Amaranth - that didn't take long

I wrote here about the large losses at hedge fund firm Amaranth, and wondered when we would get some pretty poor articles that missed the real issues. Less than a day later - and from BusinessWeek, no less - this article came in an email:

"Randall Dodd, president of the Washington-based Financial Policy Forum, said Amaranth's collapse highlights cracks in the nation's capital structure and, because of the unregulated nature of both energy derivatives and hedge funds, policymakers have no idea how deep those cracks are.

'We don't know how many more Amaranths are out there,' Dodd said. 'Several falling is a problem for the whole financial system.'"

How exactly has this affair highlighted any "cracks" in the nation's financial system? A specific fund made a (stupidly large, for the fund's size) bet that the spread between March and April 2007 gas futures would behave a certain way. They were wrong, and they rightly lost a lot of money. (I should note that, given the nature of derivatives contracts, the money they lost was actually made by others, but that is a subject for a different post.)

The most important part to realize is how well the overall system worked here. Notice that the positions which caused the problem were contracts that are due in March and April of next year. As those positions moved against Amaranth, banks and counter parties presumably required increased collateral to make up for the paper losses (as opposed to waiting to see if the firm could pay up next year). By requiring increased funds now to keep the positions open (basically, a margin call), these market participants forced the issue when Amaranth still had enough capital to get out of their commitments (albeit at steep losses to the firm). The nightmare for the rest of us isn't that Amaranth lost a ton of their money; the nightmare would be if when those futures contracts expired the firm couldn't make good on their commitments. And that is a scenario that seems to have been nicely avoided.

But don't worry, the politicians are on it:

"The political fallout from Amaranth's troubles had reached Capitol Hill by the afternoon of Sept. 19. Sen. Dianne Feinstein (D-Calif.), who has a bill before the Senate to require OTC energy traders to report their positions daily, reiterated her call for more regulation.'This is a graphic and very expensive example of the need for legislation that would increase transparency and accountability in the energy markets so the federal government could determine if speculation or manipulation is occurring,' Feinstein told Platts."

"Speculation" is now illegal? Please.

Listen, it sucks right now to be an investor in Amaranth. It may even turn out that they have a cause of action, if - as I suggested earlier - the firm violated the terms of their agreements. If Amaranth didn't violate the terms of their agreements, however, then it will suck even more to be an investor in Amaranth. Because in that case they will only have themselves to blame.