Saturday, June 23, 2007

Tick, Tock

Oh well. It was fun while it lasted. NYTimes (06.23.07):
"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."

$3.2 Billion Move by Bear Stearns to Rescue Fund

"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.

Why are these guys in such a pickle? In a nutshell, a bunch of big-assed banks (Merrill, Lehman, JPMorgan, Goldman Sachs, Citigroup, Bank of America Corp., Barclays and Deutsche Bank) loaned a lot of money ($9 billion!) to these guys to help 'em get going. For collateral, they took back a bunch of fancy paper known as collateralized debt obligations, aka CDOs. Though CDOs can make you a lot of money (which bankers really, really like), they can be a bit, uhhh, volatile (which bankers really, really hate). Bloomberg (06.22.07):

"The funds speculated in highly rated CDOs -- securities backed by bonds, loans, derivatives and other CDOs -- that were hurt in March and April as defaults on subprime mortgages to people with poor or limited credit histories increased. The fund also lost on opposite bets against home-loan bonds, which backed many of its CDOs."

Bear Stearns Plans $3.2 Billion Hedge Fund Bailout

That and nobody really knows what the hell these things are worth. "Some CDOs are so rarely traded that their owners can't tell whether they are worth 50 cents or 90 cents on the dollar, said Scott Simon, who owns CDOs among his $200 billion of mortgage-and asset-backed bond investments at Newport Beach, California-based Pacific Investment Management Co."

This has our jolly bankers scared shitless. What's a poor creditor to do? Business Week (06.22.07):

"The big fear is that a mass liquidation of those poor-performing bonds, called collateralized debt obligations (CDOs), will force hedge funds and banks with similar CDOs in their portfolios to mark down their values.

A mass reduction in CDO values could cause other banks and hedge funds to report sizable losses and scare off institutional investors. In a worst-case scenario, it could prompt lenders to get more protective and stop making loans of all sorts, not just to subprime borrowers."

Bear Stearns to the Rescue—Sort Of

Bear Stearns says not to worry, all bets are covered: "Bear Stearns Chief Financial Officer Sam Molinaro, said the firm's line of credit, known as a repurchase agreement, is 'adequately secured.'"

Some are less convinced. "'The problem is not what we see happening, but what we don't see,' said Joseph Mason, associate professor of finance at Drexel University in Philadelphia and co-author of an 84-page study this year on the CDO market. 'We don't know the price of these assets. We don't know which banks are exposed to this sector. These conditions are the classic conditions for financial crises across history.'"

And it ain't over yet, folks. "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."

Think it's dicey for 'em now? There's plenty more trouble where that came from. "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."

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