Moody's Warns of Potential LTCM-Scale Fund Collapse
By John Glover
Aug. 16 (Bloomberg) -- Moody's Investors Service warned that the global credit rout may cause a major hedge fund collapse on the same scale as Long-Term Capital Management LP in 1998.
Hedge funds face potential losses on collateralized debt obligations, securities packaging other assets, Chris Mahoney, vice chairman of Moody's, said on a conference call today. Buyers and sellers of ``risky assets'' are unable to agree on prices, causing the market to seize up, Mahoney said.
``A possible consequence of the repricing of risk assets would be the failure and disorderly liquidation of a hedge fund or other institution of sufficient size as to disrupt markets, as LTCM threatened to do in 1998,'' Mahoney said.
Credit markets started falling in June as two Bear Stearns Cos. hedge funds collapsed because of bad subprime bets. Goldman Sachs Group Inc., the world's most profitable securities firm and second-largest hedge fund manager, was forced to put $2 billion of its own money into one of its hedge funds and waive some fees after the fund lost 28 percent of its value this month.
Basis Capital Fund Management Ltd. yesterday told investors losses at one of its hedge funds may exceed 80 percent as the U.S. subprime mortgage rout prompted creditors to force the Sydney-based company to sell assets.