World's hedge funds face crisis as Refco suspends trading

The Guardian (UK) ^ | Oct 14, 2005 | Jill Treanor

[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.

[q_an_a]

we'll see lower Natural Gas and heating oil too. Already gasoline is down (sort of) to 174.00 that is 20 cents below the close last week. In addition Henry Hub gas is down nearly 20% (2.00) in one week.

[coloradan]

Why is that? Oil was $50/barrel when the gulf was on line, three to six months ago.

[Mulder]

Thanks for the ping, Travis. I haven't been posting much lately, but I still lurk.

I believe the wheels are about to fall off the economy and things will get very bad. The so-called "wealth" of this nation is little more than a facade based on illusion. Once the currency bubble bursts (and we're starting to see signs of this in the housing market), things will spiral downward from there. America is not ready for this as we are no longer self-sufficient, and the moral/cultural climate in this country is probably as low as it's ever been here. The sheeple will look to a strongman to rescue them. Say goodbye to the Republic.

Personally, I've been taking steps to prepare but still have a long ways to go. I've been moving out of paper (stocks and bonds) and into things (gold and commodities). Then of course, there are the more basic preparations such as water, food, and weapons.

Also, I found a really good resource about 6 months ago for staying on the cutting edge of this economic stuff. I've been listening to Jim Puplava over at financialsense.com. Every weekend, they have a radio show over there at http://www.netcastdaily.com/fsnewshour.htm. I find the third hour to be the most informative.

[Grampa Dave]

"Either I'm mistaken or this is the group that made Hillary look like a futures trading genius."

http://www.washingtonpost.com/wp-srv/politics/special/whitewater/stories/wwtr940527.htm

A close examination of her individual trades underscores Blair's pivotal role. It also shows that Robert L. "Red" Bone, who ran the Springdale, Ark., office of Ray E. Friedman and Co. (Refco), allowed Clinton to initiate and maintain many trading positions – besides the first – when she did not have enough money in her account to cover them.

[phelanw]

I'll bet you a $100 contribution to Free Republic that we see $10 silver before we see crude in the 30's. Loser donates when price of one or the other trips the bet. Reply to accept.
(Friendly agreement for charitable purposes only)

[Travis McGee]

Thanks for posting. I fully expected to be attacked as a moron when I posted this article, and the other article snippets. I could post 500 more and it would not make any difference to the rose-colored-glasses economic Pollyannas.

They will believe the upbeat TV talking heads until they personally cannot get money out of their ATMs, or use their credit cards at the gas station. Only then will they get it.

And as you said, at that point they will demand a strongman from the federal govt "Do something!" to simply "Fix the economy!" And of course, "Do it right now!"

It's gonna be ugly beyond belief.

[Travis McGee]

Thank you for posting 32. Most folks still see this Refco article in isolation, clearly they do not understand the intertwinings of the derivatives game, which will lead to the downward cascade effect.

[PAR35]

Sorry, I'll decline the bet. I don't keep up with metals these days.

[Travis McGee]

Neutrino's clip at 32 does a good job of explaining the situation.

Long Term Capital Management's collapse was a harbinger of where we find ourselves today.

[PAR35]

Why is that? Oil was $50/barrel when the gulf was on line, three to six months ago.

Speculators were holding the price artifically high. If the storms hadn't hit, the price would have nose dived. The storm bailed them out, but the fundamentals haven't changed. There is plenty of supply. The problem is in refining capacity. With a chokepoint there, more oil can be produced than can be processed. Thus, there will be a drop in the price of crude while gasoline remains high. The refiners should be in a position to make great profits until new refineries are built.

Hopefully the current crisis can be leveraged to get drilling in the eastern gulf, California offshore and the 'forbidden' areas of Alaska.

[Travis McGee]

Refco's woes worry markets

But analysts downplay risk of broad meltdown

By Alistair Barr, MarketWatch
Last Update: 8:04 PM ET Oct 14, 2005

SAN FRANCISCO (MarketWatch) -- Before this week, Refco Inc. wasn't a household name.

But now the possible collapse of the largest independent commodities and futures broker in the U.S. has top investment banks, regulators and exchanges scurrying to save a company that's quietly become an integral part of the nation's financial markets.

Experts said Refco's failure won't threaten global financial markets in the way Enron's collapse did in 2001 and the demise of hedge fund Long-Term Capital Management did in 1998. Still, the company's troubled tentacles stretch far and wide, from pork bellies to futures on stocks and bonds.

"Refco's big enough and it owes enough money to major financial companies to raise doubts about markets at a time when we really don't need it," said Randall Dodd, director of the Financial Policy Forum in Washington D.C., a non-profit research institute that studies markets to try to make them work better.

Read the rest at
http://custom.marketwatch.com/custom/earthlink-net/mw-news.asp?guid={0B92DA83-6451-47DD-B86E-0637914AC8DA}

[dennisw]

I guess you're also not gonna bother with substantiation for your claim that "Others had advance knowledge of this Refco crisis."

You are supremely dumb if you don't think inside information was acted upon here with REFCO and that Wall Street acts all the time on inside information and hot insider tips. So you were right about the gold price. BFD. The trend is up for it.

Got any more claims to make?

[SAJ]

$30 billion in assets, well over $2 trillion in derivative instruments...and, at the end (before the recapitalisation consortium), about $550 million in capital.

Hi, ho, Archimedes!

;^)

[Travis McGee]

That's what I call leverage.

[phelanw]

Understood. I have watched silver go up 10% in the past 4 weeks. It is now at about $7.70.

[aMorePerfectUnion]

An absolute HYPE title to this article. MOST hedge funds
are not affected by this.

[Travis McGee]

So most derivatives-based hedge funds are just rock solid, not a worry in the world?

[defenderSD]

I'm not too concerned about financial derivaties, yet. But I think GM is now in real trouble financially. (My comment on FT's article should have been limited to the odd timing of that article when interest rates have been rising lately.) GM's balance sheet looks like a horror movie: ugly and frightening at the same time.

This is what results when congress gives a huge union like the UAW an antitrust exemption, which then gives the union tremendous leverage over company management. The result is that the company is being co-managed by a bunch of uneducated union guys and now most of the cost strucuture of GM is locked in by union contracts. Now GM is only cost-competitive in luxury cars, large trucks, and SUV's. They lose money on all other vehicles.

So in effect, GM has been a partially managed by the US government through the UAW for about 75 years and we all know where that kind of management leads: high costs, loads of debt, and serious financial problems. I wouldn't be surprised if the UAW and their allies in congress start talking about a government bailout of GM because "it's best for America." (No, that would be best for the UAW.)

[Travis McGee]

I think we're approaching a "perfect financial storm." The auto sector, the housing bubble, interest rates, energy prices, the risk of a cascading collapse of derivatives are all elements.

[AntiScumbag]

You are supremely dumb if you don't think inside information was acted upon here with REFCO and that Wall Street acts all the time on inside information and hot insider tips

Nice try. I didn't say any such thing.

YOU made a specific allegation:

Others had advance knowledge of this Refco crisis

It can now be safely concluded that you have zero proof of it.