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Thread: scary scary development ...

  1. #1
    Banned Melonie's Avatar
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    Default scary scary development ...

    having CDO's sold at auction would force the 'revaluation' of all other similar CDO's, which could definitely be dangerous to the financial health of banks / credit unions / pension funds / city governments ...

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    Default Re: scary scary development ...

    which continues to get even more scary ...



    (snip)" By Walden Siew and Al Yoon

    NEW YORK, June 21 (Reuters) - Even as Bear Stearns held out hope of keeping two hedge funds from collapsing, worries over their forced liquidation are reverberating through U.S. financial markets, raising concern about broader contagion.

    So far the risks seem contained, but the fallout may be felt everywhere from leveraged buyouts, investment bank earnings and sales of collateralized debt obligations. Those securities have pushed sales of corporate and housing-related debt to record highs in the past year.

    Merrill Lynch & Co. (MER.N: Quote, Profile, Research) on Wednesday sold only $100 million of $850 million of highly rated collateral assets it auctioned after seizing them back from the Bear Stearns funds, said a person familiar with the auction.

    Three other banks -- Goldman Sachs Group Inc. (GS.N: Quote, Profile, Research), JPMorgan Chase & Co. (JPM.N: Quote, Profile, Research) and Bank of America Corp. (BAC.N: Quote, Profile, Research) -- have closed out their positions with the funds. For details, click on [nN20245025].

    High-grade CDOs trade infrequently because of their perceived safety relative to lower-rated securities that provide higher yield for investors. It might be difficult to sell such a large quantity, dealers and investors said. The concern is that a generalized markdown of CDO positions could be inevitable and spark a greater wave of selling.

    "The problem is that marking down the assets to where the market will bid them may in fact be the right thing to do, but no one wants to take the loss," said Jason Brady, who helps manage $4 billion in bonds at Thornburg Investment Management in Santa Fe, New Mexico.

    Details about Merrill's auction and efforts by Bear Stearns to offer $2 billion of CDOs were not immediately clear as possible buyers determine how to value the complex CDOs.

    Some fund managers speculated the failure to sell the assets as intended indicated the dealers were largely disappointed with what they saw.

    CDOs group debt based on credit quality to help diversify risk by placing the strongest debt at the top of the capital structure. In theory, the repackaged debt helps absorb weaker performance from riskier debt such as subprime loans.

    "It seems like credit risk premiums are prone to increase in the near term, influenced to a great degree by the risk of marking CDO assets, not necessarily liquidating them," said Christopher Sullivan, chief investment officer at the United Nations Federal Credit Union in New York. "(snip)

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    Default Re: scary scary development ...

    and the scare gets worse and worse ...

    - According to CNBC reporter, Charles Gasparino, Barclay's Bank could stand to lose as much as $500 million of unsecured debt within the fund.

    - "The other one that is a big loser, according to our sources, is Cantor Fitzgerald," Gasparino said, during CNBC's "Power Lunch." "It just put out a bid list for $400 million in collaterized debt obligations. Those are the assets that are in that fund.

    They are getting some bids, traders are telling us, that are as low as 10 cents on the dollar."

    - "So this is what is causing the massive indigestion that is in the subprime market that is obviously spilling over to the Wall Street firms," he continued.

    Gasparino said "...every Wall Street firm has to re-evaluate its own balance sheet if it holds this stuff, to match these prices, which are as low as 10 cents on the dollar.""


    In many ways this situation is akin to a new housing development mostly full of homeowners who paid an average of $300k for their recently built houses. But then a few homes must be put up for 'distressed sale' (reason could be the homebuilder flirting with bankruptcy, could be a few homeowners that can't handle ARM interest rate resets etc., doesn't really matter) and are dumped on the auction block for whatever price the market is willing to pay. In one recently publicized Florida case, homes essentially identical to those that had recently sold for $300k only drew bids for $150k. However, the fact that the sale price was only $150k also 'revalued' the assessment for all of the other essentially identical homes in the development.

    Thus on paper, those other homeowners have 'lost' $150k. Fortunately for individuals, this $150k loss does not have to be 'booked', and the homeowner can hang onto the house forever in hopes that market prices will rise again someday and wipe out this paper 'loss'. However, hedge funds, investment banks, pension funds, credit unions, local gov'ts etc. do NOT have the luxury of sitting on a paper 'loss' re the values of their CDO's. Accounting rules require that they 'mark to market' the value of their CDO's when filing quarterly statements. Thus if the speculation regarding the auction results of former Bear Stearns CDO's is the least bit accurate, ALL owners of similar CDO's will be forced to book huge losses by the end of the next quarter !!!

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    Default Re: scary scary development ...

    Quote Originally Posted by Melonie View Post
    Thus if the speculation regarding the auction results of former Bear Stearns CDO's is the least bit accurate, ALL owners of similar CDO's will be forced to book huge losses by the end of the next quarter !!!
    oh man. i didn't realize that. yikes!

    i figured they were allowed to maintain their own valuations if they were distinctively (enough) different portfolios.

    although perception leads to reality in this world.

    talk about being chained at the ankles and jumping in. in for a penny, in for a pounding.

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    Default Re: scary scary development ...

    oh man. i didn't realize that. yikes!
    for better or worse, neither does just about everybody else outside of 'high finance' circles !

    The fallout from CDO 'revaluation' is already starting to show up here and there, but so far is escaping major coverage in the mainstream financial media ...



    (snip)"Brookstreet Securities Corp., an Irvine broker dealer, shut its doors and laid off 100 local employees because it could not meet margin calls on complex securities backed by faltering mortgages, company spokeswoman Julie Mains said.

    Mains said Brookstreet went from $16 million in capital Friday to being $3 million under water Wednesday because its clearing firm, National Financial Services, demanded payment for securities bought on margin.

    The securities, known as collateralized mortgage obligations, lost value as Wall Street confidence in mortgage-backed securities collapsed. The most prominent collapse was this week's demise of two Bear Stearns & Co. hedge funds worth $20 billion that invested in collateralized mortgage obligations, which are mortgage-backed securities with varying maturity dates, risk and yields.

    Mains said the value of Brookstreet's securities plunged to 18 cents on the dollar, forcing the company to dip into its capital to meet margin calls, which is when investors must increase deposits to meet minimum account requirements.

    "It wasn't a problem with securities," she said. "It was a problem with the margins."

    Adam Banker, a spokesman for National Financial's parent, Fidelity Investments Co., denied his company's margin calls forced Brookstreet's collapse.

    The National Association of Securities Dealers ordered Brookstreet to liquidate its remaining accounts Wednesday, Mains said. Some customers lost the entire value of their investments while others "did indeed go negative," Mains said. She said clients should try to find another broker-dealer to take over their accounts.

    Mains said clients should have known they were making risky investments, but consumer attorneys said CMOs should only be sold to pros.

    Stuart Meissner, a New York attorney and former securities regulator, said he received calls from people whose Brookstreet accounts went from $250,000 to negative value. "They were supposedly guaranteed 10 percent returns," Meissner said. "(snip)

    ... and that one anecdote is probably 'just the tip of the iceberg'


    Also, don't forget the effects on the 'other side' of CDO's. For example, many banks and credit unions have written mortgages based on the purchase of counterbalancing 'credit default' CDO's that supposedly will provide 'insurance coverage' against loan losses if those mortgages go into default. However, if the financial institution behind the 'credit default' CDO's the banks and credit unions are holding goes belly-up due to 'revaluation', there is no way that those financial institutions are actually going to 'pay off' on their 'credit default' CDO's (since there won't be any assets left with which to 'pay off'). This in turn will leave those banks and credit unions to eat the mortgage default losses themselves.

    ~
    Last edited by Melonie; 06-23-2007 at 04:22 AM.

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