Credit Losses: The Good News

Where are the hedge-fund losers in the credit markets? That's what Option Armageddon is asking, via an email from a friend in the hedge-fund industry:

There have been some nice fortunes made from the spread widening (Paulson, Hayman, Blue Ridge, Lone Pine, etc.) but I have yet to see where the fortunes are being lost on the other side of those trades...
Within six months it's possible the term "counter-party risk" will have become almost as colloquial as "subprime" has.

I'm not convinced there's another big shoe to drop here. It's possible, yes. But we actually have seen fortunes being lost on the long-credit, protection-selling side of things. Merrill Lynch, anybody? Citigroup? UBS? IKB? Northern Rock? Not to mention, of course, the monolines, the buyers of CPDOs and other structured products, and just about anybody invested in CDOs, especially CDOs of CDSs.

And there were hedge funds, too, which blew up when spreads gapped out, the two Bear Stearns funds being the prime example. Add it all up, and I think it's easy to see how losses match profits.

What's more, I can't imagine there are many hedge funds who made big spread-tightening macro bets over the past couple of years. Yes, there was money to be made on the spread-widening side. But the hedge funds writing protection and taking the other side of those trades weren't in it for the long haul, and surely stopped out long before now.

Or that's the optimistic view, anyway. Ask me again on Monday, I might have changed my mind.