by Calculated Risk on 6/22/2007 03:55:00 PM

From Standard & Poor's: 133 Subordinate Second-Lien, Subprime Ratings From 2006, 2005-Vintage RMBS On Watch Neg, Cut

Standard & Poor's Ratings Services today took various rating actions on 133 subordinate classes from 62 different transactions from 23 different issuers. We downgraded 45 classes backed by closed-end second-lien collateral. ... The downgrades and CreditWatch placements reflect early signs of poor performance of the collateral backing these transactions.

UPDATE: Here is the story from Reuters: Fitch, S&P may cut ratings on subprime debt

Standard & Poor's cut or may cut the ratings of 133 subprime-related securities, potentially affecting about $1 billion in securities, the rating company said.

It downgraded 56 classes of residential mortgage-backed securities in total -- 45 groups backed by closed-end, second lien collateral and another 11 subprime classes.

Most of the residential mortgage-backed securities originated in 2005 and 2006, and the percentage of delinquencies in that group has risen to as high as 18 percent, S&P said.

by Tanta on 6/22/2007 03:33:00 PM

I kiddeth you not. "Fitch Places Bear Stearns' 'CAM2' CDO Asset Manager Rating on Watch Negative":

Fitch Ratings-New York-22 June 2007: Fitch has placed Bear Stearns Asset Management's (BSAM) 'CAM2' CDO Asset Manager Rating on Rating Watch Negative following recent reported adverse developments associated with BSAM's High Grade Structured Credit Strategies hedge funds, and the resultant uncertainties related to the on-going business strategy and capacity of the High Grade Structured Credit Strategies team.

Depending upon the resolution of recent developments with BSAM's High Grade Structured Credit Strategies hedge funds, BSAM's capacity to maintain its level of Structured Finance CDO collateral management may change. Fitch is continuing to monitor developments at BSAM and its hedge funds.

UPDATE:

22 Jun 2007 3:55 PM (EDT)

Fitch Ratings-New York-22 June 2007: The credit ratings of The Bear Stearns Companies Inc. (Bear Stearns) will not be affected by today's announcement to provide up to $3.2 billion in secured financing to The Bear Stearns High-Grade Structured Credit Fund (High-Grade Fund), according to Fitch Ratings.

The High-Grade Fund is a hedge fund managed by Bear Stearns Asset Management (BSAM). The Bear Stearns facility is a collateralized repurchase agreement, which can be readily funded with existing internal cash sources. The provision of repo financing is a product offered in Bear Stearns' usual commercial activity and does not constitute an equity investment. The Rating Outlook is Stable. A complete list of ratings is detailed at the end of this release.

The High-Grade Fund and The Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund (Enhanced Fund) have incurred redemption requests and margin calls which exerted severe pressure on fund liquidity following further deteriorating conditions in select subprime instruments. By replacing the current secured financing, Bear Stearns improves prospects to facilitate an orderly de-leveraging of the fund. Fitch views this action by Bear Stearns as a deliberate effort to optimize asset values and investor returns in this particular fund. However, Fitch does not believe this specific action sets a precedent for other funds managed by Bear Stearns. A case in point: BSAM will continue to work with creditors and counterparties of the Enhanced Fund to reduce leverage in an orderly manner and improve liquidity, but the company has not offered to provide any debt or equity. To proffer debt and/or equity across the BSAM fund universe could indeed have adverse rating implications.

by Calculated Risk on 6/22/2007 02:40:00 PM

Tanta posted on the Bear Stearns bailout this morning. Apparently this bailout is only for the less leveraged Bear Stearns Hedge fund: High-Grade Structured Credit Strategies Fund.

Assets are apparently being sold from the other fund - High Grade Structured Credit Strategies Enhanced Leverage Fund. CNBC is reporting that Cantor Fitzgerald has circulated a bid list for $400 million in debt securities from the Leverage Fund, and some bids are 10 cents on the dollar.

by Calculated Risk on 6/22/2007 02:13:00 PM

From Reuters: Fitch may cut CDO ratings linked to subprime loans

Fitch Ratings' derivatives unit on Friday said it may cut its ratings on some securities in debt products known as collateralized debt obligations because of exposure to deteriorating subprime loans.

The affected collateralized debt obligations, or CDOs, are: Trainer Wortham First Republic CBO III, ACA ABS 2003-1, ACA ABS 2003-2, and Ipswich Street CDO.
...
Securities from "three 2003 diversified (structured finance) CDOs and one high grade CDO issued last year may be downgraded," Fitch said in a statement.

by Calculated Risk on 6/22/2007 01:51:00 PM

From Bloomberg: Bank of America Report Sees Worse Mortgage Defaults

Losses in the U.S. mortgage market may be the "tip of the iceberg" as borrowers fail to keep up with rising payments on billions worth of adjustable-rate loans in coming months, Bank of America Corp. analysts said.
...
"The large volume of subprime ARMs scheduled to reset at higher rates in '07 and '08 will pressure already stretched borrowers," forcing more loans into foreclosure, the Bank of America analysts wrote from New York. A collapse of the Bear Stearns funds "could be the tipping point of a broader fallout from subprime mortgage credit deterioration," they said.

Didn't the CEO of BofA say the housing drag was about to stop?

by Tanta on 6/22/2007 12:13:00 PM

The good news?

NEW YORK — Slumping sales and drooping prices haven't diminished homeowner optimism about their own nest egg's value, a recent survey shows.

The survey by Boston Consulting Group showed that 55% of Americans believed they could sell their house for more now than a year ago, down slightly from the 59% who felt that way last summer.

Nearly three-quarters think they could sell their homes within the next six months at a price they set, and 63% believe that real estate is a good or excellent investment.

The bad news?

However, most Americans aren't planning to buy a new home anytime soon. Only 27% said they were likely to purchase a house in the next five years.

UPDATE: The worst news? Tanta forgot to hat tip lama.

by Tanta on 6/22/2007 08:10:00 AM

I predict that us UberNerds are going to spend a lot of time getting irritated in the coming weeks.

The OC Register reports on the Brookstreet mess:

In another fallout from Orange County's subprime mortgage industry collapse, Brookstreet Securities Corp., an Irvine broker dealer, shut its doors and laid off 100 local employees because it could not meet margin calls on complex securities backed by faltering mortgages, company spokeswoman Julie Mains said.

Mains said Brookstreet went from $16 million in capital Friday to being $3 million under water Wednesday because its clearing firm, National Financial Services, demanded payment for securities bought on margin.

The securities, known as collateralized mortgage obligations, lost value as Wall Street confidence in mortgage-backed securities collapsed. The most prominent collapse was this week's demise of two Bear Stearns & Co. hedge funds worth $20 billion that invested in collateralized mortgage obligations, which are mortgage-backed securities with varying maturity dates, risk and yields.

Mains said the value of Brookstreet's securities plunged to 18 cents on the dollar, forcing the company to dip into its capital to meet margin calls, which is when investors must increase deposits to meet minimum account requirements.

"It wasn't a problem with securities," she said. "It was a problem with the margins." . . .

The National Association of Securities Dealers ordered Brookstreet to liquidate its remaining accounts Wednesday, Mains said. Some customers lost the entire value of their investments while others "did indeed go negative," Mains said. She said clients should try to find another broker-dealer to take over their accounts.

Mains said clients should have known they were making risky investments, but consumer attorneys said CMOs should only be sold to pros.

Stuart Meissner, a New York attorney and former securities regulator, said he received calls from people whose Brookstreet accounts went from $250,000 to negative value. "They were supposedly guaranteed 10 percent returns," Meissner said.

Sam Edwards, a Houston attorney who has sued Brookstreet for investment malpractice, said he received calls from clients across the country complaining about losses in collateralized mortgage obligations bought on margin.

"These are very complicated, very high-risk securities and not appropriate for retail customers," Edwards said.

Dear OC Register: if we are going to make comparisons to Bear Stearn's hedge funds, and we are going to make statements to the effect that the securities in question are too complex for retail investors, it might possibly help matters if you would verify that we are really talking about Collateralized Mortgage Obligations as opposed to Collateralized Debt Obligations.

I suggest, reporters, that you call a specialist--Mark Adelson at Nomura appears willing to talk to the press, as does Janet Takavoli--and ask for a brief education in the difference between these two types of structured finance. If in fact Brookstreet was selling CDO tranches to retail investors, that's a big deal. If they were CMOs (also known as REMICs)? Well . . . the bond market is certainly going to change pretty radically if we declare that REMICs--as such--are too toxic for retail investors.

by Tanta on 6/22/2007 07:09:00 AM

From the indefatigable Bloomberg, "Bear Stearns Plans $3.2 Billion Fund Rescue to Halt Fire Sale":

June 22 (Bloomberg) -- Bear Stearns Cos. plans to take on $3.2 billion of loans to stop creditors from seizing assets of one of its money-losing hedge funds in the biggest fund bailout since 1998, people with knowledge of the proposal said.

The firm told lenders to the High-Grade Structured Credit Strategies Fund yesterday that it would assume their loans, said the people, who declined to be named because the plan is confidential. The New York-based firm stepped in after Merrill Lynch & Co. took securities that backed $850 million in credit lines to two Bear Stearns funds and put them up for sale. JPMorgan Chase & Co. and Lehman Brothers Holdings Inc. also indicated they may take over collateral for loans they provided.

``Bear needs to put this behind it as soon as possible,'' said Peter Goldman, who helps manage $600 million at Chicago Asset Management, including shares of Bear Stearns. ``The firm might take on some of the risk of the fund they didn't have before, but they're a bond shop and they wouldn't take on risk they shouldn't.''

How true. Who ever heard of a bond shop taking on risk they shouldn't? What a Kidder!

This calls for a reprise of yesterday's celebration of mixed and mangled metaphors. I say we go back to an earlier classic moment in the history of bond shops that wouldn't take on risk they shouldn't:

"We never would have touched Kidder Peabody with a 10-foot pole if we knew there was a skunk in the place," Welch said to Kidder employees in a speech in early 1988, as reported in Fortune magazine, shortly after the scandal broke. "Unfortunately we did, and now we've got to live with it. But we're as committed to winning as we were on day one. We'd love you to win -- more than any mother in the world."

by Calculated Risk on 6/21/2007 06:04:00 PM

From Barron's: Bear Stearns Hedge Fund Woes Stir Worry In CDO Market (hat tip Chance)

... the value of CDOs is measured by a "marked to market" technique that pegs them to their value in the market, rather than their book value. ... CDOs containing mortgage-backed securities seldom trade, which can mean that their "marked to market" value does not reflect recent events.
...
[Peter Schiff, president of Euro Pacific Capital] argued that if the bonds in the Bear Stearns Companies Inc. (BSC) funds were auctioned on the open market, much weaker values would be plainly revealed.

"This would force other hedge funds to similarly mark down the value of their holdings. Is it any wonder that Wall street is pulling out the stops to avoid such a catastrophe?," Schiff said.
...
"Their true weakness will finally reveal the abyss into which the housing market is about to plummet," he said.

I'm not sure about housing "plummeting into an abyss", but I do think housing is poised for another downturn with no bottom in sight.

by Calculated Risk on 6/21/2007 05:50:00 PM

UPDATE2: Mathew Padilla has more: Brookstreet closes down, 100 laid off

From Reuters: Brookstreet Securities says may liquidate (hat tip Padilla)

Brookstreet Securities Corp. on Thursday said it "may be forced to close" after heavy markdowns in collateralized mortgage obligations, according to a letter the firm sent to investors this week.

"Disaster, the firm may be forced to close," Brookstreet told its investors in an e-mail dated June 20 that was obtained by Reuters.

Julie Mains, chief compliance officer, confirmed the contents of the e-mail.

UPDATE: From Investment News (hat tip Steve): B-D warns reps of 'disaster'

[From] in an unsigned e-mail note to its advisers ...

"Today, the pricing system used by National Financial has reduced values in all Collateralized Mortgage Obligation," the e-mail said.

"Many of those accounts were on margin and suffered horrendous markdowns and unrealized as well as realized losses.

National Financial and the regulators expect Brookstreet to pay for realized liquidated losses and take a capital charge for unrealized (mark) to market losses."