## The Bear Stearns Reporting Contest

Tanta at Calculated Risk:

Calculated Risk: The Bear Stearns Reporting Contest: It was a dark and stormy night; the rain fell in torrents--

The high-stakes game of brinksmanship began early yesterday on Wall Street, and continued throughout the day. Bankers traded telephone calls, frenetically negotiating the fate of two hedge funds. 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...

except at occasional intervals, when it was checked by a violent gust of wind which swept up the streets

June 21 (Bloomberg) -- Merrill Lynch & Co.'s threat to sell $800 million of mortgage securities seized from Bear Stearns Cos. hedge funds is sending shudders across Wall Street. . . . "More than a Bear Stearns issue, it's an industry issue," said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. Hintz was chief financial officer of Lehman Brothers Holdings Inc., the largest mortgage underwriter, for three years before becoming an analyst in 2001. "How many other hedge funds are holding similar, illiquid, esoteric securities? What are their true prices? What will happen if more blow up?"... (for it is in London that our scene lies), One mortgage investor said that while the CDO assets for sale carried high credit ratings, they were backed by such risky mortgages as to be "junk in investment-grade clothing"... rattling along the housetops, and fiercely agitating the scanty flame of the lamps that struggled against the darkness. The bottom line is that big losses in subprime investments are likely to make investors more reluctant to risk their money on these instruments in the future. That will make it harder for mortgage originators like banks to sell these types of loans in bundles to the bond markets, which will, in turn, reduce the availability of funds for subprime loans and make it much harder for subprime borrowers to obtain financing. Nobody ever apologizes to Edward George Bulwer-Lytton. So I'm a contrarian. Herewith: apologies to Bulwer-Lytton. UPDATE: Thank you, Outsider, for the perfect denoument to our overwrought little narrative: "We're looking at somewhat immature markets that are going through a growth phase," Ralph Cioffi, senior managing director of Bear Stearns Asset Management, said at a bond conference in New York in February, Reuters reports. "There is a catharsis and a cleaning-out process." Investors: If you can't tell who is having the catharsis, you're the catharsis. FURTHER UPDATE: Every caprice needs a rondo. But Hugh Moore, partner of Guerite Advisors and a former executive at a subprime mortgage lending company, described the situation as a "slow train wreck." "I wouldn't be at all surprised if we hear about more [hedge funds] blowing up in the coming months, as the subprime market meltdown continues," he said. "You've got$250 billion of subprime [adjustable-rate mortgages] that are going to reset this year. I don't think it's going to be systematic . . . but for those people who invested in those hedge funds, its certainly not going to be fun."

So what's it going to be for those subprime borrowers? Just another day at the circus?