Continued Fun at Bear Stearns & Related News / Opinions
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Bear Stearns pay their executives millions in bonuses and then later claim they do not have the necessary liquidity for redemptions of a subprime mortgage backed hedge fund;
Bear Stearns Executives To Share $305 Million
Feb 21 2006
Bear Stearns' Subprime Bath
Hit by the subprime market's collapse, investors in a highly leveraged—and losing—hedge fund find they can't get out
Bear Stearns Profit Drops 10% as Mortgage Bonds Slump (Update7)
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Related Seattle Bubble Forum Thread -- Bear Stearns Hedge Fund Blow Up - So What?
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Bear Stearns pay their executives millions in bonuses and then later claim they do not have the necessary liquidity for redemptions of a subprime mortgage backed hedge fund;
Bear Stearns Executives To Share $305 Million
Feb 21 2006
Bear Stearns' Subprime Bath
Hit by the subprime market's collapse, investors in a highly leveraged—and losing—hedge fund find they can't get out
Bear Stearns Profit Drops 10% as Mortgage Bonds Slump (Update7)
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Related Seattle Bubble Forum Thread -- Bear Stearns Hedge Fund Blow Up - So What?
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Comments
The scum vote themselves raises after demonstrating their incompetence.
That's capitalism for you.
Subprime puts Bear Stearns fund on brink
A highly leveraged Bear Stearns hedge fund that made bad bets on the subprime mortgage market was on the brink of failure on Tuesday after Merrill Lynch rejected a proposed rescue plan and prepared to auction off $850m of assets that the fund had pledged as collateral.
In addition to large losses for investors and lenders to the Bear Stearns fund, some analysts feared that a failure of the fund could accelerate losses in the subprime mortgage-backed securities market and perhaps trigger a loss of confidence in the wider market for complex structured finance securities.
That, in turn, could lead to heavy selling and losses for investors, including Wall Street banks that hold some debt instruments before they are packaged and sold to investors.
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Bear Stearns's Attempt to Save Hedge Funds May Falter (Update5)
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June 20 (Bloomberg) -- Bear Stearns Cos.'s attempt to rescue its money-losing hedge funds may falter after creditor Merrill Lynch & Co. decided to seize and sell $800 million of bonds held as collateral for loans to the funds.....
....The 10-month-old High-Grade Structured Credit Strategies Enhanced Leverage Fund, run by Bear Stearns senior managing director Ralph Cioffi, has lost about 20 percent this year. The fund and a sister fund called the High-Grade Structured Credit Strategies Fund, which hadn't borrowed as much and was down less, both have faced pressure from creditors. They specialized in mortgage bonds and so-called collateralized debt obligations backed by home-loan bonds and other assets.
``The real fear has to do with just how many other funds and warehouses could be in trouble,'' said Jeremy Shor, who oversees about $3 billion in asset-backed bonds as a portfolio manager at Brown Brothers Harriman & Co. in New York. A warehouse is a credit line extended to CDO managers to buy the assets that they plan to repackage into new securities.
A slump in the U.S. housing market is leading to rising delinquencies on home loans, especially so-called subprime mortgages, made to homebuyers with poor credit or heavy debt loads. That's pushing down the value of related securities. The fallout has forced lenders such as New Century Financial Corp into bankruptcy, and caused the closure or sale of dozens more.
Bondholders at Risk
As defaults rise, bondholders stand to lose as much as $75 billion of subprime-mortgage securities, according to an April estimate from Pacific Investment Management Co., manager of the world's largest bond fund. Investors in all mortgage bonds will probably take about $100 billion in losses, according to a March report from Citigroup Inc. bond analysts....
....."One industry executive, who asked not to be named because of the delicacy of the subject, said the banks involved in the Bear funds could collectively lose $1 billion on their lendings to the Bear funds. While the amount is not itself significant given the size of these banks, it suggests the potential for bigger losses down the road."....
...."'I wouldn't be at all surprised if we hear about more [hedge funds] blowing up in the coming months, as the subprime market meltdown continues,' he said. "You've got $250 billion of subprime [adjustable-rate mortgages] that are going to reset this year.'"...
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I axed for a source and they didn't have anything other than a rumor.
So...I thought I'd do the responsible thing and pass a totally unsubstiantiated (but completely believable) rumor on as if it were a gold plated fact.
You have to figure that the truth to what this crap is worth has to be in the 20 cents range - at best. It's one thing if one hedgie gets liquidated. It is quite another if there is a stampede to find multiple buyers for financial toxic waste.
Remember, this dreck is leveraged by 10:1 or even 20:1.
If someone breaks ranks, there will be a fecal hurricane on Wall Street that will make early March look like the good ol' days.
Not that I am hoping for that :twisted:
If we get 50% whackings in major markets (or my 80% whacking that I am expecting for many coastal markets), all of these assumptions are so far gone that you would need the Hubble Telescope to find them.
Every piece of residential real estate would be a huge millstone on the individual consumer and the overall economy.
Today's purveyors of debt and debt based wealth building schemes (think about that oxymoron for a moment) are going to need to be smuggled out of the country. This ain't going to be pretty when it ends.
Back in Feb/Mar, someone that is in the biz wrote in to Fleckenstein and reported that one of the big lenders went to market with this crap expecting a bid of 108-110. The only bids they received were 63 and 56.
That was back in the original panic. What has it deterioriated to now?
30 cents and no takers? Could be.
I'm no financial wizard, but I sense that something dramatic is going to result from this due to the severe leveraging. It could be a predictor of things to come....
Two of my favorite, more relevant comments from The HBB regarding Bear Stearns' troubles:
About the auction:
Comment by KIA
2007-06-21 14:36:33
I think it more likely that there is a high degree of cherry-picking going on as the would-be purchasers finally start scrutinizing which loan packages might generate some kind of positive return versus which loan packages are sheer toxic waste which is guaranteed to suffer further losses. The percentages revealed by this auction should be a five-alarm warning for the industry.
About the situation in general:
Comment by palmetto
2007-06-21 10:32:58
"one of the most important takeaways here could be the culpability of the ratings agencies in all this."
Interesting housing bubble parallel between ratings agencies and real estate appraisers, IMHO. I just love the blame game and all the finger pointing. The truth is, everything has been so gamed, so blurred, so submerged, nobody knows WTF, anywhere.
A little sunshine is the best disinfectant.
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NEW YORK, June 22 (Reuters) - Bear Stearns Cos. Inc. on Friday said it would provide up to $3.2 billion in financing for a struggling hedge fund it manages, but sources said a second fund is still working out a restructuring plan with creditors.
The bailout sent financial markets into a tizzy, spurring investors to sell shares, particularly of investment and commercial banks, and buy safer Treasuries.
"People are extremely nervous about this issue, so it's sell first, ask questions later," said Stephen Massocca, co-chief executive of San Francisco-based investment bank Pacific Growth Equities. "People are concerned that this is a contagion that could spread elsewhere."
Bear Stearns CFO says is overcollateralized on loan
NEW YORK, June 22 (Reuters) - Bear Stearns Cos. Inc. said on Friday it is confident that the value of the collateral for its up to $3.2 billion loan to a hedge fund is greater than the value of the loan.
That means the investment bank's exposure to the fund that it manages, the Bear Stearns High-Grade Structured Credit Fund, is relatively low.
Bear Stearns is still trying to restructure the Bear Stearns High Grade Structured Credit Enhanced Leveraged Fund, and that could take several months, said Bear Chief Financial Officer Sam Molinaro.
But so far, all parties that have threatened to sell assets seized from the fund have not done so, Molinaro said. There are not additional Bear Stearns managed funds with similar market exposure, he added.
Perhaps seized assets from the fund haven't sold because no-one will buy these CDO's at an "acceptable" price as they are now considered too risky?..
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...NEW YORK, June 22 (Reuters) - Fitch Ratings said on Friday its ratings on Bear Stearns Cos. are unaffected by the bank's decision to provide $3.2 billion in secured financing to a troubled hedge fund at its asset management arm, Bear Stearns Asset Management....
....Fitch has an issuer default rating on Bear Stearns of "A-plus," the fifth highest investment grade ranking....
What are Fitch Ratings?
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An Open-Ended Black Hole
...From Bloomberg. "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."...
..."'The large volume of subprime ARMs scheduled to reset at higher rates in '07 and '08 will pressure already stretched borrowers,' forcing more loans into foreclosure, the Bank of America analysts wrote from New York. A collapse of the Bear Stearns funds 'could be the tipping point of a broader fallout from subprime mortgage credit deterioration,' they said."...
...Bear Stearns Cos. is proposing a bailout of a money-losing hedge fund by taking on $3.2 billion of loans to forestall creditors from seizing assets, the biggest rescue since 1998, people with knowledge of the plan said."...
..."Bear Stearns, the second-biggest underwriter of mortgage bonds, increased efforts to salvage the fund, one of two that made bad bets on collateralized-debt obligations."...
Mr. Joseph Mason notes how there is no transparency with CDO's...
..."'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.'"...
..."The first CDOs were created at now-defunct Drexel Burnham Lambert Inc. in 1987. Sales reached $503 billion in 2006, a fivefold increase in three years. More than half of those issued last year contained mortgages made to people with poor credit, little loan history, or high debt, according to Moody's Investors Service."...
..."CDOs may have lost as much as $25 billion because of subprime defaults, Lehman Brothers analysts estimated in April."...
..."Bear Stearns's proposal doesn't involve taking equity. Instead, the firm would become a lender to the fund, its loan secured by the assets of the fund."...
Interesting comment about who is buying subprime debt and why..
Comment by txchick57
2007-06-22 09:44:39
This will make you laugh or cry, depending on your prediliction:
Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Who's Buying Subprime Now?
As problems at two Bear Stearns hedge funds have Wall Street mortgage desks scrambling to offload subprime debt to bids as low as 30 cents on the dollar, the question now is who is buying what they're selling? Why, the usual suspects of course: university endowments. Seriously.
According to the Wall Street Journal, university endowments are stepping up as buyers of subprime debt.
"There's an opportunity out there to buy these loans at a discount," Lou Morrell, vice president for investments and treasurer at Wake Forest University told the Journal.
Wake Forest's $1.2 billion endowment is in the process of placing about $25 million with a hedge fund to invest in subprime mortgages, the newspaper reported.
Because subprime loans could sell for steep discounts, "they will be popular with a lot of endowments out there," Morrell said.
Wake Forest isn't alone. Vanderbilt University has earmarked $50 million to invest in debt backed by subprime mortgages.
Bill Spitz, chief investment officer for the $3.4 billion endowment at Vanderbilt, says he has no expertise in the mortgage market, but is placing money with a new fund from Trust Company of the West as part of Vanderbilt's strategy of putting as much as 5% of the fund's assets into "opportunistic" investments they hope can boost returns, the Journal said.
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Why the Bear Stearns Mess Will Be Contained
Lever up and mismark, a toxic combination. That's my understanding of what happened at Bear Stearns' hedge funds. And I believe there will be no fallout whatsoever beyond the funds, despite the innate desire by so many people to rumor and panic the marketplace....
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Time will tell whether he is right or not...
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There is some truth to this. There is some sort of new financial "crisis" every six months or so, and the sky never seems to fall in. Earlier this year it was the collapse of New Century and the shock of HSBC cutting back lending. Nothing dramatic happened then.
Thinking back to 2001/2002, many of the biggest scandals actually occured AFTER the stock markets were already on decidedly downward trajectories.
Let's put it another way: events don't drive markets, the markets drive events. As markets decline an increasing numbers of scandals and spectacular failures will come to light since the rising tide of increasing appreciation stops to lift all boats.
As the credit bubble unwinds I suspect we will see increasingly dramatic failures and headline grabbing events occur. However, I don't think that market actions will be driven hugely by any one of these events.
National Mortgage News; What We're hearing
Is the Bear Stearns hedge fund debacle the subprime Chernobyl we all feared or are carrot-juice-swigging financial journalists blowing the whole thing out of proportion? This is what we don't know: how large exactly are these two Bear-managed funds? What type of subprime assets are in them? And how leveraged are the funds? By using a hedge fund structure to invest in subprime assets, Bear has created a Dick Cheney-like "cone of silence" to prevent the outside world from knowing what exactly is going on at the two hedge funds....
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June 25 (Bloomberg) -- Financial shares tumbled on concern losses tied to subprime mortgages will deepen, extending the U.S. stock market's worst weekly decline since March.
Bear Stearns Cos. slid to its lowest in nine months after a Merrill Lynch & Co. analyst said the second-biggest U.S. underwriter of mortgage bonds may have to salvage another hedge fund. A decline in sales of previously owned homes sent shares of builders to their lowest since 2004.
Mounting speculation that hedge fund losses are greater than forecast erased a rally that lifted the Dow Jones Industrial Average 129 points. Moody's Corp., whose founder created credit ratings, dropped the most in the Standard & Poor's 500 Index.
``People are concerned that there's some great, big unknowable out there,'' said Brian Barish, president of Denver- based Cambiar Investors, which manages $10 billion. ``There's nothing the financial markets dislike more than uncertainty. That's why the market is jittery.'' ....
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MARKET TICKER - FRIDAY, JUNE 22, 2007
.....It looks like the market is starting to consider risk once again:
No, you think?
$3.2 billion? For guys that had $6b in leverage out against $600m in collateral?
So what's the truth here guys? The claim was that they lost "20%"? Really? Or was it 50%? Or was the leverage ratio more like 25:1, not 10:1?
And better - why do you flush $3.2 billion down the toilet if you're Bear Stearns? There is only one reason to do that - you're afraid of the explosion that will result if you don't do it - that is, the blast will be even bigger in its impact on your bottom line.
CNBC is also reporting that Cantor Fitzgerald is getting bids as low as ten cents on the dollar for some of the CDOs they're trying to sell! That's a ninety percent haircut!
There are a lot of liars out here on the street right now, and sooner or later, they're going to have to fess up. If the real loss was 50%, that's horrendous. It also tells you a lot about the exposure on the street to this issue and points out the fact that there is absolutely no way that this will be, or can be, contained. It simply doesn't matter whether people want it to be or not - there is some $2-3 trillion in losses out there that are being hidden under the carpet at the present time!
This can and WILL come out, and if I'm right about the magnitude of this "crash" isn't the right word for what's coming. More like catastrophe. This pile of paper is what supports the consumer credit markets! If it implodes, and it looks like that's exactly what's happening, the damage, given the leverage being employed, will be tremendous.....
Another Bear Stearns fund may need bailout
Oh no, not another one!
Look out below!
Can bond market stand to be exposed?
Jazon – Good article. Jim Jubak provides a good overview of the situation.
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PIMCO's Gross says "subprime crisis" not isolated
Gross said there are hundreds of billions of dollars of subprime residential mortgage-backed securities (RMBS), derivatives on subprime RMBS and collateralized debt obligations (CDOs) that buy subprime RMBS and/or the derivatives on the RMBS -- all of which he considers "toxic waste."
"Whether or not they're in CDOs or Bear Stearns hedge funds matter only to the extent of the timing of the unwind," said Gross, who manages the $104 billion Pimco Total Return Fund. "To death and taxes you can add this to your list of inevitabilities: the subprime crisis is not an isolated event and it won't be contained by a few days of headlines in The New York Times."....
CDOs in `Hooker Heels' Fool Moody's, S&P, Gross Says (Update1)
June 26 (Bloomberg) -- Holders of investment-grade portions of collateralized debt obligations may lose all of their money in the securities, which have been dressed up in ``six-inch hooker heels,'' according to Bill Gross, manager of the world's biggest bond fund.
Subprime mortgage bonds made up about $100 billion of the $375 billion of CDOs sold in the U.S. in 2006, Moody's Investors Service and Morgan Stanley data show. CDO's are created by bankers and money managers who bundle together securities and divide them into slices with credit ratings as high as AAA from Standard & Poor's and Aaa by Moody's.
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...``AAA? You were wooed Mr. Moody's and Mr. Poor's by the makeup, those six-inch hooker heels and a `tramp stamp,''' Gross said in his monthly commentary posted on Pimco's Web site today. ``Many of these good looking girls are not high-class assets worth 100 cents on the dollar.''...
....``Those that point to a crisis averted and a return to normalcy are really looking for contagion in all the wrong places,'' Gross said. ``Because the problem lies not in a Bear Stearns hedge fund that can be papered over with 100 cents on the dollar marks. The flaw resides in the Summerlin suburbs of Las Vegas, Nevada, in the extended city limits of Chicago headed west towards Rockford and yes, the naked -- and empty -- rows of multistoried condos in Miami.''...
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Bear Tracks & CDOs
Bear tracks are all over the place. No, I am not talking about the stock market I am talking about Bear Stearns and CDOs. It's time for some history as the Bear Stearns tracks go back a long time....
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June 26 (Bloomberg) -- Bear Stearns Cos. said it will put up $1.6 billion to rescue one of its money-losing hedge funds, half as much as it offered last week, after raising additional money through asset sales.
The money will help prop up the Bear Stearns High-Grade Structured Credit Strategies Fund, the New York-based firm said in a statement today.
Bear Stearns, the biggest U.S. broker to hedge funds, said June 22 it would assume as much as $3.2 billion of loans to prevent lenders from liquidating assets. The reduction means New York-based Bear Stearns won't have to tie up as much capital to salvage the fund from bad bets on subprime mortgage bonds and collateralized debt obligations.....
.....The company is continuing to work with the creditors of the sister fund, called High-Grade Structured Credit Strategies Enhanced Leverage Fund, to ``facilitate an orderly de-leveraging of the fund in the marketplace,'' Bear Stearns said. That fund has $1.2 billion of outstanding loans, it said.
Moszkowski Says Bear Stearns Rescue of Fund Unlikely (Update1)
June 26 (Bloomberg) -- Bear Stearns Cos. probably won't bail out the second of its money-losing hedge funds, Merrill Lynch & Co. analyst Guy Moszkowski said, a day after sounding the alarm that investors couldn't ``rule out'' such a rescue.
The Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund owes creditors about $1 billion, two people with knowledge of the situation said yesterday. That compares with the $7 billion that Moszkowski estimated when he said in a note yesterday that Bear Stearns might have to ``stump up'' to keep the fund from being liquidated....
So what happened? Where did they find $6 billion? Did they magically pump up the value of the existing assets in this fund by $6 billion?
... ``We are increasingly comfortable that the fund will not receive a credit extension from Bear Stearns,'' Moszkowski, who rates Bear Stearns a ``buy,'' wrote in a note to clients today.
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CDO Boom Masks Subprime Losses, Abetted by S&P, Moody's, Fitch
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especially with quotes like this one:
Well, you got the ratings wrong.... you know what's next
I'm not sure how much more damage it does to housing. These are 2006 loans making their way through the snake - causing indigestion for the bankers now. But even if the market's appetite for CDO's is down, given that home sales are down by 10%, supply and demand for them might not be that far out of balance.
Their credibility should take a hit (if anybody is really paying any attention), but it looks like no legal action can be taken against them.
From the CDO Boom article:
...The rating companies apply their usual disclaimer about the reliability of their analyses to CDOs. S&P says in small print: ``Any user of the information contained herein should not rely on any credit rating or other opinion contained herein in making any investment decision.''
Joseph Mason, a finance professor at Philadelphia's Drexel University and a former economist at the U.S. Treasury Department, says the ratings are undermined by the disclaimers. ``I laugh about Moody's and S&P disclaimers,'' he says. ``The ratings giveth and the disclaimer takes it away. Once you're through with the disclaimers, you're left with very little new information.''...
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SEC examines Bear Stearns' troubles
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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