by Calculated Risk on 6/20/2007 04:29:00 PM

From Dow Jones: Results From Sale Of Bear Assets May Not Be Clear On Wed (hat tip Brian)

While the deadline for a sale of Bear Stearns' ... hedge funds assets is not far, the results from the sale may not be clear until much later.

... Merrill Lynch & Co. (MER), which is circulating its list of $850 million of mostly highly-rated complex securities, may not be met...

That's because the securities - mostly collateralized debt obligations - on the auction block are extremely complicated, and it will take investors some time to assign what they believe is a fair value to these assets.

"At least a third of what is being shown is pretty esoteric stuff," said [Mark Adelson, managing director of fixed income research at Nomura Securities.] The bulk of collateral appearing on the bid lists are CDOs that are backed by a pool of mortgage bonds, and CDO squareds, which are CDOs of CDOs, similar in concept to a fund of funds, market participants said.

by Calculated Risk on 6/20/2007 10:27:00 AM

Reported on CNBC: JPMorgan Started Selling Stearns Hedge Fund Assets Tuesday Night

update: CNBC also reporting that Deutsche Bank and others are selling hedge fund assets.

by Calculated Risk on 6/19/2007 11:33:00 PM

More from the WSJ: Two Big Funds At Bear Stearns Face Shutdown

Two big hedge funds at Bear Stearns Cos. moved toward the brink of closing down ... as a bailout plan ... fell apart ...

The funds, which once controlled more than $20 billion in a combination of investor and lender money ... had invested heavily in various securities backed by subprime loans ...

... the funds had effectively paid down $2.25 billion of their $9 billion in outstanding credit. The first two lenders to exit their positions, Goldman Sachs Group Inc. and Bank of America Corp., agreed to unwind complicated transactions with Bear without dumping lots of bonds on the broader market. ...

By unwinding those loans in an orderly manner, rather than through a series of fire-sale auctions, Bear's fund managers ... could help stave off painful ripple effects in the broader market for mortgage-backed securities and related instruments. ...

Merrill, on the other hand ... opted to revive a planned auction for hundreds of millions of dollars worth of collateral from the Bear funds.

by Calculated Risk on 6/19/2007 06:18:00 PM

From the WSJ: Merrill Lynch To Dump Bear Stearns Fund's Assets

A day after managers of a troubled internal hedge fund at Bear Stearns Cos. presented lenders with a last-ditch plan to reinvigorate the fund with additional financing, creditor Merrill Lynch & Co. pushed forward with plans to sell hundreds of millions of dollars in collateral assets out of the fund, said traders late Tuesday.

Merrill has indicated plans to sell off at least $850 million worth of collateral assets, mostly mortgage-related securities, Wednesday afternoon, according to documents reviewed by the Wall Street Journal.

Brian sent me this link with the comment: "Look out below!"

Added: Bill Fleckenstein wrote the following today before the Merrill announcement (Fleck's site):

"I have to wonder why Wall Street is working overtime to rescue a $600 million fund. On the other hand, I think we all know the answer: In a liquidation scenario, lots of people fear what would happen to leveraged portfolios across Wall Street and the world if sales of some of the fund's paper were marked to
market.
...
I can't recall a fund of this size ever being bailed out. Liquidation is the usual outcome when a fund is down 25% to 30%, as this one supposedly is. Of course, it might be down a lot more if real prices were used.
...
Apparently, all sorts of games are being played and attempts being made to avoid marking mortgage slices-and-dices to market -- in addition to the fact that many funds aren't required to mark their positions to market until the ratings agencies say so."
Posted with permission.

First, it appears the fear will now become reality - assets will be sold. However Fleck appears to suggest that hedge funds aren't required to mark-to-market until the "rating agencies say so". We have seen a wave of downgrades recently, but overall the rating agencies have been slow to react to the subprime implosion. So if the hedge funds have to wait for the rating agencies, this will take some time to play out.

by Calculated Risk on 6/19/2007 09:37:00 AM

From the LA Times: Report from UCLA team skirts the R-word

"We suspect that the weakness in the housing market is finally spilling over into consumption spending," wrote senior economist David Shulman in the quarterly forecast being released today. "Retail sales appeared to stall in April and automobile sales have become decidedly weak.

"This is not a recession, but it is certainly close," Shulman said.

And on California housing:

In a separate report on the California economy, UCLA forecasters predicted home values would continue to fall slightly or remain flat in most parts of the state as many homeowners struggled to make higher payments on adjustable-rate mortgages.

"The pipeline of mortgage resets suggests it may be mid-2009 before California sees a normal housing market again," said the report by economist Ryan Ratcliff.

This fits with this Financial Times article: Bernanke hints at thinking on housing (hat tip Roubini)

Changes in house prices could have a bigger effect on consumption than the traditional “wealth effect” suggests, Ben Bernanke said on Friday in comments that offer some insight into how the Federal Reserve may think about the continuing problems in the US housing market.

The Federal Reserve chairman told a conference hosted by the Atlanta Fed that, in addition to making homeowners richer or poorer, changes in house prices might influence the cost and availability of credit to consumers.

This is because people with equity in their homes have more at stake in avoiding default. That, in turn, reduces the premium char-ged by lenders owing to their imperfect knowledge of their borrowers’ financial circumstances.

If this theory is correct, Mr Bernanke said, “changes in home values may affect household borrowing and spending by somewhat more than suggested by the conventional wealth effect”.

by Calculated Risk on 6/19/2007 09:13:00 AM

The Census Bureau reports on housing Permits, Starts and Completions. Seasonally adjusted permits increased:

Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 1,501,000. This is 3.0 percent above the revised April rate of 1,457,000, but is 21.7 percent below the revised May 2006 estimate of 1,918,000.

Starts declined:

Privately-owned housing starts in May were at a seasonally adjusted annual rate of 1,474,000. This is 2.1 percent below the revised April estimate of 1,506,000 and is 24.2 percent below the revised May 2006 rate of 1,944,000.

And Completions declined slightly:

Privately-owned housing completions in May were at a seasonally adjusted annual rate of 1,534,000. This is 0.5 percent below the revised April estimate of 1,542,000 and is 19.3 percent below the revised May 2006 rate of 1,901,000.

Click on graph for larger image.
The first graph shows Starts vs. Completions.

As expected, Completions have followed Starts "off the cliff". Completions are now at the level of starts. Starts will probably fall further, based on housing fundamentals of excess supply and falling demand, and completions will most likely again follow the next decline in starts.



This graph shows starts, completions and residential construction employment. (starts are shifted 6 months into the future). Completions and residential construction employment were highly correlated, and Completions used to lag Starts by about 6 months.

Both of these relationships have broken down somewhat (although completions have fallen to the level of starts). Why residential construction employment hasn't fallen further is a puzzle. Also the time between start and completion has increased recently.

This report shows builders are still starting too many projects, and that residential construction employment is still too high.