Hedge Funds Squeezed As Lenders Get Tougher

The financial turmoil is taking on a new dimension: Banks that lent money to hedge funds and other big risk-takers are asking for some of it back. Banks demand hedge funds to put up more cash and assets. Margin call produces a negative cycle. The issue came to the forefront as Calyle Capital Corp said it failed to meet margin calls on loans backing part of its $21.7 billion portfolio. Thornburg Mortgage Inc. said this week it failed to meet a demand from its lenders for $28 million, triggering defaults across its other financing agreements. Thornburg had met over $300 million in margin calls by late February, but was asked at the end of the month to pony up $270 million more. Typically banks and brokers provide financing to hedge funds through so-called repo transactions, in which a fund turns over securities as temporary collateral for a loan. The fund later buys back the securities at a higher price that includes interest on the loan. A bank might lend 97 cents against the collateral of a high-quality mortgage security with a market value of $1 -- a difference known as a "haircut" that insures the lender against losses. If the value of the collateral drops to 95 cents, the borrower faces a margin call. The funds facing the greatest pressure are those that are highly leveraged, meaning they have large borrowings relative to the money entrusted to them. Carlyle Capital managed only $670 million in client money, but used borrowing to boost its portfolio of bonds to $21.7 billion, meaning it was about 32 times leveraged.