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TheStreet Open House

Why Wall Street Won't Let Cohen's SAC Capital Hang: Street Whispers

Stock quotes in this article: GS, MS, JPM, BAC

NEW YORK ( TheStreet) - New charges against a former SAC Capital Advisors employee indicate that insider trading allegations may reach the prominent hedge fund's namesake, Steven A. Cohen, and are reportedly unnerving investors to a degree not seen since a multi-year probe by the Securities and Exchange Commission and the U.S. Attorney ensnarled a half dozen former employees of the fund.

Still, even if investors in the $14 billion hedge fund are getting flighty as they read through the U.S. Attorney's complaint, don't expect SAC Capital's Wall Street trading partners to cut and run from the once mighty and still strong-performing fund.

Top hedge funds like SAC Capital are big business for Wall Street investment banks and, if history is any guide, the fund will continue to get preferential treatment to trade in the Wall Street casino even if their luck runs dry.

Already, large hedge funds wield power in negotiating the best terms available on trading lines, prime brokerage agreements and contracts to trade complex financial products such as swaps. After giving hedge funds financial terms unavailable to traditional money managers, history has shown investment banks are reluctant to use the letter of the law to pull out from hedge fund clients in times of distress.

See why SAC Capital's alleged insider trade hid in dark pools.

In the late 1990's Long Term Capital Management was able to secure unheard of trading agreements from Wall Street dealers like Merrill Lynch and Bear Stearns. As the fund neared collapse, many of its trading partners like Goldman Sachs (GS), JPMorgan (JPM), Deutsche Bank (DB), UBS (UBS) and Morgan Stanley (MS) put hundreds of millions of dollars into the funds bailout.

The other option would have been to call in trading lines, trigger terminations on derivative trades and call for much higher amounts of collateral, which would have spelled the fund's quick demise.

During the 2008 financial crisis, hedge fund titan Citadel was seen as being helped to survival, in part, by the fund's Wall Street counterparties as ratings downgrades and a near 50% drop in investment portfolios threatened two of the firm's main funds.

The key, in both instances, is that while agreements to trade complex financial products and open prime brokerage accounts normally contain the legalese that gives Wall Street investment banks the upper hand if a fund falls on hard times, they're unlikely to wield that power against a hedge fund like SAC or Citadel that's brought in hundreds of millions in fees and commissions over the years.

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