"If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem."
— JP Getty
Amongst a certain contigent of mindless bulls, the blathering idiocy of politically motivated cretins, the cognesceti who have been clothing the emperor, has been the mindboggling transparent bullshit that the fall in Housing would have no impact on either the economy or the markets.
I have a hard time determining whether much of the trading community was blindly lapping up the spewage — or that they knew better, but were too busy clawing to maintain some semblance of competition (short term, anyway) with their benchmarks.
There is but one question before the trading crowd: How much is this going to hurt? Is this going to sting a
little? Will we be pulling out our penknives to hack off our a limb in order
to survive? I sure as hell don’t know if this gets worse, has already
bottomed, or will spiral further downwards — but its apparent to even
the most ardent bull that this is more than a mere boo-boo.
That line of thought was eloquently expressed by Barron’s Alan Abelson in this week’s missive:
"The stock market got roughed up again last week, in the process summarily giving the lie to the complacent fiction that has found such favor with the Wall Street wise guys: that the collapse of housing is not having much of an effect on the consumer’s psyche or the economy.
So, pray tell, we ask them, how do you explain that huge and ever-widening sinkhole in the mortgage market? Or the rather panicky rise in bond yields? Or the evident unease in the populace at large, manifesting itself in the unimaginable-an atrophying desire to consume?
And, if not the devastation visited on housing and the massive wave of delinquencies and foreclosures that are accompanying it, what caused the fiasco that has befallen Bear Stearns, the investment bank with a hedge-fund mentality (an aberration most investments suffer from these days)? An irresponsible computer that insisted on screwing up an otherwise infallible risk-model? An innocent mispricing mishap? Or, perhaps, it was something beyond any mortal being’s control — nothing less than an act of Lucifer." (emphasis added)
As the quote at the top of the page insinuates, being owed a little is not a problem that disturbs the dreams of bankers; Owe them alot, however — and it is suddenly their problem. I wonder what old JP would say about owing $3.2 billion dollars?
"Bear Stearns came within the width of an old school tie of having to liquidate its two jumbo hedge funds, whose combined portfolios were supposedly worth $20 billion and were loaded to the gills with assets shrinking with the speed of light, for no reason other than they served as collateral for subprime mortgages.
Any necessitous liquidation of the funds, besides inflicting real pain on the holders of such collateral, would have caused an explosion heard ’round the world.
Happily, the Bear funds’ blue-chip creditors — JPMorgan Chase, Merrill, Lehman, Goldman, Bank of America, Barclay’s (we apologize if we’ve inadvertently omitted one or two) at the last moment chose not to pull the plug. They acted, we’ve no doubt, out of the goodness of their hearts. Bears Stearns’ decision to help out its troubled progeny with a $3.2 billion infusion may have helped some, too.
Despite the gracious gesture of the creditors, we may not have witnessed the end of the story for those benighted hedge funds. The future of the more leveraged of the pair, which boasts the catchy title of the High Grade Structured Credit Strategies Enhanced Leverage fund, still looks a bit problematic. We’re grateful to the sharp-eyed toilers at East Shore Partners, which bills itself as research boutique and brokerage firm, for alerting us to the melancholy fact that everyone is not as lucky or agile or well-connected in dealing with subprime-mortgage woes as Bear Stearns."
An astute commentor posted on the blog yesterday — as did Abelson today — the first casualty of the subprime fallout has already been declared DOA: "Brookstreet Securities, a broker-dealer in Orange County, Calif., with 3,000-odd customers, went belly-up almost simultaneously with the hairbreadth escape by Bear’s funds from a fate worse than debt."
The OC Register reported "In another fallout from Orange County’s subprime mortgage industry collapse, Brookstreet Securities Corp., an Irvine broker dealer, shut its doors and laid off 100 local employees because it could not meet margin calls on complex securities backed by faltering mortgages, company spokeswoman Julie Mains said."
Brookstreet saw it capital shrink from $16 million to minus $3 million in days. They missed a few margin calls, as their collateralized mortgage obligation value had sunk to 18 cents on the dollar. Many of their clients were wiped out, and a spokesperson for the firm said others went "negative."
Those unfortunate employees who lost their jobs will be joining the ranks of those other folks "unaffected" by the housing bust, the mortgage brokers.
If this is what contained looks like, I’d hate to see what will happen if this were to really unravel . . .
UP AND DOWN WALL STREET
Barron’s June 25, 2007
Irvine broker Brookstreet faces liquidation
Attorneys say clients lost money on risky investments tied to complex mortgage securities.
JOHN GITTELSOHN and RONALD CAMPBELL
THE ORANGE COUNTY REGISTER, Friday, June 22, 2007