Goldman Sachs (GS) and Morgan Stanley (MS) are set to fundamentally alter their lending policies to large institutional clients. Both firms will now tie the amount of money they lend to hedge fund clients to their own credit spreads and bond prices. FT:
The message is that “if our firm is in trouble, we would rather fund ourselves than fund you [hedge funds]”, said a brokerage executive with knowledge of the arrangements. He added: “We would only use it if there were a real issue.”
Morgan Stanley is essentially tying its promise to provide financing to hedge fund clients to the prices of credit insurance on its own debt. If the cost of the protection rises to a certain level, that would trigger a reduction in Morgan Stanley commitments to hedge funds. Goldman Sachs is understood to have a similar arrangement that uses its bond prices as a reference point for credit commitments to hedge fund clients.
The change underscores the decline in relevance of the credit rating agencies and the growing importance of market-based models for judging risk. It also represents a further tightening of credit standards.
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