Is Bear doing a favor to the whole market?

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abacus

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So, no fire sale, no collapse of the securities, no collapse of the overall market. Now where are those risk managers?

"June 21 (Bloomberg) -- ``It's an industry issue,'' said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. Hintz was chief financial officer of Lehman Brothers Holdings Inc., the largest mortgage underwriter, for three years before becoming an analyst in 2001. ``How many other hedge funds are holding similar, illiquid, esoteric securities? What are their true prices? What will happen if more blow up?''

AND TODAY

"June 22 (Bloomberg) -- Bear Stearns Cos. is proposing a bailout of a money-losing hedge fund by taking on $3.2 billion of loans to forestall creditors from seizing assets, the biggest rescue since 1998, people with knowledge of the plan said.

Bear Stearns increased efforts to salvage the fund, one of two that made bad bets on collateralized-debt obligations, as concern about a possible collapse sent stocks and bonds of financial companies lower. An agreement with creditors would prevent a fire sale of the collateral, while increasing the risk to Bear Stearns, the second-biggest underwriter of mortgage bonds."
 
No...they are rewarding excessive risky behavior and signalling to other funds that they can take even more risk and be bailed out. This can't end good...
 
CFA_Halifax Wrote:
-------------------------------------------------------
> No...they are rewarding excessive risky behavior
> and signalling to other funds that they can take
> even more risk and be bailed out. This can't end
> good...


Yes, that must be it.
 
CFA_Halifax Wrote:
-------------------------------------------------------
> This can't end good...

you're right, good will continue to persevere in the struggle against evil. whenever you see someone do wrong, do right. help an old woman cross the street. feed a starving child. save a kitten. good won't end because we won't let it.
 
asdffdsa Wrote:
-------------------------------------------------------
> CFA_Halifax Wrote:
> --------------------------------------------------
> -----
> > This can't end good...
>
> you're right, good will continue to persevere in
> the struggle against evil. whenever you see
> someone do wrong, do right. help an old woman
> cross the street. feed a starving child. save a
> kitten. good won't end because we won't let it.


That is a ridiculous comparison. We're talking about billions of dollars in bailouts. It says to the market "hey, take lot's of risk and you will be rewarded the upside. And if the market goes down, we'll cover your ya on the down!"

B-S has the right to do this, but that doesn't make it the right thing for the capital markets...



Edited 1 time(s). Last edit at Friday, June 22, 2007 at 01:15PM by CFA_Halifax.
 
CFA_Halifax Wrote:
-------------------------------------------------------
> That is a ridiculous comparison. We're talking
> about billions of dollars in bailouts. It says to
> the market "hey, take lot's of risk and you will
> be rewarded the upside. And if the market goes
> down, we'll cover your ya on the down!"
>
> B-S has the right to do this, but that doesn't
> make it the right thing for the capital markets...

you missed the joke.
 
oh sorry lol.

There was a pretty good column to the tune of this in yesterday's ROB for all my canuck friends on here



Edited 1 time(s). Last edit at Friday, June 22, 2007 at 01:27PM by CFA_Halifax.
 
Halifax,

First, asdffsda is busting on you b/c you used good when you meant well. And isn't it the goal of any well-meaning person to do good?

Second, Bear is bailing out IT'S OWN HEDGE FUNDS. There is a big difference. If the fund I work at fails Bear is not going to be there to write a check. In this case, it behooves Bear to bail out the fund (they could let it stand on its own as it is a seperate legal entity) to avoid further embarrassment and give themselves a chance at raising funds in any future funds they open.
 
> Second, Bear is bailing out IT'S OWN HEDGE FUNDS.
> There is a big difference. If the fund I work at
> fails Bear is not going to be there to write a
> check. In this case, it behooves Bear to bail out
> the fund (they could let it stand on its own as it
> is a seperate legal entity) to avoid further
> embarrassment and give themselves a chance at
> raising funds in any future funds they open.


credit risk 102. parent implicitly or explicitly guarantees its subs.
(credit risk 101 is "no financials, no credit")
 
But the counterparties have collateral, which guarantees the obligations and is why Bear doesn't really have to fix the problem. They could allow the counterparties to sell the collateral to satisfy the obligations.

Assuming the collateral would meet the obligation, but leave the partners with nothing, Bear could have allowed this to dissolve on its own. Even if the collateral was not sufficient (I think it is probably still too early to tell in this case) the GP entities of these types of funds are typically bankruptcy remote. It might be enough to force BSAM into bankruptcy, though.

The reason Bear stepped in is because they have the problem of the sales of the collateral establishing a new, lower value of the collateral. This could spread to other funds of theirs or assets they hold on their own account.
 
^ Right - the big issue here is not the bail-out of the fund. It's why they did it. I think the B-S is beating up on Good here.
 
I listened to their conference call today. They quit allowing redemptions back in May. They won't say what assets are owned other than giving some vague descriptions like "various securitization structures such as CDOs and MBS".

Best I can tell the two funds control roughly 20 Billion in assets and Bear only has 35 Million of their own money in the funds. Bear didn't lend any of their own money to the funds either.

They said they want to see an "Orderly deleveraging" of the fund. They really kept harping on "orderly deleveraging". Their problem was that the mark to market prices they were getting from street firms really started dropping in the last few weeks which triggered margin calls, customers wanted their money back (they told the customers tough @#$%&), and then it becomes a vicious cycle of lower prices and more margin calls.

The ripple effect is what seems to be the biggest problem...if Merrill dumped all the collateral on the market to get their money back prices would drop and everyone who owns that stuff will be getting big margin calls...with all the leverage in the system it would be kind of fun to sit back and watch a bunch of hedge funds melt down.

It appears that there is not as much depth to the market as they wanted to believe. How long will it take them to liquidate if there are no buyers? How long can they pay the interest on a 3.2 billion line of credit before they have to start dumping assets themselves? They said they expect this process to take several months. This should be interesting to watch.
 
So is the idea to mark-to-model now, with the rational for not marking to market that the market prices are vapor? Is it true that there's no real price because everyone has been sitting tight for months so historical prices are not indicators of true liquidity?
 
An analyst on the call specifically asked about how they are marking to market if they've never sold any of these assets...the CFO's response was, and I'll paraphrase, "we are getting mark to market data from the street firms we are dealing with".

A lot of his answers were "I'd don't want to get into that right now" or "I'm not going to talk about that".

I think you can pull up the conference call on Bloomberg...hit their audio video section...maybe AV <go>...search for it there. Well worth the 5 to 7 minutes it takes to listen to.



Edited 1 time(s). Last edit at Saturday, June 23, 2007 at 12:49AM by Greenspan.
 
BTW - "Orderly deleveraging" doesn't ever happen. Everytime there is a disaster brewing, people like this CFO say they're going to save the day with an orderly deleveraging. That means they are going to be selling whenever they have the chance and that they are facing big gamma exposure. Which, of course, means everyone else should sell their similar stuff whenever they get their opportunity. Which means that "orderly dleveraging" means "we really don't want a liquidity crisis in this market because it will eat us alive".

I'm on the sidelines for this and I'm really looking forward to carnage. Maybe Bear Stearns will go belly up (probably not, but it would be fun).
 
I don't know Joey, I think that's a little cavalier. I'll admit I wouldn't mind seeing a few hedge funds blow up to bring some sense back to the market, but I find nothing funny about a major wall street bank going down in this market. And not just for people like us, real people would get hurt too as I think the ramifications would cause some painful losses with real money investors (mutual funds, pensions, insurance companies etc). And certainly there could be housing market implications if the securitization machine seizes up.

Full disclosure: I cover BSC and it would make my life very stressful.
 
This is how a bear market starts...

Of course I have a bias, as I have already stated the markets will be down 5-7% by Labour Day and that's only two months away.

In the words of one AFer, I would make a great doom and gloom pension fund manager!



Edited 1 time(s). Last edit at Sunday, June 24, 2007 at 12:27PM by CFA_Halifax.
 
Interesting...

Re: Credit Trading
Posted by: HoldSideAnalyst (IP Logged) [hide posts from this user]
Date: June 15, 2007 05:13PM

Lots of gamma risk in these credit portfolios, IMHO.
 
Good thing we posted this incisive analysis of the risk in credit portfolios being gamma risk. Since gamma risk is usually about options and credit risk is not usually about optionality, maybe you can explain this a little more. Most of us think that the problems in these portfolios are about leverage, tranched exposure, and modelling risk.
 
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