Tuesday, February 20, 2007
What can happen to other asset classes when you bet big and lose big on a commodity
Many banks and hedge funds have positions on oil, gas and other commodities. If these positions unwind unexpectedly causing huge losses, the bank/hedge fund will have to sell its other assets to compensate. This happened to Amaranth Advisers last summer and by losing a Natural Gas bet , they actually forced the global price of oil down, because they were "long" oil and had to sell it all to cover their losses. If a war with Iran kicks off and banks who were betting on low oil prices get killed, guess what they will have to sell sharpish: you got it - property. This will ironically more likely be the trigger of the biggest house price crash since the Great Flood. Welcome to Credit Contagion 101.