Subprime sector hit by $1bn assets sale
Subprime sector hit by $1bn assets sale
By Saskia Scholtes and Ben White in New York
Copyright The Financial Times Limited 2007
Published: June 20 2007 18:22 | Last updated: June 21 2007 00:33
The giant market for securities backed by US subprime mortgages was thrown into turmoil on Wednesday as lenders struggled to sell more than $1bn of assets seized from two Bear Stearns hedge funds that suffered heavy losses on subprime bets.
The complex securities being auctioned are rarely traded and early attempts to sell the collateral met with mixed results. The prospect of the “fire sale” knocked down prices for similar mortgage-backed assets and sent a key derivative index for the market to record lows.
The rout highlights the risks investors take when they buy illiquid and hard-to-value securities. Fire sales in times of stress can trigger dramatic changes in pricing in such markets, perhaps leading other holders of assets to mark their values down and triggering demands for additional collateral from lenders.
Kathleen Shanley, analyst at research firm Gimme Credit, said the unravelling of the Bear Stearns funds was “at best an embarrassment for Bear Stearns, and at worst it threatens to have a ripple effect on valuations across the subprime sector”.
The sales began on Tuesday and were set to continue on Wednesday. Among the assets for sale by lenders Merrill Lynch and Deutsche Bank were investments in so-called collateralised debt obligations, or CDOs, which pool securities that can include mortgage-backed bonds, corporate bonds, leveraged loans and sometimes other CDOs. Many of the CDOs the Bear Stearns funds invested in were backed by risky mortgage securities, which have suffered heavy losses and ratings downgrades in recent weeks.
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”.
Merrill Lynch was set to auction $850m of such assets on Wednesday after rejecting a Bear Stearns offer to buy them directly, while Deutsche Bank was also planning to sell $350m of CDO assets seized from the funds. JPMorgan began selling seized collateral on Tuesday, but yesterday halted its sale and then made a private deal with Bear Stearns to eliminate its exposure to the fund.
The ABX derivative index, which tracks home loans made to risky subprime borrowers in the second half of last year, dropped to a record low of 59.25 on Wednesday.
By Saskia Scholtes and Ben White in New York
Copyright The Financial Times Limited 2007
Published: June 20 2007 18:22 | Last updated: June 21 2007 00:33
The giant market for securities backed by US subprime mortgages was thrown into turmoil on Wednesday as lenders struggled to sell more than $1bn of assets seized from two Bear Stearns hedge funds that suffered heavy losses on subprime bets.
The complex securities being auctioned are rarely traded and early attempts to sell the collateral met with mixed results. The prospect of the “fire sale” knocked down prices for similar mortgage-backed assets and sent a key derivative index for the market to record lows.
The rout highlights the risks investors take when they buy illiquid and hard-to-value securities. Fire sales in times of stress can trigger dramatic changes in pricing in such markets, perhaps leading other holders of assets to mark their values down and triggering demands for additional collateral from lenders.
Kathleen Shanley, analyst at research firm Gimme Credit, said the unravelling of the Bear Stearns funds was “at best an embarrassment for Bear Stearns, and at worst it threatens to have a ripple effect on valuations across the subprime sector”.
The sales began on Tuesday and were set to continue on Wednesday. Among the assets for sale by lenders Merrill Lynch and Deutsche Bank were investments in so-called collateralised debt obligations, or CDOs, which pool securities that can include mortgage-backed bonds, corporate bonds, leveraged loans and sometimes other CDOs. Many of the CDOs the Bear Stearns funds invested in were backed by risky mortgage securities, which have suffered heavy losses and ratings downgrades in recent weeks.
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”.
Merrill Lynch was set to auction $850m of such assets on Wednesday after rejecting a Bear Stearns offer to buy them directly, while Deutsche Bank was also planning to sell $350m of CDO assets seized from the funds. JPMorgan began selling seized collateral on Tuesday, but yesterday halted its sale and then made a private deal with Bear Stearns to eliminate its exposure to the fund.
The ABX derivative index, which tracks home loans made to risky subprime borrowers in the second half of last year, dropped to a record low of 59.25 on Wednesday.
posted by Carlos T Mock @ 6:43 AM
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