World Economic News

Attali on Amaranth: 'Western Financial System Could Collapse'

Jacques Attali, the former personal advisor to French President François Mitterrand and intimate of Lazard Frères, wrote the following column for the weekly L'Express on Sept. 28, headlined, "Poisonous Flowers," with the kicker, "One day, interest rates will reflect the reality of risks. And the Western financial system could collapse."

"The misadventure which hit one of the most famous American speculative investment funds is revealing of the madness of our world. This fund, named after a flower, Amaranth, created in 2004, became famous among its peers for having earned $1 billion in a couple of weeks, early in 2006, by betting against all on a scarcity of natural gas. Strong from this success, Amaranth bet ever more money on the permanent rise of the price of gas; with good reasons: Meteorologists were simultaneously announcing hurricanes (hindering operations in the Gulf of Mexico installations) and a very cold winter. Things went differently: The climate instability and the brutal reversal of raw materials prices inflicted a $6 billion loss on Amaranth at the end of August, more than half of the funds it was in charge of on behalf of its shareholders, mostly American insurance companies.

"There is a lot behind this story: insurance companies, as the main world actors of savings, need, in order to honor their clients' engagements, i.e., in particular health-care institutions and pension funds, much higher profit yields than are offered by Treasury bonds or the best performing companies. Hence, they entrust their money to speculative funds, which in turn invest it in ever more risky financial instruments, bonds of unhealthy corporations, or unpredictable raw materials prices. Since money remains abundant, and consequently cheap, these funds, to be profitable, have to take ever higher risks, even impossible to measure, staking up to 50 times their engagement.... Today, more than $1.3 trillion is managed by such speculative funds.... Also, when the bets are lost, the loss is immense. And will be more and more....

"One day, interest rates will reflect the risks, and the whole Western financial system, first the American, could collapse. No one can say he wasn't forewarned. "

For more on the threat posed by hedge funds, see InDepth: "Crash Trigger: New Tens of Billions Pile Into Dangerous Hedge, Equity Funds."