Moody’s Investors Service fueled concern that the global credit crisis is worsening by speculating that a hedge fund collapse on the same scale as Long-Term Capital Management LP in 1998 is possible, Bloomberg reports.
Hedge funds face potential losses on collateralised debt obligations, securities packaging bonds, loans and other assets, Chris Mahoney, vice chairman of Moody’s, said on a conference call today. The funds are unable to agree on prices to sell riskier assets, causing the market to seize up, Mahoney said.
“A possible consequence of the repricing of risk assets would be the failure and disorderly liquidation of a hedge fund or other institution of sufficient size as to disrupt markets, as LTCM threatened to do in 1998,” Mahoney says.
Moody’s, criticised by policy makers and investors for failing to cut ratings on bonds backed by subprime mortgages until July when some securities had already lost more than 50 cents on the dollar, is drawing analogies between today’s credit crunch and the collapse that triggered the last bailout organized by the Federal Reserve.