Bear Stearns Fund Collapse Sends Shockwave Through CDO Market
by Mark Pittman, Bloomberg
"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.
A sale would give banks, brokerages and investors the one thing they want to avoid: a real price on the bonds in the fund that could serve as a benchmark. The securities are known as collateralized debt obligations, which exceed $1 trillion and comprise the fastest-growing part of the bond market.
Because there is little trading in the securities, prices may not reflect the highest rate of mortgage delinquencies in 13 years. An auction that confirms concerns that CDOs are overvalued may spark a chain reaction of writedowns that causes billions of dollars in losses for everyone from hedge funds to pension funds to foreign banks. Bear Stearns, the second-biggest mortgage bond underwriter, also is the biggest broker to hedge funds..."
In other words, everything would be fine if we all just lied about the true value of the underlying property on these CDOs. When this thing begins to unravel, it is going to get fugly. I've talked about "social mood" here quite a bit, but the delusional optimism necessary to do some of the deals we saw in 2006 and even earlier this year in the CDO market is off the charts.