Tuesday, January 09, 2007

Hedge-Fund Borrowing Examined by Fed, SEC, European Regulators

and they really have every reason to be worried. here is the example of the hedge funds citadel
und sie sollten jeden grund haben nervös zu werden. hier das beispiel von citadel.

More than 90 per cent of the investment expenses represent interests payments, including the cost of the roughly $100bn of net debt provided by investment and commercial banks. Citadel had gross assets at the end of August of $166bn, representing leverage of 12.5 times
Jan. 9 (Bloomberg) -- U.S. and European regulators, turning a spotlight on one of Wall Street's most profitable businesses, are conducting a joint probe into whether banks and securities firms set strict enough limits on loans to hedge funds.

The U.S. Securities and Exchange Commission, the Federal Reserve Bank of New York and the Financial Services Authority in London met last month with some of the biggest lenders to the hedge-fund industry, seeking information on how they decide the amount of collateral required, .....

``The purpose of the meetings was to discuss margin practices,'' Nazareth, 50, said. ......
Any move to raise margins as a result of the probe may crimp the $8 billion a year in fees that securities firms collect providing hedge funds with prime-brokerage services such as lending and clearing trades. ( i´m not sure if this number is correct. citadel has paid $5.5 billion in fees and interest alone!with all the loans involved the number should be much higher/bin mir nicht sicher ob diese nummer nicht deutlich zu tief ist. citadel hat alleine im letzten jahr 5.5 b$ an zinsen und gebühren gezahlt

Bear Stearns Cos., one of the three largest prime brokers, generates at least 30 percent of its profit catering to hedge funds,.....(add to this the direct effect of acting like a hedge funds themselves and you can imagine how big the real effect on profit for wall street is/ nehmt dazu den effekt den die banken daraus erzielen das sie selber wie hedge fonds agieren und man kann erahnen wie groß der einfluß auf wall street ist.http://immobilienblasen.blogspot.com/2006/12/goldman-sachs-hedge-funds-or.html)

Officials want to know how much margin banks require hedge funds to provide up front to obtain loans and cover potential losses. They're hoping to avoid the kind of turmoil that engulfed financial markets when Long-Term Capital Management LP's losses forced the Fed to organize a rescue in 1998.

....leverage also can multiply trading losses and put stress on the financial system. .....

Goldman Meeting
The meetings last month included New York-based Goldman Sachs Group Inc., Morgan Stanley, Bear Stearns, Merrill Lynch & Co., Lehman Brothers Holdings Inc., JPMorgan Chase & Co. and Citigroup Inc.; UBS AG and Credit Suisse Group, both based in Zurich; and Frankfurt-based Deutsche Bank AG, according to a person helping to direct the examinations.

The person, who declined to be named because of the confidential nature of the discussions, said the regulators are concerned that there has been a decline in lending standards because hedge funds are such lucrative customers. ....
Expanding Market
Hedge funds worldwide manage a combined $1.3 trillion, more than double the amount they controlled five years ago, ....
It's common for prime brokers to relax margin requirements because the bigger the loans, the more the banks make charging interest and holding securities as collateral, said Galper at Vodia Group. He estimates that Wall Street collected about $8 billion last year lending cash and securities to hedge funds.

``That's a selling point of the banks, how much leverage they're willing to give,'' Galper said. ``If one says, `I'll give you 10-to-1 leverage,' another says, `I'll give you 12-to-1.'''

Goldman's revenue from providing prime-brokerage services jumped 22 percent in fiscal 2006 to $2.18 billion. Bear Stearns got $1.1 billion of revenue from prime brokerage and other clearing and settlement services, up 3 percent. ......

Because hedge funds let managers participate substantially in the gains on money invested they provide an incentive to boost returns with extra leverage. Fed officials have been troubled for months by the possibility that banks may be cutting margin requirements for hedge funds too far and in some cases demand no margin at all for potential losses on over-the-counter derivatives. ........

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