Continued Fun at Bear Stearns & Related News / Opinions

[TJ_98370]

Right from our very own Seattle PI......



WASHINGTON -- The Securities and Exchange Commission is examining the near-collapse of two Bear Stearns hedge funds that made bad bets on the mortgage market, a person familiar with the matter said Wednesday.

The SEC inquiry is "informal" at this point and has not resulted in any subpoenas or formal document requests, according to this person, who spoke about the matter on condition of anonymity........
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[TJ_98370]

And now we have this happy ray of sunshine.....



America faces a severe credit crunch as mounting losses on risky forms of debt catch up with the banks and force them to curb lending and call in existing loans, according to a report by Lombard Street Research.

The group said the fast-moving crisis at two Bear Stearns hedge funds had exposed the underlying rot in the American sub-prime mortgage market, and the vast nexus of collateralized debt obligations known as CDOs.

"Excess liquidity in the global system will be slashed," it said. "Banks' capital is about to be decimated, which will require calling in a swathe of loans. This is going to aggravate the U.S. hard landing."

The group's global strategist, Charles Dumas, said the failed auction of assets seized from one of the Bear Stearns funds by Merrill Lynch had revealed the dark secret of the CDO debt market. The sale had to be called off after buyers took just $200 million of the $850 million mix.

"The banks were not prepared to bid over 85% of face value for CDOs rated 'A' or better," he said. "God knows how low the price would have dropped if they had kept on going. We hear buyers were lobbing bids at just 30%.

"We don't know what the value of this debt is because the investment banks shut down the market in a cover-up so that nobody would know. There is $750 billion of dubious paper out there in the form of CDOs held by banks that have a total capitalization of $850 billion."...
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[deejayoh]

TJ, I think you will enjoy this one...



The two hedge funds at Bear Stearns that teetered on the edge of a meltdown were essentially betting that the downturn in the subprime mortgage-lending business wouldn't be as bad as many expected. A Bear Stearns research report on subprime, "Sell on the Rumor, Buy on the News," issued in February shows the bank's researchers were making the same argument.

When Bear issued the report, the ABX indexes tracking credit-default swaps linked to subprime mortgages were tumbling amid worries about rising defaults, risky mortgage loans held by HSBC Holdings and trouble at subprime lender New Century Financial, which eventually went bankrupt. Bear researchers argued that the market's negative reactions were overdone. "As we see it, there should be nothing that is surprising in these announcements for seasoned observers of the subprime" market, Bear's analysts wrote in the Feb. 12 report.

The firm also made optimistic assumptions about the direction of home prices. The Bear researchers used a "conservative" estimate of 0% home-price appreciation for 2007. But prices haven't cooperated. Today's Standard & Poor's Case/Shiller Home Price Index of home prices in 20 large U.S. cities dropped 2.1% in April from a year ago. Economists at Goldman Sachs said the drop is in line with their expectations for a 5% decline in 2007.

Bear's model led it to argue that the fair value of the BBB- tranche of the ABX index issued in the second half of 2006 is $90.14 — at the time, it was trading for $82.68, and it hit a low $62.16 this week, according to Markit Group, which manages the index. The firm also claimed that many of the underlying mortgages in the index would fare relatively well, saying the loans with the highest level of defaults were in "weak local economies." But bad news about the performance of a majority of the loans in the index has continued to hurt it. A Monday report on remittance data on the subprime loans tracked by the ABX indexes showed measures of delinquencies and foreclosures were up in May from the previous month across all series of the index, according to Bank of America.

At the end of the day, the Bear research indicated that a buyer of the BBB- tranche (which was a bet that it wouldn't keep declining) originated in the later half of 2006 would reap an annualized return of 12.92% over 10 years. With such tempting gains, it probably made sense to make highly leveraged bets the subprime market would stabilize. Unfortunately, the research didn't match up with reality.

Housing economist Thomas Lawler wrote a scathing review of the Bear research in a note earlier this week: "Not surprisingly, by using overly optimistic (and not market-based) home-price appreciation assumptions, and overly optimistic (and not market-based) assumptions about the future credit performance of loans, the 'researchers' found that the 'fair value' of subordinate subprime bonds, and indexes based on [credit default swaps] on these bonds, was a lot higher than current 'market' values! Needless to say, the analysis was pretty shoddy."

So was the performance of the Bear Stearns hedge funds.

[TJ_98370]

[deejayoh]

[TJ_98370]

[deejayoh]

[TJ_98370]

DJO – This is the best explanation I've found so far:

To the best of my understanding the ABX Index tracks the cost of credit default swaps based on bonds secured by high risk mortgages and home equity loans. (This stuff is starting to make my head hurt.)

For more detailed info:








.....The risk of default

Credit derivatives are financial instruments that "derive" their value from the bond market. They can cover any bonds that are not issued by governments—that is, where investors face the risk that the borrower may not repay.

Their rapid growth stems from three market quirks. The first is that a traditional corporate bond bundles together a whole group of risks. A bond price might fall because investors are generally demanding higher yields for all fixed-income assets (interest-rate risk), because investors prefer bonds of one maturity date to another (duration risk), or because they think the company that issued the bond will have trouble repaying it. Derivatives separate this last factor—credit risk—from the other two.

This allows investors to insure themselves against the risk of default or, alternatively, to speculate that a default will occur. The instrument that does this is a credit-default swap or CDS (see jargon guide). Hence A agrees to pay a series of premiums to B; who agrees to compensate A if the bond defaults.

This allows investors to speculate on default without owning the bond itself. Those who buy protection could make substantial profits if the company gets into trouble, since the value of the swap will rise sharply. Plenty of speculation occurs and CDS positions are sometimes much larger than the bonds outstanding....

Okay! 'nuff said for now.

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[TJ_98370]

If all else fails, sue the bastards! I guess that's one strategy for pumping up your retirement funds.



NEW YORK (Reuters) - Investors in two struggling Bear Stearns Cos. hedge funds that made bad bets on risky mortgages will almost surely file lawsuits in hopes of recouping losses, but legal experts say they could have a tough time proving their case.

Already, some investors in the funds are talking to lawyers about bringing cases. Potential lawsuits likely would hinge on whether investors were fully informed of risks, lawyers say....
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[deejayoh]

Ratings agencies are getting busy now. check this out

http://calculatedrisk.blogspot.com/2007 ... n-abs.html

Hey! Is that my horse? I better lock that barn door...

[TJ_98370]

Their timing for re-evaluating their ratings is a bit coincidental, yes? It couldn't have anything to do with the Bear thing.

Can you believe this verbiage?

Due to the high percentage of losses to date, the cumulative loss trigger will likely fail for the life of the transaction. The failed trigger will generally maintain a sequential allocation of principal with the exception of principal cashflow from the subsequent recoveries of charged-off loans, which may be allocated to subordinate bonds. Fitch expects the amount of principal cashflow from subsequent recoveries to be limited.

Are they trying to disquise the bad news with impenetrable jargon?

[TJ_98370]

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June 29 (Bloomberg) -- Standard & Poor's, Moody's Investors Service and Fitch Ratings are masking burgeoning losses in the market for subprime mortgage bonds by failing to cut the credit ratings on about $200 billion of securities backed by home loans....

.....Executives at New York-based S&P, Moody's and Fitch say they are waiting until foreclosure sales show that the collateral backing the bonds has declined enough to create losses before lowering ratings on some of the $6.65 trillion in outstanding mortgage-backed debt....

....``We're taking action as we see it,'' said Brian Clarkson, Moody's global head of the structured products in New York. ``We're not doing knee-jerk responses.''....

....Some investors say the ratings companies are waiting too long before downgrading the mortgage bonds and the CDOs that contain them. They noted that S&P and Moody's maintained their investment-grade ranking on Enron Corp. until days before the Houston-based energy trader filed for bankruptcy.

``That's like saying these trees are just fine as there's a forest fire on the other side of the hill,'' said James Melcher, president of money-management firm Balestra Capital Ltd. in New York, who runs a $105 million hedge fund. ..
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[Jazen]

[TJ_98370]

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Ben Jones blog provides links and discussion on continuing problems with various mortgage backed investments and other related news. There are hints that the CDO problem isn't just limited to Bear Stearns. Readers comments are worth checking out also.



Don't sugarcoat it Mr. Rodriquez:

...Robert Rodriquez, chief executive officer of First Pacific Advisors, was even more blunt. "We haven't seen much of a problem in the subprime area [but only] because the pricing is a fraud; the ratings are bullshit," said the two-time recipient of Morningstar's Fund Manager of the Year.

"I don't buy these prices, but as long as someone can provide capital to keep the finger in the dike, the charade will go on."

Rodriguez concurs with Gundlach that rising subprime mortgage delinquencies are a problem not just for hedge funds but also for major banks and other financial institutions.

"It is estimated that U.S. banks have invested 10% of their assets in collateralized debt obligations," he said. "And 40% of the CDOs are in subprime mortgages. I'm trying to get details on the components and I can't get any. This is setting up the next catastrophe."?...

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Bear To Come Clean?



Investors in two Bear Stearns Cos Inc hedge funds will hear on July 16 how much money they have lost, the Wall Street Journal has reported...
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[TJ_98370]

A really good article IMHO.



"...Not sure what happened at Bear Stearns? The root cause might surprise you. You might also find your own investment funds at risk, after being used as a landfill for the same kind of toxic waste..."
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