I touched on this last week, but the WSJ also had a blurb on Sowood Capital’s admission that its hedge fund had lost more than 50% of its value, or about 1.5 billion. I posted Saturday, that the loss at the time had been 25%. Oh well, things are happening so fast, what’s another 750 million? It’s only mad money.
The hedge fund manager detailed how Sowood bet on senior debt positions and hedged itself by betting against stocks and more risky debt. However, the corporate debt tumbled in value and did worse than the stocks. Very concentrated positions along with leverage ended up crippling the fund.
I’m sure they’ll be paying the hedge fund manager a big bonus out of remaining assets before he gets kicked out. Is there a chance that he will be banned from the securities industry for life? I doubt it because hedge funds are unregulated, and I believe that they may even be allowed to use certain zoo animals for selection of their investments.
Continued failures of institutions/funds will increase fear that the current credit crunch may get worse, and I am sure that some have already looked towards the Fed for help (translation: bailout).
Last week, however, St. Louis Federal Reserve President William Poole dismissed any Fed involvement to bail out the stock market by saying:
“The Fed should respond to market upsets only when it has become clear that they threaten to undermine achievement of fundamental objectives of price stability and high employment, or when financial-market developments threaten market processes themselves.”
Hmm, let’s see if the Fed sticks to that game plan.