Quarter Life Crisis

A “repo” transaction is basically a collateralized short-term loan. It is a popular way for banks and brokers to provide financing to hedge funds. A fund turns over securities as temporary collateral for a loan, then later buys back the securities at a higher price that includes interest on the loan. If the fund fails to repurchase the securities, the bank can just sell them. That’s why repo transactions are usually considered relatively safe.

A bank might lend 97 cents against the collateral of a high-quality mortgage security with a market value of $1 — a difference known as a “haircut” that insures the lender against losses. If the value of the collateral drops to 95 cents, the borrower faces a margin call.

Because repo loans often last only one day, hedge funds can find themselves in trouble literally overnight.

When hedge funds can’t come up with cash to meet a margin call, they are at risk of losing all access to credit and shutting down immediately. In that case, banks and brokers are forced to seize the collateral. If the collateral is of low-quality, it leaves them holding the troubled securities at the root of the hedge funds’ problems. This is why analysts say banks may have to take billions of dollars in further write-downs.

Source: WSJ

In the early stages of the financial turmoil, the riskiest securities such as those backed by subprime mortgages were hit by selling. Now, as margin calls intensify, hedge funds and others find they must unload even high-quality assets such as bonds backed by the government-sponsored mortgage Fannie Mae and Freddie Mac. They have no choice but to sell these high-quality assets in order to meet margin calls and live another day.

A margin call happens when banks call in their loans to hedge funds or other investors. It forces the investor to sell off assets to raise cash, driving prices for those assets lower, leading to more losses and more margin calls. This is what economists call a “margin spiral.”

An recent example is Carlyle Capital Corp.’s failure to meet margin calls on loans backing part of its $21.7 billion portfolio of highly rated securities issued by Fannie and Freddie. Funds like the Carlyle group are highly leveraged, meaning they have large borrowings relative to the money entrusted to them. Carlyle Capital managed only $670 million in client money, but used borrowing to boost its portfolio of bonds to $21.7 billion, meaning it was about 32 times leveraged. A famous example of a highly leveraged fund is Long-Term Capital Management (LTCM) which blew up in 1998.

Source: WSJ

So Zuckerberg is the youngest billionaire ever.  But ever since they got that 15 B valuation, I haven’t really noticed anything going on with Facebook.  I wonder what they are up to with all that new cash in the account… No new features lately - writing on walls and drawing graffiti is starting to get old, personally.  Let’s see something new.  I remember once upon a time Friendster usta be the latest and greatest place to stalk your friends and their friends who look kinda cute.  But they stopped adding features and look where they are now.