DELEVERAGING. The weekend editions of the Financial Times and the Wall Street Journal both have articles which cite the need of hedge funds to raise cash to meet current and possible future requests for redemptions as one of the factors leading to the sudden drops in the markets that we have seen. This article from two weeks ago by Robert Samuelson describes the scale of deleveraging that could be required. (You can think of deleveraging as the flip side of increasing liquidity— by reducing debt rather than raising cash). I am going to quote a couple sentences in case you don’t want to register for the article: “Large parts of the financial system are too thinly capitalized and too dependent on unreliable short-term debt. Leverage ratios often reached 30 to 1 for investment banks and hedge funds (that is, $30 of debt for every $1 of capital).”

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