This is my first post on ATS so please forgive me if there are any mistakes.
Every major name has/will be indicted with regards to "expert networks" and the DOJ's MASSIVE insider trading probe. If these people are
indicted--something I feel may actually happen due to the public need for a scape goat--their respective funds will have to liquidate their holdings.
These hedge funds are not small fries by any means.
To be in the top 20 hedge funds by assets, one has to have AT A MINIMUM $10 billion. Summed up, the top 20 hedge funds own almost half a trillion
dollars worth of assets. Many of the names on the list are the very same names that are up for indictment (SAC, Citadel, Ziff, etc). I know people
have already mentioned this event, but I have not seen much on its implications.
Galleon was another hedge fund that was caught up earlier this year in an insider trading scandal.
When they were just ACCUSED and ARRESTED for insider trading, the firm instantly had $1.3 billion (30%) of their funds redeemed. Redemptions require
the fund to sell equities in large blocks at discounts in many cases, forcing them to take a loss.
The next logical question is: Why haven't there been massive redemptions on all of these funds that have been subpoenaed? No arrests have been made.
In fact, the first arrest in these "expert networks" ie people who give inside information for money took place TODAY. Below is the statement from the
US Attorney's Office regarding the arrest:
It took this much effort to arrest a small fry. Imagine what they need to take Steve Cohen down? He has been known for years as one of the best in the
industry. He is a billionaire with unlimited legal resources. It will be very hard to press forward without a super solid case.
If he is so rich and powerful, why will this time be any different than the other times the government has tried to prosecute fraud (ie Goldman Sachs
earlier this year and their $500 million settlement). Easy: the hoi polloi need a scape goat. SAC is much easier to take down than any of the bulge
brackets since all they do is try to profit off trading, as opposed to Goldman Sachs which provides many necessary and legitimate services such as
advising on deals.
So why is it a big deal if one hedge fund is taken down? If they can get Steve Cohen, they can get the rest. EVERY hedge fund will have HUGE
redemptions. This is not an exaggeration. They will have to unload on the market their securities. If all these funds are forced to unload at
once...do the math. They already provide a great deal of liquidity for loads of securities (especially Citadel which generates billions of dollars of
fees for investment banks due to their HFT program). If they not only unload their securities but stop providing liquidity, the market will easily
have reason to tank. (On a side note, it would be a great excuse for a correction in the market. "It wasn't anything the government did wrong! It was
these CRIMINALS who we only decided to go after now because we cannot keep propping up the Dow.")
The only reason I think this may be the tipping point for the markets is that there is too much going on for the markets to truly be at the levels
they are. I do not think the world is going to end. In fact, I am hoping for this market correction. Currently I am in essentially all cash (like many
investors are) waiting for a real correction to put money back into risk assets. Once a correction occurs, people will begin to chase risk assets for
real once again as cash is yielding nothing and gold yields nothing but temporary trading gains. And just to any gold bugs who respond saying "paper
currency is ending," I say you are truly ignoring reality. Governments need inflatable paper in order to tax people without their explicit knowledge.
Without this mechanism, our taxes in the US would be a much higher rate. Therefore, we have to live with a necessary evil since its better than the
other method of drastically raising taxes.
You should all be hoping the market does fall because it would mean that the market is reflecting reality instead of fantasy.
Please let me know your thoughts.
edit on 24-11-2010 by glaucon because: Embedding of Scrib'd didn't work; added link instead.