For some reason, I seem to be rather low on time over the last couple of weeks. But there are some blog posts/articles floating around out there that I really want to write up a couple of posts on. But those posts are not going to happen tonight due to an extended power outage and Click Here to continue reading.
This is the latest story to get all those bears out their excited (from DealBreaker.com)…
In case you missed it this weekend, Merrill seized $400mm in assets from a Bear Stearns hedge fund and is auctioning them off starting today. The Ralph Cioffi led fund scrambled to avoid liquidation late last week, auctioning off over $4bn worth of bonds Thursday morning alone, culminating a protracted struggle to sell assets to stay afloat. The fund has sold $7bn worth of bonds since May and frozen redemption requests.
Also, pay attention to the last line in this little news story….
The Bear fund originally raised $600mm in investor capital and borrowed $6bn from banks to bet the wrong way on the ABX.
When you are leveraged 10 to 1 making a mistake hurts. But it hurts your bankers more. After all, guys running the fund have already been paid and investors only invested 600 million. But the banks are on hook for 6 billion dollars.
That is why I think Merrill moved to pull the plug. They probably hoped that if got out first they could leave the banks holding bag. But it has not turned out to be that simple for Merrill (this from Reuters)…
Merrill is delaying selling the assets until it hears the troubled hedge fund’s plan to recapitalize, the network reported. Merrill and Bear are expected to discuss the plan on Monday or Tuesday, CNBC said.
Calculated Risk speculated over in the comments on his blog that Merrill did not like the price that they were going to get if they sold the Bear collateral at a fire sale. He thinks that this is why they are having second thoughts.
Myself, I wonder if this does not have more to do with one division of Merrill saying to the other, “hey, if you make Bear go down you are going to take us down with them.” After all, it was just this February that Merrill was spending big money trying to catch up with Bear Stearns (this from Bloomberg this February)….
Merrill Lynch & Co. Chief Executive Officer Stanley O’Neal was willing to lose $230 million to catch Bear Stearns Cos. and the shakeout is just beginning.
That’s because Merrill is determined to capture a dominant share of trading in bonds backed by home loans, the fastest- growing debt market since 1995 and this year’s most troubled. O’Neal’s enthusiasm for mortgages to potentially delinquent borrowers coincides with the highest default rate in more than six years, a record contraction in demand for so-called subprime loans and descending bond prices.
Merrill already has bankrolled two home lenders that subsequently failed and purchased a third, First Franklin Financial Corp., for $1.3 billion, just before HSBC Holdings Plc disclosed that its bad-loan provisions increased 20 percent because of the unraveling U.S. subprime market.
Now running hedge fund that bets on a bond market is different then trading bonds on the market. Still, I can imagine a scenario where some Merrill bond traders might be telling their bosses that if the Bear’s hedge fund goes down, they go down. That is the fun of modern financial markets. Everyone is dependent on everyone else, even their rivals.
Of course, all that is only speculation. In fact, nobody even seems to no for sure why or how the Bear hedge fund got into trouble or even how much trouble they are really in (though if you are facing margin calls, you obviously have problems). Felix has a good overview of the problem over at his blog. I will only quote the last to paragraphs because they are the most deliciously ironic….
Finally, of course, there’s the possibility that Bear’s Cioffi was forced to cover his short positions on the way up from 62 to 72, and incurred a lot of losses in May, rather than during the more recent move back south. With his ABX short covered, he found himself long the market at its highs, just as the market was set to take another tumble. And with his short-covering losses spurring redemptions, he found himself unable to get out of his long positions in a bear market without suffering even bigger losses. In other words, he lost money on the way up and then lost even more money on the way down.
This is all speculation, of course, and even Bear Stearns itself is probably unclear on some of this: otherwise it wouldn’t have had to alter its official April results from a loss of 6.5% to a loss of 19%. Besides, officials at Bear probably have bigger problems on their hands right now than explaining to journalists exactly what went wrong and how. Still, this is already a salutary case: a hedge fund seems to have managed to go bust by making bearish bets in a down market. Leverage can have that effect, if you’re not careful, or if you’re unlucky.
Edit 6/19/07: Merrill listened to Bear’s plan to get out of their troubles and—drum roll please– decided to sell Bear’s collateral anyway. See this blog post from Calculated Risk.
I left this comment over at the Belmont Club.
Wretchard,
I share Teague’s concerns though I am not sure why he chose this particular post to raise those concerns. Nonetheless, the substance of Teague’s comment is an issue that I would like to see you address in greater detail, because your answer to Teague seems to miss Click Here to continue reading.
Good poetry can be prophecy. A poet can capture what he does not know and foretell the future better then any pundit. One good example of poetry as prophecy would be William Butler Yeats’ famous poem “THE SECOND COMING.” When you think about when this poem was written and what happened in the two decades after it was written, it is hard to escape the feeling that you are reading a scarily accurate work of prophecy.
The sad part is that William Yeats welcomed the coming of the beast.
I have had occasion to think about this poem along with King Lear and the current intergenerational problems that I perceive to be coming.
In this rant, The EU Referendum wonders why the European council of ministers has over ruled the European Union’s high court and put The People’s Mujahideen of Iran on its list of terrorist organizations. After all, The People’s Mujahideen of Iran opposes the Iranian government and supposedly most European governments would like to see the government in Iran change. So why are they overruling their own courts to call it a terrorist organization?
This week’s essay of the week is all about Shakespeare’s King Lear. I like the play so much that any half way decent essay on it is bound to catch my attention.
These guys know how to make juggling enjoyable for a non-juggling audience. Not only are they funny, they know how to explain the tricks they are doing unobtrusively. They also do a pretty good job making the old jokes seem less stale. One of my favorite non-technical juggling videos.
I just can’t see buying most gadgets that are designed with pets in mind. They all seem like such a waste of money.
But I have to admit that I can see the appeal of buying a Cat Cam.
For those who have not heard about it, A Cat Cam is a digital camera that is strapped to the collar of a cat. It on a time controller and it takes pictures from the cat’s perspective as often as you want (from one second to every eight hours). Thus, you can get a pretty good idea of what your cat has been up to if you so desire.
This is one of the trips that a cat named Mr. Lee took. Unfortunately, the author heavily edited the selection of photos so you don’t get quite as detailed view of Mr. Lee’s trip as I would like. But it is still cool.
The Cat Cam is not really ready for the market yet, but I can see it becoming a big thing. Who has not wondered what the cats are getting up to when they are out and about?
This from rense.com…..
Today, the United States Department of Agriculture (USDA) released its first projections of world grain supply and demand for the coming crop year: 2007/08. USDA predicts supplies will plunge to a 53-day equivalent- their lowest level in the 47-year period for which data exists. “The USDA projects global grain supplies will drop to their lowest levels on record. Further, it is likely that, outside of wartime, global grain supplies have not been this low in a century, perhaps longer,” said NFU Director of Research Darrin Qualman.
Most important, 2007/08 will mark the seventh year out of the past eight in which global grain production has fallen short of demand. This consistent shortfall has cut supplies in half-down from a 115-day supply in 1999/00 to the current level of 53 days. “The world is consistently failing to produce as much grain as it uses,” said Qualman. He continued: “The current low supply levels are not the result of a transient weather event or an isolated production problem: low supplies are the result of a persistent drawdown trend.”
I am not happy about the current practice of subsidizing the burning of food (otherwise known as ethanol subsidies), but I think that the higher food prices will pull more farmland into production. Still, with food stocks low, a global wheat blight could make things tricky.
This has been all over the net, so I have been trying to avoid it myself. But it is kind of hard to avoid something like this…..
Before trial began yesterday in the case of the D.C. judge who sued his neighborhood dry cleaners after they lost his pants, the most extraordinary fact was Roy Pearson’s demand for $65 million in damages.
That was before Pearson, an administrative law judge, broke down while testifying about the emotional pain of having the cleaners give him the wrong pants.
That was from the Washington Post and it really does not need much commentary.