We three loans of Orient are/ Vainly trying to get back to par/ Haircuts rising, forced unwinding/ More sellers than buyers by far

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Oh, par of wonder, par of light/ From par to here was such a fright!/ Seldom trading, cov’nants straining/ Who will save us from our plight?

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A hedge fund was the first to invest/ High recoveries left him impressed/ Long at inception, long protection/ But margin calls made him divest

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Next we were bought by a cash CLO/ An unlikely rescuer, yes, we know./ But firm financing looked entrancing/ Till downgrades then made us go

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Europe’s banks to us then were nice/ Under IAS, who cares about price?/ Assets inflating, but low risk weighting/ Tier one capital should suffice

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To Basel then we made our way/ A committee of wise men had their say/ “This buy-and hold looks uncontrolled -/They’re levered like Fannie Mae!”

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Leverage limits then were imposed/ To liquidity risk they were overexposed/ BWICs singing, prices stinging/ (Proportion cleared undisclosed)

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A hero then arrived from afar/ E’en as we worried for our EBITDA/ The ultimate claimant made repayment/ A buyback by KKR!

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While hedge funds watched…/ While hedge funds watched their stocks by night/ All falling to the ground/ An agent from their broker rang:/ “These haircuts are unsound”/ “Be scared,” said he, for mighty dread/ Had seized their troubled mind/ “Redemptions too are on their way/ For you and all your kind”

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“But, sir!” they said, “this is not fair/ Just look at this report!/ Our fund has only profits made/ We’ve not been long, we’re short”

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“That’s no excuse,” the broker said,/ “At this unhappy time/ The credit crunch affects much more/ Than banks which hold subprime”/ “Your leverage is way too high/ For your liquidity/ Besides, we need to recalc VaR/ Given volatility”

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The fund then had no other choice/ But to exit its position/ And the thing that really drove them mad/ Was the need to pay commission

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From that day on, redemptions soared/ Just as the chap had warned/ Performance mattered even less/ The asset class was scorned

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The lesson of this sorry tale/ Of asset allocation?/ That prior performance may not stop/ Your fund’s annihilation

Good King Wenceslas/ Ben Bernanke last looked out/ On the Feast of Stephen/ Credit markets lay in rout/ Deep and crisp and even/ Paulson called up late that night/ “The markets are so cruel!/ Goldman’s profit’s down again:/ my bailouts need more fuel”/ “GS!” said Ben, “that’s no surprise/ Their funding model’s shattered/ Now had it been dear JPM/ It really would have mattered”/ “But Ben!” growled Hank, his usual croak/ O’erlaid with suppressed fury,/ “The world is going up in smoke/ You can’t play judge and jury!”/ “But Hank!” said Ben, “I’ve no resource/ To save the market’s debtors/ TSLF, PDCF -/ I’m running out of letters!/ The brokers’ model always stank/ Of insecurity:/ More repo funding than a bank/ In short maturity!”

…

“But Ben,” said Hank, “you do forget/ Just how their model’s altered/ They’re guaranteed with public debt/ We cannot let them falter/ When Lehman failed, we thought the TARP/ Would bring stability/ But Libor’s steady rise demands/ A new facility”

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Ben furrowed then his wrinkled pate/ How could they fund a bailout?/ They’d need Congressional debate/ The funds from TARP had run out/ “Why don’t banks just start to lend?/ We’ve given them our support/ Maybe we should just suspend/ The ban on selling short”

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“Now Ben,” rasped Hank, “that wouldn’t work/ They’re overlent already/ With undrawn lines they went berserk/ It’s worse than Fannie and Freddie/ Six trillion still could be drawn down/ How awful that would be!/ The average spread would make them drown:/ Just twenty-four bp!/ With that, I fear, they’ll never lend/ We need to find more dollars/ And yet the Treasury just can’t spend/ According to the scholars”

…

“But wait!” said Ben, “I’ve got a plan/ That may be our salvation/ The US cannot be Japan/ That way just lies deflation/ If you can only keep your nerve,/ We’ll clear up all this mess/ We’ll make the Federal Reserve/ A giant printing press!”

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“Yes”, cried Hank, in great delight,/ “We’d bring down credit spreads/ The old refrain once more is right:/ ‘Never fight the Fed!’”