What Caused the Housing Bust (15)

Hedge funds have no solution


The real problem is that the long-dated liabilities (a 30-year mortgage) were matched not by reliable depositors, but by fly-by-night hedge funds, which were themselves highly leveraged and subject to redemptions.

That's why even as the top executives in these firms believed their mortgages were safe and sound, they can't get the funding they need to hold onto them through the crisis.

As Keynes predicted, the lives of every higher-leveraged financial institution is precarious: " The market can be irrational longer than you can remain solvent."

The hedge funds have no solution.

Redemptions will force them to sell.

They'll continue to pressure the market, resulting in huge losses.

Hundreds of funds will likely be liquidated.

Wall Street's investment firms, if they can find additional capital to meet margin calls, might weather the storm... depending on how far it spreads.

We saw a move in this direction this week when Goldman announced $3 billion in additional funding for its big hedge funds.


For most mortgage brokers, the party is over – goodnight.

Something like 90% of them will be out of business by the end of the year.



By Porter Stansberry