Heebner - Largest Margin Call Since 1929

During an interview today with CNBC's Larry Kudlow, Ken Heebner, a widely respected hedge fund manager for Capital Growth Management, offered the following interesting 'Hedge Fund INSIDER' perspective behind the Dow's recent 7 day, 2,300 point CRASH :


" I think one of the things that's happening here is that the Fed and Treasury are doing all the right things and the market is (still) dropping at an accelerating rate. What is NOT being recognized is that there is a major MARGIN CALL on the HEDGE FUNDS. They were Levered a year ago at 4.5 to 1 on average for equity funds. It's (the leverage ratio) been coming down and now there's pressure to reduce the leverage considerably because the prime brokers are all owned by banks regulated by the Federal Reserve..and their pulling back their loans. There's PANIC Selling. This is the biggest MARGIN CALL since 1929. And what's sad about this is that the market collapses as the Fed and Treasury do all the right things and it creates the impression that there's something wrong and all these great moves that the Fed and Treasury are making aren't going to solve the problem. "

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Anecdotally thinking...of course current market fundamentals are TERRIBLE (please refer to my 10/08/08 ' The Holy Economic Trinity - C, J and H ' post for more background on this), but are they terrible enough to warrant a massive index loss of 18% over the past 5 days ?? Perhaps so but Mr. Heebner's explanation should at least provide some semblance of comfort to individual stock owners (I guess I believe in silver linings). If this horrid action is truly being driven by an event of UNPRECEDENTED proportions ('The Largest Hedge Fund Margin Call since 1929') as Heebner suggests, then the likelihood of seeing this type of watershed event repeating should become MUCH Less probable (...OF COURSE only After this Once in an Lifetime period of Hedge Fund DE-Leveraging is finally over...could take weeks/months to play out !).



Data Courtesy: CNBC + Ken Heebner