WSJ: Bear Stearns Funds Face Shutdown
Submitted by
CalculatedRisk on Tue, 06/19/2007 - 7:33pm (59 comments)
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Looks like tomorrow is going to be interesting.
from a Russ Winter thread:
Locke wrote:
I think the playbook will continue to be more of same: look the other way while banks kick the mortgage credit problems down the road with EZ refinancing for F-ed borrowers and warehouse lenders let their hedge fund clients mark to model instead of marking to market. After all, although many MBS tranches are probably worthless, it will be many months if not years before they technically default. Plenty of time for more juicy 2 + 20 fees to roll i
CR, any rumblings from the Fed on this situation? I'm assuming since this has been in the wind for a while that they are watching the developments.
So GS and BAC took the assets but did not sold them ?
what did they do - took them into their own portfolio without marking them to market ?
is this a game of hot poteto ?
this, if true !! is very telling:
""A friend of mine works as a Portfolio Manager for a $2.2b CDO pool of subprime loans. I spoke to him today for an hour. Asked how he is doing, he says nothing. I ask what do you mean nothing, I hear all these stories about CDOs and losses (Bear Stearns for example), he shrugs and says nothing will happen until the Rating agencies do something. Asked about losses, he says they are there but he doesnt have to mark to market his portfolio until someone discovers it, or the Rating agencies force his hand. So his plan is to lie low and collect the management fees and pretend as if there are no losses. Asked about management fees, he laughs and says its a low 50 bips. On $2.2b, thats a cool $10m yearly which he and his four colleagues have to split up at the end of the year. He says he has the best job in the world and says there is really no work to do every day. Just wait and hope that the rating agencies dont downgrade his CDO pool and voila, at the end of the year, he and his partners can split the $10m spoils (minus the expenses for one Park Avenue office, and a secretary). I am amazed that no body (regulators, investors, the public) hasnt beseeched the Rating agencies to review all the Subprime CDOs by now given the headlines and the incredible losses hidden there. This is a SCAM and somebody needs to stop it. "
from Winter (Economic and Market) Watch » Money for Nothin’ and Your Chicks for Free
There is simply no way any of the big investment banks allow something majorly bad to happen out of this Bear Stearns, they have time and the means to avert anything drastic from happening. I think by next Monday we wont even hear another peep outside of people talking about the black eye Bear Stearns took for such a public shutdown of one of their funds.
Seems to me the interesting question is why GS & BAC would agree to unwind whereas MER wants to auction.
Is there a White Knight GSE or otherwise readily available to support successful bids and thereby calm the overall market?
Wouldn't that be the typical PPT crisis-handling playbook?
If I know Bush - or, at least how he is so politically motivated - he will probably set it up to crash during the next (i.e., Hillary's) administration.
Yal,
I still agree with sunlight and David Pearson that liquidity demands from creditors and FoF investors supercede the whole rating agency thing. The comment about sitting waiting for agencies was said under assumption that his investors will stick around.
Cal,
I think you are probably right. The Asian markets are not rattled by this news tonight, and really, it's been in the news for a few days now and our markets haven't reacted, except for the ABX indices.
I could be totally wrong, and maybe I'm under estimating the magnitude of this event, but we've seen so many other episodes of bad news that just gets shrugged off. Again, unless this particular event IS the pressure cooker and the lid is about to blow, I suspect it will fade away just as the mini crash (precipiated by sub-prime concerns) on February 27th was quickly forgotten.
Denzel, I think the direct impact will be minimal. The indirect impact (and longer lasting) will probably be even less credit available for housing as investors become a little gun shy on MBS.
Best Wishes.
They cant make a big deal out of this or it will cause major pain in the financial system.
Ben will jump in a limo, go to the Hamptons, meet with the hedge funds and big banks and cover it up until the storm blows over and then slowly and orderly liquidate it back to the market. There will be some disruption in the market but they wont let it get out of hand- the consequences are to serious.
The deleveraging is starting to get underway. The ball starts to roll downhill slowly at first. But then it gathers speed.
CR,
If the direct impact is minimal, it's certainly a sign that times have changed. In 1998, rumors about LTCM scared everyone. If FoFs and pension funds question their investment in CDO and ABS related invstments, there could be a liquidity crisis. LAst year there was no commodity-related crisis much beyond Amaranth. CDOs is a bigger problem than commodities.... isn't it healthy for this to move markets?
Called_Bluff,
actually 110K.....that stupid sign me think of slow motion train wreck every single time pass it.....
Atlanta Real Estate - Atlanta Homes for Sale — Metro Brokers/GMAC Real Estate
But what happens if Goldman and BOA decide to pull a financial fast one and sell them off slowly while Merill sells quickly and gets a better price?
That means the slow poke ends up being the bagholder. How long will that kind of discipline hold? How charitable are they willing to be for the good of the financial system?
This was something I was expecting. And will not be the last. The Bear Stearns fund will liquidate quietly with all the majors stepping in and doing everything they can to prevent a mark-to-market. But as MBS deteriorates they may not be able to hold the next and next fund. Its also only a matter of time before lawsuits hit the ratings agencies. They have had a conflict of interest and have been complicit. No doubt this will crimp mortgage financing at the margin. The critical question is when will it start to impair asset values squirreled away in portfolios at fantasy valuations. That's when the panic button will be hit.
http://www.car.org/library/media/papers/pdf/CARLegalReport2_final.pdf
CARs educational pamphlet to their members regarding distressed sales.
I agree with malbar and CR: This one will pass quietly but this will criple the MBS biz.
where is that going to lead to ? and by when ?
what is the impact on the US bond - if any ? (no refi = longer duration)
This is just another sign of the scam, lie, and fraud that the US financial system has become based on a paper dollar that has no intrinsic value. These funds will probably go over to Nigeria set up shop and come back under the new proposed accounting standards for foreign companies.
-1 + -1 = 10
Yahoo! 404 - Page Not Found
CFC REO watch:
9,214 REO's offered for sale on Countrywide Financial's website - Countrywide Foreclosures (REO) Blog
meltdown ? : Sniffing Out the Meltdown
maybe not yet.
ABX: Business & Financial News, Breaking US & International News | Reuters.com
One day the wind will come up and you'll come up empty again.
There's no reason, no explanation, so play the violins.
It's always funny until someone gets hurt... and then it's just hilarious!
"It's a blood bath,'' said Mark Kiesel, executive vice president of Newport Beach, California-based Pacific Investment Management Co., the manager of $668 billion in bond funds.We're talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit.'' "
Rate Rise Pushes Housing, Economy to `Blood Bath' (Update2) - Bloomberg.com
"Negotiations to rescue the fund are continuing, and the situation is still fluid, a person familiar with the matter said."
i love financial terms like 'fluid
I agree with CR, the implications, long term are likely to be a further tightening of credit, in my opinion, a significant tightening of credit.
The other interesting angle, one that should be on everyone's mind, is that institutions across the country are paying fees as high as 2 and 20 on EXTREMELY INFLATED ASSET VALUES! These same instituions have a fiduciary responsibiliy to force a mark-to-market due to this facade. They cannot allow investor money to be thrown out the window on an inflated asset base that does not reflect reality.
This is a cluster-mess.
What do you mean your model was flawed and you dished out millions in fees on an inflated asset base with no recourse?
Maybe everything will stay afloat as long as the chinese and asian savings rates are so high and currencies devalued. All of their excess savings mask these troubled securities, and the markets do not react because there is so much cash around to back it up.
Its the extra liquidity from asia and petrodollars keeping the punch bowl spiked
the hangover begins only after you STOP drinking
Im waiting for the big revaluation or the chinese consumer to awake
Cal-
your just dead wrong in this case, this has widespread potential implications.
If these assets are grossly overstated and fees are billed on an inflated asset base, the poential exposure is huge.
But, don't worry, we don't need hedge fund regulation.
Stevenyork,
Well said. Will add ... your waiting will be in vain. Asian Culture had great propensity for enduring pain.
These guys need jobs for social tranquility.
What do you mean your ROIC was overstated due to the forced mark-to-market and you have to restate what you presented previously?
The CA attorneys must be salivating.
This will be managed very quietly, Goldman Sachs (Henry Paulson, cough, cough, wink)is a disinterested party merely looking for market stability, they would not want too much blood in the water. The mythical, magical PPT did not sleep last night (nor much in the last few). Do you think the day's delay was unneccessary in terms of the arrangements?
It looks like no one in the street is worried and futures are up.
what is $75B among friends....
Bear Stearns's Attempt to Save Hedge Funds May Falter (Update7) - Bloomberg.com
"Bondholders at Risk
As defaults rise, bondholders stand to lose as much as $75 billion on securities backed by the mortgages, according to an estimate in April from Pacific Investment Management Co., manager of the world's largest bond fund.
The two Bear Stearns funds together once controlled more than $20 billion and had effectively paid down $2.25 billion of their $9 billion in outstanding loans by early yesterday evening in New York, the Wall Street Journal reported today on its Web site, citing unnamed sources. They'd encountered resistance to a bailout plan, the paper reported.
The securities Merrill Lynch is selling are mostly backed by mortgages or home-loan bonds, rated AAA or AA, and represent the entire collateral for loans Merrill Lynch made to the fund, one of the people said.
Russell Sherman, a Bear Stearns spokesman, and Jessica Oppenheim, a spokeswoman for Merrill Lynch, declined to comment. "
Anyone remember the take-down of the gasoline future market with Mr. Paulson?
Yeah,
who cares if these assholes have been looting mom and pop's assets, they are too dumb to know and the system allows it.
this shit is unbelievable.
Neal
"Anyone remember the take-down of the gasoline future market with Mr. Paulson?"
Yes and the stock market has been on fire ever since. Hank has friends and they ain't gonna let a lousy few million mouse clicks foul up the works, this should be good for +50 points on the DOW today.
insanity to continue:
Bank of America's Lewis Expects Easy Financing for LBOs to Last - Bloomberg.com
Bear Stearns Tangled Web
Winter (Economic and Market) Watch » More From the Milky Way: Bear Stearn’s Tangled Web
BIS 415 Trillion-
BSC Headache= No effect
You've got unprecedented liquidity,'' Lewis said.I've never seen anything like this.''
LBO firms use a mix of cash from investors plus their own funds and debt secured on the target they buy to finance deals. They typically seek to expand companies or improve performance before selling them within five years to other funds or investors in initial public offerings.
From Yal's Bloomberg link above. I work with some of these companies - do 'contract marketing' for them. I can 100% tell you for sure - they are hollow. Paper thin.
In one particular case an executive pulled me aside & said "Don't execute the model per plan - delay, we'll cover for you. We don't have the resources in-house to do our end of it - we'll explode."
Realize that I am NOT a high level exec - just a hired gun, a 'New Bus Dev' guy. A contract peddler.
He said they were given a 'suggested' business model by their hedge fund advisers on how to grow the business 400% (double then double again) in less than 5 years. This is in a highly contested global commodity market.
After puffing up the firm the fund wants to flip the asset to somebody else for a HUGE capital gain. Five years or so from now.
Ya Right.
Personally they can capture the additional business to grow revenue 400% IF they cut price enough - but the fund backers better be prepared to invest even more capital on an ongoing basis as the captured business will be very low margin. They'll need to buy additional equipment & subsidize operations at those prices. The LBO'ed firms won't be able to carry their own weight AND grow at those margins.
How these guys don't see this is beyond me.
I personally think this current fund trouble (Bear S) is a minor blip compared to the LBO troubles coming. My guess is the liquidity REALLY dries up with the resultant smash face rush to exits when the LBO guys realize they won't be able to flip those companies for anything close to what they thought they would get. Plus the take overs won't be profitable as is - they'll be running negative due to low selling prices & high debt levels. But I bet they'll have great looking executive washrooms.
Liquidation ?
I wonder if the 10 yr going down today (yield on $TNX up) is the start of people selling highly liquid assets first ?
na. this Hedge fund thing can be so bad. surly they all ignore it and move on. no impact.
Dryfly,
Exactly why hemp and nylon will experience shortages within five years
And HD is the real un-told story today-
I put that deal in the same league as GM(gmac), F, Chrysler, SLM
What dryfly is describing above involves, from a control theory viewpoint, putting a long dead time in the feedback loop between actual company performance and investor reaction.
One of the fundamental facts of process control is that control loops with long dead times perform very poorly.
If these were truly private companies, in which the people at the top were investing their own money, they'd do things differently. But they're playing with other people's money.
Companies that play with other people's money gotten through the stock market have to report regularly and with some accuracy to the stockholders on how well they're doing. These nominally "private" LBO firms playing with money gotten through the bond market in today's "covenant-lite" environment don't.
By the time the bond market wakes up to how bad these deals are, an awful lot of money will be gone forever.
If you read the Bloomberg story closely (this AM 6/20)it suggests, if I am reading it correctly, that the real damage was done in selling last week....upwards $4 billion. Could that be the basis of the treasury spike last week and if so is it much to do about nothing after the fact?
I was short HD from 42 to 38 and I went to check how it is today. up 6% !!! but still around 40.
Dow is tilted because HD and GE today.
but over all : I don't see any of the fire sale to have any infulance on any thing.
If you have any other view please share.
CNBC just reported a wave of bond selling is occurring today. I think he said JP Morgan and Deutsche Bank are already selling, in addition to Merrill later today.
so the big question is:
More margin calls ?
the real damage was done in selling last week....upwards $4 billion. Could that be the basis of the treasury spike last week and if so is it much to do about nothing after the fact?
That was the sound of smart money running out the door. Every time this happens during the summer, it will be down a staircase in massive volume, a slight price rise on weak volume, then another gap down on massive volume.
That is how musical chairs is played on Wall Street.
Odd that there isn't more on the bigger picture of Bear Stearns itself. 20 years ago this event would have found an SEC crew inside the b/d doing a net capital computation marking illiquid securities and questionable debt assets to zero. But these are the new days and illiquid is out and "market risk computations" for qualifying b/ds is the new standard. Bear qualified in 2005 and it is doubtful that the SEC has the expertise or technology capability of doing its own computation. Also, the new approach seems to be to let the market solve the problems without government intervention. This of course means everyday investors with assets at financial institutions are shouldering additional risks for which they are not being compensated or may not know exist (as they are assuming the SEC is protecting them).
FYI Bears market cap according to Forbes is $20B and just two months ago it reportedly was seeking a 2-4B investment from the Chinese Construction Bank.
As for SPIC protections its net assets 2006 approx $1.4B; cash at year end approx $730,086.
As for junk bonds...20 years ago if they were not quoted on a public exchange they were valued at zero for the computation; but not anymore.
Financial integration and innovation are great; but this super-charged deregulation is about to be stress tested and no doubt if it fails those who instigated it will be blaming the government for lax oversight!
I wonder if the 10 yr going down today (yield on $TNX up) is the start of people selling highly liquid assets first ?
na. this Hedge fund thing can be so bad. surly they all ignore it and move on. no impact.
It seems to me that high yield bonds (which are still quite liquid) would get sold first, and we'd see a rise in the spread across credit quality.
That's why I have a hard time being bearish on the 10-year at 5.15% - people are falling over themselves to buy bonds from uncreditworthy companies at 7%. This is where the real insanity in the bond market is. Rationally, a 5% USD treasury is far more valuable in the long-term than a 7% USD junk bond, because you're likely to actually get your principal back.
I think when these compressed risk spreads finally unwind, alot of that money will find its way into cash and treasuries.
New thread.
I do very humbly suggest that one look carefully at who, if anyone, wants the "asset market" in the US to collapse.
It is assumed that everyone wants assets that always go up in value and interest rates that always go down.
As stated, let us look at the constituency for higher interest rates.
That constituency wants US government debt to be more expensive.
Does it include the Chinese? The Japanese? Of course it does!
And does it include the hard-right in the US?
Will Bernanke lower rates? Well, everyone seems to be pushing back the date on which it is certain that he will.
And inflation? You ain't seen nothing yet. Not even close.
Expect inflation surprise after inflation surprise after inflation surprise ad infinitum
High rates, high inflation. Bad for the people, good for Grover Norquist.
That's what I'm saying for weeks! Fly to quality means junk down, treasuries up.
"Rationally, a 5% USD treasury is far more valuable in the long-term than a 7% USD junk bond, because you're likely to actually get your principal back."
As Will Rogers put it, "You keep talking about the return on my principal, I'm more worried about the return of my principal."
JP Morgan has begun selling Bear Stearns hedge fund.
Bear CDO lists total at least $1.44 billion
Bear CDO lists total at least $1.44 bln - sources
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