Wednesday, June 20, 2007

Bear Stearns Saga Part IV " How To Mask The Derivative Value"

This story that started already interesting ( see links) has the potential for something really big. to me it is obvious that nobody from Wall Street wants to show how far the real market value of the derivatives have already crashed. it will be interesting to see how long this fact can be hidden......one thing is for sure... the liquidity in this segment will take a significant hit....

part 1 http://tinyurl.com/23s9fp ,
part 2 http://tinyurl.com/2sdv2u,
part 3 http://tinyurl.com/2p75le

Das ganze fing ja schon recht interessant an (s.links). Nun denke ich das die Entwicklung der letzten Tage und vor allem das Verhalten der großen Spieler an der Wall Street gezeigt hat das hier wirklich dramatische Auswirkungen drohen. Dürfte für Leser dieses Blogs nicht ganz überraschend kommen :-). Es scheint ziemlich offensichtlich das hier mit aller Macht versucht wird den Marktwert der Derivate zu verschleiern. Habe Zweifel ob das noch lange gelingt. eines scheint aber jetzt schon klar...die Liquidität in diesem Segment wird einen Schlag versetzt bekommen.....aber wie ich den Markt einschätze "die Karavane zieht weiter"......


The high-stakes game of brinksmanship began early yesterday on Wall Street, and continued throughout the day. Bankers traded telephone calls, frenetically negotiating the fate of two hedge funds.
All wanted to avoid a fire sale in the troubled mortgage-securities market, but at the same time, not get stuck with an exploding liability that could result in steep losses. The day ended with deals that appeared to have forestalled a meltdown. But questions remained about how successful they were and whether they had merely delayed the inevitable.

As the morning unfolded, lenders to two hedge funds at a unit of Bear Stearns, the investment bank, tried to ascertain what they could expect if they auctioned off mortgage securities with a face value of up to $2 billion. The solicitations were hastily withdrawn when investors reacted with little enthusiasm. But by the end of the day, some of the less-risky securities did change hands.
At the same time, several lenders, including JP Morgan Chase, Goldman Sachs and Bank of America, reached deals with Bear Stearns that forestalled a need to sell securities in the open market. It appeared that some lenders pulled back over concerns about the effect that a large liquidation would have on bond prices and investor confidence. While the securities involved represent a fraction of the market, a liquidation could have forced a bigger sell-off while setting a lower price.

One lender, Merrill Lynch & Company, moved ahead with plans to auction $850 million in collateral it had seized from the Bear funds, according to people briefed on the matter. And Deutsche Bank was said to be shopping $600 million in assets. ......

The deal that JP Morgan Chase reached with Bear Stearns Asset Management allowed it to sell $400 million collateral back to the hedge funds for cash, according to people briefed on the matter. It was not clear what price the two banks agreed to.

Goldman Sachs and Bank of America reached similar deals, though details remained unclear. Also unclear is what price the assets will eventually fetch for the Bear funds and what types of losses investors, who have been unable to redeem their investments since May, will face.

The securities causing the greatest concern within the Bear Stearns funds are known as collateralized debt obligations, or C.D.O.’s. Run by portfolio managers, these complex instrument are akin to mutual funds in that they buy stakes in a variety of bonds backed by mortgages.

They often invest in the riskiest portion of the bonds, usually with a hundreds of millions or billions in borrowed money. Some simply buy stakes in other C.D.O.’s. About $316 billion in C.D.O.’s specializing in mortgages were issued last year, up from $178 billion in 2005. ...

>no wonder they dont want to price them to market.....
>hier kann man erahnen warum einer die zum Marktpreis bilanzieren will.....

He said it would take time — perhaps several days — for potential buyers to drill down into some of the more complex securities in order to value them before any bids could be prepared. From 33 to 45 percent of the $2 billion in C.D.O.’s on offer by the funds early yesterday were investments in other C.D.O.’s,

One worry about the possible unwinding of the Bear funds is that it will cascade into larger liquidations by other investors who hold similar securities at far higher prices. Accounting rules require investment banks to mark the value of the investments to the price of similar assets trading in the market. Many mortgage-related securities, and C.D.O.’s in particular, do not trade frequently, making them hard to value.

“Do you want to be the first one out and perhaps cause the lows to be hit in the market, or do you want to wait and see how this all plays out?”

In fact, rather than aggressively selling the assets it has seized, Merrill is quietly showing it to a small group of potential buyers, according to a person briefed on the process.

Such an approach helps to keep the pricing of the securities under wraps, allowing Wall Street firms to avoid marking down their own stakes. Keeping the sales price quiet also means that the firms may not have to add collateral immediately to shore up their portfolios.

At the end of the day, Merrill sold only a small portion of the $850 million in assets it had seized from the Bear funds as collateral. Traders said what did sell was the less risky, well-collateralized securities and that those sold near or at par in many cases. It is unclear whether Merrill intends to hold onto the remaining securities or whether it will try to sell them again down the road.

Yet another emerging worry is that the big investment banks that until now have generously lent billions of dollars on good terms to traders and portfolio managers are pulling back or demanding stricter terms.

One industry executive, who asked not to be named because of the delicacy of the subject, said the banks involved in the Bear funds could collectively lose $1 billion on their lendings to the Bear funds. While the amount is not itself significant given the size of these banks, it suggests the potential for bigger losses down the road.

“We have heard that lenders have already reduced the amount that they are willing to lend against C.D.O.’s,” said Timothy Rowe, a portfolio manager at Smith Breeden Associates.

Still, analysts note that credit remains easy by historical standards and the market seems to be weathering the current storm well.

“Yes, there was too much leverage in the market. Yes, there was too much appetite for risk and yes, that risk was underpriced,” said Mark Adelson, a senior analyst at Nomura Securities in New York. “But there has not been a lick of spillover of this situation in the corporate bond market or stock markets so I don’t think people need to start hoarding food, water and ammunition because the end is coming.”
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6 Comments:

Blogger John M said...

"Accounting rules require investment banks to mark the value of the investments to the price of similar assets trading in the market."

Yesterday that NYT quote stood out for me, too. It's not good when everyone fears the truth above all.

Thanks so much for your support over at Doom. I think yesterday was a very significant milestone in this story.

4:26 AM  
Anonymous Anonymous said...

It is unclear whether Merrill intends to hold onto the remaining securities or whether it will try to sell them again down the road.

Uhh, yeah -- unclear. So maybe it would've been better to try something else?

The deal that JP Morgan Chase reached with Bear Stearns Asset Management allowed it to sell $400 million collateral back to the hedge funds for cash, according to people briefed on the matter.

After all, it seem Bear Stearns is willing to throw money (from other parts of the company) at its creditors.

4:42 AM  
Blogger jmf said...

Hi John,

the longer they postpone the obvious the more brutal the slump will be...

just like in subprime......

and i agree that yesterdays event could trigger something big...at least the risk appetite!

4:44 AM  
Blogger jmf said...

Hi Anon,

throwing good money after bad money...

shows how desperate the situation is. i can smell ANGST :-)

4:46 AM  
Blogger jmf said...

another link

Bear Stearns Fund Collapse Sends Shockwave Through CDO Market

`Systemic Fallout' .....

The reaction to the Bear Stearns situation is reminiscent of Long-Term Capital Management LP, which lost $4.6 billion in 1998. ...

http://tinyurl.com/23p2td

4:50 AM  
Blogger jmf said...

#John

Thanks also :-)

4:52 AM  

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