Lehman won’t return “billions” of frozen prime-brokerage assets “in the short term,” said PricewaterhouseCoopers, administrator for the Lehman bankruptcy.
Meanwhile, several hedge funds are planning to sing the Bono phrase from “Do They Know It’s Xmastime?”* to their cohorts at Morgan Stanley:
Hedge funds that account for less than 10 percent of Morgan Stanley’s prime-brokerage balances this week withdrew their money or told the firm they planned to, according to a person with direct knowledge of the matter.
And the really good news:
The loss of all hedge-fund accounts wouldn’t materially affect the company’s access to reserves, said the person, who asked not to be identified because the information is confidential.
I’m not certain I would take that as encouraging.
“Hedge funds tend to look at counterparty risk as they would an equity investment,” said Adam Sussman, director of research at TABB Group LLC, a New York-based adviser to financial-services companies. “If they’d bet against the stock, they’d also be likely to minimize their exposure to their prime brokerage and trading over-the-counter derivatives with them.”
I believe Bloomberg just indicated that the hedge funds leaving Morgan Stanley are “voting with their feet.”
“Foremost on people’s minds is ensuring that wherever they decide to put assets, they will be secure,” [BNP Paribas SA’s global head of hedge-fund relationships, Talbot Stark] said in an interview today.
With Treasuries yielding 0.00%—about the same as your mattress, except with no option value—”security” has become more important than (to borrow an old phrase from a deceased-but-no-longer-mourned firm) Risk-Adjusted Return on Capital (RAROC).
The people who ran the financial firms chose to program their risk-management systems with overly optimistic assumptions and to feed them oversimplified data. This kept them from sounding the alarm early enough.
Maybe more on this later.
*”Well tonight thank G-d it’s them/Instead of you”
**”He who has the gold makes the rules”