Merrill Seizes Sub Prime Assets of two Bear Stearns Hedge Funds

Even the whales are exploding as things are starting to really get smelly in sub prime!

So are these problems with Bear's funds the beginning of the end for the massive hedge fund yen/sub prime carry trade? ( borrower near zero in Yen and invest near ten in dollars)

Here is what the WSJ had to say:

"The funds, which once controlled more than $20 billion in a combination of investor and lender money, have swooned in recent weeks amid weakness in the market for subprime mortgages, or risky homes loans."....and ...."By unwinding those loans in an orderly manner, rather than through a series of fire-sale auctions, Bear's fund managers, led by veteran bond salesman Ralph Cioffi, could help stave off painful ripple effects in the broader market for mortgage-backed securities and related instruments. Because such securities can be thinly traded, it is often hard to find their true valuation, making players in those markets vulnerable to inventory gluts that could depress prices across the board." Read the whole story here:http://online.wsj.com/article/SB118230204193441422.html?mod=home_whats_news_us

I believe that this whole mess is still in the first few innings. Last weeks National Mortgage News was littered with Asset Back Securities being downgraded by an ever so queasy group of rating agencies. The senior/subordinate structure of the ABS is causing many of the over capitaization rates used in creating the credit grades to widen for many issuers. What this means in plain english is that the issuers (lenders) will have to continually raise interest rates to borrowers in order to try and protect any margin they will have left in future deals. Fannie Mae and Freddie Mac are being very aggressive buying sub-prime type debt at Alt-a prices through there automated underwriting engines. I do not believe this will bode well for the wounded sub-prime industry given the GSE's competitive advantage and the political climate for sub prime lenders.

I have contributed to several threads on sub prime over at The Motely Fool's Liquid Lounge message board, so rather than bore the innocent I will leave it at that.(most recently here:http://boards.fool.com/Message.asp?mid=25520099&sort=whole&vstest=search_042607_linkdefault)

In closing, I guess I will stick with the whole ocean theme. Soon I believe many a sub prime investor will wish they had a bigger moat...I mean boat.

See this post for a what may be a sharper visualization of what could be waiting for the average sub prime investor. http://peterbrotchie.blogspot.com/2007/06/size-may-matter.html ( I have EBD: early blogger dysfunction. I cant figure out how to put in a picture down at this end of the page)

The photo above is an actual whale that exploded while being hauled through a city street in Taiwan. Thanks to valueguy88 for originally posting the link to the article and photo over at the Liquid Lounge board of The Motely Fool