tag:blogger.com,1999:blog-5972739420349387167.post7629224830725490160..comments2023-09-22T10:30:26.544-07:00Comments on BANKING ON ECONOMICS: THE GREAT GAME: Faites vos jeux! PLEASE LAY YOUR BETS NOW!ROBERT MCDOWELLhttp://www.blogger.com/profile/07998963662141879105noreply@blogger.comBlogger1125tag:blogger.com,1999:blog-5972739420349387167.post-11042691620042025132009-03-21T06:15:00.000-07:002009-03-21T06:15:00.000-07:00Insight: Where are the Gordon Gekkos?By Gillian Te...Insight: Where are the Gordon Gekkos?<BR/>By Gillian Tett <BR/>Published: March 19 2009 16:19 | Last updated: March 19 2009 17:05<BR/><BR/>Where is Gordon Gekko when you really need him? That is a question many financiers might ask right now. In recent days, politicians on both sides of the Atlantic have railed against the antics of “greedy” speculators – and vowed to clamp down on unbridled risk-taking.<BR/>But deep in the bowels of the financial system, an entirely different type of hand-wringing is afoot. For one of the real problems in the markets is not too much greed – but a desperate shortage of risk-taking speculation in almost any form. <BR/>21st century CDO-touting version of Gordon Gekko – the iconic greed-driven figure from the film Wall Street – has gone on strike. And while few politicians or pundits might mourn that trend, this disappearance of risk capital is a key reason why so much of the financial machinery is currently failing to work. <BR/>Measuring the scale of this shift is distinctly hard. But some recent anecdotes are chilling. Last week, for example, a group of senior hedge fund players and chief investment officers gathered in Dublin – and collectively guessed that about 80 per cent of the risk capital that was sitting in the European system a year ago has disappeared. In part that reflects a stunning wave of deleveraging and redemptions among hedge funds. Back in 2008, the global hedge fund industry had some $2,600bn of assets, according to Hedge Fund Intelligence, a research group. The hedge fund gurus gathered in Dublin last week, though, reckoned that sum would be near $1,000bn by the end of this year (and some projected dramatically lower).<BR/>What is even more dramatic – but less visible – is the disappearance of banks’ proprietary trading desks. In recent weeks, some banks have publicly announced that they are shutting or mothballing these, either in response to political pressure, market scrutiny – or simple despair about the inability to devise any rational trading strategy in current markets. <BR/>Other banks have taken more furtive action. Either way, traders in London say there is really only one bank in Europe which is even pretending to run an active prop desk now – namely Goldman Sachs. As a result, billions of dollars of risk-taking capital is believed to have quietly vanished. <BR/>That has had all manner of extraordinary consequences. Two years ago, a host of hedge funds and prop desks in London were building up their distressed debt-trading teams to take advantage of a future turn in the credit cycle. Logic might suggest such funds should be wildly busy right now, swooping in to buy distressed companies, or securities. Nothing could be further from the truth. As banks have slashed their risk-taking operations, they have also cut their distressed prop desks, and most have stopped making markets in distressed products. Hedge funds dealing with distressed assets have also folded, unable to raise funds. <BR/>As a result, there is a dire shortage of capital to organise – or fund – even “simple” restructurings of companies, distressed investment entities or anything else. Hence the gridlock on dealing with toxic assets. <BR/>But not just credit assets are being hit. As asset managers hunt for places to put their cash away from the carnage of the credit or property world, some have been tempted by the world of small-cap equities. But trading in small caps can only take place with market makers – and right now, banks are not just cutting prop desks but market making activity too. As a result, fund managers are sitting on their hands. “We would love to buy small caps but we just cannot tolerate the liquidity risk,” explains one large asset manager. “Almost any sector which needs marketmakers is half-dead.” Logic would suggest that eventually this pattern should change. After all, oodles of cash remain in the system. That cannot all stay in government bonds for ever, least of all in a world where the Fed is busy intervening in such a dramatic fashion to suppress yields. <BR/>The good news for the asset management industry is that as the high-rolling, highly leveraged hedge funds disappear, the problem of investor “crowding out” is disappearing too. That should make it easier for unleveraged asset managers to make a decent return from “simple” strategies – which in turn should tempt them back in.<BR/>Indeed, some bankers think – or desperately hope – this week’s equity rally could reawaken animal spirits soon. But before the mainstream players dive in on a large scale, they need to know there will be institutions around who are willing to make markets – or speculators who are willing stand on the other side of trades, running risks that the mainstream players do not want to bear. Gordon Gekko – or, at least, a pool of risk capital – needs to exist for finance to flourish. <BR/>The crucial question in the short- and medium-term is, who will play that role? Banks? Boutiques? Asset managers themselves? Or something else altogether? Answers please on a postcard – and preferably sent to the politicians and regulators, who are angrily fulminating about what the future of finance should be.ROBERT MCDOWELLhttps://www.blogger.com/profile/07998963662141879105noreply@blogger.com