The subprime implosion is far from over. Here we have a story about some subprime mortgage backed assets that need to be sold, but no one wants to touch. What happens next; prices adjust downward, meaning that the yield on these types of assets rise. Sooner or later, these rising yields will feed into retail mortgage costs.
The subprime market is slip-sliding away.....
(MSN Money) The giant market for securities backed by US subprime mortgages was thrown into turmoil on Wednesday as lenders struggled to sell more than $1bn of assets seized from two Bear Stearns hedge funds that suffered heavy losses on subprime bets.
The complex securities being auctioned are rarely traded and early attempts to sell the collateral met with mixed results. The prospect of the "fire sale" knocked down prices for similar mortgage-backed assets and sent a key derivative index for the market to record lows.
The rout highlights the risks investors take when they buy illiquid and hard-to-value securities. Fire sales in times of stress can trigger dramatic changes in pricing in such markets, perhaps leading other holders of assets to mark their values down and triggering demands for additional collateral from lenders.
Kathleen Shanley, analyst at research firm Gimme Credit, said the unravelling of the Bear Stearns funds was "at best an embarrassment for Bear Stearns, and at worst it threatens to have a ripple effect on valuations across the subprime sector".
The sales began on Tuesday and were set to continue on Wednesday. Among the assets for sale by lenders Merrill Lynch and Deutsche Bank were investments in so-called collateralised debt obligations, or CDOs, which pool securities that can include mortgage-backed bonds, corporate bonds, leveraged loans and sometimes other CDOs. Many of the CDOs the Bear Stearns funds invested in were backed by risky mortgage securities, which have suffered heavy losses and ratings downgrades in recent weeks.
One mortgage investor said that while the CDO assets for sale carried high credit ratings, they were backed by such risky mortgages as to be "junk in investment-grade clothing".
Merrill Lynch was set to auction $850m of such assets on Wednesday after rejecting a Bear Stearns offer to buy them directly, while Deutsche Bank was also planning to sell $350m of CDO assets seized from the funds. JPMorgan began selling seized collateral on Tuesday, but yesterday halted its sale and then made a private deal with Bear Stearns to eliminate its exposure to the fund.
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2 comments:
Anonymous said...
Bear Stearns Fund Collapse Sends Shock Through Collateralized Debt Obligations ( CDOs )
http://www.bloomberg.com/apps/news?pid=20601087&sid=ai_5WXEe7Bpw&refer=home
Merrill Lynch & Co.'s threat to sell $800 million of mortgage securities seized from Bear Stearns Cos. hedge funds is sending shudders across Wall Street.
A sale would give banks, brokerages and investors the one thing they want to avoid: a real price on the bonds in the fund that could serve as a benchmark. The securities are known as collateralized debt obligations, which exceed $1 trillion and comprise the fastest-growing part of the bond market.
Because there is little trading in the securities, prices may not reflect the highest rate of mortgage delinquencies in 13 years. An auction that confirms concerns that CDOs are overvalued may spark a chain reaction of writedowns that causes billions of dollars in losses for everyone from hedge funds to pension funds to foreign banks. Bear Stearns, the second-biggest mortgage bond underwriter, also is the biggest broker to hedge funds.
``More than a Bear Stearns issue, it's an industry issue,'' said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. Hintz was chief financial officer of Lehman Brothers Holdings Inc., the largest mortgage underwriter, for three years before becoming an analyst in 2001. ``How many other hedge funds are holding similar, illiquid, esoteric securities? What are their true prices? What will happen if more blow up?''
Anonymous said...
$3.2 BILLION Move by Bear Stearns to Rescue Fund
http://www.nytimes.com/2007/06/23/business/23bond.html?hp
Bear Stearns Companies, the investment bank, pledged up to $3.2 Billion in loans yesterday to bail out one of its hedge funds that was collapsing because of bad bets on subprime mortgages.
It is the biggest rescue of a hedge fund since 1998 when more than a dozen lenders provided $3.6 billion to save Long-Term Capital Management.
The crisis this week from the near collapse of two hedge funds managed by Bear Stearns stems directly from the slumping housing market and the fallout from loose lending practices that showered money on people with weak, or subprime, credit, leaving many of them struggling to stay in their homes.
Bear Stearns averted a meltdown this time, but if delinquencies and defaults on subprime loans surge, Wall Street firms, hedge funds and pension funds could be left holding billions of dollars in bonds and securities backed by loans that are quickly losing their value.
Bear Stearns acted yesterday after the hedge fund and a related fund had suffered millions in losses and after shocked investors had begun asking for their money back.
The firm agreed to buy out several Wall Street banks that had lent the fund money, which managers hoped would avoid a broader sell-off without causing a meltdown in the once-booming market for mortgage securities.
The firm is, meanwhile, negotiating with banks to rescue the second, larger fund started last August, which has more than $6 Billion in loans and reportedly holds far riskier investments.
Those negotiations were continuing yesterday, and it was unclear whether they would be successful.
“We don’t think it is over,” said Girish V. Reddy, managing director of Prisma Capital Partners, which invests in other hedge funds. “More funds will feel the pain, but not many are as leveraged as the Bear fund.”
Nervousness about the souring subprime loans and rising oil prices sent the stock market plummeting. Already down almost 60 points, the Dow Jones industrial average fell sharply after the announcement of the bailout and closed down 185.58 points.
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hope the pain is felt far and wide.