The Whimpering Bear

It didn't get a whole lot of play outside the finance media this week, but Bear Stearns has a hedge fund that holds a whole bunch of subprime mortgage bonds that are in meltdown mode because of the housing "problem". Barry Ritholtz quotes from Alan Abelson:

"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."

Barry then offers this salient quote:

"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

Yep. In this case the good ole' boys were owed Billions, so they decided they'd better step in to prevent a meltdown that would have had an "impact" on their balance sheets. Bond yields (interest rates) have also been rising precipitiously and the stock market lost 185 points yesterday.

Prior to last week the subprime "problem" was largely ignored by Mr. Market as insignificant. It's now looking a bit less insignificant. How much is yet to blow we'll soon be finding out. Personally, I think it will help tilt the economy into recession by early next year.