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Thursday, March 6, 2008

Housing/Subprime Roundup — March 6, 2008

Items of interest:

Salon:
Twilight of the hedge funds -- The word of the day on Wall Street is "deleveraging." The simplest way to explain the concept is with an old bromide: What goes up, must come down. If you borrow a lot of money to make big bets in the market when times are good -- a process known as "leveraging" -- then you are going to owe a lot of money when the bets go sour and you have to settle your accounts -- deleverage -- during the inevitable bad times.

But it's even worse than that, because the process of deleveraging in and of itself causes more deleveraging. If you are a hedge fund and your bank wants you to pay back a loan, and you don't have ready capital at hand, then you must sell off some of the assets you are invested in. But when a bunch of hedge funds all try to sell off their assets at the same time, the frenzy only puts more downward pressure on the price of those assets, which means that the overall investment position of the hedge funds gets even worse, encouraging more creditors to come knocking at the door, and requiring the fire sale of even more assets.

As Warren Buffett told CNBC on Monday, "waves of deleveraging" are sweeping through financial markets. Perhaps all you need to know to explain why Wall Street is in a state of panic is the headline of a Wall Street Journal article published this morning: "Deleveraging's Vicious Spiral Picks Up Speed." That is an amusement park roller coaster no one wants to ride. [...]

related:
Carlyle Capital Brings Back the LTCM Memories - Portfolio.com
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Calculated Risk

MishTalk - Mike Shedlock

Paul Krugman - NY Times

The Big Picture - Barry Ritholtz

naked capitalism - Yves Smith

Pragmatic Capitalism

Washington's Blog

Safe Haven

Paper Economy

The Daily Reckoning - Australia