The Lie That Will Kill Hedge Funds

The marks are all lies.

Nobody is getting anywhere near the price of the bonds, which has become subjective anyway because of the number of defaults within the bonds.

All over the Street, these redemptions are happening. All over the Street, those doing these strategies are being wiped up. There are not enough people who were short this stuff to buy it at what might turn out to be pretty good prices unless all the mortgages within the security are going to be wiped out.

I would bet that half of these funds are gone this year. They represent trillions of dollars.

You will hear a lot of chatter about "the resetting of risk premium" right now. And it is true. But what's really going on is lying prices. These strategies didn't take into account the risk of default. The agencies didn't take it into account. The packagers didn't. The homebuilders that relied on it didn't.

Because these same hedge funds were also the buyers of high-yield bonds for private equity -- same trade: borrow money against Treasuries to capture the differential -- they don't have the capital to buy the corporates. Again, discussed as "repricing of risk," when what it really is is defrocking of marks. But that would reveal the whole industry as glib and unthought-out and complacent, which is what it really was.

This process is playing out everywhere, and the government isn't going to bail out these hedge funds. The good news is that it will happen fast. The money will come out, the losses will be big, but these hedge funds will all be closed by year-end. Trillions will vanish. But then we will start all over again.

Once this whole process is understood, the casualties, including some banks and some homebuilders and almost all mortgage companies except Countrywide (CFC Quote - Cramer on CFC - Stock Picks) because it has a bank and lots of other businesses and is not a pure broker, will be taken. By November, this will be over.

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