Hey everybody. This might be a dumb question but how exactly will those banks lose so much money on that fund blowing up? If the fund borrow x amount from those banks then shouldn't the loses be capped at x? Any insight would be great.
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The fund used their holdings as collateral, then the holdings decreased in value and they had to sell due to a margin call. CS and Nomura got the proceeds from the sale of those holdings, but those proceeds were less than the credit they extended and that is where the loss comes from. Hopefully that’s a good explanation.
Haven't looked at the details but it seems that the same collateral was used to get credit from different banks. HF got the margin call, had to liquidate, however liquidation of collateral can obviously cover only one, while everyone else takes the L.
Not the same collateral, just the same securities. It's not as if the same shares were being pledged to different banks for different leverage. Definitely can cover more than one (multiple prime brokers got out of this relatively unscathed). When the first prime brokers began to liquidate their holdings it drove down the price of that collateral, which started a domino effect in which the other prime brokers began to sell off their collateral.
Nomura and CS were late to the party.
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