 |
|
Hedge funds:Titanic story or just a temporary pass through?
|
For the first time my prediction was not correct for the week.I could not see the hedge fund problem coming.Fortunately, I, personally was not in the market for trade because I thought there was something artificial about it.The market was too good to be true.Now,I wonder how deep is the problem and how soon it might affect the rest of the markets? Can it pull a trigger in credit markets? Or is it just a temporary problem like exaggerated sub prime mortgage story we had a couple of months ago? Well, it is too early to say it. The hedge fund problem might be the seen part of an iceberg. Anyway, it is too late to discourage lenders to boost loan volumes by loosening underwriting standards.
Wall Street is now engineering a way to pretend that nearly worthless subprime bonds are maintaining.
CDOs, consisting of slices of debt securities, in the past few years have been the most popular extension of the Wall Street securitization machines that seek to spread risk among a wider array of investors.
The complex nature of the bonds that have increasingly included huge chunks of mortgage debt, makes the bonds difficult to value, increasing the risk of pricing inaccuracies.
As you know, It was Wall Street's version of hide and seek this week as some of the world's largest investment banks remained tight-lipped on the likely fall in price of some complex securities that may soon infect global debt and equity markets.
In the past week the stock market lost ground, the bond market saw prices bounce around, and investors were left with the sinking feeling that things could get worse as credit worries undermined the $1 trillion market for collateralized debt obligations (CDOs).
The losses suffered by two funds containing these complex securities, many tied to risky mortgage loans, sent Bear Stearns Cos. executives scrambling to re-finance the funds this week.
But the large and sophisticated investors in these funds did not run for the hills. Instead, they went silent.
If word of the exact nature of the losses became public, it would have forced many other funds to revalue their holdings and perhaps lose money, setting off a domino effect that could rattle markets globally.
With delinquencies and foreclosures in the subprime mortgage market for less creditworthy borrowers at the highest in a decade, losses in subprime asset-backed securities contained in CDOs are forcing the issue of valuations.
An index of subprime mortgage bond prices made new lows this week, reflecting concerns that the worst is not yet over for the industry behind the $7 trillion market for mortgage-related bonds.
Allegations that dealers are exploiting the opaque nature of the CDO market came to a head this week as JPMorgan Chase & Co., Goldman Sachs Group Inc. and others sought to extricate themselves from investments in hedge funds managed by Bear Stearns Asset Management.
Most of the hastily arranged auctions for CDOs seized from Bear as collateral were cancelled at the last minute, fueling speculation that traders were told to avoid transactions rather than accept low prices.
Bear Stearns on Friday moved to address the problem of liquidity in the market by offering up to $3.2 billion in its own money to support the two funds in question. The financing would eliminate exposures of banks including Citigroup Inc. and Barclays Plc but left exposed others that have provided loans to another fund that had lost nearly a quarter of its value this year.
The bigger worry for Wall Street and buy-side investors is that low prices for the CDO securities could force mark downs in the value of similar securities held by others. The problem is most acute for funds that used borrowed money to ramp up investments, since the lenders make margin calls and force rapid selling of the securities.
Bear Stearns fund liquidations and the potential for contagion in other markets will be scrutinized by the House Financial Services Committee on Tuesday.
Many critics of the subprime mortgage meltdown have blamed Wall Street for encouraging lenders to boost loan volumes by loosening underwriting standards.
Credit rating agencies, whose valuation models are integral to price estimates have been criticized for failing to downgrade the securities.
Even with rating assessments, investors must take a leap of faith over the risk they take in CDOs.
The rating agencies are downgrading securities after the fact and not providing the market with the right cues for comparability and valuation of assets. This is exacerbating the problems and uncertainty in situations like what we're seeing in the Bear situation.
Fitch Ratings on Friday said it may cut ratings on some CDOs, including one high-grade CDO issued just last year, due to exposure to deteriorating subprime credit. |
| Tarih
: 25.06.2007 |
|
|
View
All |
|
|
|
|
 |
|
Untitled Document
| |
 |
| |
 |
Copyright
© 2006 Mert TOKER All Rights Reserved. |
|
|
