Wednesday, June 20, 2007

WSJ: Bears Woes Test Markets' Mettle

by Bill McBride on 6/20/2007 11:52:00 PM

From the WSJ: Bears Woes Test Markets' Mettle

... word spread that several investment banks were having trouble finding buyers for subprime mortgage securities they pulled out of the teetering hedge funds at the Wall Street firm.
...
J.P. Morgan Chase & Co. ... was scheduled to begin an afternoon auction of collateral it held from the bear fund ... Minutes before the sales were to begin, the firm pulled back. Later, J.P. Morgan came to terms with Bear to eliminate its exposure to Bear's troubled hedge funds .... Some traders said the bank might have been forced to settle with Bear because the loans it had put up for sale would have fetched so little in the market.

Deutsche Bank AG and Merrill Lynch & Co., among others, remained in limbo ... Earlier in the day Deutsche quietly approached some market participants to gauge their interest in some of its collateral assets ...

Merrill also planned to sell collateral and stopped negotiating with Bear ... some of the early prices bandied about for Merrill's assets were relatively low. But when Merrill's auction took place late in the afternoon, it managed to sell some higher-quality assets at reasonably high prices ...
What a mess. No one knows what many of these securities are worth; some of them may be worthless.

The biggest risk is that this is just the "tip of the iceberg" and that other hedge funds are about to go under. Another risk, mentioned in the WSJ article, is that "$250 billion in junk bonds and corporate loans are slated to be sold to investors" over the next four to eight weeks as part of the recent LBO wave. If investors become skittish - and that Fitch Ratings notice I posted earlier today might scare a few of them too - those debt sales might be in trouble.

Even if this is just a bump in the road, at the least this probably means another round of credit tightening for the mortgage market, and more downward pressure on housing.