Saturday, January 20, 2007

Bubble, Bubble, Toil and Trouble

Neat reading here: http://www.ft.com/cms/s/92f7ee6a-a765-11db-83e4-0000779e2340.html

I thought this paragraph was especially fun:

"He then relates the case of a typical hedge fund, two times levered. That looks modest until you realise it is partly backed by fund of funds' money (which is three times levered) and investing in deeply subordinated tranches of collateralised debt obligations, which are nine times levered. "Thus every €1m of CDO bonds [acquired] is effectively supported by less than €20,000 of end investors' capital - a 2% price decline in the CDO paper wipes out the capital supporting it." Double Yikes!

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