 square feet, boasts an ice rink and was likened by Vanity Fair magazine to Windsor Castle. Some managers commute from their waterfront estates by power boat to a pier at the end of the town's main street.

Conceived as a way for the super-rich to play the markets on a riskier level, hedge funds have entered the mainstream. Their seemingly impossible returns have attracted pension money, insurance firms and savings funds as clients. According to Chicago-based Hedge Fund Research, the industry comprises 9,767 firms worldwide looking after an eye-watering $1.74 trillion.

Red numbers

But the collapse in America's credit market prompted by defaults on sub-prime mortgages has been a shock. Hedge funds are among the biggest losers from the summer of red numbers. Some, including Boston-based Sowood Capital and Australia's Basis Capital, have lost as much as 80% of their value. Wall Street titans such as Bear Stearns and Goldman Sachs have pumped billions into their own funds to keep them afloat.

Critics are wondering, not without relish, whether the industry is ripe for a major shake-out. Some suggest that hedge funds are fine for specialist investors - but that they have oversold themselves and understated risks to an increasingly wide population of punters.

Peter Morici, professor of finance at the State University of New York, says the hedge fund space is too crowded: "It seems obvious that if large numbers of people saying they have models that can beat the market, it becomes impossible to beat the market."

He accepts that hedge funds provide valuable arbitrage in global markets by spotting and pouncing on price discrepancies. But, he says: "I do believe the people who manage hedge funds have probably oversold them to investors. Investors believe they are less risky than they actually are."

An American lawyer, Jake Zamansky, is preparing a case against Bear Stearns claiming it misrepresented its funds to clients including British investors who lost more than $50m. The industry is on the back foot - so is reform in the air?

Roger Ibbotson is chairman of Zebra Capital Management, a $270m Connecticut hedge fund using the type of computer-driven technique which has struggled to cope with August's volatility. He concedes: "There have been some surprising drops among some funds you might never have guessed would have had blow-ups."

However, he says many "quantitative" funds have already bounced back - at the end of last week, Zebra was down about 2% for the month but still up for the year.

"There have always been scandals and blow-ups from time to time," he says. "Usually there's some slowdown after each of them but the blow-ups leave opportunities for the remaining funds."

David Friedland, president of a "fund of funds" called Magnum US Investments, takes a similar view. "It hasn't been a good month by any stretch of the imagination," he says. "A shake-out is good every now and again - it separates the men from the boys."

The public image of hedge fund managers is poor. They are often viewed as brash, Ferrari-driving plunderers of short-term value. Just recently, it emerged that one manager, Bertrand des Pallieres, failed to notice for three months that his £80,000 Maserati had been impounded for his failure to pay London's congestion charge.

Ari Kiev, a psychologist whose book Hedge Fund Masters examines the industry's outlook, says most are motivated by status, rather than pure cash: "It may be numbers on a screen, but it translates into planes, helicopters, second homes, third homes, the ability to buy companies and raise the game to the next level.

"It's not for the money - it's for the game. And the score is the money."

Voices of concern at this "game" are gaining force. Corporate leaders, including the CBI's former president Sir John Sunderland, dislike seeing hedge funds creep up shareholder registers, complaining that their swift trading culture neglects long-term value for short-term rewards. Unions argue that given their power, funds should pay more attention to the ethics and governance of the firms they invest in.

"It's important that there should be transparency and accountability - which we're just not seeing at the moment," says Dan Pedrotty, director of investment for America's AFL-CIO union movement. He says an unlikely coalition is forming: "You're actually seeing an alliance between companies concerned about these same problems as unions and individual investors."

Darwinian

Andrew Baker, deputy chief executive of Britain's Alternative Investment Management Association, protests that a few over-ambitious funds have damaged perceptions.

"It's a gross simplification to tar the industry with the same brush," he says. "There are some funds out there with short horizons and high turnover. There are others with low turnover who want to engage with management in constructive argument."

Those who have over-leveraged themselves on excessive debt, he adds, will go under through "good Darwinian captalism".

Back in Greenwich, the restaurants are buzzing a little less than usual - and a Rolls-Royce showroom opposite the railway station seems devoid of customers. At the Quai Voltaire antiques shop, manager Cyril Flichy says: "People are paying attention to what they spend a little bit more."

Still, he reckons a careful bit of marketing usually pays off. Gesturing towards a $9,900 delicately painted Louis XIV wooden table, he says: "It's important to present things not as an expense but an investment.

"This table is in perfect condition and it's been around since the 17th century. Its value is never going to fall by very much."

ARE WE THERE YET?

What a Difference a Year Makes (financialarmegeddon)
A year ago, if you had asked Americans about the biggest threat they face, most would have said "terrorism." Few would have mentioned the worst housing collapse in 80 years, the prospect of a severe consumer-led downturn, or especially, the far-reaching fallout from a fast-spreading credit crunch.

Back then, it was all good -- apparently -- at least as far as Main Street and Wall Street were concerned. The stock market was soaring. Pundits, politicians, and so-called strategists were almost giddy in their Polyannish economic outlook. The post-Greenspan Fed was in a honeymoon period where the new leadership could seemingly do no wrong.

Now, losses are mounting all over the place and credit markets are unraveling. Policymakers and industry insiders are working feverishly behind the scenes to try and keep the listing financial system afloat. And there is a different sort of concern on the minds of many people than there was before, as the Associated Press reports in "NABE: Bad Credit Biggest Risk to Economy."

Bad credit has supplanted terrorism as the gravest immediate risk threatening the economy, a key national research group reported Monday.

Borrowers' withering ability to pay their bills and the subsequent fallout in the credit markets this summer topped the list of short-term risks on peoples' minds, according to a survey of 258 members conducted by the National Association of Business Economics.

NABE, a Washington-based association, said 32 percent of its surveyed members cited loan defaults and excessive debt as their biggest near-term concern.

Only 20 percent of members cited defense and terrorism as their biggest immediate worry, down from 35 percent when the survey was last conducted in March. Credit risk also topped gas prices, inflation and government spending.

"Financial market turmoil has shifted the focus away from terrorism and toward subprime and other credit problems as the most important near-term threats to the U.S. economy," said Carl Tannenbaum, president of NABE and the chief economist at LaSalle Bank/ABN Amro.

The market turmoil began earlier this year, when mortgage lenders like New Century Financial Corp. and H&R Block Inc.'s Option One Mortgage Corp. unit reported their clients were missing payments on their home loans more frequently.

This led the Wall Street banks that finance the mortgage market to ultimately pull much of their money out. With cash draining rapidly from the industry, more than 50 lenders have gone bankrupt and a number of investment funds have gone under.

Victims of this flare-up include two of the 10 biggest mortgage lenders in the country and two hedge funds managed by Bear Stearns Cos.

Loan brokers say it has become more difficult for some people to line up mortgages. Subprime loans, or loans to people with spotty credit histories, have all but disappeared as lenders scale back or shut down completely.

The shakeout in the subprime mortgage market forced investors around the world to reassess how much risk they were willing to stomach. This led to an exodus of cash from investments like securities backed by home loans, short-term corporate bonds and stocks whose values were inflated because they were perceived as takeover targets.

In the past five weeks, the stock market has lost 5 percent. The dollar fell to an all-time low versus the euro. A number of companies have had to cancel bond sales because of an absence of buyers.

And, the Federal Reserve has lent billions of dollars to banks from its "discount window," normally associated with bailouts for struggling financial institutions. The Fed this month issued a statement that the risks to the economy have risen considerably and traders ramped up their expectations the Fed would cut targets for interest rates this year.

The tumult in the financial markets has led businesses to revisit their interpretation of the housing boom earlier this decade and the easy credit that fueled it, NABE said. The proportion of surveyed members who call it a "serious national bubble" more than doubled from two years ago to 29 percent, the group said.

NABE said the market turmoil is considered a short-term risk because the five-year outlook for housing is still strong. More surveyed members expect home values to appreciate in the next five years than fall. Very few expect a serious drop in home prices in the next five years.

The greatest long-term risk facing the economy is still health care costs and the medical needs of an aging population, NABE said.

BEAR LIES

Rivals Try to Pick Off Bear's Hedge Fund Clients, Report Says (dealbook)
Bear Stearns' rivals are reportedly trying to poach the investment bank's prime brokerage customers, telling them it's too risky to stay while the firm deals with fallout from the subprime mortgage crisis.

Senior prime brokerage officials with four major Bear rivals told Reuters they have been winning over business from Bear Stearns, but several hedge fund managers told the news service that they are giving just as much business to Bear as before, and one said he has moved more toward Bear in recent weeks.

The aggressive courting comes as Bear Stearns' shares have fallen some 30 percent this year after two hedge funds that it managed failed, and turmoil in the fixed income markets raised concerns about Bear's profit growth.

Prime brokers perform services for hedge funds such as clearing trades, financing positions and lending securities. They have scaled back credit to many hedge funds as the subprime meltdown has wreaked havoc in stock and bond markets.

Still, the stakes are high, with the business generating at least $11 billion in revenue for banks in 2006, according to Boston Consulting Group.

Officials at major banks told Reuters that hedge funds that work with multiple prime brokers are giving more business to the universal banks and less to Bear.

Several hedge funds, however, told the news service that they are happy with Bear despite its recent difficulties.

One hedge fund manager told Reuters he had just signed up with Bear, but noted that sales staff at competing prime brokers frequently suggested that Bear was risky to work with.

“There's no honor among thieves,” the manager said.

SMOOTH

In the frantic search for answers and predictions, nobody knows anything (times)
Never has so much debt been taken on by so many people. Never have securities been so complex. So what happens next?

It has been a torrid six weeks, but how will things play out over the next few weeks and months?

As the screenwriter William Goldman said about Hollywood's inability to predict which films would succeed and which would be turkeys: “Nobody knows anything.” That could be the motto of the financial markets as they peer anxiously into the future. It is the complexity and opacity of trillions of dollars of debt securities and allied derivatives and the resultant uncertainty that have so spooked traders. It may be that the fears are overdone and that we return to normality. Certainly, the mood music from the share and bond markets has been less sombre in the past week and share prices actually have been hardening in recent days.

So what is the optimistic scenario?

Debt traders and investors come to view the summer lurch from greed to fear as overdone. Yes, some debtors will default, some loans will not be repaid, but most balance sheets are easily resilient enough to withstand the pain. Central bankers have made it plain that they are prepared to intervene to supply struggling institutions with short-term injections of cash. They also seem prepared to cut interest rates, again easing the strain and improving sentiment.

But how does that square with the talk of financial Armageddon of only a few weeks ago? Surely, there has to be more of a reckoning?

The optimistic view is that the financial system is stronger than in the past because risk really is much better spread. Derivatives, it is argued, really do work in dispersing risk. Hedge funds, it is argued, really do dampen violent market swings by taking the contrarian view and buying when others are selling and vice versa. And central bankers, it is argued, really are better atuned to financial markets and the need to act to maintain stability.

Do these arguments hold water?

Not entirely. It is true that derivatives have dispersed risk worldwide, but there still are huge concentrations of exposure. Bank of China revealed on Friday that it had exposure of $10 billion (£5 billion) to US sub-prime mortgages - home loans to borrowers with poor credit histories that have been at the heart of the financial crisis. Some hedge funds, far from taking bold contrarian positions, have, in fact, been engaging in herd-like behaviour, especially quantitative, or “black box”, funds, whose decisions are dictated by computer programs. In general, however, markets in the past ten years have handled shocks better than in the past.

Any other reasons for optimism?

Yes. Institutions are starting to see the battered financial landscape as throwing up opportunities as well as threats and are risking hard cash in backing that view. Last week Bank of America ploughed $2 billion into support for Countrywide Finanical, America's biggest mortgage provider, buying preference shares in the business. Goldman Sachs decided with various external partners to rescue its hedge fund Global Equity Opportunities with a $3 billion cash injection rather than let it go to the wall. HBOS has started to put its own capital into Grampian, a giant credit arbitrage fund, rather than let it be buffeted by the gyrations in the short-term debt market. These moves can be interpreted as defensive efforts, but they also suggest that some of the heavy hitters are reasonably confident that stability will return sooner rather than later. For now, panic has abated.

What is the middling scenario?

This is that a steady drip of negative news will continue to sour sentiment at least for the next six months. While markets will stabilise, investors will be in no hurry to place fresh money with any but the safest and simplest of homes. More generally, risk will be more realistically priced and the high levels of leverage of the past couple of years will not be tolerated.

There is a vast backlog of loans agreed or promised that are waiting to be syndicated. That will certainly clog up bank balance sheets for months, if not years. That, in turn, will tie up capital and prevent banks from doing other business. Debt is going to get pricier and, in some cases, rationed.

Rumour and speculation continue to plague numerous financial institutions. Last week Standard Chartered was under the cosh because of worries about its exposure to US sub-prime through a special-purpose vehicle.

Surely there is more certainty than this? Aren't these investments rated by credit agencies?

Yes, but there have been serious questions raised about the accuracy and timeliness of ratings by agencies such as Standard & Poor's and Moody's. Institutional investors that try to placate markets with the claim “but it's triple-A rated” are more likely to be greeted with howls of derision than grateful relief.

But don't financial institutions have to report their best estimates of any losses to shareholders at once?

Not always and not immediately. Listed banks and other institutions are obliged to alert the stock market only if there is a “material” change in their profit prospects. Material is generally interpreted as a change of 10 per cent or more. For a bank such as Barclays, for example, which made £7.1 billion before tax last year, it could, in theory, sustain losses of up to £700 million and not feel obliged to inform shareholders immediately. And there are other complications. First, billions of dollars of asset-baced securities and derivatives are hard to value. They are thinly traded and banks use computer models to value them. The assumptions on which these models are based may prove to be overoptimistic. When thousands of end-of-year bonuses depend on the losses being as small as possible, banks may not be realistic. The other problem is that the securities are held off balance sheet in tax havens.

Off balance sheet? Now you're getting me really worried. Isn't that what Enron did?

Yes, although these vast bank-controlled vehicles, known as “conduits”, or credit arbitrage funds, are regarded as legitimate means of matching institutions with cash to park with borrowers with the appetite to borrow. However, losses in these conduits might not have to be reported immediately even though the sponsoring bank would probably ultimately have to pick up the tab.

For all these reasons, then, there could be long delays before losses are crystallised and reported. The drip of bad news could be prolonged. According to William Goss, managing director of the bond investor Pimco: “Defaulting exposure can hibernate for many months before its true value is revealed.”

And the doomsday scenario? Just how bad could things get?

A lot worse. There are two main threats. One is the risk of financial contagion - the possibility that the failure of one institution could lead to the toppling of others. A cat's cradle of derivative contracts links the world's financial institutions.

Central banks and regulators appear alert to the danger. The Federal Reserve Bank of New York successfully orchestrated a rescue of the collapsed hedge fund Long Term Capital Management in 1998, when a systemic collapse was most recently feared. But there is always the possibility that a catastrophic collapse happens too quickly or that private sector banks refuse to cooperate in a bailout.

The other big risk is that the downturn in the US housing market proves longer and deeper than forecast. Americans are already facing the biggest reduction in their wealth levels since the Great Depression. That is if house prices fall by only 10 per cent.

Clearly, larger falls could both worsen losses in sub-prime and ordinary mortgages and feed through into the real economy with people spending less because they feel poorer. Yesterday the Centre for Economics and Business Research downgraded its forecast for world economic growth from 3.8 per cent to 3.4 per cent, citing the weakness in the US economy.

So what is the most likely outcome?

Somewhere in the middling scenario looks most probable, but we are in unknown territory. Never in capitalist history has so much debt been taken on by so many people. Never have the securities backed by that debt been shaped, stretched, packaged and hedged in such complex, opaque ways. Hollywood is a model of simplicity and transparency compared with the global money markets: nobody knows anything.

THE FALL

Financial crises: Lessons from history (bbc)
The current market jitters are centred on disturbances in the world's credit markets. Worries about the viability of sub-prime mortgage lending have spread around the financial system, and the central banks have been forced to pump in billions of dollars to oil the wheels of lending.

But what happened in previous financial crises, and what are the lessons for today?

There have been a growing number of financial crises in the world, according to the International Monetary Fund (IMF).

Among the key lessons of previous major financial crises are:

* Globalisation has increased the frequency and spread of financial crises, but not necessarily their severity

* Early intervention by central banks is more effective in limiting their spread than later moves

* It is difficult to tell at the time whether a financial crisis will have broader economic consequences

* Regulators often cannot keep up with the pace of financial innovation that may trigger a crisis.

THE DOT.COM CRASH, 2000

During the late 1990s, stock markets became beguiled by the rise of internet companies such as Amazon and AOL, which seemed to be ushering in a new era for the economy.

Steve Case, head of AOL, as merger with Time Warner is announced
When AOL's Steve Case took over Time Warner, the dot.com boom peaked

Their shares soared when they listed on the Nasdaq stock market, despite that fact that few of the firms actually made a profit.

The boom peaked when internet service provider AOL bought traditional media company Time Warner for nearly $200bn in January 2000.

But in March 2000, the bubble burst, and the technology-weighted Nasdaq index fell by 78% by October 2002.

The crash had wider repercussions, with business investment falling and the US economy slowing in the following year, a process exacerbated by the 9/11 attacks, which led to the temporary closure of the financial markets.

But the Federal Reserve, the US central bank, cut interest rates throughout 2001, gradually lowering rates from 6.25% to 1% to stimulate economic growth.

LONG-TERM CAPITAL MANAGEMENT, 1998

The collapse of hedge fund Long-Term Capital Market (LTCM) occurred during the final stage of the world financial crisis that began in Asia in 1997 and spread to Russia and Brazil in 1998.

LTCM was a hedge fund set up by Nobel Prize winners Myron Scholes and Robert Merton to trade bonds. The professors believed that in the long run, the interest rates on different government bonds would converge, and the hedge fund traded on the small differences in the rates.

John Merryweather, head of LTCM

But when Russia defaulted on its government bonds in August 1998, investors fled from other government paper to the safe haven of US Treasury bonds, and interest rate differences between bonds increased sharply.

LTCM, which had borrowed a lot of money from other companies, stood to lose billions of dollars - and in order to liquidate its positions it would have to sell Treasury bonds, plunging the US credit markets into turmoil and forcing up interest rates.

So the Fed decided that a rescue was needed. It called together the leading US banks, many of whom had invested in LTCM, and persuaded them to put in $3.65bn to save the firm from imminent collapse.

The Fed itself made an emergency rate cut in October 1998 and markets soon returned to stability. LTCM itself was liquidated in 2000.

THE CRASH OF 1987

US stock markets suffered their largest peacetime one-day fall yet on 19 October 1987, when the Dow Jones Industrial Average index of shares in leading US companies dropped 22% and European and Japanese markets followed suit.

Program trading on the New York stock market worsened the crisis

The losses were triggered by the widespread belief that insider trading and company takeovers on borrowed money were dominating the markets, while the US economy was entering into an economic slowdown.

There were also worries about the value of the US dollar, which had been declining on international markets.

These fears grew when Germany raised a key interest rate, boosting the value of its currency.

Newly-introduced computerised trading systems exacerbated the stock market declines, as sell orders were executed automatically.

Concerns that major banks might go bust led the Fed and other major central banks to lower interest rates sharply.

"Circuit-breakers" were also introduced to limit program trading and allow the authorities to suspend all trades for short periods.

The crash seemed to have little direct economic effect and stock markets soon recovered. But the lower interest rates, especially in the UK, may have contributed to the housing market bubble of 1988-89 and to the pressures on the pound sterling which led to the devaluation of 1992.

The crash also showed that global stock markets were now closely linked, and changes in economic policy in one country could affect markets around the world. Laws on insider trading were also tightened up in the US and UK.

US SAVINGS AND LOAN SCANDAL, 1985

US Savings and Loans institutions were local banks which made home loans and took deposits from retail investors, similar to building societies in the UK.

Under financial deregulation in the 1980s, they were allowed to engage in more complex, and often unwise, financial transactions, competing with the big commercial banks.

By 1985, many of these institutions were all but bankrupt, and a run began on S&L institutions in Ohio and Maryland.

The US government insured many of the invidual deposits in the S&Ls, and therefore had a big financial liability when they collapsed.

It set up the Resolution Trust Company to take over and sell any S&L assets that it could, including repossessed homes, taking over the bankrupt institutions.

The cost of the bail-out eventually totalled about $150bn.

However, the crisis probably strengthened the bigger banks by weeding out their weaker rivals, and laid the groundwork for the wave of mergers and consolidations in the retail banking sector in the 1990s.

THE CRASH OF 1929

The Wall Street crash of 1929, "Black Thursday," was an event that sent the US and indeed the global economy into a tailspin, contributing to the Great Depression of the 1930s.

President Franklin Roosevelt led the US during the Great Depression

Franklin Roosevelt became US President after the crash

After a huge speculative rise in the late 1920s, based partly on the rise of new industries such as radio broadcasting and carmaking, shares fell by 13% on Thursday, 24 October.

Despite efforts by the stock market authorities to stabilise the market, stocks fell by another 11% the following Tuesday, 29 October.

By the time the market had reached bottom in 1932, 90% had been wiped off the value of shares. It took 25 years before the Dow Jones industrial average recovered to its 1929 level..

The effect on the real economy was severe, as widespread share ownership meant that the losses were felt by many middle-class consumers.

They cut their purchases of big consumer goods such as cars and homes, while businesses postponed investment and closed factories.

By 1932, the US economy had declined by half, and one-third of the workforce was unemployed.

The whole US financial system also went into meltdown, with a shutdown of the entire banking system in March 1933 by the time the new President, Franklin Roosevelt took office and launched the New Deal.

Many economists on both left and right have criticised the response of the authorities as inadequate.

The US central bank actually raised interest rates to protect the value of the dollar and preserve the gold standard, while the US government raised tariffs and ran a budget surplus.

New Deal measures alleviated some of the worst problems of the Depression, but the US economy did not fully recover until World War II, when massive military spending eliminated unemployment and boosted growth.

The New Deal also introduced extensive regulation of financial markets and the banking system through the creation of the Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Corporation (FDIC), and the separation of commercial and retail banking through the Glass-Steagall Act.

OVEREND & GUERNEY, 1866; BARINGS, 1890

The failure of a key London bank in 1866 led to a key change in the role of central banks in managing financial crises.

The Bank of England was at the centre of the world financial system

Overend and Guerney was a discount bank which provided money for commercial and retail banks in London, the world's financial centre. When it declared bankruptcy in May 1866, many smaller banks were unable to get funds and went under, even though they were otherwise solvent.

As a result, reformers like Walter Bagehot advocated a new role for the Bank of England as the "lender of last resort" to provide liquidity (cash) to the financial system during crises, in order to prevent a failure of one bank spilling over and affect all the others ("systemic failure").

The new doctrine was implemented in the Barings Crisis in 1890, when losses by a leading UK bank, Barings, made on its investments in Argentina, were covered by the Bank of England to prevent a systemic collapse of UK banking.

Secret negotiations by the Bank and London financiers led to the creation of an £18m rescue fund in November 1890, before the extent of Barings' losses became publicly known.

The bankers also organised a committee to renegotiate the outstanding debts owed by Argentina, but a banking crisis engulfed the country and foreign lending to Argentina dried up for a decade.

CC RECEIVABLES

US consumer credit card defaults rise (finfacts)
US consumers are reported to be defaulting on credit-card payments at a significantly higher rate than last year, which may reflect rising credit card debt because of the serious problems in the housing finance market.

Credit-card companies had to write off 4.58% of payments as uncollectable in the first half of 2007, almost 30% higher year-on-year. Late payments also rose, and the quarterly payment rate - a measure of cardholders' willingness and ability to repay their debt - fell for the first time in more than four years.

Moody's, the rating agency, said the trend could be related to the slowdown in the US property market and a fall in the number of borrowers rolling their mortgage debt into new and cheaper home loans.

“The combination of higher interest rates and a softer real estate market diminished the attractiveness of mortgage refinancings in which many borrowers reduced their more expensive credit-card debt by drawing on the equity in their home,” Moody's said.

However, the ratings agency said that the rate of losses remained well below the 6.29% average seen in 2004, a year before the US enacted a new law that made filing for personal bankruptcy more onerous.

The Wall Street Journal reported last week that some lenders, such as USAA, are nudging up credit-score requirements across their auto loans, credit cards and personal loans. Bank of America Corp. and Capital One Financial Corp. recently raised fees and interest rates for some of their credit-card customers. And this month, Citigroup Inc.'s CitiFinancial Auto started charging higher auto-loan rates for borrowers with less-than-perfect credit.

"In the past few months, we've been tightening up our credit underwriting standards and raising our score cutoffs slightly," Barbara Johnson, vice president of USAA Federal Savings Bank, referring to the bank's credit cards, auto loans and personal loans. The bank has also scaled back credit-line increases in its credit-card business. "We used to offer frequent, automated line increases, and now, we've pulled back on that a little bit," she told the Journal.

The Journal says that card issuers can afford to be more selective about whom they extend credit to and by how much because more consumers -- increasingly locked out of home-equity loans and lines of credit -- are using their credit cards more. This month, for example, the Federal Reserve said consumer credit rose at an annual rate of 6.5% in June to a record $2.459 trillion, the second straight sizable gain. The increase was led by an 8.4% rate of increase for revolving credit, the category that includes credit-card debt.

DULL

The Internet Is still Dead and Boring (blogmaverick)
I obviously hit a nerve with my last post. My index for quality of post has evolved to the number of "you suck", "broadcast.com sucks", "You got lucky", etc posts that are submitted but never confirmed. For this post it was off the charts. Good.

When people resort to personal comments. Its usually a good sign.

Among those I respect, there were a lot of great responses. Let me first say, my position on this has nothing to do with HDNet. I've not abandoned the net. In fact i have more than 100 RSS feeds and untold other sites Im involved with.

Ive been inundated with spam on Myspace. Used flicker. Used Digg for sourcing news and laughed at the unending ridiculousness of its posters. Used and posted to Youtube, Google Video, DailyMotion, Veoh, Flickr, Slideshare, used every bittorrent client, got bored with twitter after 7 minutes, signed up for other findme, find you, this is where I am, this is where you are, type app I could find, and the lists go on and on. I read techmeme, techcrunch, extremetech, and tons of other tech sites and I make a point to try every and any new site that seems the least bit plausible or interesting. I spend far far too much time on the net just to make sure I keep up and know whats going on.

Honestly, its just a bigger, more time consuming version on CompuServe Forums from back in the day (Find someone who participated in the OS/2 forums if you want to know about social networks). Only back then you didn't call People friends, they were just forum members.

I have a ton of Internet investments that you dont and wont know about.

i have loaded and used facebook apps and I have downloaded the API documentation and actually read it. I'm such an exciting guy, I downloaded Ruby on Rails and read the documentation as well. That's what Saturday Nights are for.

I have bought installed and integrated every imaginable wireless device in my house. I think its fun.

I have invested in and gotten involved with application development on Facebook. Had a serious discussion with Facebook about the revenue opportunities they could achieve if they would license their API for full scale commercial applications on other websites. For example, to me, it would be an interesting and potentially explosive business move for Yahoo to license the Facebook API for their Panama platform. I think the beauty of Facebook is that people for the first time have defined and opened up the "database of their lives". Which if integrated into an advertising platform like Panama would allow advertisers to truly personalize ads, rather than algorithmically present ads. To me it was an interesting conversation.

I think it could change the way advertising is handled on the net. Each user could have the option to publish certain fields/objects which could be replicated/peered to the licensees of the API and then integrated Into the ad serving application. When the user showed up on the licensee site, say Yahoo Finance, the ad server could present a contextual ad chosen based on the published objects within the context of the Yahoo content.

Its one of many good or bad ideas that are feasible because the net is the plain vanilla boring, never really changing platform that it is.

Guess what. When things go from exciting to stable and boring in the technology world, that's a good thing.

Call me a cynic. I feel the same way about Personal Computers. Faster processors dint do it for me. Installing Vista was a disaster till I read a copy of CPU magazine and used the OS mods they had in there to clean the junk up. Its sad but true that a 25 year old platform is more volatile than the Internet. It still takes so long to boot that for the first time since I had a Mac in 1990 I bought a Macbook and junked my Vista Laptop. My time is at a premium. The days of being concerned that if I bought a Mac there might be some apps that I could use but the wouldn't run on the Mac are long gone. Not because the Mac has an Intel processor, but because I cant really think of any new off the shelf software that I would get excited to buy.

Beyond Office and email, I spend a ton of time on the net. That boring platform that ain't gonna change and is dead in the excitement category.

What do I get excited about ?
I'm excited about Virtual Machines, as I have written before, and the changes and impact they could have on all of us. I get fired up about the continuing decline in flash and hard drive prices. Its amazing to me after all these years of watching drive prices fall that I can buy more than 500gigs of drive for under 100 bucks. That i can buy a 16gig flash drive for not much more. and it still pisses me off that i have to deal with file size limits that require me to manage my email files when I back them up.

And of course I'm excited about the HDTV space and whats happening there. Maybe some people dont think peoples media consumption patterns change when 70" HDTVs are installed in their homes, I do.

Which brings me to why I said that "The Net is Dead and Boring"

The best way to sum up how I feel about the excitement and opportunities on the net compared to the many other personal and corporate technology options out there is to use a Yogi Berra quote.

"Nobody goes there anymore. It's too crowded"

When everyone is looking for gold in the same river, the best opportunities are somewhere else.

But hey, that's just me.

9/11% APR

Defaults Bigger Threat for U.S. Economy than Terrorism: Poll (cnbc/reuters)
The risk of massive defaults on subprime mortgages and heavy debts now poses a bigger threat to U.S. economic prosperity than terrorism, a panel of U.S. business economists said on Monday.

"The combined threat of subprime loan defaults and excessive indebtedness has supplanted terrorism and the Middle East as the biggest short-term threat to the U.S. economy," the National Association for Business Economics said.

The conclusion was based on a survey of 258 NABE members conducted between July 24 and Aug. 14 and updates one done in March.

Only 20% of members said terrorism was now their top concern, compared with 35% in March.

"Meanwhile, 18% of those surveyed pointed to the effects of the subprime debacle as their biggest concern, and the related issue of 'excessive household and/or corporate debt' was cited by another 14%," NABE said.

For all the concern about current conditions in mortgage markets, NABE members remained upbeat about the longer-term outlook for the housing sector. (Home sales fall for 5th straight month.)

"The five-year housing outlook remains largely positive," the survey said. While 42% thought housing prices will be flat over five years, another 41% predicted they will rise compared with only 16% who foresaw a price drop.

A growing number of NABE members now see the U.S. housing boom of the early 2000s, when prices were shooting higher, as a credit-induced bubble. Comparing findings now with two years ago, NABE said 29% of members feel the boom was a "serious national bubble," up from 14% two years ago.

While about 60% of NABE members approved regulators' moves to tighten mortgage lending rules, more than 90% considered they were "too late" in doing so.

ILL

Just How Contagious Is That Hedge Fund? (dealbook)
Hedge funds may well stay vulnerable to the kind of rapidly spreading losses that have been precipitated this summer by problems in the subprime mortgage market, Mark Hulbert argues in The New York Times.

The fundamental problem, says Mr. Hulbert, is that even when hedge funds say they are pursuing entirely separate investment strategies, they often actually use common approaches, according to several experts. When one of these bets goes bad for one hedge fund, losses can result for many of them, disrupting the broader financial markets.

The convergence of hedge fund strategies is quantifiable. It was detected in a study completed earlier this year by Nicole M. Boyson, an assistant professor of finance and insurance at Northeastern University; Christof W. Stahel, an assistant professor of finance at George Mason University; and René M. Stulz, a professor of finance at Ohio State University. A copy of their study, “Is There Hedge Fund Contagion?,” is available here.

The professors focused on months when there was a particularly big loss in one of the many categories of hedge funds. Professor Stulz told Mr. Hulbert that he and his co-authors found that during those months, all hedge funds, regardless of their category, had an unexpectedly high probability of losses, too.

A number of factors have caused this convergence, according to Lawrence G. Tint, an investment consultant and retired vice chairman of Barclays Global Investors. These include “the sheer number of hedge funds, the huge amount of assets invested in them, and the enormous amount of leverage that they employ,” Mr. Tint told The Times. Another is a fee structure that provides hedge fund managers with “an intense incentive to capture the last little inch of competitive advantage,” he said.