Bernard Ebbers received a 25-year sentence today for a practice which Hedge Fund managers are duplicating at this time: Continual borrowing on the Book value worth to pay both service on previous debt, and dividends to Investors. Similar circumstance has been used with ill effect since the created mess of the Great Depression, and Hedge Funds will eventually go the way of all the rest; likely inciting a Investor-protection program equally large as the S&L Bailout. The causation of such repetitious malfeasance lies in the payment of performance awards to Fund and Organization managers.
Hedge Funds hold particular danger, as they remain actually separated from Production and Markets. They are simply the pure, fraudulent practice applied wherever they care to invade. An underdrawn portrait states they get Investors to invest, borrow against the investments, and punge buy in the Markets for high expected Returns. They continue to borrow if those Returns do not materialize. Fund managers proclaim performance, and really award themselves huge Pay packages, at all times; even as did Bernard Ebbers.
The danger to Markets consists in they using their huge rolled-over Capitalization to generate unusually high Prices in the Market. The danger of Hedge Funds to Production is in their drain of investment funds from actual Production activities. The danger to Investor and Lender lies in the fact that the Bubble will burst eventually. lgl