Fun with hedge funds: Catfight!

Moody’s fueled concern that the global credit crisis is worsening by speculating that a hedge fund collapse on the same scale as Long-Term Capital Management LP in 1998 is possible.

Hedge funds face potential losses on collateralized debt obligations, securities packaging bonds, loans and other assets, Chris Mahoney, vice chairman of Moody’s, said on a conference call today. The funds are unable to agree on prices to sell riskier assets, causing the market to seize up, Mahoney said.

“A possible consequence of the repricing of risk assets would be the failure and disorderly liquidation of a hedge fund or other institution of sufficient size as to disrupt markets, as LTCM threatened to do in 1998,” Mahoney said.

Moody’s [has been] criticized by policy makers and investors for failing to cut ratings on bonds backed by subprime mortgages until July when some securities had already lost more than 50 cents on the dollar…

Moody’s Corp. shares [have] dropped 34 percent this year as the credit rout threatened the most lucrative part of its business.

“I’m certain there is at least one major hedge fund out there at least as rightly concerned about a collapse in Moody’s as the other way around,” said Colin Negrych, a principal at Barclay Investments Inc., a broker-dealer in New York. “To see Moody’s make forward-looking negative statements about hedge funds, who may well be suffering in large part as a result of their reliance on Moody’s now evidently worthless ratings, is to witness the height of chutzpah.”

Via Bloomberg.