There is more from capital stool:

*DJ JPMorgan Already Selling Bear Stearns Hedge Fund Assets-Crapvision

*DJ JPMorgan Started Selling Stearns Assets Tuesday Night - Crapvision

*DJ Deutsche Bank, Others Also Selling Fund Assets - Crapvision

*WSJ: Merrill To Dump Bear Fund's Assets

They all are dumping!

Can anyone here get an indication of the bids on this stuff?

Bear Stearns suffered a major setback in its effort to save one of its hedge funds, but the fear of its failure to do so may push the bailout through.

Merrill Lynch, one of the three lenders to the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage Fund that helped precipitate the crisis with margin calls, indicated it was going ahead with a plan to auction $850 million in assets it seized from the hedge fund last week after a 24-hour delay, The New York Times reports.

Negotiations are reportedly ongoing, but Bear’s insistence on a 12-month freeze on collateral calls continues to garner opposition. But the alternative, a widespread sell-off of the hedge fund’s assets leading to the fund’s dissolution, could roil the markets and undervalue the fund’s securities, an unpalatable scenario for many of the lenders.

The fire sale is apparently already underway this morning as JP Morgan Chase and Deutsche Bank is selling off their portion Bear’s assets, according to CNBC.

There something I don't understand that no one has mentioned yet:

The fund had made $11.5 billion of bullish'' investments and $4.5 billion ofbearish'' bets, the Wall Street Journal reported today

Befoe this disclosure, it had been said that the fund(s?) were net bearish and lost money on bearish bets. It now appears they were net bullish. I still think it's reasonable to assume they lost money on bearish bets. It's hard to get that one wrong (though it's possible). If that is in fact the case, it would mean that this fund REALLY lost its shorts re: its bearish bets, and therefore, one assumes, they had a bunch of downward bets on the ABX indices that did real, real bad.

Said more simply, the role of self-inflicted ABX manipulation losses is maybe bigger than originally thought.

UPDATE

2 new Roddy Boyd articles:

SUBPRIME STREET IS FEELING THE HEAT - NYPOST.com

One hedge fund portfolio manager at a $4 billion fund told The Post that auctioning off the assets of Bear's High Grade Structured Credit Strategies Enhanced Leverage fund would unleash Wall Street's dirty secret.

"These CDOs [collateralized debt obligations] are probably marked 30 percent higher than where they should be," he said.

Already, Highland Financial Holdings Group's $125 million Special Opportunities Fund has decided to shut down after a disastrous series of bets in mortgage bonds. Sources told The Post that the fund dropped over 20 percent.

Highland managed a total of about $900 million, and was awarded a risk management award in 2004 from Risk Magazine.

AND ARTICLE #2:

BAD NEWS BEAR - NYPOST.com

"They haven't collapsed in price because they are often mismarked or just don't get traded," said one hedge fund executive who has evaluated the Bear fund's positions. "That is going to change in a big way today at 4 p.m., when the [Merrill] auction ends."

less than 5 hours to go boys and girls !!!!!

And this is just the beginning!

"...with Lehman taking 50 cents on the dollar for some bonds. Merrill's traders, according to several hedge fund managers, would gladly take that much."

This will be a wild ride for the next few years...

@ jus me - there is selling at market and there is dumping at any price. this seems to be the later. not typical at all.

jsquaredone,

Can you explain exactly the process of marking these things? What is Mark to Market? How do ratings come into the equation? How often to funds mark their holdings? What prompts a re-marking, and what is the algorithm for marking? When do they 'consult' with the rating agencies? Do they actually consult with them or are there rough guidelines? Who supervises the guidelines? How strict are they?

CR:
No doubt this dampens the housing market in the long run. People are finding out that the ABX hedges they relied on were inadequate, and therefore, they is no 'magic' with which these massive loan volumes can be sustained. I think what some people are forecasting is that there will also be a change in lending standards to hedge funds that invest in CDO tranches and do all kinds of fancy hedging. Not only subprime or general mtg debt CDOs, but also corporate CDOs. Just as there is an ABX, there is a CMBX. If thee are similar funds who do similar things with CMBX hedging, there may be far of CMBX manipulation. It is going to be up to markit to prove that their indices have integrity.

Yes, there are some I/O and FICO score concerns with these. Hence the 50% off fire-sale.

Negotiations are reportedly ongoing, but Bear’s insistence on a 12-month freeze on collateral calls continues to garner opposition.

I want Bear Stearns negotiating with my credit card provider. They clearly know this insolvent debtor game a lot better than I do.

I think that gratuitous swipes at Sebastian are way, way over the top.

Way over the top.

Check the markets...

Euro steady: not shooting through the roof

Stock markets steady.

Ten year bond up a touch.

One could almost take the position that this is only happening in the comments of this blog.

Except that I personally believe that the truly big players want "assets" to collapse (as stated ad nauseum).

Time will tell. But facts back Sebastian.

jsquaredone,

he is saying to the firm that he is making a good faith judgement

Ok, let's stop here. Today and yeseterday, Isn't reasonable to believe that any such trader who deals with subprime CDO paper was supervised by his superiors to a degree much larger than on most days? Furthermore, isn't it reasonable to assume that over the next few days/weeks, some of these hedge funds will have their IB creditors knock on the door and ask to verify valuations according to their own, newly updated, quant models?

based on a myriad of assumptions and models run by some quant.regarding this current situation they are not moving around enough heft to matter.

Ok so there is an internal quant model. That makes sense. Now where do the ratings come in?? Are the ratings simply one of the inputs into those quant models? Are they the dominating input?

So if those bonds are sold at 50% off, does that mean those homes are worth 1/2 as much?

probert......regarding your second point i think that ratings really shouldnt matter.you are buying a security and not a rating....to properly evaluate a bond you should deconstruct the cash flows in your own fashion.there is a gigantic conflict of interest as the issuers pay the rating agencies to rate this stuff which then serves as an imprimatur for someone in peoria,paris or pyongyang to stuff these things into a portfolio.folks are finding out now that the ratings are and were suspect.Separately,muchof this stuff went overseas and many of those buyers dont mark to market.i guess there is no problem in that regard as long as these things pay interest and maintain an investment rating....

jsquaredone,

I understand what your saying, but it seems a lot of players could change future actions based on this event.

Hedge fund managers -- yes, they mark-to-market based upon a good faith estimate. This BS meltdown is an unfavorable comparable indeed, but the hedge funad manager could make a good faith argument that "our shorts/longs aren't like that BS fund"

Ratings agencies -- they are already on the move, albeit carefully. They don't want to kill the goose laying the golden eggs, but this event can only serve to hasten downgrades, no?

Investment banks -- providing the credit for the leverage. When this is done will they feel the need to be more over-collateralized in the future?

Hedge fund investors -- The BS fund investors lose everything, right? The loss of principal and the freezing of redemptions will not be lost on other investors in MBS/CDO-heavy hedge funds. Do they look to exit?

Compared to Amaranth, this seems a much bigger deal. Natural gas futures were a much smaller market (I assume). Far fewer hedge funds focused in that area compared to CDS/CDOs.

CR seems on the money that the spread on mortage rates over the tresuries will grow as mortgage debt will be perceived as riskier.

Also, underwriting standards will tighten even further as Wall Street comes to grips with the fact that losses will be greater than they anticipated and the drop in housing values will be greater than they thought.

This is just the begin stages of the story as we will be seeing lenders auction off REO homes soon to get this junk off the books. The true value of the CDO's will then be revealed.

It is sad that the general public doesn't get to see how these behind the scenes processes are hurting their future financial well being.

I wonder if Michael Bloomberg's possible entry into the Presidentional race will focus some of the elcetion debate on these types of economic issues rather than the same old Clinton/Bush jabber.

jsquaredone,

Most of us already know ratings SHOULDNT matter. If I were dealing with structured securities myself, I would construct my own models too, but the fact is that rating DO matter to some people. Who do they matter to? Well, you said:

...serves as an imprimatur for someone in peoria,paris or pyongyang to stuff these things into a portfolio.

Right. And charge fees on it. Now some hedge fund comes along and, say, goes long CDO paper and short ABX. This guy has a quant model. Does that model fall victim to the bogus rating?

folks are finding out now that the ratings are and were suspect.

Right so again I ask, WHICH of the following were among these "folks"?

a) CDO managers?
b) Hedge funds who trade CDO paper?
c) Warehouse lenders to those hedge funds?
d) pension funds who buy CDO paper (probably yes)?

Separately,muchof this stuff went overseas and many of those buyers dont mark to market.

Overseas?? to what type of institutions/entities? If not MTM how do they value it? DCF?

Anyway, I still don't understand the mechanics behind the following statement, which is ALL over the media: "there will be no mark to market panic as long as the credit rating stays roughly the same".

How do the ratings factor in? Who factors them in and how?

The 10 trillon dollar mortgage market is so huge that if it really starts to deteriorate it's going to cause enormous damage, like we're beginning to see now.

Good point. Mortgage market is bigger than treasury market. So watching treasuries to predict mortgage could be upside-down

In the great "it's nothing" or "it's disaster" game underway, I note that most of the opinions start with something along the lines of "I think…" The question that comes immediately to mind is, based on what?

We have press quotes from (probably not entirely disinterested) hedge fund guys saying paper is overprices by 30%, Lehman selling at 50% of face. We have arbogast's point that the granddaddy markets don't seem to be responding. But what we also have is arcane financial structures, not well tested, in a (to them) new interest rate and regulatory environment, being held by and traded between entities that tend not to open their books and which operate at enormous leverage ratios.

So I'm wondering why I anybody commenting here thinks they have a useful view of the likely outcome. "Facts back Sebastian" if you choose to look at facts that back Sebastian. A different set of facts would back a different conclusion, and I have serious doubts that any of us know enough to pick the appropriate set of facts in this case.

Maybe BS just broke a golden rule by being caught out publicly fiddling the ABX and had to be seen to get a good kicking?

Was these funds just levered bets on high-grade (AAA and AA) ABS CBO tranches? Has anyone seen reports of them selling anything other than high-grade paper?

One more quote from one of the Boyd articles linked above:

"Bear's fund, led by Ralph Cioffi, not only made a massive bet on sub-prime mortgages, but did so in a singularly dangerous manner with respect to its leverage. The auction list, examined by The Post, shows the fund used borrowed money to buy the CDOs, using leverage of 10-to-1 or 15-to-1 times its capital. This made their positions massive at a time when few funds or trading desks had any interest in buying or selling this paper."

I don't know about the timing of when Bear bought the CDO's...

OT:
Investors seek better terms on Thomson LBO loan

"We are not interested if pricing and structure are not changed," another investor noted.

Several other investors said at the current offer price of 250 basis points over Libor, they would be unwilling to participate in the deal

Party's over!!!

The desperation has led to debt-funded stock buybacks being needed to juice the DJI. Can't be much longer...

Banker is "right" in the sense that the market is really ho-humming this totally.

The ten year is going up. That is the only straw in the wind.

Ya,,,you are only as good as your last trade.......what is the next 50 bp move on 10s.....i caught this little move to lower rates ...got long close to the lows and blew out yesterday. dont see the next trade.current quarter growth is strong. but i cant decide if we return to 2%ish gdp or do we stay 3%ish

Just shorted the S&P 500.

I only bring this to your attention so that you can go long. I am by far and away the best of the best at getting things wrong.

But I wanted to feel Bill and Hillary's pain.

Expired

this will show you how much people think about their "castle".

theroxylander,

To be honest, I don't know how to short a basket of REITs.

My short of the S&P is based on my newfound belief that the bubble was intended to burst from the first Greenspan interest rate cut.

It's like Sherlock Holmes said, "Eliminate the impossible..."

In this case, the impossible is the idea that Greenspan didn't know he was creating the biggest "asset" bubble in human history. The guy's not stupid, okay?

To be honest, I don't know how to short a basket of REITs.

Please look at proshares.com, they do it.

And it's a good idea to be long something energy-related at the same time, just to protect from the tide that could lift all the boats.

However, it's already down -19% from its high, and a short-seller of the security would be obligated to pay its dividend during the time he holds the short position.

Short seller will also receives all the management fees like it's his own fund

"Subprime lenders going bankrupt earlier this year was the opening act, not the finale."

"What is happening now is another act, not the final act."

What we are witnessing is Wall streets version of the foreclosure process on the BS Funds. These guys get to go first because they were so wrong in there assupmtions about the markets. Unlike a mortgage foreclosure these guys don't mess around and get things done fast

Just as in the subprime industry there will most likely be many more to come.

As the thousands of homeowners one by one get ther turn to lose out More funds will feel the pain until they to need to complete this little exercise. Unless they can dump this stuff on some unsuspecting third party.

The wheels on this process can only go as fast as people are removed from their homes. Which by design takes a long time.

We will be talking about the fallout from housing issues for many,many months.

Interesting- Bank of America was the first to throw in the towel hmmmmm But they are trying to get the Investment Banks to restructure... I'm telling you what.....
Has anybody read "When Genuis Failed" ???
This is starting to have alot of similarities to LTCM, maybe/hopefully not BUT if it looks like a rat and smells like a rat................

Why would ML rather auction the assets off than allow BS to buy them back?

Yal,

Many thanks and great call on rates. I was 100% wrong (maybe 125% wrong) on that one. Hope you made some money.

Pretty funny how the bulls are defending Bear and understating the overall total catastrophic collapse that is destined to occur from something just like this.

Ponzi architects, good riddance!

CRASH, BABY, CRASH!!!!

HA, HA, Capitalist pigs!!!

The Revolution is here, it's just waiting for participants.

for the people downplaying this in comparison to LTCM/Amaranth...

LTCM made the bulks of its bets on US treasuries and other sovereign debt - treasuries are the most liquid market in the world --most of assets were unwound in an orderly fashion ---nobody else had their positions with that much leverage

there was nothing wrong with Amaranth's positions per se -- they just needed time to right themselves and end up in the money (which citadel and jp was smart enough to realized - nobody else had the same positions with that much leverage

tommorow EVERYONE will be forced to remark based on the clearning levels achieved in the ML auction going on right now. Every CDO manager, dealer structuring desk that hedges with CDO equity, and investor in CDO equity will have to rejigger their books.

everyone owned pieces of these CDOs --and if not these exact CDOs, CDOs that looked exactly like them. imagine if tommorow shares of AT&T dropped 20%.

most of this stuff has never traded before - nobody knows what the real value is - BSAM is also a CDO manager, what happens to all those bonds too

this is just the tip of the iceberg. there are dozens of similar funds out there

t

Banker, Steve, Sebastian, etc...

First, thanks for the clarification. Second, please don't take part of what I said and apply it as though it's the whole.

I said, paraphrased, I don't think this will be a crash. I think, however, it's got the possibility of being a starter for a long-term period of doldrums.

The bit about comparing LTCM to BS - I again thank you for putting their relative power into perspective. I am curious, however... how many times in the past has a fund this large had this sort of problem, and what was the outcome? Sure, at a certain scale $20 billion is nothing, but for most things it's a bit more than that.

this may not have been clear but the most important thing is that the rating plays a part in determining where your bond is on the cashflow waterfall so that affects its value...that's what i meant by they affect structure. plus lots of people use their models.

ok, FINALLY we're getting somewhere.

bacondreamz,

I'm not talking about valuing the thing in your models. Obviously any 1/2 brain fund manager realizes that ratings don't mean crap. What I am talking about is to what extent, or under what circumstances, do rating count for valuing for ACCOUNTING purposes, i.e. lying to your investors for fees, structuring your deal as you said, and in terms of covenants triggers or whatever as albrt added. I think it's clear that less CDOs will be born going forward, regardless of ratings.

Anonymous,

You're really hitting my question here. Are you saying is that up until now this stuff wasn't trading so it was marked-to-model, but now because of these massive 100's $million liquidations that occurred today we FINALLY DO HAVE a market, and therefore they will account for it on their books using MTM for the first time ever?

And so, returning to my prior clarification, assuming ratings won't change overnight, will we still see covenants triggers that albrt mentions?

the fact that these bonds have finally traded should have ZERO impact on their rating.

I'd like to reply to this (although that wasn't at all my question).

Although I know nothing about how this is supposed to work, I disagree with you in THIS case. Why? because the credit agencies have gotten to a point where they are the 'political figureheads' of the market. They were pressured into rating things too high, and they regret it in many cases, they don't want to admit it because it'll ruin their reputation. However they will jump at he chance to downgrade something.

When it is easy to downgrade something? When you're not affecting the market?

And when are you not affecting the market? When the market already took down the market value and the horse left the barn, and then you the credit agency come along and say "oh ya by the way, we lowered our rating to xxx". And in that case an xxx rating would imply a price roughly equal to the market price.

See... a 'political' decision. Kind of like how the NAR comes out and says "oh ya... by the way we predict home prices will decline 1.4% in 2007".

And now back to my real question: I was asking about mark-to-market for accounting purposes in ABSENCE of ratings changes. i.e. Assuming rating agencies do nothing: what happens and why? Some people claim we're going to see a MTM tsunami, others say this won't happen until ratings change.

Anonymous seems to suggest that in the pre-June-20th world it was true that there won't be a MTM tsunami, but in the post-June-20th world there WILL be, simply due to the fact that today we actually have a market, and therefore one is required to switch from a mark-to-model approach to a MTM approach.

Kirk,

How often does a $600 million (equity) fund have major problems? Every few years. Julian Robertson at Tiger had them in the 1990's, the oft-mentioned LTCM, KKR when RJR got in trouble. Not to mention Barings/Leeson, DBL, Kidder Peabody, Salomon Bros/Treasury, First Boston and the Burning Bed in the 1980's, Enron/Adelphia/Worldcom, the 1987 stock market debacle etc, etc, etc. This stuff happens all the time.Heck that doesn't include the really wrenching economic stuff.

The markets are now so big and so liquid that something like this, by itself, while fascinating, just isn't that big a deal.

Of course one could take the canary in a coal mine approach. But given the market events of the past twenty or so years, this is one samll bird.

Comments like mine have become the norm? Not here they haven't!

And yes, this is one small bird. Problems are by their nature relative to the size (among other things) of the things they impact. looking at it any other way is silly.

probert-

you're correct. too many have become numb to the absolute garbage that takes place today and have the attitude that it doesn't affect me, so I could care less.

That is why we are currently still seeing this utter crap, due to the attitude that as long as I'm making mine, I can look the other way. That is sad, and let's you have a clear understanding of where you don't want to park your assets....

with those that share the same opinion as banker, because it is other peoples money, it has absolutely no meaning to him.