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Busch: Hedge Funds/Commodities/Lending

I was thinking about that $43 billion withdrawn from hedge funds in the September quarter. I think I failed to extend the thought. If hedge funds are 4 times levered, the $43 billion becomes $172 billion in securities that had to be sold for the redemptions. This deleveraging and hemorrhaging I wrote about yesterday has been a massive black hole sucking into it asset values and destroying wealth. The drop in oil prices is a great example of how this works.

Since their peak this summer at $147, crude prices have fallen over 52% as demand has fallen and hedge funds/investors have dumped their commodity positions. Remember that Goldman call for $200? Now, we have emergency meetings by OPEC to cut production due to the massive drop in price and demand around the globe. MasterCard said that by its estimates gasoline sales in the week of October 10th dropped 9.4% from a year ago. Other estimates have the US demand for crude dropping back to the levels of the 1990s and global demand remaining stagnant.

It's ironic how high oil prices contributed to the global slowdown and to the credit crunch. In commodities, greed and now fear have added their contribution to the massive deleveraging in the markets and destroyed value. Let's see how the Middle East performs now that the price of crude is below the estimated target level for country's fiscal spending plans. I wonder how they will feel when the government has to cut back on domestic spending while their sovereign funds make investments into foreign banks?

On this thought, I wonder how the rest of the 15 European Union voters feel about the European Central Bank making foreign policy on their own? In an unprecedented move yesterday, the ECB made an emergency loan to a country outside of their block. The National Bank of Hungary will receive up to E5 billion to enable authorities to funnel the cash to their commercial banks. Over the years, Hungarian banks did booming business lending in foreign currencies and competed against the EU banks successfully by taking this extra risk. Now, the central bank of Europe is bailing out these banks while the EU's own banks have suffered. I wonder how the EU banks and the EU voters feel about the ECB making these decisions? Doesn't the EU government have a say in this process?

This weekend, we'll have a meeting of European Union leaders and President George Bush to discuss proposals on reshaping the international financial rules. According the WSJ, the EU is going to propose an international supervisory board for at least 30 of the world's largest banks. White House spokesman Tony Fratto said, "This weekend's meeting is not to determine the agenda or scope of a future summit, although the financial crisis will certainly be discussed." Given the rogue actions by the ECB, I would hope the White House is extremely cautious in agreeing to do anything but talk at this point.

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Andrew Busch

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Andrew B. Busch here