Tuesday, February 20, 2007

What can happen to other asset classes when you bet big and lose big on a commodity

The Amaranth Debacle

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.

Posted by lvmreader @ 11:09 AM (482 views)
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9 thoughts on “What can happen to other asset classes when you bet big and lose big on a commodity

  • The article is a good, short article that reminds us that risks can go bad as well as going good. lvmreader suggests a plausible scenario which, linked to poor risk management, could cause a house price crash without the general public, and mainstream media, realising it – until too late. There are a lot of “ifs” in the scenario though.

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  • IF #1: http://www.gulf-daily-news.com/Story.asp?Article=169015&Sn=BNEW&IssueID=29319
    A US Navy strike group, led by amphibious assault ship USS Bataan, is on its way to the Gulf to strengthen forces in the region.

    It will bring seven vessels, carrying 6,000 sailors and Marines into the Gulf.

    But the deployment of the Bataan Expeditionary Strike Group (ESG) does not signal an unusual build-up of warships in the region, said a Bahrain-based US Fifth Fleet official.

    Approximately 6,000 sailors and Marines assigned to the ESG and the 26th Marine Expeditionary Unit (MEU) will provide a versatile sea-based force that can be tailored to a variety of missions, Fifth Fleet spokeswoman Lieutenant Denis Garcia told the GDN yesterday.

    “While in the region on a routine deployment, the Bataan ESG will conduct maritime security operations,” she told the GDN.

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  • IF #2: HSBC to write down 20% of profits as losses due to “bad lending”

    http://seattletimes.nwsource.com/html/businesstechnology/2003563822_subprime09.html?syndication=rss
    http://www.businessweek.com/bwdaily/dnflash/content/feb2007/db20070206_488329.htm

    Subprime Time Bomb
    With HSBC and New Century Financial suffering losses from subprime borrowers, which other mortgage lenders face an unpleasant reckoning?

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  • The war against iran has already started. The US are going in under the cloud of darkness.
    Q. Who’s going to back down – the americans/israelis or the Iraqi’s?
    A. No one

    The purpose of war is to serve a politcal means.
    The true nature of war is to serve itself.

    Carl Von Clauzewitz.

    Get ready for over £1.00 per litre at the forecourt.

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  • Bing-diddely-bong says:

    Rubbish – why would they have to sell property?
    Why not FX cash, stocks or bonds?

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  • lvmreader said “It will bring seven vessels, carrying 6,000 sailors and Marines into the Gulf.”

    6,000 sailors and marines is a little over a single Brigade in strength – in reality it is smaller as sailors do not fight in the land environment. The effective land force from this ESG would comprise of 3 or 4 combat battalions with the difference being made up of combat support troops (indirect fire, engineers, some army aviation) and combat service support (logistics, medics, etc) In the big scheme of things, this is little more combat power then is required to maintain a town garrison (note town not city.) This sounds like part of a mundane, routine rotation of troops and equipment in the Gulf region.

    The ability of the US to prosecute offensive operations against Iran is currently severely limited. US forces are approaching 25% commital which means Uncle Sam does not have the combat power available for further operations unless some existing ones are scaled down. (Remember any operation costs 3 times the number of troops on the ground: 1 force is preparing and training to go; 1 force is currently in the theatre of operations; and 1 force is rehabilitating having just returned.) George Bush’s build-up in Iraq hsa put paid to any incursions into Iran in the medium term.

    Secondly, I think Bing-diddely-bong has a good point – why sell property? Why not sell other things? Why not raise charges; there has been some speculation concerning the end of free banking in the UK. Having lived in Germany for a number of years, German friends were always amazed when I mentioned banking in the UK was free. I used to believe Commezbank used to charge me just for smiling at one of the pretty cashiers! (No, they never smiled back either!)

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  • Disgustedofyork says:

    I thnk all this talk of a war with Iran is just that: talk.
    Seriously, the Neo-con view of a interventionist US being able to invade, and more importantly, control enemy countries, has pretty much floudered in Iraq. I don’t think many in US have any appetite for ground war in Iran, although given sufficient provocation there might be support for a limited air war, either directly or by proxy, by Isreal.
    If anything happens, it will be short and very limited. I just can’t see any sane and rational person seeing any possible gain in a bigger conflict, on either side.

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  • hegomy or survival

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  • @Bing-diddely-bong

    If a bnak gets killed on wrong way bets, you can be almost certain that they will begin to call in loans and mortgages.

    Remember the smallprint – “they can demand the money back at any time”. This will make people into distressed sellers.

    Easily the most illiquid asset they have is housing at auction, so the sooner they can unwind from these positions the better.

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