Posted on 10/14/2005 11:30:39 PM PDT by Travis McGee
World's hedge funds face crisis as Refco suspends trading
· Leading global broker admits 'liquidity problem'
· Billions of pounds could be tied up in frozen deals
Jill Treanor
Friday October 14, 2005
A crisis in the world's hedge fund industry was in prospect last night after one of the world's largest derivatives brokers was forced to freeze trades potentially worth billions of pounds.
The move by Refco, which acts for many leading speculative investors both on Wall Street and in the City, followed the discovery of accounts irregularities at the firm earlier this week and the issue of fraud charges against its former chief executive Phillip Bennett.
Mr Bennett has been charged with defrauding investors by using a hedge fund to hide $430m (£250m) of debts owed to the firm. A British banker who has lived in the US since 1978, Mr Bennett has been released on bail of $50m secured on a house in New Jersey, a Park Avenue penthouse apartment, $5m in cash and funds raised by six co-signers of the bail bond.
The implications of the 15-day trading moratorium on the company's Refco Capital Markets subsidiary may be felt across the world financial system, depending upon the size of the funds caught up inside Refco and the types of institutions which are unable to remove their money from the operation. By locking the clients in, Refco, which has debts of $642m, is preventing a possible mass exodus of funds which could further jeopardise its trading position. While the company gave no details of the size of the funds it had tied up in its capital markets arm, it described the operation as representing a "material portion" of its business.
The rest of the article linked HERE.
Fasten your seatbelts.
I wonder if Soros is gonna take a hit on this?
or is he behind it?
We'll see $10 silver within 6 months. JMO.
Whoa!... And a salesman from Refco just called me last week trying to get me to start trading with them again. Should've known they were getting desperate calling me, lol.
The real question in my mind is, what's this going to do to prices in specific markets?
I know very little about the financial markets, but in the last few months I've heard rumors of the hedge fund market taking a giant nose dive. Could this be as bad as it has been predicted...like rocking the world economy bad?
I've been hearing about possible instability because of change in the oil prices. The hedge funds have been desperate to have a good year in 2005 and have leveraged a lot in oil. The steep downturn in the whole market has caused some like me to bail out completely..ten days ago.
It has been reported that this is the outfit involved in the magical $100,000 cattle futures deal. (She said she learned how to do it by reading the WSJ).
REFCO COLLAPSE MAY ROIL RATES
By PAUL THARP
October 14, 2005 -- The era of cheap mortgages finally ended yesterday, triggering widespread anxieties that our economy could be rolling toward a brick wall. After fueling one of the most free-spending decades on record, the cheap, fixed-rate mortgage jumped virtually overnight from its historic 40-year lows to root permanently beyond the psychologically important 6 percent level yesterday, where economists believe it will keep rising dramatically.
Rising fuel costs, overall inflation and even the collapse of the big bond trading outfit Refco were blamed.
(More at the New York Post) http://www.nypost.com/business/53503.htm
Consumer mood falls to 13-year low
NEW YORK (Reuters) Oct 14- U.S. consumer sentiment fell unexpectedly in early October to its lowest level in 13 years, as high gasoline prices and the fallout from hurricane damage continued to take their toll, a report showed on Friday.
The University of Michigan's preliminary October index of consumer sentiment fell to 75.4, according to sources who saw the subscription-only report. That was below a final September reading of 76.9 and much below Wall Street's median forecast of an increase to 80.0.
"We were anticipating that we could see a little bit of an improvement in October because the rebuilding after the hurricanes appears to have started and energy prices have stabilized, but it appears that it will take a little longer for consumers to feel better about things," said Gary Thayer, chief economist at A.G. Edwards and Sons in St. Louis, Missouri.
The survey's expectations component eased to 62.4 from 63.3, also defying Wall Street forecasts for an increase to 67.0. The early October expectations reading was the lowest since March 1992.
The index of current conditions fell to 95.7 in early October from 98.1 in September. That also went against Wall Street forecasts for a slight rise to 99.5.
Confidence measures are used as an indicator of consumer spending, which makes up about two-thirds of overall U.S. economic activity. Consumer spending in turn is seen as an indication of strength or weakness in economic growth.
Dramatic slump seen in vehicle sales
Fri Oct 14, 2005 DETROIT (Reuters)
- U.S. sales of new cars and trucks at the retail level appear to have fallen off the cliff in October, led by steep declines at General Motors Corp. and Ford Motor Co., J.D. Power and Associates said on Friday.
A report from the industry tracking firm's closely watched Power Information Network cited a lack of high-impact incentives from major automakers, high U.S. gasoline prices, low inventory levels and an apparent pullback by consumers after exceptionally strong sales over the summer for the dramatic slowdown.
Retail new-vehicle sales were down 33 percent across the industry in the first nine days of October compared with the same period a year ago, the Power Information Network said.
It said results were down at nine major automakers, but GM led the pack with a 57 percent decline followed by Ford, which saw its retail sales drop 45 percent over the first nine days of the month.
Oct. 14 (Bloomberg) -- It's one initial public offering some of Wall Street's finest wish they had never bid on.
Two months ago, New York-based futures broker Refco Inc. raised $670 million through its first public stock sale. This week, it said investors who put up that money hadn't been told the whole story.
Quickly, Refco Chief Executive Phillip Bennett was fired and put under arrest, charged with securities fraud. Refco said its published financial statements were suspect. The broker then blocked some customers from withdrawing money from accounts with an affiliate, Refco Capital Markets Ltd. It said this company represented ``a material portion'' of Refco's business and wasn't liquid enough to continue operating.
Refco's shares -- which were priced at $22 for the IPO and subsequently traded as high as $30.55 -- had plummeted to $7.90 yesterday before trading was stopped.
Looking foolish were the three securities firms that took Refco public: Credit Suisse First Boston, Goldman Sachs Group Inc. and Bank of America Corp. Refco auditor Grant Thornton LLP of Chicago certainly has questions to answer. Equally embarrassed is the buyout firm Thomas H. Lee Partners LP, which took control of Refco last year for $507 million and garnered $191 million from the IPO.
Interest rates to ramp up GM pension woes
By James Mackintosh in London (Financial Times)
Published: October 12 2005 19:05 | Last updated: October 12 2005 19:05
General Motors is likely to be hit by an additional bill of hundreds of millions of dollars next year as lower long-term interest rates increase the cost of the US carmaker’s huge pension and healthcare liabilities.
GM already faces soaring healthcare costs from hospital and prescription drug price inflation, which hit the carmaker particularly hard as it pays for the treatment of 1.1m people, more than any other private organisation. These problems are set to be worsened by the effect of drops in long-term interest rates on the $184bn liabilities of its pension and healthcare funds. At the end of last year its funds had assets of $116bn, leaving a hole of $68bn.
Or perhaps $10/barrel oil. (I don't expect to see it drop that much, but it will fall into the $30s when the Gulf gets back on line.
This article came out 10/14 in Britain, which means that if it were really a big deal, the US markets would have been down Friday, but they were up.
Credit Bubble Bulletin, by Doug Noland
More Trials and Tribulations of Wall Street Finance
October 14, 2005
(This is snipped about 2/3 down his column in Prudent Bear) http://www.prudentbear.com/creditbubblebulletin.asp
I do not argue that Wall Street Finance is necessarily inherently corrupt. Instead, I propose that a highly energized, market-based Credit system offering enormous and easily attained financial rewards openly invites abuse and corruption. What’s more, the combination of Federal Reserve easy “money” policies and overly abundant marketplace liquidity virtually guarantees a gold rush mentality of wealth-seeking endeavors – legal, legitimate and otherwise (Why did Willie Sutton rob banks?).
This week’s news of fraud and deception at futures powerhouse Refco should come as no major surprise. After all, the Wall Street Finance infrastructure that had coddled and financed the likes of Enron and Worldcom is these days more powerful and commanding than ever. Sure, there were some hefty fines to pay – but their relevance was readily diminished by a few years of historic windfall profits courtesy of the Fed’s ultra-easy monetary accommodation. Those pushing the (risk or statutory) envelope were emboldened and windfall fortunes only more handily procured.
I contend that the defining feature of Wall Street Finance is the propagation of excess and self-reinforcing risk (excessive speculation, leveraging, asset inflation/Bubbles, unsound lending, and malfeasance). The past few years have witnessed a veritable (blow-off) explosion of derivative trading and securitizations, areas particularly ripe for abuse and fraud. Nonetheless, my view is in stark contrast to chairman Greenspan’s and the consensus view that contemporary finance provides an unparalleled capacity to recognize and manage risk. For now, Mr. Greenspan’s sanguine view receives ongoing support from the potent elixir of abundant marketplace liquidity and rising asset prices. There are indications, however, that the environment is in the process of changing. As Warren Buffett has commented, “You don’t know who’s swimming naked until the tide goes out.”
With hedge fund returns lagging, recent revelations of improprieties (Bayou Group and Wood River) are likely the proverbial tip of the iceberg (there are, after all, 8,000 funds!). And to what extent market fluctuations (currencies, interest-rates, energy, oil, equities…) played a role in this week’s collapse at Refco, only time will tell. For now, we should expect the wrecking ball of destabilizing volatility across the spectrum of securities markets to continue to chip away at marketplace confidence and liquidity. In textbook fashion, the strength of U.S. equity markets has narrowed over time, and we see of late that the few favored groups have a proclivity for abrupt and major downturns. Clearly, the market environment is becoming increasingly challenging for the leveraged speculating community. There will be ongoing pressure to rein in risk, counterbalanced by the necessity of posting positive returns.
This is going to take a while to digest, not overnight.
Housing Bubble Threatens Global Economic Growth, Bootle Says
Oct. 13 (Bloomberg) -- Surging investment in real estate over the past decade has led to a bubble that threatens to send the world economy into recession, economist Roger Bootle said.
House prices and the economy enjoy a ``symbiotic relationship,'' Bootle, economic adviser to accountants Deloitte & Touche LLP and a former adviser to the U.K. Treasury, said in a revised edition of his book, ``Money for Nothing.'' As the housing boom ends, consumers will feel poorer and pare spending, driving up unemployment, he said.
``Like the earlier bubble in shares, the extent of overvaluation is different in different countries, but this is a global phenomenon,'' he wrote. ``In the end, this bubble may be more serious than the primary bubble in shares. When it bursts, the world will tremble.''
http://www.bloomberg.com/apps/news?pid=10000102&sid=a1FU1hlz5WQo&refer=uk
PLACEMARKING for husband in the morning.
This is no big deal because the numbers involved are way to small to affect the world's financial markets to any extent. The article says Refco has $642 million in debts. That is chicken feed in today's world. When Long Term Capital went bankrupt in 1997, that hedge fund had around $30 billion in assets, if I recall correctly. That was a big enough problem to cause some disruption in the stock markets. This Refco problem is totally insignificant to the stock market, although it may have some short-term effect on commodity prices.
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