Crossing the Beams

What else do you expect but total protonic reversal?



Pravda-on-the-Hudson:

...All wanted to avoid a fire sale in the troubled mortgage-securities market, but at the same time, not get stuck with an exploding liability that could result in steep losses. The day ended with deals that appeared to have forestalled a meltdown. But questions remained about how successful they were and whether they had merely delayed the inevitable.

As the morning unfolded, lenders to two hedge funds at a unit of Bear Stearns, the investment bank, tried to ascertain what they could expect if they auctioned off mortgage securities with a face value of up to $2 billion. The solicitations were hastily withdrawn when investors reacted with little enthusiasm. But by the end of the day, some of the less-risky securities did change hands.

At the same time, several lenders, including JP Morgan Chase, Goldman Sachs and Bank of America, reached deals with Bear Stearns that forestalled a need to sell securities in the open market. It appeared that some lenders pulled back over concerns about the effect that a large liquidation would have on bond prices and investor confidence. While the securities involved represent a fraction of the market, a liquidation could have forced a bigger sell-off while setting a lower price...

He said it would take time — perhaps several days — for potential buyers to drill down into some of the more complex securities in order to value them before any bids could be prepared. From 33 to 45 percent of the $2 billion in C.D.O.’s on offer by the funds early yesterday were investments in other C.D.O.’s, according to officials who have seen the bid lists.

One worry about the possible unwinding of the Bear funds is that it will cascade into larger liquidations by other investors who hold similar securities at far higher prices. Accounting rules require investment banks to mark the value of the investments to the price of similar assets trading in the market. Many mortgage-related securities, and C.D.O.’s in particular, do not trade frequently, making them hard to value.

“I think people are nervous and trying to figure out what the best course of action is here,” said Jeffrey Gundlach, chief investment officer at the TCW Group, an investment management company with $85 billion in mortgage- and asset-backed securities. “Do you want to be the first one out and perhaps cause the lows to be hit in the market, or do you want to wait and see how this all plays out?”

In fact, rather than aggressively selling the assets it has seized, Merrill is quietly showing it to a small group of potential buyers, according to a person briefed on the process.

Such an approach helps to keep the pricing of the securities under wraps, allowing Wall Street firms to avoid marking down their own stakes. Keeping the sales price quiet also means that the firms may not have to add collateral immediately to shore up their portfolios...

Excuse me... but does this smell like some kind of inverted insider trading? Keeping the price of some critical holdings private so you don't loose your shirt, pants, and Lexus? Perhaps, but it's either that or the whole Ponzi scheme crashes and burns.

The Pravda article ends with some serious whistling past the graveyard:

“Yes, there was too much leverage in the market. Yes, there was too much appetite for risk and yes, that risk was underpriced,” said Mark Adelson, a senior analyst at Nomura Securities in New York. “But there has not been a lick of spillover of this situation in the corporate bond market or stock markets so I don’t think people need to start hoarding food, water and ammunition because the end is coming.”

Nah. Just gold and guns. The other stuff goes bad.