Thursday, June 28, 2007

Subprime and CDOs II

by Tanta on 6/28/2007 12:00:00 PM

This is one weird New York Times article on the Bear Hedge Horror of 2007. I'll let you all work out the blog-movie review angle.

When I came across this paragraph, I thought, aha! Exactly what I've been saying all along:

Mr. Cioffi, a longtime bond salesman who had been trading Bear Stearns’s own money for about six months, was brought over to start a hedge fund, the High-Grade Structured Credit Fund. It would invest in bonds and securities backed by subprime mortgages. While some of the mortgage-related securities were easily valued and traded, others, like collateralized debt obligations, or C.D.O.’s, do not trade frequently and can be very difficult to value.

But then I got to this part:
The approach was so successful that the company started a sister fund last summer, the High-Grade Structured Credit Enhanced Leverage Fund, that would use even more leverage.

The timing of that fund, however, could not have been worse; the cooling housing market began to reveal the lax lending standards used by subprime lenders. Last fall, delinquencies and defaults began rising, making the environment for trading and valuing the esoteric securities that are related to those loans much more difficult.

So are the mortgage-related securities the "easily valued and traded ones" or the "esoteric" ones? If the second hedge fund was started right at the time when subprime mortgage investing started to look iffy, how did it get "more difficult" to value the securities? Last fall the deterioration of the housing market and "exotic" mortgage loans was so secret we were having televised hearings on the subject by Congress. Some secret. How, exactly, does that make these puppies "difficult to value"?

(hat tip Walt!)