More subprime lending trouble

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Murt10

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From the WSJ. Looks like we're not out of the woods yet, not by a long shot.


Murt



"Another Bear Stearns Hedge Fund Is in Trouble
By Kate Kelly

Bear Stearns Cos., already forced to shut two hedge funds that bet heavily on the risky subprime-mortgage market, is now facing big losses in a third fund that has roughly $900 million in mortgage investments, according to people familiar with the matter.

The fund, known as the Bear Stearns Asset-Backed Securities Fund, ran into trouble in July and has refused to return investors' money for the moment, according ..."

http://online.wsj.com/article/SB118591963252683893.html?mod=home_whats_news_us?mod=djemalert
 
And American Home Mortgage cannot meet margin calls as of yesterday, and may soon face bankruptcy!

More to come.
 
Murt10 said:
From the WSJ. Looks like we're not out of the woods yet, not by a long shot.


Murt



"Another Bear Stearns Hedge Fund Is in Trouble
By Kate Kelly

Bear Stearns Cos., already forced to shut two hedge funds that bet heavily on the risky subprime-mortgage market, is now facing big losses in a third fund that has roughly $900 million in mortgage investments, according to people familiar with the matter.

The fund, known as the Bear Stearns Asset-Backed Securities Fund, ran into trouble in July and has refused to return investors' money for the moment, according ..."

http://online.wsj.com/article/SB118591963252683893.html?mod=home_whats_news_us?mod=djemalert
Click to expand...

The difference with this one though is that Bear Stearns was not leveraging up using borrowed money so they are not in a situation of being forced to sell the underlying assets to meet margin calls. Apparently very little of their assets were in sub-prime anyway so they probably took the right step to protect investors from forced sales caused by withdrawals which could have led to very significant losses for all investors and instead wait out the storm.

Does show the jitters out there in the market though. The liquidity problem is beginning to resemble the LTCM fiasco and Russian debt Default in 1998. Everyone is selling and no-one is buying.
 
US Subprime

Given all the talk in the media about subprime,I thought I would post a few insights on industry.I work in the sector,so I am hoping to dispel some of the myths about subprime.I have no sinister motive here,just trying to spread some knowledge.

Subprime refers to mortgages issued to borrowers who would not qualify under normal guidelines,due too poor credit history,bankruptcies,unstable earnings etc.The loans are usualy issued with long maturities,but generally the borrowers refinance after a couple of years as their credit scores improve,because subprime rates are significantly higher than mainstream mortgages.

Banks bundle these mortgages together and issue Asset Backed Securities (ABS) off of them.The ABS's are organised into tranches,with the senior tranches having priority of claim on the assets.These tranches are bought by various institutional investors.The majority of the assets would be in tranches rated AAA,this is the highest credit rating,reflecting a very small probability of default.Too put this in perspective,Italian Goverment bonds get a lower AA rating.
The 2005 and 2006 vintages of subprime Bonds were based on weaker collateral pools,due to aggressive lenders and a weaker housing market.As a result the rate of defaults have been higher than expected.ABS are generally overcollaterised by having a greater value of mortgages than bonds issued and there is an extra cushion due to the mortgages paying a higher rate than the bonds.

Losses at this stage are predicted between 8-10% which means that the AAA tranches should not experience losses,this is why none of the AAA rated tranches have been downgraded as of yet.
The issues that are causing havoc in the market is that all the buyers are waiting to see what happens next,this is causing prices to drop as supply outstrips demand.Some hedge funds are highly leveraged investors,although their holdings are still sound (so far) their lenders are looking for additional margin due to the decline in market price,which the hedge funds cant afford.

In the last few years the global economy has been fuelled by cheap credit,in light of current volatility many credit institutions have increased their required risk premiums,this has had the effect of drying up all the cheap credit in the market.The knock on affect of this is that many of the large private equity/merger deals that have been keeping the equity markets buoyant could fall through.
 
Re: US Subprime

dunkamania said:
Given all the talk in the media about subprime,I thought I would post a few insights on industry.I work in the sector,so I am hoping to dispel some of the myths about subprime.I have no sinister motive here,just trying to spread some knowledge.
Click to expand...

What myths??
 
Did you see AHM's stock on thursday's trading. - what a ride.

Previous day it went from 10$ to 1& odd.
And on thursday it went from 1$ to 4.40$ and back down to 1$ in 1 day.

some traders made a lot of money on those swings.
Interesting to watch.

K
 
Today's New York Times describes what's happening as a 'credit freeze' and commentators are astounded at the speed at which everything is happening. Yesterday Dow Jones fell further by 2.1% in just one day. If the 'myth' you refer to is the impression that these phenomena will have effects beyond individuals with long-term 100% mortgages I don't think it's a myth. In addition unemployment in the USA has been rising fast since the beginning of this year. I am not involved in finance in any way and have an 'educated lay person's' knowledge and perspective but won't the last couple of weeks of falling international stockmarkets affect Ireland which is so heavily dependent on multinationals?
 
dunkamania said:
more the general portrayal that everyone anyway exposed to subprime is going broke
Click to expand...

Mortgages to lower 15% of the US markets ?

Is a portion of this risk management teams forcing their traders to hedge all at the same time hence dumping a supply on the market when sentiment is weak. this cause rapid fall in prices and ups damage levels ?

US employment is still very solid and non housing economy good - strong results by US multinationals?

Could this be digested by US economy by Q2 of 2008 ?
 
Does the US have this felicitous economy you describe? They're involved in expensive wars on at least two fronts and freak summer draught in the mid-west means they must import staples this autumn........ironically probably from China. In addition there is rising unemployment.

Most financial enterprises in Europe are connected with and dependant upon what is being called 'the subprime market'. As a result the European stock-market movements over the past fortnight have shown every evidence of an impending serious crash.
 
ECB rates - where next?

Not so much 'crunch' as 'freeze' according to today's New York Times lead story http://www.nytimes.com/2007/08/10/b...=th&adxnnlx=1186744051-8/71bzkFmLcVNcAkPZh60w

It is rather optimistic to think there will be any 'doddles' or 'waddles'.....more like a stampede! The problem is during the past decade cheap money and unsupported borrowings have seduced the public into a false sense of security. Initial low introductory rates or fixed-rate terms on many mortgage loans which a few years ago were affordable to borrowers are ending and thousands of borrowers will be shifted onto higher variable rates. In the impending conditions of 'credit freeze' if they don't have considerable savings to tide them through they are in trouble.
 
Re: ECB rates - where next?

Marie said:
Not so much 'crunch' as 'freeze' according to today's New York Times lead story http://www.nytimes.com/2007/08/10/b...=th&adxnnlx=1186744051-8/71bzkFmLcVNcAkPZh60w

It is rather optimistic to think there will be any 'doddles' or 'waddles'.....more like a stampede! The problem is during the past decade cheap money and unsupported borrowings have seduced the public into a false sense of security. Initial low introductory rates or fixed-rate terms on many mortgage loans which a few years ago were affordable to borrowers are ending and thousands of borrowers will be shifted onto higher variable rates. In the impending conditions of 'credit freeze' if they don't have considerable savings to tide them through they are in trouble.
Click to expand...

Yep 'liquidity' and 'freeze' are words that attach better. Not so sure about 'credit freeze' though. 'credit crunch' has a better ring to it ;)

Anyways, no matter what it's called it sounds like it's almost time to panic, PANIC ! :eek:
 
Much of the sell-off in stock markets around the world is related to the uncertainty surrounding the true extent of the impact of sub-prime lending in the US.

Does anyone have any info around what the best-guess estimate for this at this time?

tia
M
 
Markjbloggs said:
Much of the sell-off in stock markets around the world is related to the uncertainty surrounding the true extent of the impact of sub-prime lending in the US.

Does anyone have any info around what the best-guess estimate for this at this time?

tia
M
Click to expand...

Nobody knows hence the sell off and reluctance of banks to lend to each other. If Countrywide goes in the States, we could be having another 1998 on our hands
 
Yes-isn't one of the main issues here the fact that nobody really knows who is affected and how badly they are affected, so everybody is suffering.

This quote from a market commentator sums it up

"When the police raid the bordello, not only are the dancers getting carted off, but the make-up girls and piano player are as well!"

So 'good' and 'bad' financial stocks are getting hit, and when people see certain bellweather stocks taking a dive, contagion hits and markets tumble.

Coincidentally-I've been reading "http://www.amazon.com/When-Genius-Failed-Long-Term-Management/dp/0375758259 (When Genius Failed-The Rise and Fall of Long-Term Capital Management)" for the past few weeks-there are some parallels with what is happening at the moment, it's a good read.
 
Not even a back-of-the-envelop calculation? The sooner someone does this, the better - the US markets are in freefall this afternnon!!
 
Think its going to get worse, before it gets better, I see commodity prices
are down, so much for Mark Shipmans predicting these as the next big investment boom, I see he has closed his position on crude oil, but still
is open on gold, which has taken a hit as well...but then if we were all mark shipmans, we all could afford to take a hit. I notice a lot of technology stocks are largely unaffected? I wonder why this is?
 
From what I can see whatever has been rising consistently for the last 6 months (anything, gold/euro/comodities/specific shares) and so is what people have lots of high risk / highly leveraged open positions on, and are now being forced to close them, sometimes to non-intuitive conclusions: Dollar is now rising against the Euro even though it's banking system is bankjaxed and the market is pricing in cuts in the $ interest rate, which ordinarily would cause the dollar to fall.

Conversely you would imagine that anything which has been falling consistently for the past 6 months would also have lots of open short-sell positions against them and I wouldn't be surprised to start seeing a number of stocks which have been in the doldrums start rising dramatically for no aparent reason.

A good time for the contrarian investor.
 
Howitzer said:
From what I can see whatever has been rising consistently for the last 6 months (anything, gold/euro/comodities/specific shares) and so is what people have lots of high risk / highly leveraged open positions on, and are now being forced to close them, sometimes to non-intuitive conclusions: Dollar is now rising against the Euro even though it's banking system is bankjaxed and the market is pricing in cuts in the $ interest rate, which ordinarily would cause the dollar to fall.

Conversely you would imagine that anything which has been falling consistently for the past 6 months would also have lots of open short-sell positions against them and I wouldn't be surprised to start seeing a number of stocks which have been in the doldrums start rising dramatically for no aparent reason.

A good time for the contrarian investor.
Click to expand...

I think your analysis is spot on here and some great opportunities are emerging as hedge funds are having to sell successful positions to meet margin calls on recently marked down securities.
 
room305 said:
I think your analysis is spot on here and some great opportunities are emerging as hedge funds are having to sell successful positions to meet margin calls on recently marked down securities.
Click to expand...

I agree. The only problem is deciding on the timing. I think there are going to be a few more bad days yet so I am reluctant to enter just yet. Certainly financials are beginning to look very very cheap but I am still wary of headline risk. Interesting to see if the Fed gives into pressure and cuts rates which is looking more and more likely. Whether that is a good thing is another matter!
 
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