A bear of a Bear?

Figured I ought to write something about the Bear Stearns mess that just unfolded in the past week. I'm not sure whether I should be making my posts more timely as things are occurring or only after the fact. I had figured that I ought to write everything after the fact in order to avoid putting anything out there that might still be sensitive or incorrect information. Let me know if you have an opinion either way.

Well, it seems the players have made their entries and exits. A Bear Stearns' hedge fund backed largely by subprime mortgage backed securities got into some trouble last week and nearly faced liquidation. At one point people were talking about Merril the funds' assets to cover their margins. There was talk of help from Goldman, Bank of America, Credit Suisse, JP Morgan, etc. None of it came together. Then, finally, Bear decided to save its own hedge fund. That's cool. Then there was talk of Bear's other hedge fund and whether it would save that one too. They decided not to.

So what's it all mean? It had all sorts of implications on the credit/structured markets. ABX (the asset-backed securities index) was tanking from the subprime woes. A lot of that money went into treasuries, making a flight to quality type rally for a while in rates markets. Overall though, it didn't make that big a splash in the markets as far as I'm concerned. People are making a big deal out of something that really didn't change much.

There's talk now about whether Bear Stearns is in trouble too. Well, that's just bunk. Bear might show a PnL hit, but I doubt this would put them in jeopardy. Others talk about this making Bear Stearns prone to a buy-out / acquisition. I think that , while more likely than Bear Stearns going bust, is still crap.

Where I have heard the subprime mess and the Bear Stearns mess having effects is in origination. Apparently the appetite for these sorts of loans has significantly declined both on the originators side and on the buyers side. That means people are more stringent about their loan characteristics before they are willing to loan the money and buyers are less likely to buy the securitizations. Double whammy for the capital seekers there.