Quote:
Originally Posted by Archaea
This part is what concerns me.
|
Where some of them have gotten out of control is when they think they have developed some super cool model. When the yen does such, interest rates do such. When oil does such, foreign currencies do such and on and on. These models can get very complicated.
If they work the difference you pick up is small, but done at such a grand scale you make huge sums of money. If it is working they can acquire more investors capital and even get banks to loan money and bet margin. At one point I think Long Term Capital had $6 billion of investor money in the deal and over $130 billion in borrowed money.
Here is how something could come unraveled. Take my simple Stock example. Arbitrager buys at $39.50. He also borrows to do it because the numbers work out and the more he has the better .50 a share will make him.
Hic cup occurs. Buying company has an SEC problem. Deal falls apart. Stock now at $35 a share and margin calls are coming. The more he gets margin calls, the more stock he is forced to put on the market and the stock falls further. Eventually he loses all his money and a lot of the lenders money.