Are fund managers crying wolf?
One newspaper report that I read this week talked about traders actually weeping about losses incurred in the ‘market meltdown'.
Nobody with any compassion wants to see other human beings suffering genuine stress or indeed distress.
But am I alone in feeling less than tearful that all those City slickers might have to join the real world? At least, just for the moment?
For years, investment bankers and hedge fund managers have partied hedonistically. Extracting hefty fees from the market goldmine has generated huge financial rewards and funded champagne lifestyles.
Then a month ago the credit bubble burst. Suddenly the financial wizards were forced to work a bit harder to justify their pay packets.
But now central banks have rushed to bail out the markets again. And the US Federal Reserve (Fed) has just poured oil over troubled markets by cutting its discount rate, at which it lends to banks, and hinted it might lower its Fed funds (base) rate in September.
So is there a real ‘nasty' out there making the Fed run scared?
Or was this a cosy love-in with their friends in the financial markets?
The message from the US central bank had seemed crystal clear. If banks were nursing painful losses, tough. The president of the St Louis branch of the US central bank said on August 15th that only a "calamity" would justify a rate cut between scheduled Fed meetings.
Then the Fed changed its tune, ripped up its August 7th economic outlook statement, and handed over cash to ‘re-liquefy' the markets.
The initial request for the move came from the Fed district banks in New York and San Francisco. So it's possible that the financial detectives have unearthed clues that some major player in either of those cities is in danger of going to the wall.
Perhaps a big name lender has incurred losses big enough to imperil not only its own financial health but also the ongoing stability of other key loan institutions which have lent it money. As in the old line: 'Owe the bank £100, you're in trouble; owe £1bn, the bank's in trouble!'
Already there are fears that the US mortgage fiasco may do more damage than the 1998 LTCM hedge fund failure or the 1987 stock market crash.
But my problem with this theory is this:
Over the last few years, the world has experienced the biggest growth in money and credit since time began.
And now we are told there is a shortage of cash in the system.
Where on earth has it all gone? Either market punters' losses are massive, or there is another explanation for the Fed rate cut:
The City slickers are getting worried about their bonuses and have successfully pressurised the central bankers.
When I see hedge fund managers talking Armageddon and demanding lower loan rates, I wonder about their motives.
Having recklessly forced asset prices artificially higher, taking greater chances and ignoring the downside, many of these professional punters are now concerned that the party is over.
They now expect to be rescued from the fallout of their rash pursuit of chasing ever higher returns, regardless of risk.
And when I see the denials of Christopher Dodd, chairman of the Senate banking committee, that he was applying "political pressure" on the Fed to cut interest rates, I get very suspicious.
The FT reports that Dodd, the "favoured presidential candidate of the hedge fundocracy" according to Breakingviews, was told by Fed chairman Ben Bernanke and US Treasury secretary Hank Paulson that "all the available tools" would be used in current market conditions.
In other words: Yes, it's Another Bailout. To get the markets firing again and to get those bonuses back on the agenda.
Regardless of the longer term damage this would cause.
Thus far the Bank of England has held the line on giving no quick fixes. I never thought I'd say it, but well done Chairman King.
By the way, neither explanation makes me feel any less bearish.
More: Hedge Fund Sell Outs Threaten Markets
