Continued Fun at Bear Stearns & Related News / Opinions

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Mr. Denninger shares his opinions about the housing market, ratings agencies, SEC.....


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Investors in the worse-hit of two stricken Bear Stearns hedge funds are offering to sell their holdings for as little as 11 cents on the dollar but still finding no buyers, according to unfilled trades on Hedgebay, a secondary market for funds....
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Ohio's attorney general is investigating the role that credit-rating agencies like Moody's played in rubberstamping dicey bonds, report Fortune's Katie Benner and Adam Lashinsky....
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NEW YORK (Reuters) - Credit Suisse analysts estimated banks could lose up to $52 billion over time due to their exposure to collateralized debt obligations that invested in U.S. subprime mortgages.

Most of the losses would stem from loans to hedge funds, compared with an expected $5 billion to $10 billion from banks' direct investment in subprime CDOs, the Credit Suisse analysts said in a report dated July 6.

The global financial system can absorb such losses, the analysts said, but the prospects for the subprime mortgage sector remains murky. The risks of CDO downgrades by rating agencies and further depreciation in the U.S. housing market could result in erosion in CDO values, according to the report.

...Troubles at several other hedge funds have came to light since Bear Stearns' fund problems: Cheyne Capital's Queens' Walk, Cambridge Place Investment's Caliber Global Investment, and United Capital's Horizon Funds....


..."Losses in the tens of billions of dollars are clearly a huge problem, but we do not think that they are a systemic one," the analysts said....
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[Eleua]

Good grief! How bad does it have to get before someone in the banking sector stains his shorts?

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"Standard & Poor's just drove a huge harpoon into the heart of the mortgage credit bubble...." -



WASHINGTON (MarketWatch) - Standard & Poor's just drove a huge harpoon into the heart of the mortgage credit bubble and it's going to take a long time to clean up the mess once the beast finally dies.

S&P, one of the three main credit-rating agencies that served as enablers of the subprime mortgage boom, announced Tuesday that it would lower its ratings on 612 bonds, a small portion of the mortgage-backed securities it had given its seal of approval to.

But the bigger news is that S&P isn't going along with the charade any more. S&P said it would change its methodology for ratings hundreds of billions of dollars in residential mortgage-backed securities.

And it would review its ratings on hundreds of billions of dollars in the more complex collateralized debt obligations based on those subprime loans.

A lot of debt will be downgraded to junk status. A lot of that debt will have to be sold at fire-sale prices. A lot of pension funds and hedge funds that once thrived on the high returns they could get from investing in subprime junk will now lose a lot of money.

S&P's announcement is a death warrant for the subprime industry. No longer will mortgage brokers be able to help buyers lie their way into a home. Fewer stressed homeowners will be able to refinance their mortgage, thus extending and exacerbating the housing bust.

"We do not foresee the poor performance abating," S&P said. Prices will fall, and foreclosures will rise. More mortgage fraud will be uncovered as the tide goes out.

And hedge funds will have to find another way to beat the market, if they survive this blow, that is.

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SAN FRANCISCO (MarketWatch) -- Influential rating agency Standard & Poor's said on Tuesday that it may downgrade $12 billion of subprime mortgage-backed securities because losses in this low-end part of the home-loan market have increased and will probably get worse.

Credit ratings on 612 classes of residential mortgage-backed securities (RMBS) backed by U.S. subprime collateral have been put on CreditWatch with negative implications, S&P said. Beginning in the next few days, the agency said most of these classes will be downgraded.

.....The agency said it's also reviewing ratings of Collateralized Debt Obligations (CDOs) that invested in the RMBS that could be downgraded. (CDOs are a bit like mutual funds that hold asset-backed securities. Many CDOs bought subprime RMBS, helping to fuel the housing boom earlier this decade.)....

.....S&P also said it's changing the way it evaluates subprime RMBS, partly because of unprecedented levels of misrepresentation and fraud, combined with potentially shoddy initial loan data. The new approach will be applied to new RMBS deals and could affect the ratings of other mortgage-backed securities, such as RMBS issued this year, the agency noted.....

......The ongoing weakness in both national and regional property markets will exacerbate losses with little prospect for improvement in the near term," the agency said. "Also, many of these transactions will likely encounter additional credit stress from upcoming interest rate and payment resets.".....
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[rose-colored-coolaid]

Yowsers!

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The slumping housing market again rattled the bond market yesterday.

Standard & Poor's, the credit rating firm, said that it would tighten the standards it used to rate bonds backed by subprime mortgages, a tacit acknowledgment that it might have been too optimistic about the housing market.

At the same time, Standard & Poor's said that it would probably downgrade bonds totaling a relatively small $12 billion, a move that surprised investors with its tone and timing. A rival agency, Moody's Investors Service, followed suit later in the day, saying that it would downgrade 399 bonds with a face value of $5.2 billion and put another 32 bonds on watch.

Yesterday's actions are expected to draw further attention to the role of credit agencies in the market for mortgage securities, which helped fuel the housing boom by extending credit to people who may not have otherwise qualified for loans.

Investors and policy makers are increasingly asking whether Standard & Poor's, Moody's and a third agency — Fitch Ratings — were lax in their evaluations of the mortgage bonds that Wall Street banks sold to investors like pension funds, insurance companies and endowments....

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.......Anyone who has been reading the financial press over the recent fortnight will have been overcome by articles about the Bear Stearns hedge fund story and all that emanates from it. There have been a number of news items about other hedge funds also affected, the most recent of which is Unit Capital Asset Management, a mid-sized Florida hedge fund. They have been forced to suspend redemptions from several funds holding asset backed securities. Prior to that, the London fund Calibre Global, who are selling assets and returning funds to investors following an $8.8m net subprime loss. Prior to that but also following the Bear Stearns news, Cheyne Capital Fund were reported to have lost £45m from CDO investments.

The American subprime mortgage market which is the root of the problem was an act of madness by mortgage lenders who should have known better. How can it be good business to lend 100% of the purchase price of a property to applicants who not only had no money, but no credit worthiness, nor sufficient income to meet the eventual true servicing cost of the loan? To then package those toxic loans with other better quality loans into CDOs and sell them is a process only justified by the big fees. Some of the buyers were hedge funds, others were pension funds. Almost all were institutions.

A Collateralised Debt Obligation (CDO) is a pool of mortgage-backed assets that are sliced into parts or tranches that carry different risks. For many of the CDOs, subprime mortgages comprise a meaningful percentage. It has been calculated that subprime mortgage securities make up about $100 billion of the $375 billion of CDOs sold in the US in 2006. According to data from Moody's and Morgan Stanley, half contained subprime debt of as much as 45% of the total contents. As John Mauldin explained in his recent letter, which we recommend you to read (to do so, go to his website http://www.frontlinethoughts.com), as foreclosures increase, subprime securities in CDOs begin to crumble. This almost certainly leads to a ratings downgrade below investment level. If that happens, many institutions will be forced to sell the CDOs they own because they are only allowed to hold rated paper. Who will they sell to and at what price? That is the question. John Mauldin also reported that according to Risk Analytics, who write computer programs for accounting firms, 25% of the face value of CDOs is in jeopardy.

"Oh what tangled webs we weave when at first we practice to deceive" - a famous saying that fits the bill absolutely. Intelligent people know that bad credit is a bad credit. Prudent lending practices work but imprudent practices destroy money and reputations. The marketplace has, over recent years, been riddled with imprudent lending practices operated, incredibly by intelligent, financially astute people who have made huge amounts of money by creating and passing on financial junk, labelled as investment grade, to experienced investors who ought to have known better.

Imprudent lending begets debt forgiveness (polite words for bankruptcy). Debt forgiveness begets bank and investment losses. It's therefore not surprising that the financial sector of the stock market is performing badly. Falling profits translate stock market valuations based on price-to-earnings (P/Es) ratios from being modestly ok, as the "E" component falls, to being expensive. As P/E ratios rise on the back of falling earnings, investor complacency evaporates.

As we have repeatedly said in the past, the unprecedented credit expansion will inevitably be followed by an unprecedented credit contraction and there is a very good chance, we think, that this is now underway. ..

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NEW YORK: A turn for the worse this week in the subprime home loan meltdown has pundits and investors playing the blame game.

This week lots of fingers were pointed at the rating agencies. Many investors castigated the credit assessment firms, which made lots of money reviewing and grading bonds tied to these risky home loans, for being late with warnings on these securities.

Two weeks before, Wall Street firms were the culprits — for buying these risky securities and then making them into multitiered credit cakes with a punch and selling them to funds and investors. And earlier in the year, it was greedy home loan brokers and lenders, and naive or desperate consumers looking to buy a home with risky loans who were the instigators of the subprime crisis.

The turmoil in the US home loan market was triggered by tens of thousands of home loans going bad. These loans, known as subprime, were offered during the housing boom to borrowers with slim or shaky credit histories. As the loans began to default, the impact roiled a slumping housing sector, banks, homeowners, markets investors and the economy.

"Frankly it's the greed factor all over again"

The tale of woe that has evolved in the risky housing loan sector has a cast of characters and a number of chapters and reads like an epic encompassing struggling homeowners, Wall Street mavens and a few of the Seven Deadly Sins. "Frankly it's the greed factor all over again," said Bill Featherston, a managing director at broker-dealer J Giordano Securities Group, which is based in Stamford, Connecticut.

Lawyers are sharpening litigation knives and politicians are calling for reforms, investigations and someone to blame. But it is unclear who will ultimately pay....
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Big investors looking for higher returns may have exposed themselves to more risk than they thought.

The mood in the global financial community is shifting rapidly toward gloom. Warnings of trouble ahead are multiplying.

Many fear that a large number of important financial institutions in the United States, Europe, and elsewhere have taken inordinate risks that could damage the pension funds and insurance annuities that so many people rely on for a comfortable retirement – and maybe even hurt the broader economy.....

......After the financial community weathered quite successfully the brief US recession in 2001, fears of financial risk declined. Financial institutions, such as hedge funds, regarded more and more leverage (using borrowed money to buy assets) as acceptable in the effort to improve investment results. They were more willing to buy risky CDOs, even though the quality of the mortgages behind them was not fully known. They relied on credit-rating agencies to assess the risk in a package of investments, a process that often involves complex mathematical models and historical experience that may or may not be repeated.

The Federal Reserve has been "overly lax" under both Chairman Alan Greenspan and his successor, Ben Bernanke, in its regulation of the US financial markets by allowing them to become "increasingly opaque and private," charges Tom Schlesinger, executive director of Financial Markets Center in Howardsville, Va. He holds that hedge funds and private-equity funds should be obliged to disclose more.

The financial innovations initiated by such funds can shift risk from the bankers (who put together CDOs and other complex financial instruments) to the buyers, such as pension funds, Mr. Schlesinger says. Households become "the shock absorber of last resort."

A few days ago, the Fed issued stricter mortgage-lending guidance to banks, notes Malmgren (an economic consultant in Washington). The Fed "has proven itself to be too slow and timid in responding to fundamental shifts in financial market behavior, even when the dangers were fully recognized by regulators."

Lack of fear, combined with greed, fraud, and lies....

Part of the problem, Malmgren says, is a lack of financial fear among investors. That, combined with greed, "bred fraud, which began to spread ... as mortgage originators lied to home borrowers and underwriters, and banks misled investors about the quality of mortgage-backed securities."

If there are more financial casualties on Wall Street, in London, or elsewhere, there could be both a flight to quality (better investments) and a flight to liquidity (investments that can be sold easily), warns Malmgren. The secondary market for outstanding CDOs is very limited, partially because the value of their underlying assets is often mysterious.

"Home appraisers may find themselves instructed by banks to lowball their valuations."-Really! Holy market correction, Batman!!!

The financial damage from future shocks, says Malmgren, could stretch over the next three or four years as the CDOs mature. Many Americans may find it harder to get a mortgage or home equity loan, and interest rates may rise. Home appraisers may find themselves instructed by banks to lowball their valuations. "Everybody is in a state of anxiety in the financial sector," he says.
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[TJ_98370]

Note that Bear did not report on losses today.



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.....

[Eleua]

[TJ_98370]

[sniglet]

[Eleua]