Hopefully for author David Cay Johnston, he had the means and the initiative to sell short banks and hedge funds when he published “Free Lunch; How the wealthiest Americans enrich themselves at government expense…” in 2007. Here is an excerpt of what he wrote:
“What makes such huge returns possible is not just computer programs that spot pricing gaps. What fuels hedge funds is debt. Lots and lot and lots of debt. Hedge funds and banks have become joined like algae and fungus to form financial lichen. And just as attractive lichens can be poisonous, so can this financial symbiosis, with its attractive investment returns, turn toxic….from the few cases where records have become public, it is known that UBS, the big Swiss bank has a policy of lending to hedge funds at a ratio of 30 to 1…Of course, if things go badly, the investor can be wiped out. Banks foolish enough to lend so much can also suffer huge losses. If the banks have no idea how many intertwine, cross-connected deals their money is in, and something unexpected goes wrong, it could wreak havoc with the global financial markets.”
According to Wikipedia, “UBS suffered among the largest losses of any European bank during the subprime mortgage crisis and the bank was required to raise large amounts of outside capital. In 2007, the bank received a large capital injection from the Government of Singapore Investment Corporation, which remains the bank’s largest shareholder.”
