It's not just some fear-mongering, apocalyptic scenario; it's real, and it will be visiting other brokerage firms and financial institutions, many of which may be at a place near you. The same type of rumors that enveloped Bear Stearns, while Schwartz was claiming all was well (and as S3 had been yanking 25 billion from BSC for a few months, according to the WSJ http://www.bloomberg.com/apps/news?pid=20601087&sid=aYZCGOSAg8jQ&refer=home), are now circulating regarding Lehman and others: S3 Partners Pulled $25 Billion From Bear Stearns, WSJ Says By Nicholas Larkin March 15 (Bloomberg) -- S3 Partners LLC moved $25 billion of clients' assets from Bear Stearns Cos. to other brokers in the past three months, the Wall Street Journal reported, citing S3 managing partner Robert Sloan. Renaissance Technologies Corp., which oversees more than $30 billion, also shifted its assets from Bear Stearns to other Wall Street rivals in the past week, the newspaper said, citing unnamed people close to the matter. The report didn't give a figure. Debt investors yesterday also became ``more cautious'' about Lehman Brothers Holdings Inc., with the cost of five-year credit-default protection on Lehman's debt rising to $450,000 annually for every $10 million in debt, up from $395,000 the previous day, the Journal said. Investors wanting to buy this protection on Bear Stearn's debt at one point had to pay as much as $1.1 million upfront to sellers and agree to pay $500,000 annually for five years for the insurance, the newspaper said. Do you think it ends there? Not a chance. Much of the damage to date has been fostered by deteriorating residential, mortgage-backed security issues. Now, commercial real estate looks as the inevitable next shoe to drop: The re-emergence of the MAC clause comes as 10-year fixed conduit spreads for commercial mortgage-backed securities -- one measure of the cost of commercial real estate lending -- more than tripled to 291 basis points since November, according to data compiled by New York-based Morgan Stanley, the second-biggest U.S. securities firm by market value. After two hedge funds run by New York-based Bear Stearns Cos. collapsed last July, resulting in $1.9 billion of writedowns in the fiscal fourth quarter, demand for mortgage-backed securities dried up, sending a chill through the credit markets. No Market The thaw still hasn't come, said William Fryer, partner and head of the real estate capital markets practice group at the King & Spalding law firm in Atlanta. ``The market is largely shut down,'' Fryer said. CBRE Realty Finance Inc., an indirect unit of CB Richard Ellis Group Inc., the world's largest commercial real estate broker, took a charge of $19.2 million in the fourth quarter for loans made to New York City developer Harry Macklowe. It hired Goldman Sachs Group Inc. to carry out a strategic review. Moody's Investors Service, the New York-based bond-rating company, expects commercial real estate values to decline by as much as 20 percent over the next few years, erasing the gains of the last two years. http://www.bloomberg.com/apps/news?pid=20601109&sid=aIGRziUnaXjE&refer=home On top of it all, despite S&Ps recent, vague proclamation (where's the data, S&P; show us the beef) that the subprime mortgage writedowns are nearing an end, the insurance industry appears awfully close to basically decimating whatever little credibility S&P has left with their own, carefully honed projections (remember, the numbers the insurers are reporting are not the full extent of the writedowns, but only their losses to date in the wake of the subprime mortgage calamity: http://www.bloomberg.com/apps/news?pid=20601109&sid=azT_a4VrTn.0&refer=home ``This is a bigger event than Katrina,'' said Robert Haines, an insurance analyst at New York-based CreditSights Inc. ``This is a much more unprecedented event.'' After Katrina, companies including Northbrook, Illinois- based Allstate Corp., the largest publicly traded U.S. home insurer, raised rates in disaster-prone areas, bolstering their balance sheets and stock prices. Now, insurers are stuck holding mortgage-related investments in a market where there are so few buyers that it's hard to know what those assets are worth. Unquantifiable Losses AIG, Ambac Financial Group Inc. and MBIA Inc. have reported the biggest markdowns tied to the mortgage markets....
Okay, so we're almost done with the writedowns and associated damage, right? Hardly, S&P. Get ready for the follow-up tsunami, because it's already on the way: http://www.nytimes.com/2008/03/15/business/15risk.html?em&ex=1205812800&en=385f57e170b3e482&ei=5087 News Analysis A Wall Street Domino Theory By JENNY ANDERSON and VIKAS BAJAJ Published: March 15, 2008 The Federal Reserveâs unusual decision to provide emergency assistance to Bear Stearns underscores a long-building concern that one failure could spread across the financial system. Wall Street firms like Bear Stearns conduct business with many individuals, corporations, financial companies, pension funds and hedge funds. They also do billions of dollars of business with each other every day, borrowing and lending securities at a dizzying pace and fueling the wheels of capitalism. The sudden collapse of a major player could not only shake client confidence in the entire system, but also make it difficult for sound institutions to conduct business as usual. Hedge funds that rely on Bear to finance their trading and hold their securities would be stranded; investors who wrote financial contracts with Bear would be at risk; markets that depended on Bear to buy and sell securities would screech to a halt, if they were not already halted. âIn a trading firm, trust is everything,â said Richard Sylla, a financial historian at New York University. âThe person at the other end of the phone or the trading screen has to believe that you will make good on any deal that you make.â Commercial banks, mutual fund companies and other big financial firms with deep pockets would presumably weather such turmoil. Firms that traded extensively with Bear Stearns could be at great risk if the bank failed. For individual customers, the Federal Deposit Insurance Corporation insures deposits up to $100,000. Furthermore, when a Wall Street firm fails, the Securities Investor Protection Corporation steps in to take over customer accounts. The Fedâs action was intended simply to keep the financial markets functioning. Since various trading markets seized up in August, credit conditions have steadily worsened, and interest rate cuts, the main tool central bankers use to bolster the economy, have become less effective. Policy makers anticipated some of the problems now affecting the financial world. In 2006 and 2007, Timothy F. Geithner, president of the Federal Reserve Bank of New York, asked major Wall Street institutions to gauge the impact on their portfolios if a large bank failed. The volume of financial contracts that are not traded on any major exchanges has ballooned in recent years after the bailout of a big hedge fund, Long-Term Capital Management, in 1998. Now, much of the trading in derivative contracts tied to stocks and bonds takes place in unregulated transactions between financial institutions.Policy makers have been wrestling with questions about when and how they should provide assistance since the last major bailout of a tottering bank, Continental Illinois, in 1984. At the time, Continental was considered too big to fail without sending waves of losses through the financial system. Regulators are facing an unprecedented and widespread deterioration in many markets. Last summer, the value of risky and exotic securities plummeted in value. Now, even top-rated securities once deemed as safe as Treasuries have hit the skids. Financial firms have written down more than $150 billion of their assets. Some analysts are predicting that losses in various credit markets will reach $600 billion. Bear Stearns was one of the first firms to experience a direct blow from the subprime mortgage crisis when two of its hedge funds collapsed because of the declining value of mortgage-backed securities. It is also among the biggest firms in the prime brokerage business, or the financing of hedge funds. In recent weeks, nervous fund managers have scrambled to protect themselves. Robert Sloan, who is the managing partner at S3 Partners, a financing specialist that works with hedge funds, has shifted $25 billion out of Bear Stearns accounts in the last two months, he said. âThe problem is the financing of the hedge fund industry is very concentrated and very brittle,â Mr. Sloan said. âIf they go under, you will have thousands of funds frozen out,â he said, adding that everyone might then have to wait for a court to name a receiver before business could resume. Hedge funds rely on Wall Street for a range of services from the humdrum, like holding their securities, to the critical, like providing loans they use to increase their bets. As Wall Street has buckled under multibillion-dollar write-downs, the firms have cut financing to hedge funds and asked the funds to put up more assets to back their borrowing, forcing managers to sell en masse. This has caused a series of hedge fund blowups, including Carlyle Capital, an affiliate of the powerful private equity firm Carlyle Group; Peloton Partners, a hedge fund founded by former Goldman Sachs traders; and Drake Capital, a blue-chip fund that has been struggling. A manager at one hedge fund that uses Bear Stearns as its prime broker said his firm had been nervously watching the situation. The manager, speaking on the condition that he or his fund not be identified, said the fund had lined up backup firms that could clear its trades and keep its portfolio, though as of Friday afternoon it had not left Bear Stearns. Customer accounts at financial institutions are kept separate from banksâ and dealersâ own holdings to protect those funds if the broker has to seek bankruptcy protection. But the bigger worry for hedge funds and others that do business with Bear Stearns is whether the firm will be able to honor its trades. Of particular concern are the insurance contracts known as credit default swaps in which one party agrees to guarantee interest and principal payments in case an issuer defaults on its bonds. Investors in such contracts with Bear Stearns are closely studying whether they can get out of them or have them transferred to a more stable firm. Compounding the problem, some big investment banks this week stopped accepting trades that would expose them to Bear Stearns. Money market funds also reduced their holdings of short-term debt issued by Bear, according to industry officials. âYou get to where people canât trade with each other,â said James L. Melcher, president of Balestra Capital, a hedge fund based in New York. âIf the Fed hadnât acted this morning and Bear did default on its obligations, then that could have triggered a very widespread panic and potentially a collapse of the financial system.â Already, investors are considering whether another firm might face financial problems. The price for insuring Lehman Brothersâ debt jumped to $478 per $10,000 in bonds on Friday afternoon, from $385 in the morning, according to Thomson Financial. The cost for Bear debt was up to $830, from $530.
Some major names will fall before this is over. Bear Stearns Lehman Brothers Citibank (would rock the banking world) Ambac MBIA Countrywide
in this bear environment, we would expect hedge funds are "rolling in the money". but to my surprise, hedge funds' blow-up & forced-liquidation add to the present selling pressure. anyone else is shocked about this? i thought hedge funds are easily up 30% ....lolz. anyway... the conclusion is: be careful in the short positions too. if the hedge fund boys can't even do well in this bear market, no small traders should feel too comfortable in their short positions.