I think they canceled the party... oh well.. let's wait to see what happens.

These wall street guys don't know what each department in the building is doing. Don't they realize they are making things worse for themselves.

They are all buying up or opening sub prime mortgage companies. All these companies are tightening underwriting standards which make fewer borrowers qualify for mortgages.

Less people qualified to buy homes means that home prices have to drop so more homes sell.

Lower home prices means more losses on foreclosures.

More losses on foreclosures means lower prices on MBS securities.

Lower MBS prices mean hedge fund Foreclsoures.

I guess I must be missing something

Get with the program - not just CDO squared but CDO cubed. (sorry for long article, but worth reading, especially second half)

Who'd Ever Invest in Everquest?
7 June 2007
HedgeWorld News

NEW YORK (HedgeWorld.com)—The proposed initial private offering of Everquest Financial Ltd. is turning into one of the most controversial IPOs in years. The storm blew up after an article appeared in Business Week on May 11, just two days after the firm filed its S-1 with the SEC. In it, journalist Matthew Goldstein suggested—wrongly, as it turned out—that via the offering Bear Stearns Asset Management was trying to shuffle non-performing assets in the form of collateralized debt obligations from its books.

Mr. Goldstein technically may have been wrong, in that the assets in question actually had not been on Bear Stearns' balance sheet at all. Even so, all the evidence points to a clumsy attempt to muddy the waters with respect to the true value of the assets in the portfolios of two hedge funds in Bear's $29 billion asset management arm, as well as shifting some of these funds' unwanted assets elsewhere.

The two BSAM funds in question are Bear Stearns High-Grade Structured Credit Strategies Fund, reported to have about $2 billion under management, and a levered version of this fund, Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund, which had assets valued at $638 million at the end of March. On the S-1 they are referred to as "the BSHG funds."

In September 2006, the BSHG funds transferred equity in 10 CDOs, including 100% of the equity in a vehicle called Parapet, to Everquest. The transaction was valued at $548.8 million, of which $369.8 million was in Parapet equity, and was paid with $148.8 million in cash and 16 million Everquest shares (valuing the latter at $25 each). Subsequent transactions involving further cash outlays left an offshore Stone Tower affiliate with 2 million shares in Everquest, whose net assets were valued at $697 million at the end of 2006.

Part of the problem here is that initial investors in the BSHG funds now have part of their holdings in illiquid Everquest shares that they may not even want.

And there are some obvious question marks. "Overall, the structure is opaque, very difficult to value, and appears to have significant conflicts of interest," noted John Padrnos and Saul Haydon Rowe, partners in Devon Capital, a London-based firm of derivatives advisers specializing in CDOs. Everquest is jointly managed by Bear Stearns Asset Management Inc. and Stone Tower Debt Advisors (an affiliate of private investment firm Stone Tower Advisors LLC, which managed in excess of $7.7 billion at year end). In form S-1, one of the risk factors mentioned is "the existence of conflicts of interest in our relationship with BSAM and/or its affiliates and with Stone Tower and/or its affiliates, which could result in decisions that are not in the best interests of our shareholders."

Part 2

More specifically, Ralph R. Cioffi, co-chief executive at Everquest, is a director of BSAM, the founder of the BSHG Funds and beneficially owns equity in the BSHG Funds. Michael Levitt, the other co-CEO, is the founder of and beneficially owns equity interests in Stone Tower. Both Stone Tower and BSAM can be considered competitors of Everquest.

It is also noted in the Everquest S-1 that "[s]ubstantially all of our initial CDO holdings were purchased from the BSHG Funds which are managed by BSAM." It also notes that negotiations for the purchase of these holdings were not conducted at arm's length, and so the terms of the deal "may not be as favorable to us as if they had been negotiated with an unaffiliated third party." The same rationale applies to the small amount of CLO securities purchased from Stone Tower.

If Everquest securities were to be offered to sophisticated investors with sufficient experience to evaluate not only the CDOs in the portfolio, but also the "CDO-squareds" and "CDO-cubeds" that make up the vast majority of Everquest assets, then the incestuous nature of the offering could almost be overlooked. But this is an IPO, and via the market mechanism the shares eventually will be available to retail investors also.

In fact, it may be intended for them. "It seems that Everquest is being pitched to retail investors as a high-yielding mutual fund where the asset class is CDO equity (primarily from subprime RMBS CDOs); and investors get Bear Stearns' and Stone Tower's expertise and experience," said the Devon partners in an email interview.

Not-So-Secure Securities

The Everquest portfolio is made up of primarily residential mortgage-backed CDOs, plus a far smaller amount of commercial mortgage-backed CDOs for a reported cumulative fair value of $498.3 million, plus collateralized loan obligations (CLOs) for a reported value of $198.6 million. Furthermore, the S-1 states that the majority of the RMBS held by these CDOs are backed by collateral pools comprised of subprime mortgages.

"It would be extremely difficult for a professional to calculate the "fair market value" of this structure, let alone a retail investor," according to Messrs. Haydon Rowe and Padrnos. "Modelling it would probably cost $100,000 in analysts' fees." They pointed to "the extraordinary complexity of modelling the structure, which appears to have elements of a "CDO cubed" (a CDO of CDOs of CDOs) through its holding in Parapet and other CDOs of CDOs."

Parapet, the largest holding, constitutes 61.6% of Everquest's total assets.

Again from the S-1 we learn that "[o]ur subsidiary, Parapet CDO, is a CDO of CDO securities which holds CDO mezzanine securities and preference share and income notes tranches… Parapet CDO has issued an AA/Aa3-rated tranche of Class A floating rate notes that as of Dec. 31, 2006, had an aggregate principal amount of $136.9 million, as well as a tranche of preference shares a

Part 4 (final)

Reasons Not to Be Cheerful

But if Everquest is not exactly the deal of the century, it would be difficult to infer so from the fees being charged. "This fee structure also looks to be high compared to market standard," noted Messrs. Haydon Row and Padrnos. "The managers are asking 1.75% annually to manage assets that they themselves originated. Other CDOs with third-party managers, such as Aladdin or ZAIS, incur far lower fees." As for the performance fee, 25% over a hurdle of 8% annually, [for a basket of such high-yielding securities] seems high, they say, and the breakup fee of one-to-three years of management fees if the board elects to replace the managers also seems excessive.

In short, there are many reasons not to like this investment. Messrs. Padrnos and Haydon Rowe summed it up as follows:

• CDO equity is a complex, opaque and generally risky asset class. BSAM contributed the bulk of the initial portfolio under terms agreed to in 2006—at valuations it determined;

• The fee structure seems too high;

• External shareholders will have a minority interest, making it much harder to achieve redress against BSAM or Stone Tower even for egregious conduct;

• There are other conflicts of interest, such initial valuations, trading valuations, substitution powers, allocation of market opportunities, limitation of liability and so on;

• Specifically, Everquest appears to contain many highly risky underlying assets, as shown by their yields of over 20%.

An ongoing assessment of the prices of these assets will be extremely difficult, as it would be almost impossible for an investor to ascertain which reference credits underlie the structure.

There is potential exposure to RMBS from the first half of 2006, which was generally when some of the RMBS problems started accumulating, including the Tricadia CDO Management and Alliance Capital Management tranches with exposure to RMBS.

"In summary, we recommend that anyone contemplating buying this instrument should perform extensive analysis, and consult independent CDO experts," advised Messrs. Haydon Rowe and Padrnos. Given that their firm is itself a CDO specialist, potential investors should draw their own conclusions.

Waddya think? Are they desparate enough to take a $10 mill bid for all four- then we could desecuritize and actually break them down back into mortgages that might make a profit with careful management...what do you think? I bet MER would give up 5 years at 9 percent to shovel the sh*t...

But after all waste disposal contractors do make quite a bit of money;-}

Someday this war's gonna end...

Boston Globe clarifies on the 850 million:

Help - Page Not Found - Boston.com

Merrill Lynch is selling high-grade, collateral-backed debt obligations worth about $850 million.

So they were not liquidating collateral. They are liquidating the fund's assets, which have been seized. Also, globe confirms what some posters here have been saying re: what is actually trading so far:

"Nothing has happened in this auction that would be a catalyst for a further decline, or more margin calls," he said. "There's no major surprises to the downside, but most of what is being traded is higher quality."

and UPDATE 7 from Bloomberg

New York-based Bear Stearns today agreed to buy JPMorgan Chase & Co.'s $500 million of loans to the fund to prevent securities being dumped on the market, one person said.

I thought it was 300 million, but who's counting. So JPM is now out, the same way GS and BAC got out. It sounds liek Merill is really sticking it to Bear. Everyone else seems to agree to deal directly with Bear.

more confusing details:

http://www.tradingmarkets.com/.site/news/BREAKING%20NEWS/566155/

Not every security was sold, but Merrill Lynch is believed to have sold enough to cover its exposure to the funds. About $850 million of securities were put up for sale, and a series of derivative positions will be put up for sale on Thursday.

This is confusing because earlier articles mentioned $1B of stuff being sold during the day. If Merill was the only seller, that's impossible.

Also, some websites say Merill sold until 4pm, and others say the auction only started at 4pm.

Holy smokes, rcryan! They admit multiple conflicts of interest in the S-1 filing!?!..."not conducted at arm's length"...I guess they figured few would read the filing; which unfortunately is likely an accurate assessment.

I find it funny and rather gutsy of Bear to name this company after a online fantasy world where people pretend to be someone they are not and use magic and encounter monsters of all sorts. Maybe the company name should be a tip-off that this company is a lemon...