Oct. 23 (Bloomberg) — Hundreds of hedge funds will fail and policy makers may need to shut financial markets for a week or more as the crisis forces investors to dump assets, New York University Professor Nouriel Roubini said.
“We’ve reached a situation of sheer panic,” Roubini, who predicted the financial crisis in 2006, told a conference of hedge-fund managers in London today. “There will be massive dumping of assets” and “hundreds of hedge funds are going to go bust,” he said.
Group of Seven policy makers have stopped short of market suspensions to stem the crisis after the U.S. pledged on Oct. 14 to invest about $125 billion in nine banks and the Federal Reserve led a global coordinated move to cut interest rates on Oct. 8. Emmanuel Roman, co-chief executive officer at GLG Partners Inc., said today that as many as 30 percent of hedge funds will close.
“Systemic risk has become bigger and bigger,” Roubini said at the Hedge 2008 conference. “We’re seeing the beginning of a run on a big chunk of the hedge funds,” and “don’t be surprised if policy makers need to close down markets for a week or two in coming days,” he said.
Roubini predicted in July 2006 that the U.S. would enter an economic recession. In February this year, he forecast a “catastrophic” financial meltdown that central bankers would fail to prevent, leading to the bankruptcy of large banks exposed to mortgages and a “sharp drop” in equities.
The comments preceded the collapse of Bear Stearns & Cos. and Lehman Brothers Holdings Inc. as well as the government seizure of Freddie Mac and Fannie Mae. The Dow Jones Industrial Average, a benchmark for American equities, has lost 37 percent this year, including its biggest daily drop in more than twenty years on Oct. 15.
The Dow average rose 2.5 percent to 8728.73 as of 10:55 a.m. today in New York.
Italian Prime Minister Silvio Berlusconi roiled international markets on Oct. 10, first saying world leaders were discussing shutting down global financial exchanges, and then saying he didn’t mean it.
“In a fairly Darwinian manner, many hedge funds will simply disappear,” Roman said, speaking at the same event as Roubini.
The hedge fund industry is stumbling through its worst year in two decades and posted its biggest monthly drop for a decade in September. Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.
“Things are getting very ugly also in the emerging markets,” Roubini said. “The usual saying is when the U.S. sneezes, the rest of the world catches a cold. Unfortunately, this time around the U.S. is not just sneezing, it has a severe case of chronic and persistent pneumonia. It’s becoming a mess in emerging markets.”
Developing nations’ borrowing costs jumped to the highest in six years today as Belarus joined Hungary, Ukraine and Pakistan in seeking a bailout from the International Monetary Fund to help weather frozen money markets and a slump in commodities. Argentina risks defaulting for the second time this decade.
“There are about a dozen emerging markets that are now in severe financial trouble,” Roubini said. “Even a small country can have a systemic effect on the global economy,” he added. “There is not going to be enough IMF money to support them.”
Roubini, a former senior adviser to the U.S. Treasury Department, earlier this month said that the world’s biggest economy will suffer its worst recession in 40 years.
“This is the worst financial crisis in the U.S., Europe and now emerging markets that we’ve seen in a long time,” Roubini said. “Things will get much worse before they get better. I fear the worst is ahead of us.”
Last Updated: October 23, 2008 10:59 EDT
By Alexis Xydias and Camilla Hall