Monday, June 25, 2007

Don't Ask; Don't Tell

Reuters (06.23.07):
"It was Wall Street's version of hide and seek this week as some of the world's largest investment banks remained tight-lipped on the likely fall in price of some complex securities that may soon infect global debt and equity markets.

In the past week the stock market lost ground, the bond market saw prices bounce around, and investors were left with the sinking feeling that things could get worse as credit worries undermined the $1 trillion market for collateralized debt obligations (CDOs)."

Wall Street circles wagons on risky securities

"The losses suffered by two funds containing these complex securities, many tied to risky mortgage loans, sent Bear Stearns Cos. executives scrambling to re-finance the funds this week."

"But the large and sophisticated investors in these funds did not run for the hills. Instead, they went silent." Case in point: last week, Merrill, Lynch and JPMorgan freaked out, and moved to dump a bunch of these things. Cooler heads prevailed, however, and the liquidation sales were kinda, sorta canceled. Why?

No one is sure what kind of prices these CDOs would fetch on the open market. We'd bet they'd bring a lot less than the value on the books. Considering how much of this crappy paper the big banks are holding as collateral, a panicked fire sale would be very, very bad. How bad? Collapse, crash and burn bad.

"If word of the exact nature of the losses became public, it would have forced many other funds to revalue their holdings and perhaps lose money, setting off a domino effect that could rattle markets globally."


"'Wall Street is now engineering a way to pretend that nearly worthless subprime bonds are maintaining' their original values, said Peter Schiff, president of Euro Pacific Capital, a broker-dealer based in Darien, Connecticut."

Maybe not worthless, but worth a lot less than they once were. Bloomberg (06.21.07):

"Not since 1994 have mortgages at banks with past due payments been so high, according to first-quarter data compiled by the Federal Deposit Insurance Corp., the agency that insures deposits at 8,650 U.S. banks. Lehman analysts estimated in April that the collateral backing CDOs had fallen by $25 billion."

Merrill Sells Portion of $850 Million Bear Funds

And the best is yet to come. Bloomberg (06.22.07):
"Losses in the U.S. mortgage market may be the 'tip of the iceberg' as borrowers fail to keep up with rising payments on billions worth of adjustable-rate loans in coming months, Bank of America Corp. analysts said.

Homeowners with about $515 billion on adjustable-rate home loans will pay more this year, and another $680 billion worth of mortgages will reset next year, analysts led by Robert Lacoursiere wrote in a research note today."

Bank of America Report Sees Worse Mortgage Defaults

"More than 70 percent of the total was granted to subprime borrowers, people with the riskiest credit records, they said."

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