Bear Raids and Economic Warfare on a Global Scale

The lawmakers and regulators may wish to look into the quiet but devastating run on the hedge funds that is occurring right now, that is going to cut that industry in half, and distort the markets until the end of the year.

This will affect key commodities in addition to certain industries, and may temporarily impair some national economies.

The Prime Brokers have a rough idea where the hedge funds, their clients, have their major holdings, and are leading bear raids on them as the funds have to raise liquidity because of redemptions. They are publicly identifying those positions to other players in the industry. A conflict of interest of the first order it appears at first blush. Perhaps not illegal, but certainly destructive and 'feeding the fire.'

These bear raids on key positions generate more panic and losses for the hedge funds, which in turn generates more forced selling and losses.

The irony of course is that the Prime Brokers are also the biggest banks, and are being bankrolled by the US Treasury and the Fed by about 400 billions per day in rolling capital. They appear to be at a loss so to speak with regard to productive investment opportunities. Thus they turn to speculation.

In addition to the hedge funds, many banks with their own small trading desks are being caught in the cross fire.

We do not think of this as a conspiracy but clearly the unintended consequence of poorly thought out but well intentioned actions taken in haste.

The lawmakers and regulators must create a firebeak to stop the cycle of destruction. They could require any bank accepting Federal funds to adhere to some simple guidelines about the potentially predatory use of those funds, especially banks that are more like large hedge funds themselves in their composition.

This cycle of destruction of assets is exactly why the Congress enacted Glass-Steagall in the 1930's. Some of the Washington and Fed whiz kids might wish to go back and revisit the raison d'etre for that legislation.

Some likely measures would be an immediate limit on the expansion of short positions in all commodities, with limits based on market size, and the enforcement of laws against naked short selling on all equities immediately.

There should also be disclosure from all recipients of taxpayer money of all net positions to the SEC on a daily and weekly basis. We would also approve of a ban against short selling over certain limits of the size of a market or the shares outstanding by players over a certain size, and all those receiving Fed subsidies.

But this will probably not happen, which is why we may have a political crisis next year.

To put a very fine point on this so no one can miss it, it is not the hedge funds themselves that we care about, or the 'qualified investors' that put money into them. What concerns us are the unintended consequences, the malinvestment, the market distortions, the polarization of wealth, and the political blowback that come from interfering with markets and other people's business for a protracted period of time, and in a big way. The actions being taking by our banks, our 'national champions,' is ours because we are funding them and regulating them. And in this world, if you break it, you bought it, whether it was intended or not.

This is starting to look like economic warfare from some perspectives. The blowback may not be attractive.