On June 22, 2007, Bear Stearns announced that it was pledging $3.2 billion to bail out one of its hedge funds, the High-Grade Structured Credit Fund. Another fund, the High-Grade Structured Credit Enhanced Leveraged Fund was also in trouble and it was working to prop up that fund.
The demise of hedge funds is not unusual. Many last just a few years before closing. The Bear Stearns announcement didn't cause much of a ripple on Wall Street beyond concerned Bear Stearns shareholders who feared they would ultimately be seeing losses in the quarter.
In fact, Wall Street was so nonchalant about what was happening at Bear Stearns even after the hedge funds failed that shares were still trading as high at $93 as late as February 2008. They would plunge to $2 in March of that year.
The Bear Stearns funds were invested in collateral debt obligations. We now know that the implosion of those two funds set off a chain reaction that would ultimately result in the demise of Bear Stearns itself in March 2008 and would lead to the financial crisis of the fall of 2008.
The failure of these billion dollar hedge funds was a Black Swan event.
Author Nassim Nicholas Taleb used three criteria to determine a black swan:
1. The event is a surprise.
2. The event has a major effect.
3. After the fact, it is rationalized in hindsight. That it could have been expected.
Recently, there have been a series of financial events that have been outside the norm.
1. On Apr 15, gold saw its largest one day plunge in 30 years, falling 9%. It's still unclear how many hedge funds or money managers were impacted.
2. On May 23, the Nikkei suffered its largest one-day loss in 2 years, falling 7%. On June 13, it plunged again, losing 6.4%. Since May 22, it has fallen 20% from its high. The Nikkei is the first of the major stock indexes to enter into a bear market.
3. In May, global bond markets had their biggest sell off in 9 years.
Will one of these events turn out to be a Black Swan event?
Or is the Black Swan still to come?
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