Wednesday, August 01, 2007

Subprime: winners and losers

Well, the news of subprime's growing fallout continues as investors worldwide are affected by fund closures amid losses from subprime mortgage bonds and other high-risk debt.

In fact, it's not even just exposure to the subprime mortgages that's worrying people now. It seems investors are now wondering whether debt instruments that are higher up the ladder carry an unacceptable level of risk. Just ask the the investors who are trying to pull their money out of Bear Stearns Asset-Backed Securities Fund.

Mortgage bonds and asset-backed securities are suddenly suspect in the wake of of recent fund blow-ups and bank losses. It's not just a subprime problem anymore.

"Bear Stearns Blocks Withdrawals From Third Hedge Fund":


Bear Stearns Cos., the manager of two hedge funds that collapsed last month, blocked investors from pulling money out of a third fund as losses in the credit markets expand beyond securities related to subprime mortgages.

The Bear Stearns Asset-Backed Securities Fund had less than 0.5 percent of its $900 million of assets in securities linked to subprime loans, spokesman Russell Sherman said in an interview yesterday. Even so, investors concerned about losses sought to withdraw their money, he said.

Shares of New York-based Bear Stearns had their biggest drop in almost three months, pushing brokerage stocks lower on concern about shrinking profits from debt underwriting and trading. Bear Stearns triggered a decline in credit markets in June, when funds it managed faltered after defaults on home- loans to people with poor credit rose to a 10-year high.

``There will be more pain,'' said Felix Stephen, a strategist who helps oversee the equivalent of $7.5 billion at Advance Asset Management Ltd. in Sydney. ``I'm giving it a couple of months at least. It's not the subprime issue that really matters, it is the first card to fall in the tower of cards in this situation.''

It seems everyone is ready to wake up to reality and shake off the party line...you know, the one about "containment".

The latest developments signal that the slump in the subprime mortgage market may not be ``contained,'' as officials including Treasury Secretary Henry Paulson have said.

``You don't necessarily have to be a subprime fund now to be having problems,'' said Bryan Whalen, a money manager in Los Angeles at Metropolitan West Asset Management, which oversees more than $21 billion in fixed-income assets.

Yep. Here's Fintag's assessment of the growing fund troubles. So far the list of banks and funds said to be seriously affected by the problems in the credit market includes Bear Stearns, Macquarie's Fortress Funds, Sowood Capital, Caxton, Basis Capital, and French asset manager Oddo & Cie.

Not to mention the negative sentiment towards the debt of major Wall St. banks, as reflected in the credit-default swap market.

"Bear, Lehman, Merrill, Trade As Junk, Derivatives Show":

On Wall Street, Bear Stearns Cos., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Goldman Sachs Group Inc., are as good as junk.

Bonds of U.S. investment banks lost about $1.5 billion of their face value this month as the risk of owning the securities increased the most since at least October 2004, according to Merrill indexes. Prices of credit-default swaps based on the debt imply that their credit ratings are below investment grade, data compiled by Moody's Investors Service show.

The highest level of defaults in 10 years on subprime mortgages and a $33 billion pileup of unsold bonds and loans for funding acquisitions are driving investors away from debt of the New York-based securities firms. Concerns about credit quality may get worse because banks promised to provide $300 billion in debt for leveraged buyouts announced this year.

This story seems to be coming back with a bit of a vengeance; I remember seeing these headlines back in March after the first leg of subprime worry got underway.

Anyway, someone's got to be making money from the other side of this mess, as the FT Alphaville gang points out in, "Subprime- where are the winners?". Alphaville mentions a few specific funds that probably benefitted from taking the other side of the trade, and also points to probable success for many event-driven funds.

And as the NY Times points out, Ken Griffin's Citadel fund has increasingly been making its reputation as a buyer of distressed fund assets and positions in times like these.

The latest move for Citadel as a buyer of a distressed portfolio came earlier this week, when the group bought out the troubled portfolio of Boston-based Sowood Capital. Sowood had been caught on the wrong side of a fallout in the credit markets and was unable to prop up its eroding investments. The fund found a ready buyer and much-needed source of liquidity for its remaining investment positions in Citadel.

The Times story also went on to note that Silver Point Capital, of Greenwich, CT, was among those looking to establish "opportunistic funds" that would take advantage of recent blow-ups in the markets.

As always, stay tuned.

Update: See FT.com for an interactive map which highlights the winners and losers in the ongoing credit market turmoil.