August 12, 2007 (LPAC)--There is growing recognition of the role that predatory hedge funds, and the allied investment banks that lend to them, played in last week's market meltdown. "Hedge Fund Panic Was Behind Global Stock Markets Collapse," was the headline on the Sunday Telegraph today, while the Chicago Tribune on Aug. 11 headlined its Business section "Hedge Funds Blamed for Sell-Off."

The Telegraph complained that hedge funds were supposed to provide stability to the system, by diversifying risk, but "were instead at the epicenter" of last week's crisis. The problem, according to one Business School professor, is that hedge funds invest in "exotic" instruments like subprime mortgages. "They borrow money that is liquid, and they invest in things that are illiquid."

When, at the beginning of August, big investment banks like Goldman Sachs, Lehman Brothers and Merrill Lynch, started calling in notes from the hedge funds they lend to--"Everyone has hiked margin calls; whoever says they haven't, is lying," one banker is quoted by the Daily Telegraph--the funds had to sell their illiquid investments to pay back the loans, often at a loss. As their losses mounted, rumors spread that some of the big hedge funds, like Goldman Sachs's Global Alpha fund or the New York-based Tykhe Capital were in big trouble.

And its not over, the London Guardian warned today. "Investors are bracing for another white knuckle ride on the markets this week, as the fallout from the American subprime mortgage crunch starts to claim fresh victims." The Telegraph quoted another banker on the unprecedented nature of the crisis: "This is a one-in-100-year event, in which there are extremely unusual correlations that no one prepared for. We are in a situation where everyone is very scared."