[stu]

This has caught my attention.

Refco freezes debt-scandal unit

$this->bbcode_second_pass_quote('', 'R')efco, the brokerage whose former boss has been charged with fraud, has frozen accounts at a scandal-hit subsidiary at the heart of the allegations.
Shares in the firm were suspended in New York after they plunged 27%.

[rogerhb]

$this->bbcode_second_pass_quote('stu', 'F')irstly I have no idea what hedge funds are and what part they play in the economic process but I am aware that they are important.

[GoIllini]

$this->bbcode_second_pass_quote('stu', 'F')irstly I have no idea what hedge funds are and what part they play in the economic process but I am aware that they are important.

[NEOPO]

dream on!!

[Gary]

Oh, it's only highly leveraged gambling, eh? Well, that's all right then! Everything is just fine. We'll get the taxpayers to bail our highly leveraged arses out, then, OK?

And yes, when the economy nosedives and we won't be able to pay for oil at half the price, why then we'll just become the number one coal extraction nation on the planet.

Then we can do a bit of highly leveraged gambling with global warming and all that sort of thing.

I am increasingly impressed by our human capacity for overweening pride.

Please 'scuze me now while I go stare at the full moon for awhile....then maybe I'll be able to sleep.

So, tell me, please, "how bad is this?"

[NeoLotus]

The 100 year storm I take to mean the Great Depression. Which, according to some folks at the DailyReckoning, or was that Financial Sense Online, is going to look like a picnic compared to what are facing.

There are three factors which are different now than they were in 1929 when the market crashed.

1) Then, we were a creditor nation. Now, we are debtor nation.
2) Then, we were still flush with oil. Now, we import more than we produce.
3) Then, we still manufactured our own stuff. Now, we buy it from China.

[rogerhb]

$this->bbcode_second_pass_quote('NeoLotus', 'T')he 100 year storm I take to mean the Great Depression. Which, according to some folks at the DailyReckoning, or was that Financial Sense Online, is going to look like a picnic compared to what are facing.

There are three factors which are different now than they were in 1929 when the market crashed.

1) Then, we were a creditor nation. Now, we are debtor nation.
2) Then, we were still flush with oil. Now, we import more than we produce.
3) Then, we still manufactured our own stuff. Now, we buy it from China.

[curiousxx]

. . . . . .thought the auditors and the S.E.C. were looking out for us. . . guess not

[richardmmm]

i think that refco will survive, i don't think it's half the problem that it is stated to be.

either they are pulling down the share prices to buy them up alla Kmart, which makes their shares a good buy and everything will pan out, or one of the other big brokers, most likely Goldmans, is just clobbering them to stop them getting too big, in which case it will get carved up and sold off for pennies.

[MrBill]

$this->bbcode_second_pass_quote('richardmmm', 'i') think that refco will survive, i don't think it's half the problem that it is stated to be.

either they are pulling down the share prices to buy them up alla Kmart, which makes their shares a good buy and everything will pan out, or one of the other big brokers, most likely Goldmans, is just clobbering them to stop them getting too big, in which case it will get carved up and sold off for pennies.

[FoxV]

$this->bbcode_second_pass_quote('MrBill', 'T')ougher sentences for corporate fraud.

[jimmydean]

Although I too don't understand the full destructive power of hedge funds that hide losses if Buffet is worried about them then that's good enough for all of us to be concerned about the ease with which these firms can "hide" losses.

Buffet on Derivatives

The profits and losses from derivates deals are booked straight away, even though no actual money changes hand. In many cases the real costs hit companies only many years later.

[rogerhb]

$this->bbcode_second_pass_quote('FoxV', '')$this->bbcode_second_pass_quote('MrBill', 'T')ougher sentences for corporate fraud.

[Free]

There are many more bad books to open in my opinion, with Enron, Refco and the like we only ever see the tips of the icebergs.

This whole affair is big news here as an Austrian bank (Bawag) is involved in this, they lent 425 million to the CEO of Refco, and as security they got shares. I love how they are handling this meltdown PR-wise, they say, don't worry we have about 1,5 billion of cash reserves, so who cares!

Serves them well, how can you be so stupid, greed I guess...

[dbarberic]

Hedge funds are not always highly leveraged. Leverage is just one technique that a hedge fund manager could use to generate high returns.

Hedge funds are pools of investor money, similar to a mutual fund, but much less regulated in regards to reporting and investment techniques used. The less regulation is derived by the fact that since most hedge funds only deal with wealthy, sophisticated investors, they do not need the protections that are mandated by law with mutual funds. Hedge funds usually have very high minimum investment amounts to get in, so most “common” folk are not invested in them. In addition, sometimes the minimum investment also includes a minimum investment period, sometimes stretching a decade or more. Because of the great flexibility given to the investment team through less regulation and little limits placed on investment techniques, hedge funds can produce year after year of spectacular returns that most mutual funds would never be able to touch. The downside to spectacular returns is that it often requires spectacular risk, thus a few bad moves could put a hedge fund manager in a world of hurt real quick.

[rogerhb]

$this->bbcode_second_pass_quote('dbarberic', 'H')edge funds are not always highly leveraged. Leverage is just one technique that a hedge fund manager could use to generate high returns.

[MrBill]

If you're trapped in a burning house, you want to be able to get out and the quicker the better. Unfortunately, many mutual funds, asset & portfolio managers of public funds are only legally allowed to invest in certain kinds of products. Imagine being only long bonds while interest rates are going up or long stocks during a downward correction. These are the long only, fully invested type of funds. The only way to get any diversification is to invest in several funds or take your money out of one and invest in another.

Hedge funds on the otherhand have the ability to go long or go short and to take advantage of whatever market happens to be moving. It may be European stocks markets and energy markets this year and the Chinese yuan next year. Also, they have the discretion not to invest, just sit on cash until a chance comes along, or in fact as was mentioned to borrow so that they can take bigger bets. For example, buy US treasuries, pledge those US treasuries against a loan and buy more US treasuries. A wonderful strategy when interest rates are falling, but dangerous once they start rising.

If I am long stocks, I may not want to sell my long position if I feel they might go higher. Therefore, I may sell an option, which is a derivative, to cap my upside while giving me some downside protection in the form of my premium. Money for nothing as I was prepared to be long in any case.

However, suppose a fund manager is not happy with the 4.5% yield on US treasuries. So he visits Bill the Banker and Mr.Bill! says, no problem, I will guarantee you a yield of 5.5%, so long as US treasuries stay below 5.5% for the next 10-years, but if they go higher, you have to pay me twice the difference between 5.5% and the current yield if the yield goes above 5.5%. If you're view is lower interest rates, you might take that bet. If you're wrong you would have to pay. If you borrowed the money to take that bet, it could all go terribly wrong, if we saw yields head north of 5.5%.

But, it is not blackbox voodoo. The pricing is straight forward and so is the obligation. I pay you a yield of 5.5% if the yield is anywhere below 5.5% no matter how low it goes. If the yield is above 5.5% you pay me double. However, as it is a contingent liability from an accounting point of view it would not be prudent to book your profits until maturity. In reality, you would book profits on the difference between 4.5% and 5.5% to flatter your own performace. Doing a great job. Get a bonus. However, there is still an unrealized liability until the contract matures. That is what Mr. Buffet is referring to. Profits all of a sudden turning into losses.

In this case, the fund manager should have either accepted the 4.5% yield on existing treasuries or invested in something else.

[MrBill]

The other shoe falls.

$this->bbcode_second_pass_quote('', 'U')PDATE 1-Refco files for bankruptcy, agrees to sell unit
Tue Oct 18, 2005 12:01 AM ET

NEW YORK, Oct 17 (Reuters) - Troubled commodities brokerage Refco Inc. (RFX.N: Quote, Profile, Research) said on Monday it had filed for bankruptcy protection as it struck a deal to sell its core futures brokerage business to a group of private equity investors for $768 million.

New York-based Refco said it and certain subsidiaries filed for bankruptcy protection on Monday as part of the memorandum of understanding with investors.

None of Refco's regulated subsidiaries -- its futures brokerage business, which is conducted through Refco LLC, Refco Overseas Ltd. and Refco Singapore Ltd, and its broker-dealer, Refco Securities LLC -- filed for bankruptcy protection, it said.
The investor group is led by private equity fund J.C. Flowers & Co. LLC and includes entities associated with Enstar Group Inc., Silver Point Capital, MatlinPatterson Global Advisers LLC and Texas Pacific Group.

Refco, which will have an option to keep up to 20 percent of the equity value of the entities being sold, said it expected to reach definitive agreements shortly but that there was no assurance a sale would happen.

The proposed purchase price equals 103 percent of the net capital of the business being acquired, Refco said in a statement issued late on Monday.

The company said Greenhill & Co. (GHL.N: Quote, Profile, Research) would continue as its financial adviser. The advisory services of Goldman Sachs Group (GS.N: Quote, Profile, Research) were terminated on Monday upon the bankruptcy filing.

[stu]

Refco Files 4th Largest Bankruptcy in U.S. History

$this->bbcode_second_pass_quote('', 'R')efco Inc., the futures broker reeling from a bad-debt scandal, filed for the fourth-largest bankruptcy in U.S. history as it asked a U.S. Bankruptcy Court in Manhattan for permission to reorganize.

Refco listed assets of $48.8 billion and liabilities of $48.6 billion in its filing, which listed the parent company and 23 of its units. The company didn't include Refco LLC, Refco Overseas Ltd. and Refco Singapore Ltd, the futures trading business which J.C. Flowers & Co. has offered to buy for $768 million.

[strider3700]

This doesn't just hurt refco. Bennett paid back the 430 million he had borrowed for his other company. He did this by taking out a loan with a bank in europe. for collateral he used his refco stock. Now that the stock is worth basically nothing

http://today.reuters.com/investing/fina ... DATE-2.XML