We discussed for weeks already that broker-dealers are consistently bidding below 3% (and sometimes below 2%) at Fed TOMO auctions. For example today Feds were forced to lend at 2.87%. The suspicion was that they reduce the amount of credit they are willing to open for their clients.

Today the Russ Winter blog finally gave the confirmation of this theory from FT:

Hedge funds are beginning to close their doors or lay off teams of traders in response to the unprecedented gridlock in the debt markets which has led to losses and significantly reduced the amount of money banks are willing to lend their hedge fund clients

As explicit as it can get. In particular:

Credit hedge funds and so-called relative value funds are also having a hard time. To make profits from small discrepancies among prices, these funds use massive amounts of borrowed money. In the past they could borrow up to four times their own money. Now most are fortunate to get twice as much from banks.

“There has been a significant deleveraging of the business model,” said John Wickham, a managing director at Lehman Brothers with responsibility for financing hedge funds. He added that many hedge funds were forced to close out positions last year because they violated their credit agreements or faced margin calls they could not meet

Feds will need to push the string very hard to get money back into markets