Monday, June 25, 2007

The Hunter as Hunted

So the United States Senate has nearly completed its peek into Amaranth's errr ... ummm ....accident. And though I made it a point NOT to flog this one into the ground, I did post one rather lengthy comment entitled Amaranth: Was it the Market?. I stand by everything that I wrote, including the philosophical questions. Some of these, however, were answered toay as the scrutiny shed some fascinating light, not just into the traded market for natural gas, but more importantly, the nature of the notion of market democracy, generally speaking. I highlight this because I think it is central to understanding financial markets in a world of PBoC, the BoJ, collusive hedge fund groups and activities, and "traders" who buy and sell interests in companies the size of which approach or regularly exceed 15% of the shares outstanding.

Back to Amaranth. In a nutshell: Hunter at Amaranth smashed Bo's position at Motherock, causing an irreparable chasm between Motherock's equity and the required margin. Hunter apparently stretched and flouted most exchange and federal rules against such activity, including the contravention of exchange position limits, outright market manipulation. Lawyers may quibble on this point, but "gunning someone" i.e. the intentional accumulation or disposition of interests for the express purpose of impacting price leaves little doubt over one's intentions and motivations. Markets, in this regard, are a game only to an extent.

But the Hunter was hunted, and apparently in the process of slaying Motherock, Hunter (and Amaranth) exposed themselves to the same, something, and so their direct competitors, their financing sources, and finally the market, in turn, disposed of Amaranth. This was not about value, supply or demand. It was about market power, its abuse, the limits of that abuse, and finally retribution in the form of application of market power in reverse, through collusion. Heady stuff.

Granted Hedge Funds are not Central Banks. And though both may break the rules either in fact or spirit, Central Banks and monetary authorities can (and frequently do) change the rules, whereas mere behemoths remain (in the end) not only beholden to them, but dependant upon them for the enforcement of their gaming tactics. Still, what comes across from the US Sentate investigation is how remotely this "market" actually resembles "the market" we learn about in rose-coloured theory and which capitalism holds on high - i.e. the perfect market of lots of small participants each with little to no ability to hold sway, and where price discovery is achieved only as the result of aggregate activity. This ugly hunchbacked stepchild of the market is deeply flawed insofar as this can, and does, occur with regularity, ir not pervasiveness. On the bright side,these games, however, often do end in tears, whether for the manager, the portfolio manager or the end investor, (not to mention the integrity of the market and the system). This was true of the Hunt Brothers, Sumitomo's Hamanaka, Barings' Leeson, LTCM, Amaranth, as it was true of Janus and Fidelity's abuse of market power evidenced by their largest funds' pathetic relative performance following high-market impact performance-game era's. And to be certain, there are casualties, reprehensible when they are innocents and orphans, and perhaps just desserts for those who do not understand the dangers inherent in agent vs. principal conflicts.

But the [literal] multi-trillion-dollar question is: will the PBoC/SAFE/BoJ - Central Bank or not - suffer the same ignominomous fate the befalls those that piss into the wind for too long, contrary to BOTH sustainable fundamentals and the perhaps inevitable attack of the electronic herd??


Agustin said...

Great post. Have you written extensively about power & markets?

"Cassandra" said...

Thanks, but it's really an abortion as I haven't edited it properly. I just banged it out while thinking aloud with my fingers. And yes, I've written a reasonable amount about the topic, mostly as it relates to gaming behaviour and the agent v. principal conflicts that create most of it. The distortions caused by PBoC/SAFE/BoJ in financial markets are rather new, though parallels in all manner of tariffs and NTBs with respect to goods trade are as old as man himself.