Crisis spreads from US lenders to UK hedge funds

Ben Bernanke was cast yesterday in the role of firefighter, called to the scene to tackle wildfires that are springing up all over the financial system.

All sorts of companies are feeling the heat, not just at the source of the blaze - the market for home loans to low-income Americans, where Countrywide Financial is one of the biggest lenders - but also elsewhere, as the fires spot and jump to other countries and other financial industries. Man Group, the hedge fund manager whose shares continued their meltdown in London yesterday, has barely any exposure to the US sub-prime market, but it too is being licked by the flames.

But how has the wildfire spread from Countrywide to Man? Countrywide's shares slid on the New York Stock Exchange yesterday after the company warned that "unprecedented disruptions" in the secondary market for home loans meant it will be unable to sell on the mortgages that it is writing. That means less funding for future loans, and a potential cash crunch. Dozens of smaller rivals have gone out of business.

Angelo Mozilo, chief executive of Countrywide, used to lash out at people who said funding mortgages for risky borrowers would come back to haunt the company. Suggesting that low-income Americans should be denied mortgages was tantamount to saying "let them eat cake", he used to say. Now, Wall Street is describing these loans as "toxic waste" and won't touch any bonds backed by them. That in turn has led to a slump in the value of all mortgage-backed bonds, especially collateralized debt obligations (CDOs). Hedge funds that traded CDOs can no longer be sure what their assets are worth, so the banks that lend to them want more collateral or - worse - their money back.

So hedge funds everywhere have been dumping other assets to raise cash, leading to a maelstrom of liquidations that have sent some of the most predictable trading strategies to produce horrific results. Computer trading programs at so-called "quant" funds (it is short for quantative) that were previously the most sought-after investments in the hedge fund industry have produced big losses this week.

For example, former US government code cracker James Simons is the most expensive hedge fund manager in the world and personally earned $1bn from his computer-based hedge fund, Renaissance Tecchnologies. But Renaissance told investors yesterday that it is down 9 per cent since the start of August, while Man's flagship hedge fund, AHL, also a quant fund, was already down 6.8 per cent in the first week. Man shareholders are not waiting until the latest performance figures, out next Tuesday, before heading for the hills. The world's largest publicly quoted hedge fund manager, Man has seen nearly a quarter of its market value lopped off in the last month alone, a rout that was capped by the worst two-day drop in the company's history at the end of the week.

It is a baptism of fire for Peter Clarke, who recently took over as chief executive. Man has pulled the proposed US float of its Man Dual Absolute Return Fund, while the July listing of its futures brokerage arm MF Global was a disaster. It has shed 21 per cent in its first month as a public company.