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It is looking like a bear of a summer for Bear Stearns hedge fund manager Ralph Cioffi.
Wall Street learned Tuesday just how bad the carnage is in two of Cioffi's funds, a month after they nearly collapsed under the weight of bad bets on the swooning subprime mortgage business. The two funds chock full of esoteric securities -- High-Grade Structured Credit Strategies Fund and its sister vehicle, High Grade Structured Credit Enhanced Leveraged Fund -- are now worth less than 10 cents on the dollar, according to media reports....
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NEW YORK, July 17 (Reuters) - Bear Stearns Cos. Inc. has told investors in its two troubled collateralized debt obligation (CDO) funds that the funds are now essentially worthless, CNBC television reported on Tuesday.
Bear Stearns shares were down about 2.7 percent in after-hours electronic trading following the report.
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It's going to be very interesting to see how much effect this event has on the overall market, yes?
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by deejayoh » Tue Jul 17, 2007 4:30 pm
I'm not sure about the interpretation here -
It says very little value is left for the investors - principal in the funds was about $900 million, which was levered up 6-10x with debt.
So is it 9 cents on the dollar for principal, or the entire levered amount?
I'm seeing people commenting on this as if it was the latter - I think its the former.
anyone know for sure?
It says very little value is left for the investors - principal in the funds was about $900 million, which was levered up 6-10x with debt.
So is it 9 cents on the dollar for principal, or the entire levered amount?
I'm seeing people commenting on this as if it was the latter - I think its the former.
anyone know for sure?
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by deejayoh » Tue Jul 17, 2007 7:47 pm
I'm sorry, but is there something wrong with my math here?
Total amount invested by fund A: ~$11.5B
Percent rumored to be lost in internet blogs including this one: 70% ("can't sell for 30 cents on the dollar" - )
Implied loss: $8 billion
Actual loss: $600 million
Multiple by which internet rumor-mongering overstated the impact: 13X
So now we see the extent of the debacle, and you are acting like its the end of the world, when the actual impact was oh, lets see - 7.5% of what was thrown out earlier?
Is it just me, or have you all completely lost perspective? If Jim Cramer turned bearish, I now know what he would sound like.
Total amount invested by fund A: ~$11.5B
Percent rumored to be lost in internet blogs including this one: 70% ("can't sell for 30 cents on the dollar" - )
Implied loss: $8 billion
Actual loss: $600 million
Multiple by which internet rumor-mongering overstated the impact: 13X
So now we see the extent of the debacle, and you are acting like its the end of the world, when the actual impact was oh, lets see - 7.5% of what was thrown out earlier?
Is it just me, or have you all completely lost perspective? If Jim Cramer turned bearish, I now know what he would sound like.
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by Eleua » Tue Jul 17, 2007 8:57 pm
It depends on how much leverage the fund had. If they were levered up 13X, the numbers would make sense.
There is more to this story to come.
Once the BSC hedge funds mark to market, all the other funds out there in CDO land will have to do the same. This may cause a cascading default or liquidation across the industry.
What is important isn't the amount lost by BSC, but that the CDOs being marked to a theoretical model era has come to an end.
They will have to mark to a market, which will be much more problematic during a down cycle in housing.
Example:
If everyone in Ballard had their retirement dreams held in the prices of the homes there, and everyone agreed that Ballard homes are all worth $1M each, then they can all act like they have a cool $1M ready for their golden years. Suddenly, the bank that is holding the note for some crazy musician decides they have too much risk and try to foreclose/call the loan, they have to sell the house. If the house only gets a bid of $600K, and the bank was on the hook for $800K, the musician loses 100% and the bank loses 25%. No big deal in the big picture.
The stink comes from all the other banks that have notes in Ballard. They just looked at 'shugy's house and hit the panic button. Now, they don't want to continue to fund homes in Ballard at the $1M price. They will only fund at the $600K price, but if there is a stampede, then they can only fund at $250K.
Can you see the problem here?
Mark to model was institutional fraud. Those days are over, but they were responsible for the enormous tidal wave of liquidity that fueled this madness to begin with. With that over, the contraction will continue and that will make the mark to market even worse.
The excitement over the BSC funds is very, very justified.
Lastly, we don't know the extent of the immediate damage to BSC or MER.
There is more to this story to come.
Once the BSC hedge funds mark to market, all the other funds out there in CDO land will have to do the same. This may cause a cascading default or liquidation across the industry.
What is important isn't the amount lost by BSC, but that the CDOs being marked to a theoretical model era has come to an end.
They will have to mark to a market, which will be much more problematic during a down cycle in housing.
Example:
If everyone in Ballard had their retirement dreams held in the prices of the homes there, and everyone agreed that Ballard homes are all worth $1M each, then they can all act like they have a cool $1M ready for their golden years. Suddenly, the bank that is holding the note for some crazy musician decides they have too much risk and try to foreclose/call the loan, they have to sell the house. If the house only gets a bid of $600K, and the bank was on the hook for $800K, the musician loses 100% and the bank loses 25%. No big deal in the big picture.
The stink comes from all the other banks that have notes in Ballard. They just looked at 'shugy's house and hit the panic button. Now, they don't want to continue to fund homes in Ballard at the $1M price. They will only fund at the $600K price, but if there is a stampede, then they can only fund at $250K.
Can you see the problem here?
Mark to model was institutional fraud. Those days are over, but they were responsible for the enormous tidal wave of liquidity that fueled this madness to begin with. With that over, the contraction will continue and that will make the mark to market even worse.
The excitement over the BSC funds is very, very justified.
Lastly, we don't know the extent of the immediate damage to BSC or MER.
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