As reported by Vanity Fair
a while back, Bear Stearns
was bankrupted by Hedge Funds and, supposedly, Goldman Sachs short sellers who fueled rumors of cash flow troubles to reporters, hoping the rumors
would drive the price down, resulting in hefty gains for the short sellers.
What happened was just that. The price dropped. Something else happened along the way. Bear Stearns clients started pulling their money out to
avoid losing it should Bear fail. Well, when the money was pulled, Bear found itself in a cash flow crunch. The rumors became fact and the bank was
sold. Vanity Fair referred to this as murder.
Once it became clear that hedge fund short selling helped bring down banking giants like Bear Stearns, an emergency rule was put in place to ban short
selling on 950 companies.
So, with the volatility in the markets, with huge drops taking place, the bank prices are plummeting. Sovereign bank dropped 80% in price last
monday. And now, the hedge funds are whining that they can't profit on this by short selling the stocks.
They're pleading with the SEC to let them short sell these already troubled banks, potentially pushing them to failure. Some of these banks might
actually be able to ride out the volatility but, with funds short selling the stocks, they will have a harder time regaining some of that value,
chasing more investors away and chasing more clients away. As it is, people are pulling money from the smaller, more troubled banks and adding an
ever dropping stock value keeps their name in the news, acting as a reminder that your money should go elsewhere.
The fund managers helped put us in this mess and now that they are being forced to play the stock game like the rest of us, they are crying foul.
I've got several hedge fund managers for clients. I find the vulture mentality to be horrific. This isn't like picking over a depressed real
estate market to get far more for your money than you normally can. This is picking at a wounded beast, speeding up its demise. This is a shark
nibbling and picking at a fish, removing its fins, its tail etc. Feeding on it as it slowly dies.
For years, Hedge Funds have operated in a somewhat lawless environment. They are not regulated like mutual funds, they are not bound by the same
rules that mutual funds and other investments are. They made fortunes for their owners, managers and employees (and often their investors) but, when
the well dries up, the investors lose their money and the employees and the managers and the owners are sitting on their 2 or 3% management fees and
their 20 or 30% performance fee.