All Mortgage Tranches Take a Hit

CNN Money is reporting Two Bear Stearns Funds Nearly Worthless.

Weeks after the meltdown of two prominent Bear Stearns Cos. (BSC) hedge funds that bet heavily on the market for risky home loans, the brokerage has told the funds' investors that the portfolios' assets are almost worthless, according to people familiar with the matter.

The assets in Bear's more levered fund, the High-Grade Structured Credit Strategies Enhanced Leverage Fund, are worth virtually nothing, according to people familiar with the matter. The assets in the other larger, less-levered fund are worth roughly 9% of the value since the end of April, these people said. The April valuations weren't immediately available but in March, before their sharp losses, the enhanced leverage fund had $638 million in investor money, while the other fund had $925 million.

These losses, which took more than two weeks to calculate because of the fluctuating values in the market for risky, or subprime, mortgage securities, came amid another tumultuous day for the broader mortgage market. One particularly wobbly slice of the market tracked by a closely watched index called the ABX fell to an all-time low of 44.

You have to pity the investors that were locked in all the way back in February. A history of the Bear Stearns saga can be found in Bear Tracks & CDOs and A Bear's Bath. Essentially Bear Stearns bet the farm (or rather its investor's farms) by making extremely risky leveraged bets with customers' money then locking them in. Had investors been able to bail in February they might have gotten 70% on the dollar. It's hard to say. What is not hard to say is they would have gotten considerably more than zero cents on the dollar.

Mortgage Selloff Not Limited To Subprime

No matter how many stories we hear about how contained this mess is to subprime, one must remember that all of those stories are blatant lies. In Gates of Hell I reported that the mortgage mess was contained to three continents.

Today Kevin Depew on Minyanville upped the ante. In "Five Things" Kevin reported that Subprime Well Contained to All 15 ABX Indexes. Not only that, but he posted a chart to prove it.

This morning, just as a Bloomberg headline scrolled by reporting that Merrill Lynch's (MER) CFO is assuring everyone that the Bear Stearns (BSC) subprime issues are "limited" and "well under control," we happened across another story noting that all 15 of the ABX Indexes - indexes made up of credit default swaps on subprime mortgage bonds with ratings from AAA to BBB- fell to record lows yesterday. All 15. Record lows.

Oh, but it's not just the ABX indexes under pressure. According to Bloomberg the CDX North America Investment-Grade Index of 125 companies was up big as well. An increase in the index suggests deterioration in the perception of credit quality. Corporate credit quality.

Eh, so what?

• But as Willem Sels, a credit analyst at Dresdner Kleinwort told Bloomberg, the question for investors -especially hedge funds - "is whether their prime brokers, the people who provide them with liquidity, get nervous and start demanding higher margins or more collateral."
• Why does that matter?
• Because it is simply a fancy way of describing more stringent credit conditions and a reduction in liquidity.
  

ABX-HE-AAA 07-1 (The AAA rated tranche)

The AAA tranche took a 5% hit. The bottom tranches are worthless. Anything else is in between. With that it seems the top this containment ball is now in my court.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/