Monday, June 18, 2007

Hedgies Grab the Other Third Rail

by Tanta on 6/18/2007 10:32:00 AM

I don't often find myself making confident predictions these days--the market can stay irrational longer than I can--but I will do so on this subject: some hedge funds are about to discover what is Different about home mortgage lending, with unfortunate results for the hedgies.

Bloomberg, via John M. (thanks!):

June 18 (Bloomberg) -- James E. ``Jimmy'' Cayne helped make Bear Stearns Cos. the mortgage king of the securities industry by packaging home loans into bonds and selling them to clients like Michael Vranos. Now Vranos, who manages $29 billion at Ellington Management Group LLC, is cutting Cayne out of the middle and buying mortgages on his own.

On Wall Street, they call that disintermediation, and it's eating into almost $9 billion of fees that firms including New York-based Bear Stearns earn from securitizing mortgages. Instead of buying such bonds at markups of 1 percent or more, hedge funds expect to make better returns by taking over bad debts and pressing borrowers to pay up.

Well, guys, welcome to the most-regulated lending industry in history, with the biggest middle-class political constituency imaginable, and some major honkin' participants who happen to be giant financial institutions whose calls are taken by the Federal Reserve.

Hope you find enough "inefficiencies" to make it fun while it lasts.