(snip)"In recent weeks, an investment bank has reportedly been trying to sell several billion dollars worth of the loans it has extended to hedge funds. The idea behind this putative sale, which seems to be the first of its kind, is that the risk in this lending would move from the prime broker to a wider investor pool. And the members of that pool would include more, er, hedge funds.
I do not know the name of this pioneering prime broker. Hints on a postcard would be most welcome. But if the story is true, and I strongly suspect it is, this marks a startling watershed for the financial system.
After all, the interface between hedge funds and their prime brokers is currently one of the most incestuous parts of the financial world. It is also potentially one of the more dangerous, given the scale of lending in sometimes murky circumstances. (One dirty little secret of the leveraged finance world, for example, is that when a bank distributes bonds or loans it often also provides the funds with the leverage to buy these products).
However, if prime brokers start to sell some of their hedge fund exposure, this adds a whole new dimension to the dispersion of risk. More specifically, if another LTCM were to implode, it would no longer be just banks left on the hook but a much wider group of investors."(snip)



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