The CDOâs Flying Circus June 30, 2007 Merrill Lynch & Co. on Wednesday sold only $100 million of $850 million of highly rated collateral assets it auctioned after seizing them back from the Bear Stearns funds, said a person familiar with the auction. Details about Merrill's auction and efforts by Bear Stearns to offer $2 billion of CDOs were not immediately clear as possible buyers determine how to value the complex CDOs. Some fund managers speculated the failure to sell the assets as intended indicated the dealers were largely disappointed with what they saw. - Reuters, June 21, 2007 Lehman and Credit Suisse held auctions of this collateral before the bailout, and insiders claimed the former sold the assets for half their face value, a development with huge consequences for Wall Street and the stability of the global financial system if true. The pricing is crucial because US financial regulations require banks and hedge funds to value CDOs on their books at market price, but, because of the illiquid nature of the instruments, they usually retain them at the purchase price. â¦if Lehman achieved such a low price for the CDOs, it could precipitate a major revaluation of the sector that may, domino-like, devastate related markets. Last week, Merrill Lynch attempted to auction CDOs worth $850m; some traders claim it managed to sell about $100m. No prices were revealed. - A bet that went wrong, Helen Dunne, The Business, June 30, 2007 ââ¦a lot of hedge funds are now trembling -- and I don't mean because Congress wants to raise the tax rate on general partners' carried interest. The big hedge fund secret is that, barring credit downgrades, many leveraged and esoteric investments (such as the collateralized debt obligations that inhabited the Bear Stearns hedge fund) aren't marked to market.â - Hedge fundsâ dirty little secret, Doug Kass, TheStreet.com, June 28, 2007 Thanks to lots of discretion in all the right places, the Bear Stearns hedge fund blow up has yet to trigger a financial debacle worthy of a Shakespearean tragedy. With lenders to Bear Stearnsâ hedge funds pacified, if not satisfied, and CDO values still under wraps, the event unfolded more like a Monty Python skit: Banker: Excuse me! Farmer: Yes sir? Me sir? Banker: Yes, quite. I believe my bank loaned you money some time ago to buy a pig. That loan is now due. When can we expect payment? Farmer: Oh, I canât pay you sir. Banker: Iâm sorry, Iâve had a cold can you repeat that? Farmer: Yes, I said I canât pay you. Banker: Still canât hear you. Annoying things these colds. Farmer (shouting): I said I canât pay you back the money, sir. Hard times you know. Banker: Canât pay back the money? Oh dear. What will my supervisor say? Farmer: Thatâs why Iâm going to the market, sir. To sell the pig. And then give your bank the money. Banker: What pig? Farmer: This pig, sir. Banker: Oh, that is a pig you have there. So you sell the pig and then you give me the money? I see. Splendid. Are you sure? It looks sick. Farmer: Sick? Why, itâs the healthiest pig there is, sir. Banker: But look at its face! Itâs got a rash or something. Farmer: Thatâs not a rash. Itâs lipstick. Banker: Lipstick on a pig? Farmer: Itâs pretty isnât it. Banker: Well, yes, sort of. I mean no! No, itâs not pretty. Itâs ridiculous. Farmer: Watch what youâre saying, you might offend her. Banker: Well, why would a pig be wearing lipstick? Farmer: âCause without the lipstick it would be just a pig. Now itâs a pig with lipstick. Sheâs worth a lot, you know. Banker: How much will you get for her then? Enough to pay back the loan? Farmer: With lipstick and all? Banker: Yes, yes, how much? Farmer: I donât know. A lot I suppose. You know, pigs like this are in demand. Banker: In demand? Since when did so people have such an interest in buying pigs with make-up on them. Farmer: Oh these pigs have been quite the thing for a while now. And itâs just lipstick sir. No eye shadow or anything. Banker: So when will you have money? Farmer: After the auction. Itâs right in here, sir. At the auction⦠Farmer: Itâs our turn now sir. See, thereâs my pig. The one with the lipstick. Banker: Theyâve all got lipstick! Farmer: I told you it was the thing, sir. Auctioneer: Now, what do I hear for this pig, pig number 236? Farmer (shouting): Donât forget the lipstick! Auctioneer: What do I hear for pig number 236 wearing lipstick? Do I hear one-hundred? One hundred? Farmer (to banker): See, that's just what I owe you. One hundred. Auctioneer: How about ninety? Do I hear ninety. How about eighty? Banker: Thereâs no one bidding! Auctioneer: Seventy-five, seventy-five? Sixty? Farmer (shouting): Thatâs top of the line lipstick! Auctioneer: How about we start the bidding at fifty? Anyone bid fifty? Fifty? Banker (jumping up): Hold it, weâve changed our mind! Auctioneer: Changed your mind? Banker: Yes, weâve changed our mind. Weâre not selling. The pig is off the market! Farmer: Why is she off the market? I thought you wanted the money? Banker: Money is not everything. Weâre leaving. Farmer: Donât you want to see what my neighborâs pig sells for? Banker: Who is your neighbor? Him? I loaned money him money too. Tell him to come with us. Letâs forget this whole pig selling thing. As far as our bank is concerned, your pigs are still worth a hundred. We donât need an auction to tell us that. Farmer: What about the money we owe? Banker: Oh, you still owe it. But letâs not worry about that right now. Farmer: You look like you could use a stop by the pub, sir. Banker: Grand idea. Letâs get out of this wretched place. Farmer: You think I can bring my pig inside? She likes pinball http://www.prudentbear.com/articles/show/2054